They're loaning us all this money, almost $1 Trillion now, while their currency is artificially low, and ours is artificially high.
Stay with me here...
When we go to pay China back (if we ever do - if we ever can) we'll be paying them back with the revised currencies - ours will have depreciated significantly, theirs will have appreciated significantly. So if it was 1 dollar for 1 yuan, now it's like 4 dollars for 1 yuan.
See the problem? You should if you're holding dollars...
The best part about all of this (if you are on the China side of the deal) is that the U.S. dollar is at its strongest it will ever be in terms of value. As mentioned, the yuan is at an artificial low. So for the Chinese, all the lending that they have been doing is at the best possible terms: On the cheap. If the yuan is allowed to strengthen against the dollar, any "repayments" done on America's part could be twice as expensive going back.
All of a sudden I feel like I'm living in Argentina in the early 90's.
April 11, 2006
Doin' the math - how many depreciated dollars will it take to pay China back
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17 comments:
umm, I'm not an economist, so I may be totally off base here, but haven't you got it exactly backwards? The US government pays on its obligations in USD. We'll be paying them back in depreciated currency --- far less in value than what we would owe if the yuan stayed pegged to the dollar.
the problems I see are:
1) the dollar is about to get killed
2) china is likely to start selling off its US$ debt - thus sending interest rates sky high
So yes, exactly, we'll be paying them back in depreciated currency. Or someone back, if they manage to unload their US$ debt.
But my assets, 100% in dollars, will be worth less than they are today. Unless I move into foreign stocks, gold, foreign currencies, oil, etc
In times of inflation, the debtor wins and the lender looses. Sure our dollar is worth less but what will we care if we are making more money. It will be they who loose out.
And just why are we so pissed about China subsidizing our purchases?
Keith,
As others have said you have it backwards. I took a few economic courses in college and read a lot about economic issues. Please fix your mistake.
David
Bubble Meter Blog
The reason China doing that is very simple. They need our technology and they're succeeding in that. Manufacturing outsorcing is just a preliminary step. Research and development business in high-tech and bio/medicine is their target. My friend lost his job as a researcher because Motorola outsourced it to China. China is building 5 huge semiconductor fabs with capacity comparable with Intel. They're developing very cheap processor, together with Linux a laptop would cost about $100.
Some people give 5-10 years for China to catch up the US in technology. I would estimate 2-3 years. In 2008 they're hosting Olimpic Games, so after that can start dumping US Treasure Toilet Paper. For sure that will collapse all lifestyle in US, sending interest rates to the Moon. Once collapse is undeniable, many chinese professionals (as well as Indian) will leave this country and bring their knowledge and skills back to their native countries. I talk to them, they're very determined.
So, enjoy you life until 2009.
"And just why are we so pissed about China subsidizing our purchases?"
Because the situation is like having a Walmart move into town...all the local businesses start folding up. We are shutting down our manufacturing infrastructure because our products are not competitive against subsidized Chinese products. When the dollar goes into deep decline, we will be paying through the nose for all those things that we cannot produce domestically any longer.
Check the comments of Dr. Osterholm on the Avian flu situation...they claim that most of our basic medical supplies are no longer made in North America and will have to be imported 12,000 miles from Asia. That is if they don't use them all at home during a pandemic...And we don't have much in the way of stockpiles due to just-in-time delivery.
And, yes, Keith has the situation backwards.
It is the Chinese who are taking the risk in holding all the dollar accounts....which explains why they are currently trying to spend them down buying US and energy assets. If the dollar starts into a steep decline, it will be difficult to get out of those dollars positions without huge losses.
Of course, they have to take the currency risk because the US is their biggest market..... if the domestic Chinese factories start shutting down, they might be facing unmanageable social unrest.
Keith is wrong about many things, but given his extreme alcoholism, he could be much worse. Keith, put down the bottle man, it is making you stupid.
HYPERINFLATION ON STEROIDS HERE WE COME!!!!!!!!!!!!!!!
From "The Creature from Jekyll Island" by Edward Griffin and I came across this;
"Because the Federal Reserve can be counted on to "monetize" (convert into money) virtually any amount of government debt, and because this process of expanding the money supply is the primary cause of inflation, it is tempting to jump to the conclusion that federal debt and inflation are but two aspects of the same phenomenon. This, however, is not necessarily true. It is quite possible to have either one without the other.
The banking cartel holds a monopoly in the manufacture of money. Consequently, money is created only when IOUs are "monetized" by the Fed or by commercial banks. When private individuals, corporations, or institutions purchase government bonds, they must use money they have previously earned and saved. In other words, no new money is created, because they are using funds that are already in existence. Therefore, the sale of government bonds to the banking system is inflationary, but when sold to the private sector, it is not. That is the primary reason the United States avoided massive inflation during the 1980s when the federal government was going into debt at a greater rate than ever before in its history. By keeping interest rates high, these bonds became attractive to private investors, including those in other countries. Very little new money was created, because most of the bonds were purchased with American dollars already in existence. This, of course, was a temporary fix at best.
Today, those bonds are continually maturing and are being replaced by still more bonds to include the original debt plus accumulated interest. Eventually this process must come to an end and, when it does, the Fed will have no choice but to literally buy back all the debt of the '80s -- that is, to replace all of the formerly invested private money with newly manufactured fiat money -- plus a great deal more to cover the interest. Then we will understand the meaning of inflation."
On the other side of the coin, the Federal Reserve has the option of manufacturing money even if the federal government does not go deeper into debt. For example, the huge expansion of the money supply leading up to the stock market crash in 1929 occurred at a time when the national debt was being paid off. In every year from 1920 through 1930, federal revenue exceeded expenses, and there were relatively few government bonds being offered. The massive inflation of the money supply was made possible by converting commercial bank loans into "reserves" at the Fed's discount window and by the Fed's purchase of banker's acceptances, which are commercial contracts for the purchase of goods.
Now the options are even greater. The Monetary Control Act of 1980 has made it possible for the Creature to monetize virtually any debt instrument, including IOUs from foreign governments. The apparent purpose of this legislation is to make it possible to bail out those governments which are having trouble paying the interest on their loans from American banks. When the Fed creates fiat American dollars to give foreign governments in exchange for their worthless bonds, the money path is slightly longer and more twisted, but the effect is similar to the purchase of U.S. Treasury Bonds. The newly created dollars go to the foreign governments, then to the American banks where they become cash reserves. Finally, they flow back into the U.S money pool (multiplied by nine) in the form of additional loans. The cost of the operation once again is born by the American citizen through the loss of purchasing power. Expansion of the money supply, therefore, and the inflation that follows, no longer even require federal deficits. As long as someone is willing to borrow American dollars, the cartel will have the option of creating those dollars specifically to purchase their bonds and, by so doing, continue to expand the money supply.
We must not forget, however, that one of the reasons the Fed was created in the first place was to make it possible for Congress to spend without the public knowing it was being taxed. Americans have shown an amazing indifference to this fleecing, explained undoubtedly by their lack of understanding of how the Mandrake Mechanism works. Consequently, at the present time, this cozy contract between the banking cartel and the politicians is in little danger of being altered. As a practical matter, therefore, even though the Fed may also create fiat money in exchange for commercial debt and for bonds of foreign governments, its major concern likely will be to continue supplying Congress.
The implications of this fact are mind boggling. Since our money supply, at present at least, is tied to the national debt, to pay off that debt would cause money to disappear. Even to seriously reduce it would cripple the economy. Therefore, as long as the Federal Reserve exists, America will be, must be, in debt. The purchase of bonds from other governments is accelerating in the present political climate of internationalism. Our own money supply increasingly is based upon their debt as well as ours, and they, too, will not be allowed to pay it off even if they are able."
==
This little snip flashed across my brain while I was thinking what a coincidence that the M3 indicator was discontinued by he Fed last month.
"Eventually this process must come to an end and, when it does, the Fed will have no choice but to literally buy back all the debt of the '80s -- that is, to replace all of the formerly invested private money with newly manufactured fiat money -- plus a great deal more to cover the interest."
Is this it boys and girls? As Griffin says "Eventually this process must come to an end". Could this be the end of that process and we now face a period of massive hyperinflation??
Keith, I still love you.
follow this argument and let me know if I am wrong. I think the confusion is you're all putting yourselves in CHINA's shoes our the US GOVERNMENT'S shoes. Also the author used the word "expensive" where he should have said "more dollars"
For this argument, I'm talking about YOUR shoes - any holder of dollars.
1) dollars are going to get killed as the only way to pay off the $US Trillions of debt held by foreign holders is with depreciated dollars. One reason why the US has let the debt be rung up and one reason why China will try to get out of US$ bonds
2) If you hold dollars, your wealth or buying power will get killed
3) If you hold assets priced in dollars (gold, oil) their value will skyrocket as it will take more dollars to buy them
Period. That's my argument. Right or wrong?
Two issues:
If the dollar collapsed like you said, then China would have lost 75% of its investment in US debt.
You say: "while their currency is artificially low, and ours is artificially high".
I say: All modern fiat currencies are artificial.
The risk isn't as bad as Argentina's. They OWED $ but had their own currency. Their own currency fell then they had to pay more.
We owe the Chinese money but it is in dollars. We could depreciate our currency to nothing and pay them back with worthless dollars.
That's their risk.
Of course, we'd never be able to borrow again, and no one would want to hold our currency. We wouldn't have a "current account deficit" because no one would invest in this country. Import prices would be sky high. Inflation would have been ruinous. But inflation helps debtors not creditors.
You have to think they're actually being pretty kind (stupid) to let us borrow 2Trillion or so at 5-6% interest. But they are.
Or the gov't could print a trillion dollars and hand it to the Chinese, saying "thanks for the loan". Now what can the Chinese do with those freshly printed dollars? Spend them on American stuff. Inflation. Maybe that would be a way to get compensation for all the technology they have stolen.
Why can't we counterfeit other countries currencies like the NK's and Iranians do ours?
I do not like having my 401K in dollars. I work for the feds so the best option is what they call the international fund. It invests in overseas companies. It is the very best performing fund the gov't has, by a good margin.
That's the great thing about having the loan priced in dollars.
The problem is if you (the US citizen) have dollars that aren't protected from inflation...then you get watered down by inflation too.
Eventuall if we want to borrow it'll be in yen, euros or gold. Then we can't control the value we have to pay back.
i think u have it backwards coz the are loaning us dollars not yuans
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