That's exactly why the current crisis is so dangerous. Because the FED won't be able to simply raise the interest rates. (that would squeeze the capital from the USA to the foreigners).
They keep interest rates as low as they are currently - inflation will hit us sooner or later (already at 10% if you use US Government formula for calculating inflation from the Reagan years). The raise interest rates : well, that's akin to credit card holder raising interest they owe to the bank. Foreigners will earn even more from their debt holdings.
So, from the two evils to choose from, the FED will choose to print into oblivion because that will be politically more acceptable than repaying obligations to foreigners.
BTW, US Treasuries are currently at their all time (almost 300 years time) high. If that's not a bubble then I don't know what is.
Striking to me that you posted a link that directly supported what I was explaining.
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As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47% of the debt held by the public of $9.49 trillion and 32% of the total debt of $14.1 trillion.[71] The largest holders were the central banks of China, Japan, Brazil, Taiwan, United Kingdom, Switzerland and Russia.[73] The share held by foreign governments has grown over time, rising from 13% of the public debt in 1988[74] to 25% in 2007.[75]
As of May 2011 the largest single holder of U.S. government debt was China, with 26 percent of all foreign-held U.S. Treasury securities (8% of total U.S. public debt).[76] China's holdings of government debt, as a percentage of all foreign-held government debt, have decreased a bit between 2010 and 2011, but are up significantly since 2000 (when China held just 6 percent of all foreign-held U.S. Treasury securities).[77]
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The key fact here is: China holds 8% of US debt. Eight Percent.
Also worth mentioning that according to those same numbers we hold a majority of our own debt. So please, tell me more about how "wrong" I am.
The link explains that we hold only half of our debt. So while you were correct to point out that technically the US public owns most of it, still 47% held by foreigner is so high that everything what I said in my post is still valid. We can't raise interest rates because this will result in funds going from the US to foreigners. Economic suicide. And we won't be able to keep them at zero too. I specifically used word foreigners and not China too.
Now, eight percent my seem not too much, but it is 16% of the foreign held debt. Let's say that China for purily political reasons decides to sell all the US debt they hold on a single day. When - as I said - the US Treasuries are valued at their 300 years high, so looks like a bubble, so temptation may be there anyway. I think all these central banks arounf the world sitting on the piles of the US Treasuries are just really, really worried at that point. It's like owning mortgages on plenty of houses back in 2007. If one of them can't take the pressure anymore and sells, everyone will, the bubble bursts. Plus China may have additional political agenda to do it (i.e. too may US bases around their country). This will crush prices, force rest of the foreigners to sell, making US Treasuries effectively worthless. Bam, the bubble bursted. Welcome to the world where the US dollar isn't the world reserve currency anymore.
Now, nothing to worry about. The US will be just fine after the default. As many other countries were fine after defaulting.
Look at the UK and why they quit Sues Canal in early 1950s. Because the US threatened them with open sale of all the UK bonds (guilds) we had. From this point on the UK empire is officially just en "empire". Because we got them by the balls. As China has us now.
Your history here of US UK monetary relations leaves a lot to be desired. If you want a better sense of how it really worked go back to Keynes vs. Harry White at Bretton Woods, or before that with Lend Lease, or before THAT to the defaulted/forgiven UK Great War debt and the modified gold standard of the 1920s.
Bluntly, you seem to pick and choose facts that support your view of unsustainable debt and impending doom. Neither is the case. We have China "by the balls" as much as they have us. I see your "gold" link in your profile. That explains your POV nicely I think.
Edit:
Also it seems like you're confusing interest rates at the Fed discount window with yields paid in US debt auctions.
Edit Again:
I just read your "how the bubble will burst" parapgraph. I'm sorry man but you really don't have a grasp of how this would work. First, what on EARTH do you mean when you say "Treasuries are at an all time high?" Bonds have a face value and a yield. The yield is currently at possibly an all-time low. So maybe I'm missing something, would be great for you to explain because this sounds like whole cloth to me, like you're repeating something you heard somewhere.
Moreover, every seller needs a counter-party. How exactly do you think the market works? How is China going to sell all of their debt? Sell it below face value? That hurts China, not us. I think you lack an real understanding of how this works, man. Now maybe you mean their foreign currency reserves. They could try reducing that, flooding the forex with USD. But of course the Yuan is pegged to the USD (via a "basket" where USD is predominant). So Chinas own currency would sink as well. And it's not like they can snap their fingers and create a free market Yuan exchange. But OK, so they dump their USD for what? Euro? So it drives up the value of the Euro. Guess who doesn't want that? ANYBODY IN THE EUROZONE. Do you think Germany -- who exports nearly as much as China every year -- wants the cost of their goods to skyrocket in the US? No. So simple, the Eurozone prints more money and buys the USD from the chinese. In the grand scheme of things, Chinese holdings of USD aren't nearly enough, not NEARLY enough, to really disrupt global forex without nearly universal global cooperation.
Look, I'm done with this thread, you can go ahead and have the last word. But I really feel like if you're interested in these things, you should actually study the macro economics you're trying to discuss. I trained as an economist before becoming a software engineer 15 years ago and most of what I'm talking about can be learned in a 100-level Macro class.
>Your history here of US UK monetary relations leaves a lot >to be desired.
Says who?
>If you want a better sense of how it really worked go back >to Keynes vs. Harry White at Bretton Woods, or before that >with Lend Lease, or before THAT to the defaulted/forgiven UK >Great War debt and the modified gold standard of the 1920s.
Honestly, I don't see a connection here. I read both Keynes and Hayek.
>Bluntly, you seem to pick and choose facts that support your >view of unsustainable debt and impending doom. Neither is >the case. We have China "by the balls" as much as they have >us. I see your "gold" link in your profile. That explains >your POV nicely I think.
You see, we're this far in your posts, no arguments yet from your side... dude tell me where I'm wrong and how already.
>Edit: Also it seems like you're confusing interest rates at >the Fed discount window with yields paid in US debt >auctions.
Here we go again. I'm the one who made money in 2007/08 because I saw obvious things than others (who probably read too much Keynes and watched too much CNBC) didn't, so quit it already.
>First, what on EARTH do you mean when you say "Treasuries >are at an all time high?" Bonds have a face value and a >yield. The yield is currently at possibly an all-time low. >So maybe I'm missing something, would be great for you to >explain because this sounds like whole cloth to me, like >you're repeating something you heard somewhere.
Compared to other bonds traded internationally for one.
Compared to gold for two.
Interest rates at all time low don't help your case too.
>Moreover, every seller needs a counter-party. How exactly do >you think the market works?
If you have an "assets" that's a hot potato the market works this way that your price has to be low enough to find a buyer. Ever heard of supply and demand ? LOL
> Sell it below face value? That hurts China, not us.
No. They have all the production in the world, so long-term they are fine, we're screwed. Economically may not make sense to sell, politically may make perfect sense to sell. Loose $1.4 trillion to hurt the US long-term while they get just a short-term pain? Might be absolutely acceptable in the right political environment.
> But of course the Yuan is pegged to the USD (via a "basket" > where USD is predominant). So Chinas own currency would > > sink as well.
Two options:
1. Let it sink (cheap export, remember they are the production engine of the world). Very tempting, I think.
2. Peg it to gold. Would make Yuan world reserve currency right away. Who wants USD that's just sinking like crazy when you can get money backed by gold, biggest creditor in the world (vs. US biggest debtor in the world), and biggest producer in the world (vs. US biggest consumer in the world made possible thanks to the foreign credit, just a function of the USD being world reserve currency, and you know it).
>But OK, so they dump their USD for what? Euro? So it drives >up the value of the Euro. Guess who doesn't want that? >ANYBODY IN THE EUROZONE. Do you think Germany -- who exports >nearly as much as China every year -- wants the cost of >their goods to skyrocket in the US? No. So simple, the >Eurozone prints more money and buys the USD from the >chinese. In the grand scheme of things, Chinese holdings of >USD aren't nearly enough, not NEARLY enough, to really >disrupt global forex without nearly universal global >cooperation.
Of course they will dump it for gold or silver or both to have the world reserve currency backed by hard assets making it more attractive than USD backed by debt. It's easy: China calls US, says: you want our 8% of debt to be written off? We want X amount of gold for this.
>In the grand scheme of things, Chinese holdings of USD >aren't nearly enough, not NEARLY enough, to really disrupt >global forex without nearly universal global cooperation.
Yeah, and the amount of houses under the line in 2007 wasn't nearly enough to cause global recession. There are too many factors involved for you or me to know. Again, The Treasuries are hot potato. If China sells, this will be the trigger for others. I'm sure Russians would sell too, and than probably everybody else.
According to Jim Rogers the US is currently the biggest debtor in the history of the world. Jim Rogers has been business partner of Soros in 1970s in the Quantum Fund. I think he knows what he's saying. BTW, he immigrated to Singapore in '05 saying depression is coming. So probably he wouldn't lie regarding the US debt.
Now think about it. Who wants to keep bonds of a country that's a biggest debtor in the history of the world. Nobody. That's the point. If China sells, their holding are big enough for others to start selling. It's a bubble. Like housing in 2007. One guy probably started selling like crazy, and here we go, somehow everybody and their uncle starts seeing now that the king is naked. Will be the same with the Treasuries bubble.
>Look, I'm done with this thread, you can go ahead and have >the last word. But I really feel like if you're interested >in these things, you should actually study the macro >economics you're trying to discuss. I trained as an >economist before becoming a software engineer 15 years ago >and most of what I'm talking about can be learned in a 100->level Macro class.
I really don't like your tone. It's like I'm smart and you're stupid. Because I heard something in academia and CNBC and I think you didn't. You know what? How much money you made in 2008/2008? I bought oil options when oil was trading in $30s. I bought gold options when gold was in $700s. And I had macro course done too. Master's in business. Don't assume your discussant is stupid just because owns a gold website.
I told you I'd let you have the last word and I will, you've had it. Debate over. However, while I'm sure you will not admit it here, but maybe this will stick with you when you look yourself in the mirror later:
Much of Economics isn't science at all. So in many circumstances there is no clearly "right" or "wrong" answer. But in many cases there is. There are so many instances of you making factually incorrect statements here that it's impossible to enjoy any debate with you on this subject. A dozen times or more you say, essentially, "Two plus two equals five" and I say "No, it equals four" and you say "well, that's your opinion." That just makes you a poor sport.
In many cases, your reasoning is foolish. For example, suggesting that China would have some "political" reason to usurp the USD and hurt the US economy when China's own economy would crumble without their US exports. China is a country with weak domestic demand. They are a country of exporters. But your poor reasoning here isn't what I'm talking about. You're entitled to poorly thought out prognostication. But so many times you speak mumbo-jumbo gibberish and come across as though you truly truly believe you know what you're talking about.
You'd probably enjoy actually learning about this stuff so I hope you do. I don't have all the answers nor even half. I'm wrong often, about a lot of things. It's OK to be wrong. And me pointing this out isn't about trying to make you feel bad. It's just about... trying to virtually pull you aside and pat you on the back and point out some of this silliness.
Another reply, sorry about it, but that link has a great quatation from the BIS (so called Central Bank of the Central Banks, located in Switzerland):
Bank of International Settlements, which stated, "Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely."
The writing is on the wall for all the foreign US Treasuries holders. This and most expensive in 300 years of their history. Now, it's a chicken game. And the one who blinks first wins because looses the least of the Treasuries value.
We owe most of our debt to ourselves.