Terry writes:
Please don't feed the trolls.
Terry | 05.17.08 - 3:30 pm | #

AllenM writes:
Ahh, CR, the JJ's of the world doubt that decoupling can exist- hence their calls for a perpetual bull market in US debt. I fully believe that the R>O>W will decouple out of a desire to pull the fangs from the raw materials inflation showing up in the dollar.

Simply put, the world is awash in dollars, but if they are all sold back to here, we will be awash in dollars, and they will be worth much less.

All of the talk of a strong dollar policy is defeated by our policy actions which resemble nothing so much as a beggar thy neighbor policy carried out through intentional inflation.

The federal deficit is growing fast, and that is our true source of inflation. After all, they just keep issuing debt, and those far off fears of running out of federal debt look pretty funny after seven years of economic max stimulus.

Someday this war's gonna end...
AllenM | 05.17.08 - 3:30 pm | #

Tom in AZ writes:
I guess if they have enough of our assets and they want to take care of their own bad enough, they will sell and take their chances for a time. But I don't know jack and admit it.
Tom in AZ | 05.17.08 - 3:33 pm | #

Terry writes:
China will need to spend a lot of money to recover from the recent earthquakes. They'll be buying a lot of steel and cement, amongst other things. They'll need to liquidate a portion of their USD holdings to fund those expenditures.

This may get interesting.
Terry | 05.17.08 - 3:35 pm | #

barely writes:
"not sure spending these surpluses will work as well as Lockhart envisions."

Especially for us. If these BRICs even slow down their investment by pulling back on Treasuries purchases it will spell trouble. If they dip into reserves (US Treasuries) and sell, LOOK OUT.
barely | 05.17.08 - 3:35 pm | #

GillianX writes:
To think that the US is going to slow down and it won't be felt in the emerging world is fantasy. When the US stops buying who is going to take their place?
GillianX | 05.17.08 - 3:47 pm | #

sdtfs writes:
but if they are all sold back to here, we will be awash in dollars,

Woo Hooo! We'll all be millionaires!


...someday never comes...
sdtfs | 05.17.08 - 3:50 pm | #

giacutter writes:
Thank you, CR, for addressing this topic.

I happen to agree with your conclusions.
giacutter | 05.17.08 - 3:50 pm | #

Big Al Yank writes:
With Europe slowing down too (another 25% of world GDP), I guess the Chinese and Indians are going to be selling to each other to make up for it. Good luck with that keeping the global economy ticking. Problem with those countries is what they don't spend on survival (food and warmth), they save.
Big Al Yank | 05.17.08 - 3:55 pm | #

sdtfs writes:
what they don't spend on survival (food and warmth), they save.

Let's send them some unemployed IB types to teach them how to invest and go for the big returns. India should have infomercials by now,...
sdtfs | 05.17.08 - 4:02 pm | #

justlookin writes:
The United States has to change the economic mix of our National output. We cannot keep spending and not producing and expect to survive as a Nation.

When the downturn is severe enough we will bring manufacturing back to our borders. This will be accomplished by other nations or it can be done by us.

A good start is to make all manufacturing tax exempt for the company and for the employees. This will make us competitive in a world market, create jobs so we can afford to reinfate and build our economic base.

The tax revenue can be replaced with a 5% National sales tax and/or a export tax.

We may take a belly blow but we will regain our footing if we have enough guts.

JL
justlookin | 05.17.08 - 4:20 pm | #

Kid Clu writes:
I am more concerned about what the effects on the US will be of "a negative demand shock of some duration". Perhaps if Fed governors were more worried about what was happening in OUR OWN COUNTRY and their duty to regulate member banks, we would not be in the financial mess that we are today, and Mr. Lockhart would not now have to be so upset about what may befall the rest of the world.
Kid Clu | 05.17.08 - 4:21 pm | #

bugly writes:
If China needs to spend dollar reserves to support domestic growth through a New Deal style program, they will crush the dollar in an emergency or a political contest of will; even if their holdings are devalued. Don't forget, China can run a deficit too.
bugly | 05.17.08 - 4:22 pm | #

AllenM writes:
Big Al Yank- actually they save, and then they loan it out rapidly.

All of those new buildings in china didn't spring up from imaginary capital.
As for the rest of the world, well, they are beginning to contemplate a world without massive US consumption propping it up, and they are contemplating getting their fair share, whatever the cost to our lifestyle.

After all, US centric thinking reigns supreme on Wall Street. Easy proof is how they view the solar market- it is all about demand here- which is puny. Third and Second world demand for solar is immense, yet all the blather is about the grid parity costs *here*.

In China and India, often there is a poor or nonexistant grid, so solar is replacing diesel and gasoline gensets.

Geez, yet all the analysts keep on blathering about the US Congress.

We are in a world of hurt, with plateaued oil supplies (really due to nationalization of major oil exporters), and a currency that is supported by the full faith and credit of the United States. Fat lot of luck spending that.

I read an article today http:// articles.moneycentral.msn...arsAGallon.aspx
discussing $10 a gallon gas, and what cutbacks would have to occur.

Kinda makes all of that drivel about house prices and the old ways of doing business look like buggy whip manufacturing.

I only hope that we have reached a temporary isle of stability in the decline of the dollar, if not, then my tagline will only apply when we get a new currency, and sdfts may be right in that it will be a long time coming.

Someday this war's gonna end...
AllenM | 05.17.08 - 4:28 pm | #

nanya writes:
I recently visited Eastern Europe, and noticed something that seemed counter-culture for the place: On TV were numerous ads enticing people to take out loans to finance their lifestyle (e.g. flat screen TV, motorcycle, furniture, etc.) I say counter-culture because it is ingrained into those people psyche to avoid debt. Also, this type of ads was absent a few years back.
nanya | 05.17.08 - 4:34 pm | #

BB writes:
I thought no one was actively buying US treasuries already.

Anyhoo, more protectionism will probably occur.. and wars break out too.

Best case scenario world gets richer {albeit at a slower pace than if US was consuming more) US gets poorer faster, worst case ..see above.
BB | 05.17.08 - 4:34 pm | #

Estragon writes:
CR - "And wouldn't that push up interest rates in the U.S. - further weakening the U.S. economy?

The fed could credibly threaten to cap long rates through longer duration open market operations (eg. buy long treasuries and agencies with newly minted cash). That would be inflationary (if they had to actually do it), but with a slowing economy they'd likely be able to justify it.

IIRC, this was among the measures Bernanke mooted back in 2002.
Estragon | 05.17.08 - 4:39 pm | #

andy in nz writes:
The argument for decoupling will go the same way as:

Goldilocks economy
Contained
soft landing

Most of the OECD economies have slowed, BRICs will have to follow, we have had a global synchronised boom....

Whooocooouldanoode!
andy in nz | 05.17.08 - 4:55 pm | #

Mr. Bail Out writes:
"The fed could credibly threaten to cap long rates through longer duration open market operations (eg. buy long treasuries and agencies with newly minted cash)."

Actually Bernanke said they could target a certain maturity (say at 2yrs) at a constant rate (or in otherwords price).

There is a problem though. If the inflation is being fed (or Fed :), then the holders of the longer term maturities wouldn't necessarily want to hold them at a low rate. So what you might see still is a very steep yield curve.

You should also note, that this option would NOT be taken in use before the effective federal funds rate was dropped to zero, or very close to zero.

So basically we are talking about an already mounted deflation before Fed would do it. Trying to do that (dropping FFR to zero and start targetting constant price for a U.S. treasury on a certain maturity) while having inflation pressures on would be insane.
Mr. Bail Out | 05.17.08 - 5:00 pm | #

aarlrenter writes:
Long-term interest rates should have gone up a long time ago. Until recently, economists thought that U.S. government borrowing and crowding out would drive up long term interest rates. No dice. More recently, many economists thought for sure that the falling U.S. dollar would cause foreigners to sell their U.S. assets and drive up long term rates. Nope. Then I figured that the financial crisis and subsequent inflationary policies by the Fed would drive up rates. No way. According to official measures, inflation remains low (and falling) and so do long-term rates.

I'm sure that Calculated Risk is correct and that foreign governments are buying up our T-bills to prevent their currencies from appreciating, but if, after this wrenching financial crisis and subsequent actions by the Fed don't stop them from buying T-bills, they're never going to stop.

I'm beginning to be convinced that macroeconomists don't really understand our economic system very well. It's as if pigs suddenly started to fly and physicists and biologists were unable to figure out why.
aarlrenter | 05.17.08 - 5:11 pm | #

Aheadofthecurve writes:
Consumption is not going to fall in the BRIC countries; it will rise. To some extent the high savings rate has resulted from the limited selection of goods outside of the largest, most cosmopolitan cities. That is now changing

http://www.nytimes.com/2008/05/1...& pagewanted=all

There is a huge difference between a mature market and a formerly poor, rapidly developing one. Everyone in the US who wants a sofabed already has one. To grow sofabed sales above the rate of the general economy you need to come up with some new innovation in sofabeds, which is hard to do. In Novosibirsk, all you need to do is open an IKEA.

Talk all you want about the US consumer slowing down (and they aren't spending less overall, just shifting to spending more on food and gas and less on housing) the global consumer is just getting started. If you focus on the US alone you will see the knotholes in the trees and miss the forest.
Aheadofthecurve | 05.17.08 - 5:11 pm | #

anon writes:
India alrealy started selling the U.S reserves to control core inflation. See the chart.
http://www.x-rates.com/d/INR/USD...D/ graph120.html
http://www.economist.com/agenda/ ...ory_id=11392398
anon | 05.17.08 - 5:11 pm | #

Bob Dobbs writes:
"Talk all you want about the US consumer slowing down (and they aren't spending less overall, just shifting to spending more on food and gas and less on housing)...."

That's a big "just." It means they can no longer get credit, and they're "shifting" spending to the increasingly expensive bare neceessities.

They're spending more money than ever, but it buys less and less, except in the housing market, which is deflating faster than a steroidal bodybuilder who lost his 'roids connection.
Bob Dobbs | Homepage | 05.17.08 - 5:27 pm | #

Belogistica writes:
Re: "It used to be said that when the United States sneezes, the world catches pneumonia."

I think there is a huge, very massive case to be made for diarrhea, which is the end result of colllusion, corruption, constipation and a large void of leadership.
Belogistica | 05.17.08 - 5:27 pm | #

Aheadofthecurve writes:
Bob-Most Americans (myself included) have so much stuff that if they bought nothing but necessities for the next 6 months they wouldn't feel a thing.

That's not true in Novosibirsk-Ivan and Yelena have been waiting for a sofabed (and a washer/dryer, car, etc.) since Kruschev's days and now they are going to have one. Just try and stop them. Go on...
Aheadofthecurve | 05.17.08 - 5:34 pm | #

jus me writes:
AOTC- does Novosibirsk really lack sofabeds?
jus me | 05.17.08 - 6:02 pm | #

hittites writes:
I'm beginning to be convinced that macroeconomists don't really understand our economic system very well. It's as if pigs suddenly started to fly and physicists and biologists were unable to figure out why.
aarlrenter | 05.17.08 - 5:11 pm |

If something can't go on forever, it will stop.

I don't remember now whose law this is, but this current situation will end, badly.
hittites | 05.17.08 - 6:03 pm | #

? writes:
I think the emerging world picking up where the US leaves off makes sense but the time frame is much longer than most think.

I doubt they'll be buying, fake X-Max trees and all the Western culture's paraphernalia.

There's a turnaround time for producing crap they'll want vs. the current crap they are producing for Westerners and I doubt for a lot of stuff it's less than a couple of years.
? | 05.17.08 - 6:04 pm | #

Anon writes:
Let me know when Chindia "celebrates" sweetest day. When we run into trouble in the US Hallmark always comes through.

Matter of fact, that's why they have been behind the curve...no Hallmark!

Paging McKinsey & Co., where have you been on the Hallmark solution?

:)
Anon | 05.17.08 - 6:11 pm | #

Ed T. writes:
America's Golden Age could be turning to Silver, China, India, and soon Africa are all just beginning to fully enter their industrial boom. The world's markets are shifting in that direction already.
Ed T. | Homepage | 05.17.08 - 6:13 pm | #

PrintFaster writes:
We fantasize that our GDP is the largest in the world and is needed to hold up the global economy. Wake up, our GDP with respect to the rest of the world is decreasing.

If the dollar drops another 50%, then the US ceases to hold much sway over the global economy. We are living in a dream world buoyed by a levitated dollar. When the props are finally cut for the dollar and we have to pay for the debt issued for imports, we will decouple.

We will decouple like a northern Argentina. The key to coupling is a valuable dollar. Without that we are adrift, much to the chagrin of Wall Street. Investment banks will need to move to Berlin, Bombay, and Beijing.
PrintFaster | 05.17.08 - 6:14 pm | #

Anonymouse writes:
"We fantasize that our GDP is the largest in the world..."

No fantasy needed: http://en.wikipedia.org/wiki/Lis...y_GDP_(nominal)
Anonymouse | 05.17.08 - 6:30 pm | #

barely writes:
"That's not true in Novosibirsk-Ivan and Yelena have been waiting for a sofabed "

LOL! If you think the price increases for food and fuel present difficulties here, where food costs run 10% or less of income, consider in emerging economies where food already represents 50%. 100% won't cover food expenses alone. Why do you think you are seeing food riots in EMs.

Ivan and Helena will be waiting a lot longer...
barely | 05.17.08 - 6:37 pm | #

Anonymouse writes:
Also notice how USA outranks the next four countries combined: Japan, Germany, China, UK.

One other important point. The second largest GDP - Japan - has been the only rich, industrialized country post WWII to have been in a general economic malaise for over a decade. They're well below where their GDP would have been today had they kept their trend growth from 1945-1991. My opinion is that 15 years from now, the U.S. will still be at the top of this list but will have stagnated even worse than Japan has since '91.
Anonymouse | 05.17.08 - 6:38 pm | #

andiron writes:
decoupling is a myth..a good chunk of reserve is susceptible to quick withdrawal by FIIs (in contrast to FDIs)//
there is a lag in the coupling process,but global recession will be serious. Commodities have peaked (hance BR of th bric too)
Lots of wall street pimps have tons of money at stake in Bric..hence this constant chirping of bric sustainability..
andiron | 05.17.08 - 6:39 pm | #

Anonymouse writes:
Sort of OT: I recall many here recommending Murray Rothbard's book about the Depression of the '30s. I've just begun reading Charles Kindleberger's work The World in Depression and am finding his thesis interesting (not exactly Keynesian or Monetarist). I recommend it.
Anonymouse | 05.17.08 - 6:45 pm | #

Disempowered Paper Pusher writes:
America's Golden Age could be turning to Silver, China, India, and soon Africa are all just beginning to fully enter their industrial boom. The world's markets are shifting in that direction already.

Africa? No way. Africa is barely supporting it's agriculture, much less an industrial base.
Disempowered Paper Pusher | 05.17.08 - 6:49 pm | #

Darkness writes:
When the US stops buying who is going to take their place?

Well, India's middle class is the size of the entire U.S. population and they are eager to be movin' on up as the song goes...
Darkness | 05.17.08 - 6:49 pm | #

Anon writes:
RE: India

India doesn't offer the opportunities that America does. I know a group of investors that have wanted to open a Ritz Carlton in New Delhi and there is no love from anyone there to get it done. Bribes haven't even worked.

Freedom to win and lose is what made America special. Through financial engineering we attempt to win 100%, but there is always a loser. When the government gets involved it bails out the wealthiest with the leasts' money through taxation.

We have lost touch with our roots.
Anon | 05.17.08 - 6:56 pm | #

mal writes:
Anyone read this story on the Texas family that's giving away their earthly possessions with the dream of striking out for organic farming in Vermont?

http://www.nytimes.com/2008/05/1...us/ 17texas.html

They just can't understand why nobody wants to come to their house and haul away the lifetime of accumulated Wal-Mart crap they wish to donate (because they're not able to properly value it for sale, they say.)

Oh, and in addition to organic farming in "clean country, with clean food and like-minded people," they expect that the husband will have high-speed Internet access in the deep woods so he can continue his career as a web admin.

According to their blog, they also forgot to obtain a suitable bus for them to live in, so are hoping someone will donate one. (Maybe they should have purchased one before they gave away all their priceless possessions...?)

my question: Why is it always Vermont? Why is it always organic farming? (Why not, say, plumbing in Pennsylvania? That's good honest work and I'm sure there is plenty of fresh air in PA too) Don't these discontented white collar suburbanites have any original ideas?
mal | 05.17.08 - 6:58 pm | #

barely writes:
"Don't these discontented white collar suburbanites have any original ideas"

web admin. The blue collar work of the 21st century. Crappy pay (relatively), uninspiring work, wage arb victims... without the guys to hang out and luchbox with or a union to bargain for them. It's actually worse.
barely | 05.17.08 - 7:06 pm | #

Sara R writes:
Well, crud. Someone official is saying what Peter Schiff has been saying for years. We must be closer to the end than I thought.
Sara R | 05.17.08 - 7:13 pm | #

bond guy writes:
If you look at the flow of funds or national accounts, you see that they are accounting identities. If foreign countries sold U.S. securities (Treasuries, Agencies, mainly) to "pull money out", they gotta buy something with their dollars. For every transaction, there has to be a buyer and seller.

"Capital repatriation" implies that the U.S. has to have a massive export boom, and the foreign countries have massive imports. Could happen if food prices rise 1000%.

If China does something like buy oil, it just means that energy producers have a bunch of dollars to buy Treasuries with. Also doing something like that will blow a big hole in their export-driven development strategy.
bond guy | 05.17.08 - 7:19 pm | #

Sara R writes:
Peter Schiff explains how American consumption isn't the engine of the world economy

He compares the world economy to an island with 7 people on it: 6 Asians and one American. They divide up the work: one Asian fishes, another gathers food, another one cooks, and so on. The American's job is to eat. We think that the American is creating all these jobs by consuming, but the Asians' standard of living would rise if they got rid of the American.
Sara R | 05.17.08 - 7:19 pm | #

Anonymouse writes:
Peter Schiff's EuroPac clients will be screwed over the next 2-3 years at least . He buys foreign equities, focusing on high dividend paying, commodity based companies. 1) The US dollar will have a significant bounce against all currencies but the Yen and Yuan. 2)All foreign stock markets will tank, typically more than the US market. 3)Commodities, even if their in a secular bull market, will decline by 50% or more and commodity stocks will do worse than the broad markets worldwide. 4) No decoupling. Possible collapse of many international debt markets. 5) Glod and Sliver will go back to their 2004 prices.
Anonymouse | 05.17.08 - 7:20 pm | #

Lucky Jim writes:
I'm not sure I agree with Lockhart's conclusions, but at least he's asking the right question: for decoupling to occur, where would the money come from, and what would be the effect? And it's going to have to be A LOT of money, with credit destruction accelerating and consumer spending decelerating here in the US.

Much of the rest of the industrialized world (especially the Anglophone countries) seems to be on a similar trajectory, so it'd have to come from the developing world. Foreign currency reserves are probably the largest pools of money out there. But if countries like China start spending them rather than continuing to accumulate them, it means the end of the vendor-financing monetary perpetual motion machine that's kept the global economy roaring for several years. I suspect the fallout from that would be severe, but I wish someone would address this in a more quantitative way.
Lucky Jim | 05.17.08 - 7:46 pm | #

Lucky Jim writes:
Sara R, I think that fable misses an important point: the American is paying those others for their food. Where does he get his money? By borrowing it from them. They lend him more, he buys more, etc. If the American disappears, all the others' "money" disappears as well because it's all in fact just IOUs from America. Then they're back to being subsistence fishers and gatherers.
Lucky Jim | 05.17.08 - 7:52 pm | #

El Cliffo writes:
Well, here's USA Today on cities suing home lenders for letting foreclosures happen, because that reduces the tax base and subsequent government tax receipts:

"Hawthorne [Minn.] and the city of Minneapolis are pioneers in an emerging civic strategy to sue lenders and banks to recoup lost revenue and reclaim neighborhoods devastated by the mortgage crisis. Around the country, the loss of tens of thousands of homes to foreclosure is shrinking cities' tax base, straining city services such as policing, and ruining neighborhoods."

The message is: if we can't tax you, we'll sue you.
El Cliffo | 05.17.08 - 7:55 pm | #

compsult writes:
Nice analysis. A good chess player has the ability to see how a current move will change the board and affect future moves. Lockhart seems to look only one move ahead.
Another thought, in a downturn, will the savings prone Chinese consumer increase their spending or their savings? In an economic slowdown, I think they stuff more under the mattress. A negative feedback loop could develop consisting of economic weakness, layoffs, fear & less spending.

Spending the reserves would mitigate the downturn, but as you say, would likely raise US interest rates as a side effect
compsult | Homepage | 05.17.08 - 8:06 pm | #

AllenM writes:
Anonymous,
I disagree. Every spring gold and silver, copper, etc have gone on a tear for the last five years, and every summer they take a break, yet they never seem to have regressed to the putative bottom of 1999.

They never will- oil dictates the cost of extraction, and that is much higher than it was in 2004, or 1999 for that matter.

The funny thing is nobody wants to accept the dollar is *falling*, not that gold is rising or oil is rising.

They are but signs of the disease. You might as well rail against the wind. It all kicked off when Cheney said: "Deficits don't matter, reward the base."

After that this has been a simple exercise in inflationary economics. Everybody wants it to be *different*- all it is is the same old thing. Too much debt from a large deficit, too much money going for the same amount of resources to foreign providers.

That lack of money means that we are going to have a bit of deflation in house prices, but in *anything* that is sold on a world market- just about all of your food, alcohol, oil, artwork.

So get used to it, there will be a *lot* of inflation in the pipeline, as we adjust to this level of input prices.

Houses, and money to buy them are essentially local services, not international commodities. Now, a mortgage is a long term commitment- but in the originating currency (unless you are foolish enough to take it out in a real hard currency- like swiss francs;-}

So go figure it out, most of it is quite obvious. Everytime a politician mentions a strong dollar policy, go buy something you will need in the future, it will be cheaper now, rather than later.

Someday this war's gonna end...
AllenM | 05.17.08 - 8:12 pm | #

linear algebra writes:
So much of the decoupling debate involves a straw man argument. No one simultaneously argues that globalization (increasing interdepency) is compatible with decoupling. OTOH, some people (including in this thread) are still assuming that the consequences of a U.S. recession will necessarily be bad for the rest of the world, rather than, say, having its pluses and its minuses, depending on where you stand. What if over the next couple of years US-China trade boils to the US importing inflation from China and the Chinese importing a needed cooling down of their economy from the US? Wouldn't that be a fair turn around from the situation of the recent past, where the U.S. exported debt instruments and imported goods and merchandise? If so, don't expect any gratitude from the Chinese. They are already complaining loudly that the U.S. gov't isn't doing enough to defend the value of the dollar.
linear algebra | 05.17.08 - 8:20 pm | #

Aheadofthecurve writes:
It will be interesting to see how Americans will react to giving up their "Exceptionality" and joining the rest of the world. I'm not sure it's a bad thing at all. For (at best) a marginally higher standard of living, Americans work 20 or 30 % more hours and don't even have a guarantee of health care. I suspect that after a bit of grumbling Americans may take to discarding the McMansions and SUVs for life in livable communities where you can walk, bike take public transit and now and then drive around in a fuel-efficient car. Will that be the end of the economy? Hardly, for every industry that dies, a new one will rise.

Obama is sort of a world figure and his rise indicates to me that many Americans are tired of being exceptional and are ready to join the world. Maybe the US will even adopt the metric system, leaving Bhutan as the only holdout. Who knows?
Aheadofthecurve | 05.17.08 - 9:27 pm | #

Emma Anne writes:
AOTC: "It will be interesting to see how Americans will react to giving up their "Exceptionality" and joining the rest of the world. I'm not sure it's a bad thing at all. For (at best) a marginally higher standard of living, Americans work 20 or 30 % more hours and don't even have a guarantee of health care."

Can we give up being a superpower too? There would be more resources at home if we didn't have a military the size of ten other countries'.
Emma Anne | 05.17.08 - 9:50 pm | #

Emma Anne writes:
Terry: "China will need to spend a lot of money to recover from the recent earthquakes. They'll be buying a lot of steel and cement, amongst other things. They'll need to liquidate a portion of their USD holdings to fund those expenditures."

Eep. This make me want to buy more TIPS. Isn't this combination inflationary?
Emma Anne | 05.17.08 - 9:51 pm | #

Jim writes:
"Can we give up being a superpower too? There would be more resources at home if we didn't have a military the size of ten other countries'."

Of course, WE can give up being a superpower. It would like having to give up being driven into penury. It would be like having to give up limitless moral shame.

The question is: Will the Mafia that profits from military expenditures and a worldwide extortion racket ever give it up?

And the answer is: Of course not, not unless they are forced to by an informed populace, one that is not brainwashed into militarism and nationalism by evangelical Christianity and by the MSM run by the Mafia.

And what, exactly, do you think the chances are that Americans would ever become informed?
Jim | 05.17.08 - 10:23 pm | #

Charles II writes:
Calculated Risk asks, "Wouldn't they [foreign countries wishing to stimulate their economies] have to sell U.S. assets? And wouldn't that push up interest rates in the U.S. - further weakening the U.S. economy - and further weakening exports for these same countries?"

The question to ask is, "Did the US have to sell foreign assets to run its deficits?" The answer, of course, is "No." We borrowed the money.

Sara R had a useful link to Peter Schiff saying that American overconsumption has not contributed to the well-being of the world. This is not quite right, but it's close. The point is that any region or country can choose to take the role of the US, running deficits. Countries with older populations might wish to do this. Countries that want to develop infrastructure might want to do this. Anyone can do it, as long as the world community consents. Up until now, we've had the veto power. No more.
Charles II | Homepage | 05.17.08 - 10:26 pm | #

barely writes:
ATC - "Americans are tired of being exceptional and are ready to join the world"

You're out of your mind completely.
barely | 05.17.08 - 11:37 pm | #

S N writes:
BRIC(developing) economies Forex contains sizeable amount of liability money like investment in thier country. These money will fly-out the moment these econimoes start showing weekness.

People have to understand the dynamics in place in BRICs. They are different. They aren't like US. However the bad in US, the US provides strong dose of blood and life in the form of allowing any person or entity to file BK.

Even though no one had ever talked about the possibility of US fed failings its promisses and defaulting on its treasury debt, US doesnot require to default on its debt.

All US has to do is force foriegners to incur loss in one way or another.

For example, India only pays US fed interest rate on all dollar accounts in india. Reason, they dont want to attract non-resident-indians (NRI) to open a dollar account in india and earn INR (indian-rupee) interest of 8%. Now you flip the plate. The US can and will say in the future that the interest paid to the foriegners will be approximately none. This will force the foriegners to divest their treasury holdings causing raise in interest rate of the local US population, but where will they invest then. By this time none of the investment avenues would be safe.

Whoever talks about the strength of BRIC, they understand nada about these countries or they are intentionally blinded themselves.

Ask just one simple question. Why in the world, the INR(indian-rupee) weakend 5% in past two weeks.

The life of all BRIC countries economic system are sustained by growth of money base.

That is, one should monitor the rate of money growth, rate of currency appreciation/depreciation and the inflation in that country.
S N | 05.18.08 - 12:18 am | #

Deepak Shenoy writes:
"India alrealy started selling the U.S reserves to control core inflation. See the chart."

The chart shows exactly the reverse. India's currency had fallen 6% against the dollar in the last two weeks. India's foreign exchange reserves are some $312 bn, and it seems like our fed (the RBI) is collecting reserves by the handful.

I for one would be quite happy to see reserves fall to get the exchange rate lower and contain inflation (a 44 month high of 7.83% as of Friday) India's gotta get rid of them dollars to buy foreign companies and pay for all sorts of infrastructure development imports. We don't need more than $100bn to stay healthy - could even do with $50bn, the rest should happily be thrown for development. Otherwise India's going to be just as badly hit.
Deepak Shenoy | Homepage | 05.18.08 - 12:29 am | #

norfolkcounty47 writes:
The thing is simple...they sold us material goods, we gave them dollars which they hoarded as a store of value. Now we will inflate the dollars so that what dollars they sell, or spend to buy our coal, tech, wheat and other goodies will fetch a lot less than they'd planned...we are not known enviously as yankee traders for no reason.

What a deal....to have someone sell you goodies in a currency you control...PT Barnum is laughing.

Life is good...enjoy it.
norfolkcounty47 | 05.18.08 - 1:21 am | #

unirealist writes:
Decoupling? Ha. If you want to know what will happen to the rest of the world when the US collapses under the weight of its debt, bureaucracy, military empire,and wacky religious superstitions, read history:

What happened to Europe when the Roman Empire collapsed?

Five hundred years of dark ages.

During that period, only a fraction of Europeans (and North Africans, and British) ever knew what century they were living in. Had it not been for monks and Moslems, science and philosophy would have vanished entirely. It was more than a thousand years before people rediscovered how to make concrete.

Hypothetically, decoupling is possible. Realistically, it won't happen. The US will drag everyone down with it into the abyss.

Leaders of the developed world know that decoupling is impossible. That is why they are doing all in their power to prevent our collapse. But you know what usually happens when a guy tries to save his buddy from drowning. They go down together.
unirealist | 05.18.08 - 4:05 am | #

mark writes:
Unrealist - The European 'Dark Ages' coincided with the 'Golden Age of Islam'. While Europeans shivered in hovels Damascus and Baghdad were some of the richest and most sophisicated cities on Earth.
mark | 05.18.08 - 5:14 am | #

jm writes:
CR wrote, Wouldn't they have to sell U.S. assets? And wouldn't that push up interest rates in the U.S. - further weakening the U.S. economy - and further weakening exports for these same countries? I'm not sure spending these surpluses will work as well as Lockhart envisions.

Right on, CR!

It is amazing how few people commenting on the possibilities of what the Asians might do with their dollar assets grasp the simple, utterly fundamental fact that to do something with them, they are going to have to sell them, and since they themselves constitute such a large fraction of the market for the Treasury and GSE securities they've been buying, any move by them to sell any significant quantity is going to send prices plummeting, interest rates soaring, and negatively impact their exports to the US.

Whenever I hear someone talking about the Asians selling their US assets to punish us, I always ask, "Sell? To whom?".
jm | 05.18.08 - 5:21 am | #

bond guy writes:
"jm writes:
It is amazing how few people commenting on the possibilities of what the Asians might do with their dollar assets grasp the simple, utterly fundamental fact that to do something with them, they are going to have to sell them... they themselves constitute such a large fraction of the market for the Treasury and GSE securities they've been buying...
Whenever I hear someone talking about the Asians selling their US assets to punish us, I always ask, "Sell? To whom?"."

Yup; as I pointed out above, the balance of payments is balanced, and for every buyer there is a seller.

If an Asian central bank sells $100 bn in T-notes, they will have $100 bn to put into the banking system. They can then buy something, which transfers the deposit to someone else. However, their banking counter-party now has $100 bn in cash deposits, which they need to lend out. They will thus likely end up lending the cash to a bond investor who was the original buyer(s) of the T-notes. The problem however is that the Chinese may not get a good price (lower price = higher interest rate).

Meanwhile, after this scenario plays out, the Asians have to figure out who can afford to buy all the stuff that their export machines crank out.

Asian/U.S. co-dependency has been going on for a long time, and so far the world has muddled through.
bond guy | 05.18.08 - 6:18 am | #

me writes:
Auto registrations UP in Europe. BMW and Mercedes shifting autos AWAY from the US to emerging markets.

Oh yeah, profits up.

Get over yourselves people and read Kevin Phillips latest book. The Saudis have been stiffing us since Bush invaded Iraq and started selling their oil to China. We are broke and cannot buy anymore. We make nothing for others to buy. We are a net importer of technology now and that was supposed to be our salvation along with films, which are also moving offshore rapidly.
me | 05.18.08 - 9:33 am | #

germansausages writes:
about the value of the us t-bills the chinese cant sell (because they would lose value to) Are that the same tBills the fed and the BOE are swaping for cdo at the moment and if that is so
what does that say about the value of this bills in the first place.So bet your A*** the chinese will sell before the fed devalued them conmpletely
germansausages | 05.19.08 - 6:05 am | #