US living on borrowed time - and money

[TexasLawyer]

An excellent article in Asia Times. The news is NOT good.

Mar 24, 2006

US living on borrowed time - and money
By Julian Delasantellis

<snip>

As the US political system shows absolutely no indication of being either desirous or even able to deal with its fiscal profligacy (the recent congressional farce surrounding the increase in the debt ceiling being an example), the current-account deficit will only rise; unless US households are willing to increase their savings rates massively (very unlikely, since I haven't seen any "going out of business" signs on Best Buy or Circuit City lately) or the declining-TIC-inflow trend reverses, there's trouble ahead for the latest US experiment in cut-rate conquest. {Note: "TIC" is the Treasury International Capital (TIC) report. The current-account data report how much the US needs to finance its lifestyle; the monthly TIC data report what it actually gets}.

There are many ways this trouble could manifest itself. Since much of this foreign-capital inflow finds its way into long-term US Treasury securities, it's hardly surprising that, with the recent shortfall in TIC inflows, Treasury interest rates are rising to their highest levels in two years. If demand is falling, then the market is marking down prices, and the basic rule of bond markets is that yields move in inverse directions to prices. Rising mortgage rates will put the US real-estate boom in real jeopardy, and it has been US homeowners pulling spendable cash out of the inflated values of their homes that has generated much of the consumption component of recent US growth.

It is also possible that this could lead to a sharp selloff in the US dollar, as has been happening in the dollar-euro market since November. If foreigners with export earnings from the US do not put it back into US assets, they will not just keep it stuffed in their mattresses; they will look around for interest-bearing instruments denominated in euros, sterling, yen, or a dozen other currencies.

This will cause these currencies to appreciate in value, and the dollar to fall. If you've ever looked at the back page of The Economist magazine you'll have seen the huge foreign-exchange reserves being built by countries that have recently been the winners in the global trading game. As of December, the International Monetary Fund lists Japan's reserves at $847 billion, China's at $819 billion, Taiwan's at $253 billion, South Korea's at $210 billion, Russia's at $194 billion, and India's at $137 billion. These reserves, held overwhelmingly as US dollars, are the potential gasoline just waiting for the match to set alight a huge global economic conflagration.

If somebody starts selling his dollar reserves, even if it's only a portion of his dollar portfolio, other countries could be forced into panic selling of their huge dollar reserves. The foreign-exchange markets are the biggest and most liquid in the world, but whether they would be able to absorb the amount of selling that could emerge from portfolio adjustments this large is a very open question.

<snip>

http://www.atimes.com/atimes/Global_Economy/HC24Dj01.html

[converted_democrat]

1. Kick and Recommend..

I honestly think the dollar will be all but worthless by the end of June, if not before that..


On edit- Here's why I think it's going to happen-

http://today.reuters.com/investing/financeArticle.aspx?type=governmentFilingsNews&storyID=2006-03-22T000415Z_01_N21342616_RTRIDST_0_ECONOMY-BERNANKE-UPDATE-2.XML

Snip-
WASHINGTON, March 21 (Reuters) - The chronic U.S. trade gap need not fuel a "precipitous" decline in the dollar, but the economy may be able to shrug it off if it did, Federal Reserve Chairman Ben Bernanke said on Tuesday.

"Although U.S. trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment," Bernanke said in a letter to Rep. Brad Sherman, a California Democrat.

The shortfall in the U.S. current account, the broadest measure of the nation's overseas trade, widened to a record $804.9 billion last year, or 6.4 percent of U.S. gross domestic product. Some analysts have said the widening of the trade gap could lead to a potentially damaging dollar drop.

On second edit- I don't think Bernanke would've brought it up unless he knows something is coming down the pike..

[riderinthestorm]

2. Shit, I really hope not June.

I need about another year to get my financial house in the shape I really want it.

Please please! Just a year and I'll breathe a sigh of relief....

[electron_blue]

3. Mind me asking?

What's so different about June? And if you *were* in the shape you wanted to be in, what would you do with all your money?

[riderinthestorm]

5. We're selling our farm

Where we are in debt up to our eyeballs and looking for a farm where we'll own it outright. The process of listing, selling, finding a new place and moving all of the livestock and equipment, as well as ourselve will eat up a chunk of time.

I'll use some of that cash to buy property out of the country so I get rental income in Euros. Locating that property and purchasing it will also take time.

Lastly, I'm in the process of waiting for my application for Irish citizenship to go through and I think a major US meltdown will spark a huge demand for others seeking a legal way to work in the EU - this would delay the processing of my application.

[electron_blue]

22. oh, wow. I see how it could come togheter for you very soon. good luck!

[riderinthestorm]

27. Thanks!

We're very, very lucky that we are right in the path of urban sprawl and the realtor tells us we should net $50,000/acre!!!!!

We're looking at properties that will cost us no more than $5-8,000/acre now which should free us up enormously.

But it's all a matter of time. And if the US implodes faster than we can get listed and sold, well it will be trickier.

And I worry countries like Ireland will severely restrict their immigration/citizenship processes if/when the US goes down.

Don't get me wrong, I sincerely hope NONE of this happens but I really believe the US is in for some devastating pain, and soon, and I want to be prepared.

We should have gotten out from under this mortgage a long time ago. But (hopefully) it's not too late.

[mistertrickster]

34. It's not too late. Interest rates are inching up, they're not shooting up

This economic melt-down scenario would take years to play out.

Also, the savings rate of Americans is not nearly as bad as it looks because whoever calculates it does not figure in real estate appreciation and investments (like stocks) as savings.

There's still a helluva lot of money in this economy, despite everything BushCo. has done to it.

[NMDemDist2]

4. I need til August or so

but I have moved my plans up to RIGHT NOW because the signs are there......

[LiberalPartisan]

6. How high will the US jump when China commands it?

If somebody starts selling his dollar reserves, even if it's only a portion of his dollar portfolio, other countries could be forced into panic selling of their huge dollar reserves.

China has been financing our debt which only hastens our slide in to 2nd rate power while China is ascending. The coup de grace will be when they decide to start blackmailing us in to modifying our policies under the threat of a dollar dumping.

In case it escaped anyone the US is no longer a super-power. We may have the toys, for now, but the sunlight is fast fading for the US as any kind of significant influence in the world. This is the Sino-Century. I wonder how the US will be remembered in the history books.

[Tierra_y_Libertad]

8. As another empire that overstretched itself.

History is littered with them.

The irony is that we preached capitalism to the Chinese and Indians. They're quick learners.

As Lenin said, "The capitalists will sell us the rope with which we will hang them."

[ladjf]

12. History may recall that while the U.S. had a great and noble

beginning. As the years passed, their citizens became increasingly stupid, possibly due to some environmental problem. Ultimately, the U.S. became a large and worthless third world country, now administered by an International UN Committee on Undeveloped Nations.

[Swamp Rat]

7. At this rate, the US dollar may be worthless in a couple of years.

Good thing I invested in education - it is priceless and I can bring it with me wherever I go. :)

[TexasLawyer]

9. The one thing no one can ever repo!

[Swamp Rat]

11. Yes, though I have some hefty student loans.

I'm not worried, unless debtor's prisons are created. :hide:

Two years ago I decided to go back and get yet a couple more grad degrees in science. Now, my prospects for working abroad have greatly increased, especially since I speak a couple other languages. :)

[Jamison]

13. Working abroad might be your best option.

There's a good number of highly educated people here working for crappy wages, and it's only getting worse with insourcing and outsourcing.

[Swamp Rat]

14. I'd like to stay here

in New Orleans, but it looks like the U.S. Government is gonna let us drown - the levees are NOT fixed, not even close! So, why should I stay in a country that lets my brothers and sisters die? Hell, I was happily living abroad but decided to move back to help with the 2004 elections. IF things do not turn around in the next two years, I will be seriously considering moving away for good. Anyway, this stupid government won't let my fiancée even VISIT me because she is from a Third World country, yet she teaches at a university, speaks 5 languages and has a college education! :eyes:

[upi402]

18. hey

I sent you a PM

[TahitiNut]

10. If the Fascist Neocons have their way with Social Security, then ...

... not only would it have a huge inflationary effect on the equities markets, the reduced demand for Treasury securities by the Trust Fund would merely add to the upward pressure on Treasury interest rates. The impact on the dollar might be enough to tip it over.

[Kansas Wyatt]

21. Are they planning on jerking Social Security away from Americans?

That would be enough to push Americans over the edge to rise up against their government.

If so, could this be the reason for the internment camps they are building?

After all, they will need prison camps to house people who have finally figured out that their government was defrauding them, because the people would be enraged and no longer obedient. Also, could be their repackaged 'New Deal,' where they claim they have campuses to take care of you, instead of paying out Social Security anymore and people worrying about whether they have enough money.

[cliss]

15. I'd like to make a suggestion -

for anybody who's interested in protecting themselves when the Dollar starts to tumble. (notice, it's not if but when).

Invest in circulated silver coins. We've started doing that. If we end up with hyperinflation like they had in Germany, we'll need a wheelbarrow to buy a loaf of bread.

For as little as $10.00 a month, you can build up quite a nice hedge of silver. Only get coins that were minted before 1964, because they are pure silver. You can go to any coin shop, they can sell you bags of the stuff for just a little above the spot price for silver.

Also, we live completely debt-free. I drive a small car which costs $20.00 a week to tank up. All our meals are home-made, from scratch. It's amazing how little you can live on, when you decide to do it.

I believe hard times are just around the corner.... I intend not to be one of those who gets taken by surprise....

[Gloria]

17. Guy on Coast to Coast a couple of nights ago recommended

a bag or half bag for every household....Silver will actually appreciate better than gold at this point...

[Elwood P Dowd]

19. They call it junk silver

I have a small bag, along with a couple of late-1800s Walking Liberty $20.00 gold coins, in the safe deposit box. Wish I could buy some more. Those were purchased 12-13 years ago. I imagine they are worth double what they were back then.

[AnneD]

30. Watch out what you put in a safety deposit box...

the Gov can access it for any reason (IRS does it all the time). I'd keep it were I could get my hands on it in a hurry if I needed it.

[pitohui]

36. so could any burglar

cheezus this is terrible advice

you have lots of warning before the irs gets fed up w. your lack of payment and goes into your box, one of my friends who had this happen literally did not pay his taxes for many, many years -- and at that irs left a receipt in his box so if by chance he does win his case, he'll get the package returned

the burglar gives no warning and sure as hell you never see the precious metals, jewels, or cash ever again

your homeowner's insurance does not cover these items, either, only up to $200 on the cash or jewelry, don't believe me? call your insurance agent TODAY

[AnneD]

38. I beg to differ......

there are many safes that can thwart many burglar and a built in hidden is the best of all. One must be discreet and not flash money about or habitually carry large sums. So the question is, do you want to be robbed by Homeland Security, IRS, or other gov entity, or do you want to take a chance that some kid breaking in might figure it out. I HAVE been burglerized before and they took things that could be replaced BUT, they never found the safe and the other valuables. I have learned the hard way to always keep some liquid assets on hand. I have been through hurricanes, floods, forest fires and an earthquake and never regretted having the cash on hand.

[TexasLawyer]

20. That's a good idea

I read once about how people in Venezuela coped with the melt-down of their economy.

People who had some cash in their house fared better because the gov't closed the banks and then sharply restricted the amount of money that could be withdrawn.

In the longer term, people were better off if they had things that they could barter.

I'm not saying that things will get that bad, but it can't hurt to be just a little prepared.

[TexasLawyer]

16. I thought this was interesting

From the article:

Thus in 2003, the current-account deficit meant that the US needed to entice $531 billion from the rest of the world. TIC data reported that what it actually got was $747 billion. For 2004, the need was $666 billion; it actually got $915 billion. For 2005, the need was $801 billion; $1.025 trillion was actually received.

Many economic commentators believe that as this excess foreign capital started sloshing around and through the US banking and financial system, it kept US interest rates low and thus fired the tremendous rallies in real-estate and stock-equity prices that have occurred in the past few years.

But nothing good lasts forever. From reaching a high of $117.2 billion in August 2005, the TIC reports are showing a steady decline in foreign inflows, down to $74 billion in December, and $78 billion for January, the last month for which data are available.

[DemReadingDU]

23. we're doing ok, but I worry about my 20-something kids

They're really just starting out in their careers, buying house, having kids, etc. When the economy folds up, they're more likely to be hurt financially.


So buying coins is more failsafe then socking money in bank CD's?

[earth mom]

24. K & R! nt

[EVDebs]

25. Don't we require 5 planet earths to sustain our consumption rates ?

Unsustainability, since the US is propping up the world's economy (World GDP around $36 trillion; US GDP at around $12 trillion, with 3/4ths that being 'consumption') means that if the US goes under we end up taking the rest of the world with us. And since the rest of the world doesn't have the same consumption habits as Americans, the end result is what ? World wide depression ?

I personally favor the Iranian petro-euro-bourse. It will further cause the value of the dollar to free fall and thus cause the return of manufacturing jobs etc back to the US. Sure, we won't be making the same amounts (being paid in worthless dollars) but Wal-Mart will be ruined along with the other farflung supplychain petroleum-based globalized corporations.

[AndyA]

26. Well, hasn't this been an uplifting thread?

Just the way to start off a new week here in debt-ridden America.

[mmonk]

28. I've been buying euro currency shares

from the Euro Currency Trust.
http://www.currencyshares.com

[pitohui]

37. buy high and sell low?

the time to buy the euro was some years ago when it was introduced, not when the soft dollar policy has been followed for some years and the euro is already too strong against the dollar!

if i have any gripe against DU, it is the amazingly astoundingly bad and irresponsible investing advice i have seen posted over and over on this site

if you've missed the train, you've missed the train, no use jumping on the tracks and trying to dragg everyone else along w. you

transaction costs alone from buying euro now will end up in eating your entire investment over the next decade or so

[mmonk]

39. No, you got it wrong.

I bought some euro shares as a possible counterbalance to maintain the value of my cash holdings (like when a person diversifies between stocks and bonds). The dollar very well may rise soon. As per my investments, when everybody lost around 34% in the stock market a few years back, I lost around 3%. So be careful in your assessments. I didn't invest in euro shares to buy low and sell high. I do that with stocks looking for undervalued companies. I also wasn't offering advice, merely making a statement of what I did a few months ago.

[mmonk]

40. Another thing concerning currency shares

You don't pay the fees of simple currency conversion as it's a trust whereby you pay in dollars for one share of the trust (euro deposits) which is the value of the euro. Also, you are paid interest at the euro bond rate (softens the decline you may experience in value per share). You can get out at anytime with a phone call and you are paid back in dollars.

I'm not advising anyone to do it. It is an alternative to gold as a hedge against a weak dollar and high debt policy. There will be other currencies such as the Swiss franc available in trust form. This is not for seeking profits or the home run but to guard against a depreciating dollar against other world currencies and it trades like stock.

[Festivito]

29. I'd look good as US if I borrowed 25% of my income each year.

Fed gov brings in 2.2T$ and borrows .6T$, or more.
That would be borrowing 26%.

If I made $22,000 and borrowed $6,000 each year, adding to my debt, I'd look swell.
I'd look like I made $28,000 a year.

Then, one year, some year, I'd crash.

[Neil Lisst]

31. I agree with the article. The US has 2.5 trillion held by those countries

... listed in the article.

While we probabaly don't have to worry about countries like Taiwan and Japan dumping their US dollars and securities, not so for China and Russia, who could dump a trillion between them. The result would be dramatic interest increases across the board in the US, affecting every transaction.

While Bush fiddles in the Mideast, the US economy could tank any time China decides to dump dollars.

[Greyhound]

32. Indeed

:kick:

[mistertrickster]

33. One problem with this scenario--foreign countries DO NOT want a weak $

I agree with a lot of this analysis.

But why is a weak dollar bad? It's not. It will make American products competative and drive up costs in dollars of foreign goods. That Chinese slave labor will be less profitable for the robber barons and US labor will be less expensive by comparison.

Why is that bad?

The only people that will really suffer will be people overseas holding dollars . . . their dollars will be worth less in local currency. It would also hurt folks wanting to take a vacation trip to a foreign country in which the dollar has devalued.

If that doesn't apply to you, why should you care?

BTW, tourism to the US would drastically INCREASE as foreign currency appreciates relative to US dollars.

[pitohui]

35. well this is why snow has followed weak $ policy for years

it does affect you if you travel, the $ is "toilet paper" in the infamous words of one of my netherlands cab drivers

people who think they will live overseas on their dollars have already had to come home if they were in europe, the euro and the pound are too strong unless they're filthy rich

in a sense the weak $ becomes one of those currencies that keep its people at home so they don't see how much better the europeans live w. their health care, child care, etc. benefits that we don't enjoy