Greenback Grizzlies

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The grumps over at The Economist say the dollar, and the U.S. economy, is in for a royal screwing if the budget deficit isn't hacked, and pronto. Excerpt:

If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it. […]

America has habits that are inappropriate, to say the least, for the guardian of the world's main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America. […]

America's challenge is not just to reduce its current-account deficit to a level which foreigners are happy to finance by buying more dollar assets, but also to persuade existing foreign creditors to hang on to their vast stock of dollar assets, estimated at almost $11 trillion. A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets.

The dollar's loss of reserve-currency status would lead America's creditors to start cashing those cheques–and what an awful lot of cheques there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession.

More dourness here.

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  1. Dour, perhaps. But probably accurate.

  2. The huge increases in government revenue that inevitably result from upper-income tax cuts are going to start showing up any time now, making concern about the size of the deficit moot.

    Yep, any minute now.

  3. So the thing to do is to load up on debt to buy stuff, then when the dollar is devalued your debt is a lot smaller in real terms than it was originally, while the stuff is still the stuff (with a little depreciation)?

    Meanwhile it’s stupid to keep money in the bank because it will be losing its value over time?

    If the 00s are the 70s all over again, what were investment strategies that worked in the 70s?

  4. Tax Tax Tax em damnit! Tax the rich. Tax the middle class. Tax the poor. Tax businesses. Tax government. Must. Get. More. Income.

    Joe, aww, an “I told you so!” comment. I thought that was the trademark of Rush Limbaugh?

    Not many readers here condones the spending policies of the current administration. You know that. Quit trolling and go away.

  5. “Today the dollar was up! Today the dollar was down!”

    A dollar — of what?

  6. Brian,
    WHen you find out…let me know.

  7. Ironchef-
    I think Joe was just making fun of the idea that you can cut taxes and automatically generate more revenue to pay for increased gov’t spending. I know it’s wacky, but you hear it all the time (I heard Denny Hastert making this argument recently on Meet the Press.

  8. Some perspective: right now the Euro is being traded and held in reserve at about the rate that the legacy currencies it replaced were in toto.

  9. Did you know that disco record sales were up 400% for the year ending 1976? If these trends continue… AAY!

    I guess you could turn your dollars into Euros? However you do that. I’m starting to think I’m being a chump for having money in the bank. I guess I could buy a compound out in Montana.

  10. Brad, that “wacky” idea is called “supply side economics,” and formed the basis of Ronald Reagan’s budget policies. The Republicans in Congress are such true believers that they insist on incorporating the revenue increases that are certain to appear into CBO analyses, under the term of art “dynamic scoring.”

  11. I don’t think you’d be a dummy for keeping money in the bank. As interest rates rise, your savings account (which is linked to a money market kept by your bank) will increase in yield. The same is true of money kept in a money market, because the bills (short-term bonds) in a money market have a yield no longer than 100 days; thus, they track the basic fed rate very closely.

    Stocks, however, are poised to take a big hit if this situation shakes out the way the Economist and many others fear. If the dollar devalues by 30%, then any overseas holders of American securities will take an automatic loss of 30% on any investments that they have made in either the stock or (long-term) bond markets. If they lost 30% of every euro (say) invested, then the American securities would have to experience capital appreciation of nearly 50% just to keep them even.

    Needless to say, in such a situation, the argument for cashing out of the American securities markets will be intense for any overseas investor. At that point, you the American investor will take a massive hit as the securities they hold glut the market and drive the price of them down.

    What I plan on doing (and you can take this or leave it) is to build up a cash reserve in a bank and to invest in companies that still raise their dividends throughout whatever comes. Those are the companies that have cash on hand, and it is interesting to note that nearly half of the total returns on the stock market in the last 100 years is accounted for by dividends.

  12. Two things about the cutting taxes to increase revenue thing.

    First, I would say that with any pricing scheme, there’s a level that maximizes revenue. Revenue can be lost by charging a price that’s either too high or too low. The reason for the former is not as obvious as the latter, but of course it’s still pretty obvious. The same thing holds for tax rates, although many on the left reject the possibility that a higher tax rate can ever decrease revenues. Would tax revenues be maximized at a 100% tax rate? Of course not? At a 90% tax rate? Most likely not. But of course they wouldn’t be maximized at a 0% rate either. Somewhere in between there is the magic level at which revenues would be maximized, but there’s no perfect way of knowing where that level is.

    Secondly, Bush’s cuts could be increasing revenues because, ahem, revenues could be worse without them. It sounds silly to say so, but it’s entirely possible.

    That said, I think the limited time frame of the tax cuts interferes with whatever revenue enhancing potential they may have, and the increase in spending was irresponsible regardless, only more so in light the unrealized increase in revenues.

  13. Those Republicans are such wonderful fiscal conservatives. Hold on to your gold and silver I feel another 1980 coming.

  14. Jesus fucking christ. I thought we were all familiar with the Laffer curve around here. If I wanted to have an ‘intro to econ 100’ discussion I’d go to Crooked Timber.

    Cutting to the crux of the issue:
    We are so fucked. (you can quote me if you like)

  15. Isn’t this supposed to be the time where Evil Bush ™, who no longer fears an oncoming election, shows his true soul and starts slashing gov’t programs, tossing millions onto the street starving?

    Its about time. Keep the tax cuts, start the gutting with the Dept. of Education, Commerce, Energy, HUD, and maybe the ATF for good measure.

  16. Warren,

    The problem with the use of its properties regarding taxation is that we never cut enough spending for it to make a difference. 🙁

  17. Gold and silver are no less fiat currencies than the greenback is. Both metals have limited applications in the real world. They are valuable because they are rare–that makes less sense to me than a currency that is valuable because it has been assigned a value by the total market?not just currency traders, but you, every time you decide whether to spend $.89 on a can of string beans.

    Inflation is not something that has only happened because the dollar is off the gold “standard.” The cause of inflation in the 70s was largely because of energy prices, and it has had innumerable causes in all times past.

    Gold is the new tin hat.

  18. An econ professor once summarized things by saying that the basic concept of the Laffer curve is sound, but people haven’t been very good at actually figuring out where that magical rate is. Or, those who have tried to predict it haven’t always done a good job of demonstrating that they got it right.

    The concept is sound because if taxes were 100% then everybody would either stop working or else work but fail to report income, and there would be no reported income to collect taxes on. If taxes were 0% then nobody would pay taxes. We know empirically that (1) the tax rates are between 0% and 100% and (2) the taxes collected are non-zero, therefore there must be an optimum point somewhere between 0% and 100%.

    One problem with actually finding the optimum is of course that income taxes are only measured once per year. How do you verify that a change in revenue (in either direction) came from the change in tax policy rather than from a change in economic activity unrelated to tax policy? This isn’t like microeconomics, where you can study daily or weekly revenues at numerous small businesses to see how changes in price affect revnue, and use statistical methods to isolate the effect of pricing from effects like location, product quality, etc.

    You could, perhaps, look at state income taxes (the sample size is 50, after all) but the state economies are highly heterogeneous. It’s hard (maybe not impossible, but definitely hard) to separate out the effects of that extreme heterogeneity.

    The other problem with finding the optimum tax rate is that income taxes, for good or for ill, are not determined by a simple formula. Because they are progressive rather than flat there are more parameters (the rates and cutoffs at which the rates apply). And the thousands of pages of loopholes, deductions, exemptions, and credits add even more parameters.

    With a flat tax and no deductions, exemptions, credits, or loopholes we could probably find the optimum rate pretty easily. But add in time-varying deductions and all bets are off.

  19. I just did a little trading at my local coin emporium. I have a bunch of French 20 frnc. gold Napolean III’s from the 1850;s and 60’s. They aren’t that rare, which means they are easy to buy and sell, they are high quality and trade at bullion rates, which are trending upward now. Portable hard wealth is looking awfully good right now.

  20. Great things to invest in in the ’70s (aside from record companies), thanks to the beauty of hindsight:

    1, Commodities (Oil, Gold, metals that seem scarce).
    2, Technology (err, know when to sell, but companies like Intel came public in the ’70s, when Silicon Valley was rocking).
    3, Fads! (Pet Rock, Disco, Farah Fawcett posters, frisbees… the golden age of fad-dom.)

    Also, if you have serious scratch to start with (say $100 million), now might be a good time to speculate against various currencies around the globe. Heavy leverage required.

    Or, you could calm the freak down, recognize that in addition to being a boon for exporters (and these days GM, say, is at least competitive in most auto markets), currency drops of this sort put excruciating pressure on the Chinese in terms of inflation (likely forcing an increase in the value of the Yuan, thus really opening up their markets stocked with consumers hungry for ‘Mercan goods… at the expense of domestic providers).

    Also, why is this drop in the dollar a “disaster,” while the early ’90s version, with Bubba in office, that at one point saw the $ hitting 70 yen (compared to 102 now), was a “brilliant strategy?”

    Curious. And waiting for the .50p mark to be breached.

    2 porns for a pound! 2 porns for a pound.

    /OK, disclaimer, resized all my printed books ’cause, well, there’s an overseas market, and shipping costs…

  21. thoreau – You’re obviously pretty well versed? what about consumption taxes? Is there an optimal rate at which a simple, national sales tax can function without triggering deflation, and what would that estimate be? Any data sources?

  22. Hate to tell you joe, but the increases in tax base resulting from cuts on investment taxation are probably present, which means that things would be worse than they are now otherwise.

    It is not true and is not generally argued that any tax cut on invesment will pay for itself. It is argued that any tax cut on investment is stimulatory, and will tend to increase the wage base as a result. It is also argued that increases in taxation on investment deter investment, which is really uncontroversial. Put the two ideas together and you get that curve that illustrates that at SOME LEVEL of taxation, the decrease in wage base more than offsets the higher rate, and revenue falls.

    The argument is where we are on the curve. Certainly increasing outlays in a nationalized healthcare plan and inspecting every container that enters the US won’t help.

    If you are keeping expenditures constant and increase tax rates, you will start paying down the debt until you start shrinking your taxable base. If you aren’t holding the line on expenditures, you aren’t doing anything.

  23. Gold and silver are no less fiat currencies than the greenback is. Both metals have limited applications in the real world.

    Balderdash! Gold and silver have vast application in the real world. That is one of the main reasons they function as stable investments.

    The assertion that they obtain value from “rarity” is patently false. Neither is particularly rare, platinum is far rarer. Tellingly, now that there are more applications for platinum it too is acquiring currency status.

  24. Bachelor WASP-

    I don’t have any data to figure out what an optimal sales tax would be, but one surely exists. A sales tax of 0% would bring in no revenue, and a sales tax of infinity% (the tax could in theory be larger than the revenue to the retailer) would obviously mean zero consumption, or at least zero consumption on the open market (black market is a whole other story). The thing is that it’s still a somewhat complicated optimization problem because a tax doesn’t just affect consumer decisions. A tax also changes producer decisions.

    Also, contrary to what some people (even some people on this forum) claim, a sales tax isn’t always paid by the consumer: Say that the market price of a product (before the tax) is $1, and then a tax is levied. The seller’s first inclination might be to pass along the entire tax to the consumer, so if the tax is 10% the price becomes $1.10.

    But in a competitive market with many sellers and well-informed buyers, a seller might get an idea: He might lower the price to $0.95, so that after tax the price is $1.05 (approximately). He’s just taken a hit of $0.05 per unit, but if the buyers are well-informed and willing to change then he’s just captured a bunch of business from his competitors.

    Of course, they might retaliate by undercutting even more. Eventually a market equilibrium will be achieved. The new price (including tax) will be no lower than $1 but no higher than $1.10. Where it falls between those limits determines how much of the tax is paid by the buyer and how much is paid by the seller.

    In general, I’m not a big fan of sales taxes as a means of “revenue-neutral tax simplification”. They sound nice, but any politically feasible proposal to move to a sales tax will include exemptions for food and medicine. (Even Tom Campbell, a libertarian-minded politician with a Ph.D in economics, proposed similar exemptions.) That is just an open invitation to social engineering, as businesses clamor to include their product in an exempt category while removing a competing product. (“My vitamins should be counted as medicine, because they contain such-and-such, while these competing supplements don’t include enough nutrition to be classified as pharmaceutical.” “My competitors make unhealthy food that shouldn’t be exempt from the tax.” “My wheelchair is a major medical expense that should be deductible, while those motorized wheelchairs made by my competitors are luxury items.” etc. etc.)

    I think a flat tax would be simpler. But I’m open to counter arguments here. My main goal is to make taxes simpler and hence remove economic micromanagement via the tax code. If somebody can come up with a sales tax proposal that does it then I’m all ears.

  25. The combination of smart bombs plus “if you break it, you’ve bought it” seem to be addictive to Dubya.
    Considering where this addiction has got us so far in his Holy Crusade, it’s no wonder the dollar is sliding.

  26. I have a tax plan that is just as likely to happen as these others, but will be much better for the market. How about….we don’t need a goverment (it only stiffels the economy), therefore, we don’t need to pay taxes to support an institution that only hurts us anyway (“Thank you, Sir. May I have another?”).

    Just wishful thinking, I guess.

  27. The US has 24 trillion dollars in unfunded liabilities between medicare and social security. The EU has perhaps 45 trillion dollars worth of unfunded liabilities in assorted pension systems. Both are facing aging demographics. China is looking like a better long term investment.

  28. What to invest in?

    Well, you could go long on the dollar or short the euro. Both are trading well outside their range, at multi-year peaks or lows.

    Of the two, I might be inclined to short the euro – it has far greater structural weaknesses than the dollar has structural strengths.

    Have you ever noticed that, no matter what the dollar does, it is bad news? When it is low, that’s bad because the consumer gets screwed. When its high, that’s bad because exports take it on the chin.

  29. Cutting spending is clearly what needs to be done. Regrettably, congress just voted to raise the government’s debt limit by $800 billion and Bush, who asked for the increase, signed the bill.

    http://www.cnn.com/2004/ALLPOLITICS/11/19/congress.spending.debt.ap/

    Also regrettably, GOP members, who tend to vote for less spending than there Dem counterparts, mostly voted for the increase, with the exception of some conservative hold outs in the house. If anyone can provide the vote breakdown in the house and senate, please do so. I think we should contact our contact your congressperson and senators…

    http://www.visi.com/juan/congress/

    …and praise the ones who voted no and tell them to follow thru and vote to cut spending, and give Hell to the ones who voted to raise the government’s debt limit. And, tell them that they had better shape up and control spending if they want our votes.

  30. “If the 00s are the 70s all over again, what were investment strategies that worked in the 70s?”

    Oil and refinery stocks, though not for the afforementioned reasons.

  31. I dunno. I’m finding this whole thing pretty fascinating. How bad, exactly, does Bush’s budgetary policy have to get before you’re willing to switch teams?

  32. Balderdash! Gold and silver have vast application in the real world. That is one of the main reasons they function as stable investments. The assertion that they obtain value from “rarity” is patently false

    If gold derives its value from usefulness rather than rarity, why isn’t iron an even better investment? Iron is far more useful than gold.

  33. Needless to say, in such a situation, the argument for cashing out of the American securities markets will be intense for any overseas investor. At that point, you the American investor will take a massive hit as the securities they hold glut the market and drive the price of them down.

    where this is really a problem for us is not in stocks — it’s in bonds. the same motivation to sell, with less potential for capital appreciation, exists; and selling essentially raises interest rates.

    and this is the conundrum with so much american debt being foreign-held. the potential now exists for a vicious cycle of dollar devaluation/treasury selling to take hold until american debt is undervalued/underowned internationally and interest rates are much higher.

    don’t take my word for it; try bill gross.

    Gold is the new tin hat.

    fwiw, it’s a very, VERY old tin hat — and has worked brilliantly in financial crisis repeatedly. that in part because the supply simply cannot be expanded at will (a la dollars); but i suspect partly for irrational animal causes, though no one can prove so. gold has been valued for thousands of years in civilizations around the world; it has strange appeal that one can’t rationalize but is far more reliable than any rational construction.

    I might be inclined to short the euro

    as a short-term trade, do what you wish — there can always be countertrend moves of some duration.

    in the longer term, however, mr dean, that bet is a good way to hose yourself. let the american government destroy itself; you don’t need to be complicit out of jingoism.

  34. Make that “*…their*…Dem counterparts.”

    “Preview button, I will come to know thee”…

  35. The EU has perhaps 45 trillion dollars worth of unfunded liabilities in assorted pension systems. Both are facing aging demographics. China is looking like a better long term investment.

    China has an unfunded liability from its pension systems as well — and, due to the draconian population-control methods implemented over the past few decades, one of the worst age-related demographic crises in the world.

  36. jeff,
    I’m with you… content to be just one of the Vestal Virgins minding the flame here on H & R.

    One of these days, they’ll come to us begging for advice.

  37. China has an unfunded liability from its pension systems as well — and, due to the draconian population-control methods implemented over the past few decades, one of the worst age-related demographic crises in the world.

    indeed — i think indonesia, iran and india might be yet better l/t wagers. but china has a great deal going for it that no developed nation can have.

  38. Rick, if GOP Congressmen “tend to vote for less spending than their Dem counterparts,” then why have the budget and the deficit risen to record heights since the GOP took control of both chambers?

    Look at the latest appropriations bill – it set a record for pork projects, and was a completely Republican bill.

    The NTU is a Republican organization, and the ratings you take as gospel are skewed to make Republicans look better.

  39. All the checks are cashed. The dollars come back as investments.

    What they mean is that nobody (foreign) wants to be in dollar-valued things when the dollar is falling. But there’s nobody to sell to. So it runs the usual cycle, owing to the other fact that everybody wants to buy in at the bottom and ride the dollar up.

    A timing question, is all.

    The alternative to investing in dollar denominated stuff is buying American goods. Their choice.

  40. agreed tj — gold can only be a store of value. it will never generate a profit. it is a horrid long-term investment.

    but it has been for centuries extremely effective as a store of value in fiat currency panics. that’s all i’d ask it to do; if the dollar should collapse by 50% or more, gold would double or better — even if it moved not at all vs the euro.

    that it might be better than, say bundesbonds or won as such an investment has to do with the utterly unforseeable (yet surely massive) global financial destabilization that such a collapse could engender. much as in the depression of the 1930s (and countless others before it), there may simply be no safe place to put wealth; physical gold could be one of the best of a lot of horrifying choices.

  41. thoreau –

    With regard to micromanagement via tax code, the problem is one of definition of terms. Personally, I have no problem with a consumption tax exempting unprepared food ? that is, grocery store food rather than restaurant food, the definition need be no clearer in practice than that? manufactured clothing and a primary residence. All other retail transactions would be nonexempt. Now, if you wanted to game the system a bit more to mitigate the “regressive” argument, you could tax utilities, fuel and transportation prices at a lower rate, so-called “luxury” goods at a higher rate, or not. Almost nobody sells a consumption tax as “simplification” and any tax system that is politically feasible will be gamed to some extent.

    The advantages to consumption-based taxation are that collection is largely turned over to the commercial sector, which is far better equipped to handle it efficiently and fairly than the IRS, it eliminates an entire class of bureaucrat, provides natural incentives for thrift, investment and productivity, and, with regard to the more wealthy, taxes them according to their consumptive vices rather than their virtues, as the income tax does.

  42. Bachelor WASP-

    My concern isn’t so much that food and clothing will be exempt. Not all micromanagement is created equal. My concern is that it will start off like that and pretty soon the tax status of any product will be politicized. And that companies will try to game the tax code by lobbying to have their product exempt while also lobbying for heaviertheir competitors’ products.

    You know, sort of like what we’ve done with the income tax. Why else would it fill so many thousands of pages? I’m not a utopian who thinks that each law or regulation should fit on a single page or whatever, but I do think that the tax code is a complicated monstrosity used to benefit anybody with political clout, and I’m not eager to embrace any “reform” that’s doomed to go down the same road. That’s why I admit to even being skeptical of my own preferred “reform”, the flat tax.

  43. What to invest in? LAND

    Pick a place with favorable real-property rights and a growing population. Then wait for the one permanent scarcity to make you rich.

    And to the “optimal tax” discussion, I dutifully remind all that stealing the product of sweat is wrong on principle, even if you promise to spend the booty on fuzzy puppies for orphan babies.

  44. Dynamist-

    I’m not arguing that taxes aren’t wrong in principle. I just think that reform will have to happen slowly, and that if we can take away a tool for economic micromanagement that is a step forward for liberty. It would level the playing field and create a much more even marketplace.

    Besides, if eliminating economic micromanagement leads to greater prosperity, that also means that (1) the “need” for the welfare state will shrink and (2) whatever size the government is, it will constitute a smaller share of GDP and hence be less of a burden.

  45. How likely is a major sell-off? It’s not like every nation can just dump their $ overnight. They need some to participate in trade with the US, don’t they? Anyone know of a good analysis of this?

  46. joe,

    First of all, note that concerning the vote to raise the debt limit, I fault the Republicans more because most of them, with a few exceptions of some conservatives in the ranks, went along with Bush’s position to raise the limit. Most of the Dems did not.

    You couldn’t be more wrong about the NTU. THE NTU IS MOST CERTAINLY NOT A REPUBLICAN ORGINAZATION. They are completely non-partisan. In general, the less spending voted for, the higher the grade earned from them.

    The sad facts of the spending binge of Bush’s first term are that, as much as spending went up, (27% mote than Clinton’s last term) Bush advocated even more spending, and the Dems voted for even more spending than that! The GOP congress people have been the *relatively* frugal ones.

    I’m NOT SAYING that they have been fiscally conservative. They haven’t been. In fact, on the whole, they have been shamefully big spenders. I’m just saying that the voting records shows that the GOP members in congress have been more fiscally conservative than the Dems. These facts are not at odds with the record budget that you cite, or the record amount of pork, (I’ll take your word for that one and only differ with your contention that it “was a completely Republican bill.” But, that it was bi-partisan, in no way absolves the GOP)

    The NTU ratings are definitely not skewed to make Republicans look better or for any other reason. The NTU is the only rating service that considers EVERY vote on spending. This gives a summation:

    http://www.ntu.org/main/components/ratescongress/

    The NTU is the indispensable tool to hold those who vote for bigger government accountable. Check out their ratings for all of congress:

    http://www.ntu.org/misc_items/rating/VS_2003.pdf

    And see which members earn the “Taxpayers Friend Award” in the House:

    http://www.ntu.org/main/page.php?PageID=40

    And in the Senate:

    http://www.ntu.org/main/page.php?PageID=41

  47. joe,

    Also, when I cite NTU ratings that show that GOP Congressmen tend to vote for less spending than their Dem counterparts, I’m comparing the votes between the two in the same sessions. Not the sessions from Bush’s first term vs Clinton’s last, or anything like that. Which also brings me to the point that much of the problem with the current spending binge rests with Bush’s lack of conservative leadership on fiscal matters. This is why I don’t think that he deserved the support of fiscal conservatives in the election. In spending matters, Bush might as well be a Democrat.

  48. What to invest in? LAND

    Pick a place with favorable real-property rights and a growing population. Then wait for the one permanent scarcity to make you rich.

    baron von rothschild once gave sage investment advice: “fortunes are made by buying low and selling too soon.”

    in the united states today, in almost all urban localities, one cannot buy low. if you’re going to buy land low in an economy built on credit, you can’t do it when real interest rates are near zero. there’s almost nothing, in fact, one can buy low in the united states except (possibly) dollar-denominated commodities and foreign currencies.

    if you were to buy land, i’d advocate buying it overseas. germany and japan, it seems, have not participated in the housing boom that has permeated the anglophone world. i’d examine there further. if you’re more adventurous, perhaps brazil.

  49. How likely is a major sell-off? It’s not like every nation can just dump their $ overnight. They need some to participate in trade with the US, don’t they? Anyone know of a good analysis of this?

    there’s been scads of analysis that i’ve read, mr bill, much of it private. but events in time like a dollar collapse are chaotic. there is no guessing ‘when’; assessing ‘if’ is speculative enough.

    i’d recommend picking up the dec 4 copy of the economist for starters, though, for a good overview.

    but a major decline — fast or slow — is very probable. i see bill gross on the front of wsj section c philosophizing on whether or not american treasury debt should really be AAA-rated (any downgrade seems unlikely right now). that someone as intelligent, experienced and involved as gross can even so speculate in the realm of reason speaks titanic volumes about how things are — and how bad they could quickly become.

    in any case, don’t be fooled into complacency.

    It’s not like every nation can just dump their $ overnight.

    fwiw, the prices are set at the margins; it only takes some large hedge funds or one central bank to start aggressively punishing american bonds to trigger large price moves if there is a shallow pool of buyers. and 3/5 of american debt is currently bought by just two operations (chinese and japanese central banks). if they quit bidding, that would be all that was necessary.

    why would they quit bidding? to diversify into euros or yen. speculation is that china now holds 80% of its currency reserves in dollars. given the poor quality of the dollar as a store of value, it may feel entitled to peg the yuan to a basket of currencies instead of the dollar, and so diversify its holdings. some think this event is possible this coming year.

  50. Rick, the NTU is certainly “nonpartisan” for tax purposes. Like the NAACP and NRA, I suppose. Yeah, right.

    Their analysis of votes doesn’t take into account the fact that many votes are purely symbolic, especially those by the minority party on party-line votes. The doomed spending bills a Democratic Congressman votes in favor of to make a point do not necessarily reflect his real bugetary philosophy.

    Oh, and the vote to raise the debt ceiling is a bad metric. The spending has already been done, and raising the debt ceiling is a mere formality. When there’s that much debt to cover, you either raise the ceiling or put the country into default. The Democratic votes against it are not indications that the Democrats want the country to go into default, but purely symbolic gestures.

  51. joe,

    The NTU is nonpartisan as an integral part of their mission. The NTU doesn’t care about political affiliation, they care about reducing federal spending. Note how they attack Bush’s big spending agenda.

    I don’t think that there is any evidence that the Dems would be more frugal if they had the capacity to ram thru all the spending that they wanted and that in this case they would retract a significant portion of the spending that they voted for. Also, with Bush not vetoing a single spending bill, much of what they have voted for has gone thru. There have been some spending bills that have passed with a majority of the Dems and a minority of the GOP member’s support. Again, I’m not excusing the big spending of the GOP.

    “The Democratic votes against it (raising the debt limit) are not indications that the Democrats want the country to go into default, but purely symbolic gestures.”

    You misunderstood the point of my first post. I wish that the Dems would have prevailed in this vote. If they did, the only alternative would be to cut spending. Raising taxes by this huge amount would never fly. I’m disappointed that the majority of the GOP voted to raise the limit. Of course, what motivated many of the member’s votes on both sides was, which party has the White House now.

  52. gaius: I was thinking of foreign land, if the rights and current exchange rate were favorable. I should look into Brazil. If I had to keep my money at home, I’d look into small cities slowly emerging from long stagnancy. (I’m a bit familiar with the Quad Cities)

    thoreau: I’m all for any step in a good direction. A flat tax would make me giddy. (If it replaced, rather than supplemented, some existing scheme of theft, of course.)

  53. “The NTU doesn’t care about political affiliation, they care about reducing federal spending.”

    And the Family Research Council doesn’t care about political affiliatin, they care about preserving traditional family values against the assault by coastal, liberal elites. Uh huh.

    “I don’t think that there is any evidence that the Dems would be more frugal if they had the capacity to ram thru all the spending that they wanted and that in this case they would retract a significant portion of the spending that they voted for.” Well, there’s the strict adherence to the established spending levels from the Budget Reduction Act that defined the most recent term when Democrats controlled Congress, and the abandonment of “pay-go” by the Republicans.

    My point about the debt ceiling is that the decision to go that far into debt was not made in the debt ceiling vote, but in the spending bill votes that preceded it. There were a number of fiscally conservative Republicans who voted to raise the debt ceiling, because that money was already going to be spent – the decision had already been made – and the defeat of the bill would not have meant lower spending, just a default on obligations.

  54. joe,

    I’m sure that The Family Research Council doesn’t base its ratings (if they have them) on something as objective as voting records. Fiscally conservative Democrats, (not very many of that type) earn good grades from the NTU and big spending Republicans (there are quite a few of that type ) get bad grades.

    “defeat of the bill would not have meant lower spending, just a default on obligations.”

    Default on “obligations” *would* mean lower spending, and I wish the majority of the Democrats who voted against it, would have prevailed on this bill.

    “Well, there’s the strict adherence to the established spending levels from the Budget Reduction Act that defined the most recent term when Democrats controlled Congress,”

    When was this? We had some fiscal restraint when Clinton was pres. and the GOP had at least one house of congress.

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