America has China over a barrel, not the other way around.

to answer your question....when t-bonds / t-notes mature and the US Govt obviously has no money to pay the debtholder back, the US Govt. has to refinance (borrow more money to pay back) that debt at the current interest rate...

here's some basic info regarding interest on the debt:

Budgeted net interest on the public debt was approximately $240 billion in fiscal years 2007 and 2008. This represented approximately 9.5% of government spending. Interest was the fourth largest single budgeted disbursement category, after defense, Social Security, and Medicare.[60] This declined to $189 billion in 2009 to approximately 5% of spending, despite higher debt levels, because of lower interest rates. Average interest rates declined due to the crisis from 1.6% in 2008 to 0.3% in 2009........CBO estimates that nearly half of the debt increases over the 2009-2019 period will be due to interest......Should interest rates return to historical averages, the interest cost would increase dramatically.

http://en.wikipedia.org/wiki/United_States_public_debt

As I posted before, Krugman is an idiot plain and simple for writing this crap. Your excerpt quotes him on record that if the US Dollar falls it will be good for us Americans since our exports will gain a competitive advantage. Well, if the US Dollar falls then the world will endeavor to get out of their falling US Dollars which means our interest rates will rise which means our DEBT will balloon even more swiftly.

Krugman also contends that the Fed can offset any rise in interest rates by buying even more long-term bonds. This is beyond ludicrous. Where will the Fed get the money to buy these long-term bonds? Unless the Fort Knox gold is put up for sale, they are going to have to print it up out of thin air - which only increases the DEBT even more! Krugman is in essence trumpeting up the mother of all ponzi-schemes as our ace in the hole against the Chinese...

 

I feel that the Obama administration's China policy has swung from one extreme to the other without any real progress being made. Obama should take a page from Bush's book in dealing with China. W. was able to get China to appreciate RMB by 15% over the few years and cooperate with the U.S. on certain international issues. Obama is getting nothing from China.

 

Ae you arguing that the bolded portion is not true? I mean it's only been accepted theory for over 100 years and is only supported by empirical data. I mean I'm looking at some data right now from the last period of relatively rapid dollar depreciation - you can actually see US exports going up right afterwards in teh data set as the dollar depreciates.

Yet you treat it as if he's absurdly crazy to say it - if you have some alternative explanation to this in a two player game, I'd like to see it.

As for the second half - again, you have to resort ot the DOOMSDAY scenario. Newsflash, the dollar fell, rose, and then fell very precipitously between Summer 2008 and present day, an 18 month span - and on none of these occasions did your doomsday occur.

The whole capital account/current account thing is based on balance.
When it starts getting out of whack in one direction, it gravitates in the other direction. The only reason why it wouldn't would be if one participant was artifically trying to keep it slanted in its favor - such as by actively manipulating currency by purchasing billions of dollars every day. HINT HINT HINT.

The funny thing is that you advocate the exact same course of action that would make it worse, much like Mr. Wen. If there's an artificial imbalance that makes the dollar vulnerable to a massive depreciation, why would you endorse additional hoarding of the dollar to exacerbate that imbalance?

 

Ok, I was responding to your statement "at the same time be forced to pay out huge interest payments on our debt". At first glance, it didn't connect with me logically because it seems to me you meant existing debt. But if you meant the overall debt necessary to run our economy, I don't disagree.


Anyways, it seems to me you made two assumptions with Krugman's proposed strategy
1) Interest rate will necessarily rise significantly because of world wide sell off of their US assets.
2) The US mounting debts will not stop despite significant rate spike and incur higher interest cost, which in turn reduces US debt servicibility.

What you describe is akin to Greece.

Just to spell out, what Krugman said was
to 1) Interest rate will not rise significantly because i) US will have ways to keep the rate at a reasonable level despite China (because US is not Greece, and your doomsday version about other countries panicking might not hold). and ii) the US buyback.
To me Krugman's US buyback argument is not his main solution to catch all. He was just proposing a possible way to mitigate the potential mounting interest rate in the China dumping scenario. He is not assertive and he probably meant TO THE EXTENT that US could buy back some those bonds. I wouldn't read it out of context.

to 2) Krugman said there could be positive effect of falling dollar, and thus reduced debt servicibility is not necessarily true. I am w/ Sam and also because your doomsday version will not happen necessarily.

My main disagreement with you is that US the ability to service its debt is not only measured by how much debt it has because there are also other factors. First and foremost, US is still the world's most robust economy. Again US is not Greece.

 

^^^^^

lowering the minimum wage to 35cents would be great for US exports as well - but not necessarily good for america.......in any case, to clarify on what your asking...

lower dollar = rising rates = accelerating increase in DEBT = not good

regarding your question about the dollar, perception and confidence can change overnight......just because it hasn't already collapsed does not mean its safety is guaranteed indefinitely.....there are many factors at play thus far......for one, from a foreign perspective several central banks including the ECB have been actively devaluing their currencies in the past year in order to stay competitive (China is not the only currency manipulator!)......and two, from a domestic perspective both corporations and individuals have been hoarding dollars in order to pay off their debt......this has all helped to prop up our currency in the short-term, vs. competing currencies that is......and NOT vs. precious metals.......and this brings us to your own personal catch phrase "DOOMSDAY".....i have not brought up this term in my posts, but now that you mention it, it would indeed entail a worldwide lack of confidence in not just the US Dollar, but in all government currrencies.....in which case we're all ****ed :grin:

btw, who's this Mr. Wen? and your last sentence contains too many big words for me to follow/understand.......i'm no big shot lawyer at white & case or sullivan & cromwell.....i'm just a dumbass client of them

 

You guys need to read Krugman's statement more carefully. He was not proposing an all-out buyback.

 

The US budget deficit to GDP ratio is only about 1-2% lower than Greece's. The US national debt to GDP ratio is about 85%.

But yes you are correct that the US is not Greece because the US currently owns the world's reserve currency, the US Dollar. And therefore the US has been able to print up the money it needs whilst at the same time enjoying continual foreign demand for that money.

But when that demand falls off, the US is actually in a far more precarious position than Greece. This is because Greece's debt is still small enough for Germany, France, and the EU to bail their asses out. Our debt obligations are so massive that nobody will be able to bail us out.

 

That's precisely one the of the reasons that I don't believe Germany, Japan, or Taiwan and Korea (duh) will join the parade with China to be dump happy, because they cannot afford to let US fail on many levels.

Anyways, from pure economic point of view I think Krugman deserves more credits than you gave him, but I don't think his proposal sits well with either the Dems or Repubs because, as someone pointed out, there are simply more to economics when we talk about a hostile challenge to China like this one.

 

As of right now, the size of the economy apart, the US is viewed as a "safe haven" during times of crisis because it is perceived as safer (in part due to the size). Treasuries have enjoyed lower rates than they probably otherwise have in part due to this factor. What what would happen should the US ceased to be perceived as safe? What would happen to investments in not just Treasuries, but US stock, FDI, etc? Does Krugman really believe wiping out China's dollar savings would affect the US "that much?"

To start off, assuming no massive instantaneous spending cuts (which are rather hard to come by nowadays), Dept of Treasury would have to sell its debt in the open market without its biggest buyer, pricing out domestic American companies. Seriously, this is Econ 101 here. Food for thought.

On another note, when Krugman says along the lines of long term rates are based off short rates, which are essentially zero. I wonder what he means. This is a serious question that I would ask him if we met in person.

Is he talking about "bootstrapping" the long term rates from short term on the yield curve? I know many FI traders who try to use such a method when the bootstrapped long term values diverge from prevailing rates, giving an exploitable "opportunity" for arbitrage. I find myself questioning the validity of the method more and more recently though.

 

HA HA HA. Seriously Sammy, that gave me more than a chuckle. I mean seriously, Vietnam? The country that is copying the Chinese model not to mention also has its currency pegged to the dollar? So you would be going from China to mini-China?

And how many governments have Thailand had in the past 20 years? I've stopped counting after a while.

India had lower labour wages for decades and as of right now, is more than 60% lower than China, if not more. If an American company wants to shift production to India due to labour cost, what's stopping it?

Could it be because that China offers the best combination? Could it be that aside from labour, China has a strong infrastructure, a relatively skilled labour force (for cheap), a government that is extremely favourable to doing businesses, politically stable, not to mention being one of the largest markets in the world? The cost advantage was always there, but what China offered was, is and has always been value.

Want to reduce costs further, shift 300KM further inland. You'd more than halve your labour, utilities and energy cost. There you'd still have better infrastructure than those countries you've mentioned.

Or you could build them from scratch in India and Mexico...

 

Samsung, Sony, and Benq make lots of LCD monitors in Mexico. Zenith does some LCD TVs in Mexico also. That's just a few of the brands that I saw that said "Made in Mexico", while shopping online. I ended up buying a BENQ that's made in China.

 

Correction, I meant to say Dell made monitors in Mexico but that I bought a BENQ made in China.

 

There are NAFTA rules dictating source of the product. The monitor can still be assembled in Mexico, but if most of parts of monitors are from China, then I believe the the monitor is considered originated in China for tariff purpose. And there are also marking laws regarding the origin of a product alone the same line.

Mexico can be viable alternative if its NAFTA 0 tariff leverage is amplified w/ rising Chinese yuan. If more and more supplier's foundries are built in Mexico, that can in turn reduce a lot of logistic cost. So never say never.

 

This little factoid just proves the vast American advantage over China -- we live in entire MUD districts in this majestic, free country.

 

Quite possibly... I'm not an economist, so bear with me... What exactly does Kurgman mean by this:

 

You are taking it out of the context.

Watch the careful tense he choses and necessary inferences.

Here is what I wrote in post #104

To me Krugman's US buyback argument is not his main solution to catch all. He was just proposing a possible way to mitigate the potential mounting interest rate in the China dumping scenario. He is not assertive and he probably meant TO THE EXTENT that US could buy back some those bonds. I wouldn't read it out of context.

 

Thanks YallMean. I think I got it: Krugman is saying interest rates won't rise significantly if China dumps US assets, and if it does it will be minimal enough for the Fed to buy the bonds.

It will be interesting (and freaking scary) to see which one (Krugman vs Schiff) is right. Hopefully (as a person not the US or China) it doesn't come down to a trade war.

 

Yes, that's more or less what I think he was getting at. His statement about long term and short term interest rate is compact and yet profound. He probably couldn't really go into details elaborating them in the column. But back to the point of my first post in the thread, we have to make sure to understand the economic point made by an Nobel prize winner on the subject before dissing him. Take him seriously and give him due respect.

 

http://business.timesonline.co.uk/tol/business/columnists/article7026223.ece

According to this pro-trade war approach article in Feb., it notes pentagon simulations having China coming out on top in a trade war.

 

I've been wanting to start a debt-related thread for awhile, but can't after getting rookified for asking if Granville is a r****d... so I'll post it here. If one of you members think it's worthy of discussion, would appreciate if you help me create the thread:

Is it possible for countries without an unusually large amount of natural resources to maintain a 1st world quality of life without getting into external debt in today's economy?

The reason I ask is, growing up in southeast asia, I've always been envious of the quality of life of 1st world places like the US, Japan, Europe. I've always known the US has been running deficits for a long time, but after reading up more after the financial crisis in 2008, was surprised to find that external debt levels (as % of GDP) in Japan and a bunch of European countries are even worse than the US.
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

For a comparison, I'll use Singapore as it has low external debt, is the most developed of the SEA countries, but still lags behind the US, Europe, Japan and whose quality of life improvement is showing signs of slowing down. Americans who work in Singapore tell me pay is higher in the US, while the cost of living in places other than LA+NY is actually cheaper. My personal experience of living and working in Japan was similar: Cost of living in both places were around the same (smaller items like food and services are more expensive in Japan, but big items like rent and cars were cheaper outside of Tokyo+Osaka), but pay was much higher in Japan. To make the jump to first world quality of life, does a country like Singapore have to take on debt to finance better living standards?

The follow up question to that is, if yes, should it? If I had a choice, debt be damned, I would have preferred growing up in a first world country over the last 20+ years.

End. Sorry if its too rambly or too much personal anecdotes. Pls don't CSB me :grin: