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Elephants in the Living Room

Coryoth (254751) writes | more than 9 years ago

The Almighty Buck 37

The United States is facing the possibility of a severe economic correction. Yet most of the causes of such a correction are, for the most part, being completely ignored in preference to partisan bickering. It is the proverbial elephant in the living room - except it is not just one, but several elephants that everyone is doing their best to ignore. While the likelihood that any of these issues could result in disaster i

The United States is facing the possibility of a severe economic correction. Yet most of the causes of such a correction are, for the most part, being completely ignored in preference to partisan bickering. It is the proverbial elephant in the living room - except it is not just one, but several elephants that everyone is doing their best to ignore. While the likelihood that any of these issues could result in disaster is low, these are issues worth taking the time to discuss.

The first elephant is debt. There are 3 kinds of debt that are of concern: Household debt, the budget deficit, and the current account or trade deficit. Of those three, it is only the budget deficit that gets any real attention, and even then it is often brushed aside.

The current US budget deficit stands at $413,000,000,000 in the 2004 fiscal year. This is a record deficit. To put it in perspective, that's 3.6% of the Gross Domestic Product, almost a quarter of total federal spending, or 80% of the total receipts from Federal income taxes. Clearly such a situation is not good. But there are deeper implications for such a large fiscal gap. Some economists argue that such large deficits are detrimental to private investment. The deficit effectively soaks up a large portion of the US's savings, which would otherwise be invested back into the private sector. There is historical precedent for this - investment fell to record lows during the previous record budget deficits under President Reagan. But there is something else to consider as well. This debt is managed by selling Government bonds and securities. These securities can be, and often are, sold overseas.

Currently, the two largest foreign owners of US Government debt are Japan and China. Japan had an economic boom, but collapsed in the 90s and has been struggling since. The Japanese government is very conservative, and has been remarkably slow to introduce reforms that are seen by many as necessary to stimulate the Japanese economy. Recently however, the Japanese Prime Minister, Junichiro Koizumi, has been fighting to push through the necessary reforms, with some success. In the last couple of years the Japanese economy has shown signs of improvement. Meanwhile, the Chinese economy is strong, and only getting stronger. Why is this important? Because as both of these economies gear up there will be far less interest in investing overseas, and much greater emphasis in investing the the local growing economy. This would essentially amount to a mass sell off of US debt in the form of government bonds, something that would almost certainly fuel higher inflation in the US, putting pressure on the Federal Reserve to take action by increasing interest rates. That is to say, it would almost certainly lead to a large scale recession in the US.

The US current account deficit stood at $530,668,000,000 in 2003 and $313,341,000,000 for just the first two quarters of the 2004 financial year. That's a record figure for each of the first two quarters of 2004. This could represent a country living beyond its means, or it could represent an economic power attracting large amounts of foreign investment. Certainly as long as the US remains a significant economic powerhouse it can sustain high current account deficits. That is, as long as the US remains an attractive place for foreigners to invest, an imbalance is of limited concern. Whether such a high current account deficit is sustainable is a complicated issue affected by many factors. A reasonably coherent explanation of some of those factors can be found in a 2002 paper by Catherine Mann. In rough précis, the current account deficit is balanced by private savings, but widened by budget deficits, yet at the same time is driven by the attractiveness of US investments to foreigners. Should the current account grow too large, the perception of the ability of the US to repay the investment may decrease, causing an economic correction. In the conclusion of her paper Mann indicates that a change in trajectory (from growing to shrinking) is inevitable, and the concern is whether this will occur through slow structural and policy changes, or whether it will be caused by a sharp correction in overseas investment. Two of the major requirements she lists for structural change are greater fiscal discipline (resulting in budget surpluses) and increased personal savings. Since the paper was published in 2002 we have seen massive increases in the budget deficit, as just discussed. At the same time, the prospects for increased personal savings are very limited (which I will touch on in a moment). Add to that the beginnings of resurgent Asian economies attracting investment, and the risk of a sharp correction is certainly much greater. The consequences of a sudden shift in global investment away from the US would be extremely rapid depreciation of the US dollar, most certainly resulting in considerable economic hardship in the US.

US household debt stood at $8,454,400,000,000 in 2002, and has grown since. A quick look at the associated chart shows just how serious the upward trend in household debt is. This debt is driven both by mortgages, and by credit card debt in an increasingly consumerist society. Do you recall the "Shop for America" campaigns following September 11? It is exactly that kind of thinking that helps to drive the consumer society even further into debt. In 2004 household debt increased 4 times faster than the economy, and average credit card debt for households with at least 1 credit card increased 300%, to over $9000. Of course this is not necessarily crippling, as a recent speech by Alan Greenspan points out. It is, however, trending in the wrong direction, and getting worse fast. It is certainly far from the increase in household and personal savings required to help curb the current account deficit.

The concern about debt for the US is, in the end, quite simple. US debt, in all three forms, is huge, and it is only getting larger. All three forms of debt, while different, are connected in that both household debt and government debt have a significant influence of the sustainability of such a large (and growing) current account deficit. At the same time, either the current account deficit or the budget deficit, if they continue to grow, could easily trigger a rapid and severe depreciation of the US dollar. Which brings us to our next elephant.

The second elephant is the US Dollar. At the time of writing, the US Dollar is running at about 0.77 Euros to the Dollar. One could claim that this is simply due to a strong Euro, but in reality most world currencies, including the Japanese yen and the Great British pound are trading strongly against the US Dollar. A quick look at the historical record of the US Dollar against the Euro, the yen, and the pound shows a distinct downward trend over the last two years in all cases. Of course this need not be seen as a bad thing, certainly it is beneficial to US exports, an increase in which would be highly beneficial for the current account deficit. There are potential issues however. The US dollar has, to some extent, remained as strong as it has due its position as the de facto global currency, in which most major commodities, including oil and gold, are traded. The Federal Reserve estimated that in 2003 around $400 billion of the $680 billion US dollars in circulation were held outside the United States. This high demand for US Dollars overseas is an effective prop for the US Dollar, meaning it is unlikely to ever fall too low too quickly. This prop could, however, disappear. The possibility of the Euro becoming a new alternative global currency is increasing.

In 2001 Alan Greenspan gave a cogent speech on the possibilities of the Euro as a global currency. The first salient point is the fact that a global currency tends toward a natural monopoly - as use increases, it becomes an increasingly attractive currency to hold, while the decreasing liquidity of competing currencies makes them less and less desirable as a global currency. Transitions can of course be slow, for example the transition from the Pound Sterling to the US Dollar between the world wars, but once it begins it becomes inevitable. Greenspan then notes that, at least on the surface, the Euro possesses all the traits required of a global currency (a stable currency based in a strong economy with a well developed financial system and deep, liquid financial markets). Greenspan continues by discussing reasons why the US Dollar remained so dominant after the introduction of the Euro. He cites the strength of the US Dollar against the Euro (the Euro depreciated against the US Dollar in its first two years after introduction), the strength of the US economy on comparison to the EU, and the Euro's apparent inability to expand into foreign equity markets. As already noted, the strength of the US dollar against the Euro, and in fact most world currencies, has been in decline. On the other hand, while the relative strength of the EU economy to that of the US has increased during the US recession, the US economy is beginning to show signs of increasing growth. Lastly, however, the Euro is now beginning to extend into foreign equity markets, most notably oil. An increasing amount of Middle Eastern oil is being traded in Euros, and while the US Dollar remains dominant, both Iran and Saudi Arabia have flirted with the idea of completely converting to Euros. Equally significantly, Russia, the second largest oil producer in the world, has expressed serious interest in trading their oil in Euros instead of US Dollars, though it has not yet embarked on such an en masse conversion. For now the US dollar comfortably remains the dominant player, but there are enough signs for concern, and as Alan Greenspan pointed out, a transition will have a tipping point, after which it will be carried by its own momentum.

The threat to the US economy is that this transition, if it occurs, may not be slow. Because the strength of the US dollar is currently supported in part by its position as a global currency, a shift toward the Euro could trigger further collapse of a weakening dollar initiating a panic driven feedback cycle resulting in an almost complete collapse of the US dollar from its current point of strength. Such a collapse will only be compounded by the fact that the US currently repays its debt in US Dollars - the only country in the world that is granted the privilege of paying off debt in its home currency. Should the US Dollar destabilise significantly (or the Euro establish itself as the global currency) many debt holders could choose to request payment in Euros. This would force the US to purchase Euros (at a markup) to service its debt, both reinforcing the Euro as global currency, an inflating US debt. Such a situation would only serve to exacerbate the US Dollar's collapse.

Of course ideally such a collapse would be halted by the closing current account deficit as the price of imports skyrockets, and US exports become ever more attractive. The US populace is, however, a heavily addicted consumer, more than willing to spend its way into increasing household debt (as already noted). Worse still, US exports have been on the decline despite the recent weakness of the US dollar. Increasingly, the US is importing goods from China, and services from India. Which leads us to another elephant.

The third elephant is the rise of India and China. Both the Indian and Chinese economies are growing very rapidly. These are the two most populous nations on earth, so they should not be taken lightly. Both countries are filled with young and talented people eager to make the most of their education and climb the global economic ladder. In the case of India this has taken the form of, for example, outsourced IT jobs from the US. Increasingly US companies are importing their IT service from India, where there is a vast pool of highly capable people who do not face the vast cost of living that their counterparts in the US do. In many ways this can simply be seen as globalization and free trade beginning to more evenly distribute the wealth of the world, and is not a threat as long as the US continues to innovate and create new industries for itself. There is a question as to whether this actually occurring however.

The most common statistic for measuring economic strength, Gross Domestic Product (GDP), shows the US economy to be in good shape. Current US GDP is between 10 and 11 trillion US dollars depending on whether you measure by Purchasing Power Parity (PPP) or Current Exchange Rate (CER). GDP does have problems, the most important to consider here being its ability to include work that produces no net gain, and its lack of consideration for negative externalities. It is worth considering how much work in the US is included in the GDP that has very minimal net gain. For those familiar with the SCO Group versus IBM court case, its worth noting that tens of millions of dollars have been spent, all counted toward GDP, and yet most observers would point out that, in comparison to the money spent, the gains are negligible if they exist at all. This is common to a surprisingly large number of other court cases in an increasingly litigious country. All of it counts toward GDP, much of it returns little if any gain. A more debatable issue is the current costs of management, particularly in larger corporations that have exceptionally high salaries for the many tiers of upper management - is the net gain provided by management actually comparable to the money being spent. It is certain that management provides significant value, what is unclear is exactly how much value, and how that compares to the salaries involved. As stated, this is a point for debate. The fear is that if, in fact, US GDP is inflated by such issues, the economy could find itself hollow when it comes time to compete in earnest.

Currently India is exporting low and mid level IT services to the US, but given current Indian growth, it is only a matter of time before India is in a position to cease selling its services piecemeal, and instead sell complete packages. At present, while a certain amount of work is being outsourced to India as their economy grows, management and the corporations have remained in the US. Given the growing number of capable and experienced IT workers in India however, it is inevitable that new companies will arise in India taking advantage of the considerably lower cost of living to compete head to head with US corporations for complete solutions. Again we have to question the ability of the US to forge ahead into new industries. It could be argued that ambition for education, science, and research is lower for the current youth of the US than for their would be competitors in India, China, Korea and Japan. While there is involvement from the US in the very ambitious fusion reactor project, it will most likely be sited in Europe, and if not there, then Japan. On the other hand it was a US based company, Scaled Composites, that recently won the Ansari X-Prize and looks to be at the forefront of commercial spaceflight. The future remains uncertain, but this is certainly an issue for concern.

Finally, the rapid growth in India and China is having other visible effects. China, in particular, with its rapidly growing manufacturing sector, has had an an equally rapid increase in its demand for oil, adding a new element to the global oil market. While China is currently trying to slow its economic growth to more sustainable levels, the growth in its hunger for oil is not expected to be similarly dampened. Oil prices are already being driven ever higher, and unlike the crises in the 1970's, it is not due to disruptions in supply, but instead simply due to demand. That this is detrimental to the worlds largest oil user, the US, is obvious. Of more concern is that with increasing Chinese oil needs stretching current oil production capacity to its limits, a disruption in supply now could be catastrophic. This issue is discussed in detail in an article by Paul Krugman. In the wake of ever higher oil prices, alternative energy sources may prove to be one of the most significant new industries in the coming decade. With this in mind, the question must be asked: Which countries are going to be at the leading edge of research in alternative energy sources?

There remains one significant issue to discuss: the domino effect. This is the fact that the three major issues so far discussed are all interconnected. Increasing strength in the Chinese and Indian economies, providing goods and services to consumption addicted Americans willing to go into personal debt to maintain their standard of living, could easily lead to a widening of the US current account deficit. If the current account deficit grows too large it could easily trigger significant depreciation of the US Dollar. Should the US Dollar start too look too volatile, or become a significant financial risk to hold (due to depreciation), global markets could easily start to embrace the far more stable Euro, potentially sending the US Dollar into free fall. During a period of such extreme uncertainty in the US Dollar, foreign investors may well seek to diversify their investments away from the US towards rapidly growing countries such as India or China. That is to say, any one of these issues could trigger the others, to a devastating end.

Much of what has been discussed is speculative. Far from being probable, the potentially disastrous outcomes outlined are somewhat unlikely. Furthermore, even if the worst did come to pass the US would rebound, and may well come back stronger than ever. The reason to consider these issues, despite the low probabilities, despite the eventual recovery, is that the possible effects could be so pernicious during the time required for such an economic correction to shake itself out. The severity of the possible outcome demands our attention. These are issues that US politicians should be discussing instead of quoting the standard divisive talking points about the usual false dichotomies. You won't hear these issues raised, however, because with these issues politicians can't give a soundbite as to how they'll spend some money, or make a law that will fix the problem. Ignoring the problem won't make it go away, and just because there are no easy solutions doesn't mean that nothing can be done. What is certain is that nothing will be done if people aren't aware of the problems.

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Excellent Essay (1)

Vrejakti (729758) | more than 9 years ago | (#10929964)

Having read every word from beginning to end, I see you have clearly research all of the topics presented extensively. Thanks for enlightening me further on such interesting topics.

--
Stephen

Whoa! (1)

MsGeek (162936) | more than 9 years ago | (#10934677)

Damn good essay...you should be writing professionally. I'm linking to this on my blog.

Paul Krugman on Public Radio's Marketplace (1)

pherris (314792) | more than 9 years ago | (#10935245)

Paul Krugman [mit.edu] did a excellent commentary [marketplace.org] on this subject. It's pretty grim.

BTW, great journal entry.

safe harbours? (1)

SubtleNuance (184325) | more than 9 years ago | (#10943043)

Terrific entry. Ive been talking with people about these issues for some time, but this brings things together very clearly -- kudos.

If such an even DOES occur, how would a person defend his personal finances against it? Or even take advantage of the situtation?

Invest in euros? Gold? Resources etc?

If a quick adjustment of the US dollar does occur, what will both provide a safeguard and/or a personal-financial advantage (profit)?

Re:safe harbours? (1)

Coryoth (254751) | more than 9 years ago | (#10946131)

Realistically your best option at this stage is just diversifying your investments, particularly any long term savings. For instance, find a mutual fund, or other investment, that has most of their money sunk into interests outside the US, or other means to juggle their money to avoid the US Dollar. In the end it is better to let the professionals do any currency speculation wherever possible.

To try to take advantage of the situation involves large gambles - you have to bet that bad things will happen. If you're willing to do that, then investing in local industry that would be at head of any recovery would be the way to go. That's harder to predict, but some forms of manufacturing, such as makers of alternative fuel cars are one option - picking the right one is hard of course. I've also heard interesting things about Ethanol, and TCP as fuel sources (as opposed to hybrid cars). Investing in TCP plants could be another option.

However, unless you have a lot of money and can afford to take a few gambles, the safest option is simply, as stated above, to diversify your portfolio to investments that aren't dependent on the US.

Jedidiah.

Re:safe harbours? (1)

Edward Faulkner (664260) | more than 9 years ago | (#10968263)

Holding some gold is an excellent hedge against a dollar collapse. I have found that e-gold [e-gold.com] is a low-cost solution. And for the truly paranoid/wise, a little bullion buried in the back yard is smart insurance.

Another alternative is foreign currencies - especially from countries who are getting rich exporting commodities to Asia. You can buy CDs denominated in several different currencies from Everbank [everbank.com] . As a plus, many currencies are paying higher interest rates than you can get on dollars.

For the brave, there are many potentially lucrative speculations. Buy companies that profit from rising commodity prices, and that do business with China. Buy puts on exchange traded funds to profit from market crashes. Of course, it's all in the timing...

Re:safe harbours? (1)

slashdot_commentator (444053) | more than 9 years ago | (#10992083)

You have to be careful about using gold as a hedge. Realize that if you're not in physical possession of the gold, you're leaving yourself open to the possibility of getting burned. If you're buying gold shares, you have to be careful that the fund has a sacrosanct policy where they can physically back the complete value of their shares with gold. Some of them are "cheating" on that policy. Perfectly legal; the federal gov't doesn't even back their paper (the dollar) with any precious metals.

Also, realize that having physical holdings is no guarantee it will stay an effective hedge. The US on two occasions have made the trading of gold among individuals a crime, and compelled reinbursement of gold at an unfavorable exchange rate. That's why some investors recommend buying "collectable" gold coins instead, believing they won't be subject to a gold confiscation and will still keep their value. I'm not so confident this will always be the case.

The best advice is to diversify as much as possible between US currency attached investments (like US companies), and foreign sectors funds. Buy some land (at a fair price). I can't see putting more than 10% in precious metals. (Build a stockpile of food and water. Consider it a commodities investment.) Observe what happened to places like Argentina in the '90's and see what you can do to insulate yourself from a serious financial collapse.

Make sure you have a passport and perhaps a firearm, in case things get really dicey. Keep the eyes open. The media is committed to distort or not report critical information which could "spook" the general public. The media is owned by the privileged few. TV, newspapers, and radio answer to them and their lawyers, not to the readers or the truth. Look at how much warning you got from CNBC when the tech bubble burst. Did they get you out of Enron, Tyco, Worldcomm ahead of time? Analyze the contrast in coverage of Bush, Iraq, and 9/11 between US and foreign news services if you think I'm talking with a tinfoil hat. More nightmare^H^H^H^Htime reading [bostonherald.com] to keep you up at night.

Re:safe harbours? (1)

Edward Faulkner (664260) | more than 9 years ago | (#10992858)

Everything you said about gold is right on. For a "paper gold" approach that I think is more reliable that gold funds (like GLD), check out the Perth Mint's Certificate Program [cyberhaven.com] . You get full convertibility into unencumbered gold - and it's safely out of the US.

Sounds like you'd like The Mogambo Guru [dailyreckoning.com] .

Re:safe harbours? (1)

Rotten168 (104565) | more than 9 years ago | (#10996058)

If you're taking financial advice from one of the many "level-headed" individuals from /. then you have bigger problems to worry about.

Two words: Peak Oil (1)

vrmlguy (120854) | more than 9 years ago | (#10948043)

Most of these concerns are actually irrelevant. World-wide consumption of petroleum products continues to grow but no new reserves are being found. Once production peaks, we will see a world-wide economic collapse that will make the Great Depression seem like a down day on Wall Street. Gasoline will be unaffordable for consumers; some form of rationing will have to be instituted for essential transportation of food, but then food production will also start to fall to 1880 levels. Large portions of the U.S. will suffer malnutrition if not actual starvation. Due to the lack of gas, people will flee cities on foot and wipe out nearby farming communities.

I'm unsure if there will be any nuclear attacks on U.S. soil; I see little benefit to the attacker, but that doesn't mean it won't happen. Eventually, I can see a "Wild Wild West" scenario, where most of the country is living in 1880 but pockets of advanced technology try to maintain the communications and medical advances of the past century.

The only ways out are to spend a lot of capital now. Maybe on ethenol or bio-diesel, maybe space-based power satellites. Either way, I don't see anyone doing the spending. Me, I'm building an off-grid "vacation" home 3 hours driving time from the nearest city and 1 hour by car from any town with more than 10,000 people. I'm doing this on land where my great-grandparents were able to grow enough food to not only feed themselves but also sell some to the surrounding communities.

Re:Two words: Peak Oil (1)

Coryoth (254751) | more than 9 years ago | (#10949076)

We're still a ways from hitting peak oil consumption, and already there is considerable research into alternative energy sources, and downstream dvices to make use of those new sources (and do so increasingly efficiently). Predicting disaster when remedies are being worked on, and the horizon is still distant is perhaps a little foolhardy.

The US has immediate concerns in the here and now. Let me provide you a few links:

BBC US Dollar movement:
Decline begins [bbc.co.uk]
Slide getting serious 10 Nov [bbc.co.uk]
New low 17 Nov [bbc.co.uk]
New low 23 Nov [bbc.co.uk]
New low 24 Nov [bbc.co.uk]
New low 25 Nov [bbc.co.uk]
Dollar bounces a little [bbc.co.uk]

BBC General:
Greenspan says deficit is a problem [bbc.co.uk]
IMF says deficit a problem [bbc.co.uk]

Economist:
Buttonwood overview [economist.com]
Possible currency crisis [economist.com]

Miscellaneous:
China ditches US bonds [marketwatch.com]
Funds flee US [epinet.org]
Russia ditches US Dollar [nytimes.com]
Greenspan on the deficit and Asia buying debt [federalreserve.gov]
Why not make more debt? [boston.com]

A lot of that is pointing to the fact that many of the points discussed are potentially happenning right now, not in some distant future.

I'd also like to point out that I'm talking about a possibility of danger, not certainty of it. Claiming certain disaster is always something one should eb wary of. Few things in life are certain.

Jedidiah.

Re:Two words: Peak Oil (1)

ctr2sprt (574731) | more than 9 years ago | (#10949327)

The WSJ feels that our (national) debt is not a huge concern, as when you figure it as a percentage of GDP it's still fairly low. They ran a story lately comparing it to several European countries and our ratio is apparently significantly better. That said, they would like to see more being done to address the problem (in the form of reduced government spending). The export deficit they see as not a problem owing to our status as the biggest industial economy: they expect that when China and India catch up more they, too, will start running trade deficits. (In fact, China already is, to the tune of something like $50 billion.)

On the topic of exchange rates, they have been running editorials about every week, and occasionally more frequently, begging Greenspan to do something. They view it as the #1 risk to our economy at this point - and by a wide margin. Today the article is Currency on a Collision Course [wsj.com] . Since probably nobody here has a WSJ account:

In the meantime, the Bush emphasis on growth at all costs means a continuing benign acceptance of a weaker dollar so long as that trend is not precipitous. Dollar weakening is clearly underway again and this is renewing focus on Asia's failure so far to let its own currencies appreciate. The pain of this adjustment is again becoming apparent in Europe, while the Japanese are threatening intervention again. All of this means renewed attention on the renminbi's perceived extreme undervaluation. This is best reflected in China's growing share of world exports. China's share of world exports has risen from 1.8% in 1990 to 6% in the first five months of this year.
And later...
There are, then, risks, from the narrow U.S. perspective, of pushing China and other Asian governments to revalue since the present "game of chicken" suits the U.S. even if this means increasingly scary macro imbalances which, if they are allowed to continue to grow, will ultimately trigger the demise of the dollar paper stand to the benefit of owners of gold bullion. But from the point of view of the whole world, Asian currency revaluation is required to bring about a more balanced world economy by boosting the dollar purchasing power of Asia's cashed-up consumers. Bring on the Plaza 2 Accord.
I understood about one word in three of that, but the parts I did grok seem to support your argument.

Re:Two words: Peak Oil (2, Insightful)

Coryoth (254751) | more than 9 years ago | (#10949577)

It is indeed a big game of chicken in many ways. China has their currency artificially pegged to the US Dollar. The more the US Dollar falls the more pressure there is on China because their currency is further deformed from its true market value. To try and remedy that China, and actually even more so Japan, have been buying up large on US bonds and securities, artificially propping up the value of the Dollar, and alleviating pressure while allowing them to keep a low relative currency and hence have a good export market.

The game is nearing breaking point however. The US current account deficit has reached 6% of GDP - the point that normally signals economic collapse (see Indonesia and Argentina, both of which had such collapses at this mark). The US is okay for now because the US Dollar is the global reserve currency, but even that is not enough to stop pressure going on the US Dollar to depreciate. The falling Dollar leads people (such as Russia) to move their reserves into Euros, weakening the Dollar as a global reserve currency. At the same time, the pressure is reaching getting to be too much for China and Japan.

The catch for China and Japan is that to get out of the game is to let the Dollar fall. If they do that, they stand to make a loss in the tens (for China) or hundreds (for Japan) of billions of dollars on the securities they already hold, at the same time that their export market collapses. Pretty clearly that's an undesireable outcome. On the other hand, the longer they postpone it, the worse the situation gets for them.

So the bubble has to pop. The only remaining question is whether the bubble can be deflated slowly through structural change, or whether it bursts at once, causing economic chaos for the US, China and Japan. There's still time for changes to slow down any effects, making them bearable, but time is definitely running out.

Jedidiah.

Re:Two words: Peak Oil (1)

Panaflex (13191) | more than 9 years ago | (#11014640)

Way way late in the game on this response.. but perhaps the weakening of the USD is on purpose?

We have let our dollar fall from one of the strongest positions in many years to the lowest in a matter of 3 years. I think the US is trying to break the Chinese to stop devaluing their currency so as to even out trade deficits. As long as China pegs against the Dollar we can't close the gap easily.

America has always been masterful at using its economy to defeat others. I recently worked at a large US corporation on a currency conversion project. It was somewhat odd to me at the time why we would want to start collecting in Euros. Now I know why, as the conversion has saved millions of dollars in losses which would have occured. I noticed many other companies were in a simular effort as well. Perhaps it was planned? Who knows?

Pan

Re:Two words: Peak Oil (1)

Coryoth (254751) | more than 9 years ago | (#11014946)

Way way late in the game on this response.. but perhaps the weakening of the USD is on purpose?

Certainly there is a certain amount of purpose in letting the Dollar fall, as you say it outs pressure on the Chinese to stop pegging their currency, and it eases the current account deficit. The problem is, as outlined, if the US Dollar alides too much it could break some of the props that have been holding it up. Right now the US is running a current account deficit of 6% of GDP, and it has been steadily increasing. That cannot continue: Other countries that ran that sort of trade imbalance, like Argentina, Indonesia etc. albsolutely crashed, had their currency devalued massively, and had rampant inflation. Do some reading on Argentina and you'll get the idea. It's chaos there. The US hasn't suffered a similar fate for many reasons, but the US Dollar as global currency and China and Japan buying up US debt have been a couple of major points. If the dollar slides too much the Euro is poised to take over as a global currency, and given the way things have been going China and Japan are not keen on buying any more US debt (in fact, China has already slashed its holdings).

Kick those two props out from underneath the US Dollar and it could plummet instead of slide. Think "losing 40% or more of it's value in a year". That could drive inflation wild. Given that the US economy is currently fairly weak and consumer confidence is low the Federal Reserve has been very averse to raising interest rates (the normal approach to combattin inflation) for fear of crushing the slowly blooming recovery. The situation is very delicate right now, and things are going to be very interesting over the next 6-12 months.

Jedidiah.

Re:Two words: Peak Oil (1)

CaptainPinko (753849) | more than 9 years ago | (#10959814)

Large portions of the U.S. will suffer malnutrition

I'm sorry, but how is this a problem? Aren't many Americans already malnourished? And isn't the carb-reserves in America more than enough to last for at least a year of crisis? I mean if you lived off french fries you'd only need to ewat a few to get all the calories you need for a day. I just don't see Ethiopia happening in the states. Not trolling , just curious. IANADietician.

Re:Two words: Peak Oil (1)

vrmlguy (120854) | more than 9 years ago | (#10962268)

Did you see the movie, "Supersize Me"? First, you need more than calories, you need nutrition: vitamins, minerals, etc. A year's supply of One-A-Days would help, but once they're gone... Second, there's the transportation of the food. A year's supply of french fries aren't going to do you much good if they are rotting in a warehouse 500 miles away.

I've seen estimates that without petroleum, the food-producing capacity of the US is only enough for 200 million people. The population today is 290 million, you do the math. Plus, those extra 90 mill aren't going to roll over and die; they will fight for food, meaning any decrease in population will likely overshoot the mark a bit. I could see a drop to 100 mill, maybe even 50 mill, before things stabilize.

Re:Two words: Peak Oil (1)

toganet (176363) | more than 9 years ago | (#10996713)

That's what the drugs are for, man.

When the food gets scarce, you make sure there are drugs available for people as an alternative. Crack is especially good in this regard. After only a few uses, people will choose it over food anyway.

Re:Two words: Peak Oil (1)

slashdot_commentator (444053) | more than 9 years ago | (#10992173)

Maybe on ethenol or bio-diesel, maybe space-based power satellites.

Scratch ethanol or bio-diesel. They're not self-sustaining methods of generating fuel. The big thing about "peak oil" is not that there won't be fuel for food transport. The big thing about "peak oil" is that we use A LOT of petroleum in order to generate the fertilizers & pesticides to create our technological crop yields. No petroleum, no ethanol.

Me, I'm building an off-grid "vacation" home 3 hours driving time from the nearest city and 1 hour by car from any town with more than 10,000 people.I'm doing this on land where my great-grandparents were able to grow enough food to not only feed themselves but also sell some to the surrounding communities.

Have you ever tried to bring in a crop for a season? Some "vacation" home...

Re:Two words: Peak Oil (1)

vrmlguy (120854) | more than 9 years ago | (#11030766)

Scratch ethanol or bio-diesel. They're not self-sustaining methods of generating fuel. The big thing about "peak oil" is not that there won't be fuel for food transport. The big thing about "peak oil" is that we use A LOT of petroleum in order to generate the fertilizers & pesticides to create our technological crop yields. No petroleum, no ethanol.
Both of our assertions are true. First, ethanol production doesn't have to be "self-sustaining" for ethanol to be useful. The production of batteries isn't self-sustaining but they are very useful as a way to store and transport energy. Using ethanol allows re-use of the existing petroluem infrastruction to keep our cars/trucks/railways running. Unfortunately...
  • The US imports 606,295,000 barrels of gasoline, jet fuel, diesel and kerosene annually.
  • 1 bushel of corn produces 2.5 gallons of ethanol.
  • "23.8 gallons of ethanol displace one barrel of imported oil." (The meaning of this is open to interpretation of the word "displace", but I'll go with the simplest.)
So as a back-of-the envelope calculation, we need at least 5,771,928,400 bushels of corn annually to produce enough ethanol to replace the current US imports of gasoline, jet fuel, diesel and kerosene. The bad news is that the US grows "only" 9,100,000,000 bushels of corn annually, so we'll use over half of our corn crop. I am forced to conclude that the private automobile will be so much junk. Commuter trains are usually electric, so they can be used within cities. But even assuming a "soft" touchdown, our interstate highway system will have to have tracks laid down on the roadbed for the use of coal- or wood-fired locomotives. Commercial airplane travel is going to be obsolete, althought the government will keep its fighters and bombers running as long as possible. Intercontinental cargo will have to be transported via sailing ship instead of cargo transports. Any business that depends on large trucks will go belly-up; "small town" cafes and stores will finally have their revenge on McDonalds and Walmart.

Space-based power is still barely possible. As the first step, we need to immediately dust off NASA's 1980 plans (http://www.islandone.org/MMSG/aasm/ [islandone.org] ) to build a von Neumann machine on the lunar surface.

Have you ever tried to bring in a crop for a season? Some "vacation" home...
Once things start to collapse, I think that I won't mind the required effort. The house is on a few acres of land that already has a half-a-dozen fruit trees. I will be planting a larger orchard of maybe thirty trees. I will also be experimenting with a vegetable garden. http://www.eap.mcgill.ca/MagRack/SF/Winter%2094%20 O.htm [mcgill.ca] This and a few head of cattle will give me a nice Atkins-like diet until I can replace the alfalfa with cereal. My goal right now is to stockpile things that will become valuable (like sheet plastic for building greenhouses) that won't be able to be produced after the oil runs out.

Starve the beast (1)

hrvatska (790627) | more than 9 years ago | (#10948456)

The huge federal deficits are not purely accidental. There's actually a method to the madness. There is a wing of the Republican party that believes in a strategy known as 'starve the beast'. This approach seeks to limit government programs by producing large deficits that make it impossible for the federal government to do anything but engage in little more than essential services.

same guy (1)

Apreche (239272) | more than 9 years ago | (#10949513)

At first I thought you were stealing a story from Kuro5hin, but now I see you are the same guy, so its all good. But why link to your /. journal in your sig instead of the story on kuro5hin where there is an active discussion?

Re:same guy (1)

Coryoth (254751) | more than 9 years ago | (#10949593)

Oddly enough the Slashdot sig character limit. The lengths of links counts into that, and a Slashdot link saves me a lot of characters, which leaves more room for actual text.

Ye are wrong. (2, Funny)

killjoe (766577) | more than 9 years ago | (#10950040)

Dear Sir,

My name is George W Bush. I wish to inform you that you are very wrong. There is nothing wrong with deficits, increased govt spending, or the decline of the dollar. How do I know? Because God told me so that's how. Now who you gonna believe? Some liberal bedwetter or God?

God will take care of it in the end. He will make sure his chosen people are OK and really who cares about the rest.

I gotta go now, toby keith is on the radio.

Bye.

Use of statistics (1)

bequw (153588) | more than 9 years ago | (#10950392)

Overall I like your entry. I had a couple comments while reading it. When expressing national economic statistics, it is more expressive to show things in proportion to the country. So for debt (or other stats), don't say 'The US debt is $413,000,000,000!' since that is worthless if you don't know the size of the US economy. Yes the US debt is rising, but let's look at the numbers in the right perspective. I got all this data the Economist [economist.com] (go to each countries Profile-Economic Data). Here we go, Public debt as % of GDP in 2003.
USA-62.43
Germany-63.90
Spain-64.45
France-69.10
Canada-77.00
Italy-106.67
Japan-154.62

Regarding China, and its purchases of US debt, China primarily buys US bonds because it wants to keep it's exchange rate artificially low to help its export business. What is most likely to stop this isn't China's growth, but either a large slide in the dollar or them easing up on monetary policy (due to our urging no doubt).

Your comments about GDP being inflated are somewhat true, but also untenable and hardly US-specific. For one, trying to seperate 'gain' from 'money spent' is going to leave you with no place to stand. For one, it's highly biased. A frivolous SCO lawsuit to one person could be a useful business signal for accurately assessing the state of laws in the US. And how do you compare frivolous litigation in the US to a firvolous entertainment industry in Bollywood?

From having worked in Bangalore I can tell you that companies there are already moving up the value chain. But the outsourcing situation is, again, overblown with its emphasis on Indian IT. In terms of global outsourcing, the US is net-beneficiary (from an Economist this past year, though I don't have it on hand). The US provides much high-value work including business and financial planning. In the end, it's just too small to make a huge impact for many years to come. Trade will always be based on comparative, not total, advantage.

Regarding oil, one main reason that oil prices are so high, is that there is already a 'threat' premium that accounts for something in the order of $10-$15. So, no need to get doubly worried, the oil traders are already pricing in risk of damage to the supply.

Re:Use of statistics (1)

mdfst13 (664665) | more than 9 years ago | (#10950610)

It's also worth noting that while a deficit of 3.6% is too high to join the European Union (as per Maastricht), it is not that much too high. The cut off was 3%. In other words, even *with* the war, we are still at roughly the same deficit as the UK was when they were trying to join the EU. Without the war, the deficit would be 2.9% or 3.0%, within the EU limits. Not to say that the US wants to join the EU, just that it isn't that far off from the qualifications.

When based on GDP %, deficits don't look nearly as big relative to other countries.

Re:Use of statistics (1)

flossie (135232) | more than 9 years ago | (#10969133)

Not to say that the US wants to join the EU, just that it isn't that far off from the qualifications.

:o) There are many other qualifications that would be required if the US wanted to join the EU. Apart from relocating to Europe, there is a lot of legislation about social welfare and workers' rights that would be very unpalatable to the current US administration. Oh, and a certain degree of transference of sovereignty to Brussels.

You aren't scared enough (1)

tqft (619476) | more than 9 years ago | (#10950897)

One - look at Fannie Mae and Freddie Mac. Dodgy accounting, increasingly risky position taking.

Two - look at the credit derivative markets. How many trillion dollars ?

Three - guess what happens if a major bank or institution gets caught on the wrong side of big currency swing (USD/JPY or USD/Euro). Credit event. Credit derivative market goes ape. Fannie and Freddie, and a bunch of others, feel real pain.

Money available to borrow (households, corps) - nil.

US growth - negative.

US jobs - negative.

Political reaction???

Nice work (1)

beef3k (551086) | more than 9 years ago | (#10951258)

Just to add some more praise - excellent job mate!

You have a poor understanding of GDP. (1)

Rotten168 (104565) | more than 9 years ago | (#10995989)

That's all I will say about that.

Re:You have a poor understanding of GDP. (1)

Rotten168 (104565) | more than 9 years ago | (#10996116)

In particular you've fallen into the "broken windows" trap. Essentially the theory goes that you can break a large number of windows and add the net cost to the GDP, which you most certainly can. But what will be taken into account is the net loss in other parts of the economy from those broken windows. If you break someone's window, you're decreasing overall productivity, for example, so while you're adding the total cost to the GDP, productivity will be lessened elsewhere and it will show up when all the counting is done at the end of the day. GDP represents a point-in-time finite size of the total economic capability of a country and whether we use our economic capability to make pet rocks, litigation, or computers the net effect is the same (at least at that moment, the long-term effects are another story). A lot of the stuff Japan and China makes are toys and knickknacks and Jesus figurines (things that have absolutely no practical economic benefit), do these artificially inflate their GDP?

If you're gonna talk about GDP inflation, you should at least mention hedonic pricing, which is controversial (and was introduced by the Clinton administration). BUt that's another story.

Debt (1)

fishbowl (7759) | more than 9 years ago | (#11014080)

Whoever keeps lending money to a bankrupt deadbeat NEEDS TO STOP.

If the US is even ABLE to incur debt, that reflects much more on the lender (SUCKER), than on the US.

Re:Debt (1)

Coryoth (254751) | more than 9 years ago | (#11014987)

Whoever keeps lending money to a bankrupt deadbeat NEEDS TO STOP.

If the US is even ABLE to incur debt, that reflects much more on the lender (SUCKER), than on the US.


For foreign countries Japan is the worst offender, with China a close second. They've been buying US debt because buy buying bonds and currency they can keep the US Dollar strong. As long as the US Dollar is strong they have cheap exports to the US. It's been working very well for them for the past many years. The problem is, if their buying is no longe enough to prop up the Dollar (like now), or they come to doubt the returns on the investment (like now), they may well stop buying debt. That's going to make things very hard for the US.

The single worst offender though, is the US itself. Weird as it may sound, the US owes itself a lot of money. For example, money is lent from Social Security to finance budget deficits. In some ways this is good, the goervnment has cash in one had, and a shortage in the other, so giving itself a cheap low interest loan rater than an expensive private loan makes sense. Then again, that money will have to be paid back in some manner when the requisite Social Security comes due. In reality the American public is the biggest funder of US debt.

So that sucker that needs to stop? That's YOU!

Jedidiah.

Re:Debt (1)

fishbowl (7759) | more than 9 years ago | (#11027791)


>So that sucker that needs to stop? That's YOU!

Well, "borrowing" without express consent of the lender, is more correctly called something else.

Re:Debt (1)

Coryoth (254751) | more than 9 years ago | (#11028324)

I understand where you're coming from, but generally elections are considered to be the "consent" phase of the whole operation. Which, of course, is not to say that you consented, just that a majority of the population consented. Blame them.

Jedidiah.

Re:Debt (1)

fishbowl (7759) | more than 9 years ago | (#11033634)

"Which, of course, is not to say that you consented, just that a majority of the population consented. Blame them."

Ok. So either they are right, and it will all work out in the long run, or they are wrong, and the country is on the fasttrack to utter ruin.

Either way, I'm satisfied. I know how to grow my own food, etc. Others can starve for all I care.
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