Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

[ThePythonicCow]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

It seems that you feel that the US options will be limited and that the rest of the world will have an enforceable claim on US wealth. I believe they do have a claim on that wealth and that the US will be wounded, I just think the US likely won't pay up and there is not much the world will be able to do about it and most everyone else will be hurt more.

When the ship's this far off keel, both sides drown .

[Jay]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

I think you're having some pronoun difficulties.

The proximate cause of the strong arming is not going to be the rest of the world, it is the US itself.

Were the US a cooperative debtor, then a gradual easing into a more balanced situation between debtor and creditor would definitely occur. There would still be lots of suffering but it would be a 'lost decade' type - Japan or UK style - where an entire national population is debt enslaved to pay off its extravagances of the period before.

But between Obama, Bernanke, Geithner, and the big US banks and USIPs - the dancing is anything but slow.

Furthermore you still fail to respond to the facts I've laid out:

1) the previous US default was when the US was a net creditor to the rest of the world (70s abrogation of Bretton Woods)

2) The restructuring of Reagan era debt as exemplified by the Plaza Accords was also a debtor/creditor event which was relatively well managed and again the US was a net creditor.

3) The US ceased being a net creditor somewhere around 2005 and is now a net debtor. Other nations have much less to gain by cooperating than previously - in fact have much more to lose.

Warren Buffet noted in a series of public statements starting in 2003 that the US was losing (i.e. sending abroad) $3B/day between federal, trade, and interest costs ($1B/day/each).

http://www.berkshirehathaway.com/letters/growing.pdf

http://www.berkshirehathaway.com/2005arn/2005ar.pdf

That number is now somewhere between $5B/day and $8B/day. Should interest rates rise, expect corresponding increases in the daily nut.

The EJ article itself notes how debt levels have increased dramatically since only 2005.

So again I am confused how the past in any way leads to possible similar outcomes with today.

The US has never been afraid to act in its best interest and will continue to do so. Most other contries have deferred to this behavior in the past. Bretton Woods/Plaza show that this is the case. Just because ithe US is now a debtor and not a creditor, there is no reason in my mind that this self-interested behavior won't continue. I think we may differ on what this means to USCorp going forward. It seems that you feel that the US options will be limited and that the rest of the world will have an enforceable claim on US wealth. I believe they do have a claim on that wealth and that the US will be wounded, I just think the US likely won't pay up and there is not much the world will be able to do about it and most everyone else will be hurt more.

There is no need to be supercilious. My intent is dialogue not confrontation.

[c1ue]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

It looks like a slow dance pull away to me, lasting years, without much of a strong arm heading in the direction of the US. The US has unilaterally defaulted before and the world watched and did nothing, and I bet it's going to happen again in a similar fashion.

I think you're having some pronoun difficulties.

The proximate cause of the strong arming is not going to be the rest of the world, it is the US itself.

Were the US a cooperative debtor, then a gradual easing into a more balanced situation between debtor and creditor would definitely occur. There would still be lots of suffering but it would be a 'lost decade' type - Japan or UK style - where an entire national population is debt enslaved to pay off its extravagances of the period before.

But between Obama, Bernanke, Geithner, and the big US banks and USIPs - the dancing is anything but slow.

Furthermore you still fail to respond to the facts I've laid out:

1) the previous US default was when the US was a net creditor to the rest of the world (70s abrogation of Bretton Woods)

2) The restructuring of Reagan era debt as exemplified by the Plaza Accords was also a debtor/creditor event which was relatively well managed and again the US was a net creditor.

3) The US ceased being a net creditor somewhere around 2005 and is now a net debtor. Other nations have much less to gain by cooperating than previously - in fact have much more to lose.

Warren Buffet noted in a series of public statements starting in 2003 that the US was losing (i.e. sending abroad) $3B/day between federal, trade, and interest costs ($1B/day/each).

http://www.berkshirehathaway.com/letters/growing.pdf

http://www.berkshirehathaway.com/2005arn/2005ar.pdf

That number is now somewhere between $5B/day and $8B/day. Should interest rates rise, expect corresponding increases in the daily nut.

The EJ article itself notes how debt levels have increased dramatically since only 2005.

So again I am confused how the past in any way leads to possible similar outcomes with today.

[Jay]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

The US being the epicenter of the world economy... this is changing as we speak. Think Multi-Polar.

As for what being done to the US hurting the do-er - we're way past the point of clean intervention. Think 'The Exorcist' instead.

The point is that while anything done by the US' creditors will hurt the creditor economies in the short term, in the long term allowing a deadbeat customer to continue to draw down your credit is worse.

I agree on the evolving multi-polar world and the bilateral agreements that China has been making, ect., I'm just not convinced the rest of the world will dicate much to the US, at least in the near future. Why would the rest of the world pull an 'exorcist' if they can pull away slowly? Excorcism gets green pea soup vomit all over the couch. It looks like a slow dance pull away to me, lasting years, without much of a strong arm heading in the direction of the US. The US has unilaterally defaulted before and the world watched and did nothing, and I bet it's going to happen again in a similar fashion. If someone isn't happy with that or something untoward happens, the US will end up with one eye while everyone else is blind. What else can the world do? Cry and stomp their feet? How do they get dibs on Corporation USA if we tell them to go screw? I doubt we just hand them a few military bases and smile.

I agree that things get tricky with a shrinking GDP, but don't you think that especially in that scenario that the big bully US, who has been happy to play rough many times before, and who still has plenty of bullets in the gun, will be dictating the terms?

The reason I'm scared is because I know that the US isn't afraid to play rough if need be, behind the scenes at first and more publicly as a last resort.

[swgprop]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

A friend in the mortgage business sent us a note that explains that under the new Home Affordability program Fannie Mae is buying up first and second loans at what he describes as, “extremely dangerous and unprecedented levels.” Once owned by Fannie, principal reductions of $200,000 or more are being provided to borrowers.

EJ-

This is anecdotal but quite interesting. I've not heard of any programs embracing principal reductions yet. The "official" policy under HAMP is to offer annual incentive-based principal reductions of $1000 - pay for performance if you will (quite a reward for becoming a debt slave).

Ultimately we may get to the stage where voluntary principal reductions are offered, perhaps only after they are the de facto practice via BK cramdowns.

Institutions at this point are reluctant to offer them for a variety of reasons, not the least of which is that once they go down that path there is no turning back. Who is going to accept an "extend and pretend" modification once it becomes known that principal reductions are on the table?

In any case I'd be interested in any evidence to support the notion that Fannie has adopted reductions as a practice.

And thanks for the great analysis, look forward to reading it over and over and over ....

[Jay]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

i think any analysis/forecast should include mention of the dollar-oil link, whether middle eastern oil remains [for the most part] sold only for dollars, and how those dollars are recycled. i agree that the chinese might not mind a dollar slide vis a vis the euro, and would tend to force the yuan down similarly. but our middle eastern clients might not be very happy and their actions will complicate the process. were they to de-link the dollar and oil, the dollar's slide might get disorderly.

Might they not see the benefit if the world is melting down and the two winners are PM's and oil? Assuming they stay in power, of course. They lose their savings, but have much more real currency under the ground unlike much of the world.

[ThePythonicCow]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

Am I color blind or are the lines in the chart above, colored backwards?

EJ had fun with the Y-axes -- beware.

P.S. -- Looks like metalman responded better than I did, for both my last two posts here. Read him, not me .

[ThePythonicCow]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

I can well understand EJ's reluctance to let anyone else take a look at the text prior to publishing on his own site. His passion and commitment are by far and away the better expressed in the raw text we get and what the heck? It is absolutely great material.

Well said.

An edit cycle, even if just for the easy typos, adds another several hours to the publication process.

I'll wager that if we took a poll here and asked whether people want it sooner with more warts, or later after some fixes, it would be overwhelmingly in favor of sooner.

In general, the amount of time one should spend in cleanup cycles depends on how wide is the audience. The more people who will read or use the end-result, the more it makes sense to shift the consumption effort from the consumer to the producer.

[c1ue]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

What can they do to the US that won't rebound and hurt them even more? The US is the epicenter of the world economy, finance, agriculture, and military might. I would hazard that the US options are vast if things get bumpy, no? All of those countries will be on tip-toes until the debt is deflated. How do they dictate anything to us? Am I just being jingoistic here?

The US being the epicenter of the world economy... this is changing as we speak. Think Multi-Polar.

As for what being done to the US hurting the do-er - we're way past the point of clean intervention. Think 'The Exorcist' instead.

The point is that while anything done by the US' creditors will hurt the creditor economies in the short term, in the long term allowing a deadbeat customer to continue to draw down your credit is worse.

I've spoken to this before: if the choice is between killing the value of the existing dollar hoards in the US' creditor countries or allowing the US to devalue the dollar but the world economy continues to grow, then no problem. But the world economy is shrinking AND the US is devaluing the dollar. Why then bother continuing to extend MORE credit when your own internal economies are suffering?

You are advocating losing money on each sale, but making up for it in volume. Doesn't work.

Has it occurred to you that China may WANT the USA to devalue to dollar...or may eventually come to see that this is necessary?

China does not want the US to devalue the dollar. Why? One of China's advantages has been its ability to control its currency - specifically to keep the RMB lower in relative value than it should be.

How would the US devaluing its currency help China?

A lower dollar (and an even lower RMB) just means China gets even less for its currency than it currently does without any corresponding benefit. If you're already the lowest price dude on the block, Wal-Mart moving in and forcing you to lower your prices more is not a benefit.

Secondly the lower dollar has immediate effects on the existing dollar 'savings' which China has accumulated. No one in China wants to see the fruits of the last decade+ significantly devalued away.

As for devaluation being necessary - the question isn't whether the dollar devalues or not. The question is what the US' creditors are going to get.

The public company analogy is apt: China is the bondholder to the US as a corporation. While the dollar = stock shares of the US is going to tank, as a creditor China normally would have first dibs on the US' assets should the company/US go into bankruptcy/restructuring.

These assets could be intellectual property, resources, income producing real estate, military bases, technology, or whatever.

Sure, if the US didn't need more money from its creditors then perhaps no assets would need to be surrendered.

But the US does need more, LOTS more.

$20B+ per week in Treasuries sold for every single week from now until the end of 2010 as one example - that's only $1.3T

If the full federal deficit were funded, the number per week would be more like $40B+

Now throw in an additional $7B/week for the trade deficit.

Then another $10B/week for interest on existing debt.

Scared yet?

[metalman]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

I can well understand EJ's reluctance to let anyone else take a look at the text prior to publishing on his own site. His passion and commitment are by far and away the better expressed in the raw text we get and what the heck? It is absolutely great material.

we've been over this before, no? the errors get fixed over time... a day or two after the initial publishing date. fred used the analogy of beta versions vs major release. why don't we all pm fred with errors we find instead of nitpicking them the thread? as a tech writer i can tell you, in 9,000+ words there will be errors even several editing passes vs a 500 word harvard biz review shorty. btw, i find spelling & grammar errors all the time in major newspapers & magazines.

[metalman]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

Am I color blind or are the lines in the chart above, colored backwards?

Currently US Exports, BOPXGS, labeled in red, are increasing, over 50 years and then "fallling off a cliff", while US imports, BOPMGS, labeled in Blue have been declining over 50 years and now are jumping suddenly.

This chart is colored backwards, right?

balance of payment basis exports = bopxgs right scale red, scale starts at 0 to -700. as exports vs imports rises, exports bop falls.
balance of payment basis imports = bopmgs right scale blue, scale starts at 569 to -40. as imports vs exports falls, exports bop rises.

another chart you'd never see in harper's or havard biz... too complicated to read with two scales... and who understand bop? the only way to show the relationship?

[jk]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

i think any analysis/forecast should include mention of the dollar-oil link, whether middle eastern oil remains [for the most part] sold only for dollars, and how those dollars are recycled. i agree that the chinese might not mind a dollar slide vis a vis the euro, and would tend to force the yuan down similarly. but our middle eastern clients might not be very happy and their actions will complicate the process. were they to de-link the dollar and oil, the dollar's slide might get disorderly.

[Jay]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

Has it occurred to you that China may WANT the USA to devalue to dollar...or may eventually come to see that this is necessary?
They have an export dependent economy. Restructuring it to rely on domestic consumption may take decades, and may be impossible due to their own surplus of cheap labour. The easiest thing for them is to "allow" the USA to devalue the dollar 50% to stimulate a "recovery" ( and effectively reduce debt/GDP by 50%).
Remember that the Chinese government bought their US assets using yuan they printed up at no cost. They exchanged printed fiat yuan for dollars (through sterilisation operations), then parked them in bonds. If their assets decline in value by 50%, so what? They were always STRATEGIC assets to begin with, not economic assets. It was all about gaining the ability to peg the yuan at any level they chose and transfering the manufacturing base from the USA to China.

If the USA dollar lost 50% of its value, that doesn't necessarily mean the yuan rises against the US dollar. China has the resources to peg the yuan against the dollar regardless of how far the dollar slides - they too have a printing press.

They could allow or - here's a thought - PROVOKE a slide in the US dollar, while maintaining the yuan peg - which would allow them to devalue the yuan in lockstep with the dollar while claiming total innocence. This would give them a further export advantage relative to Europe at a time when their exports were crashing, and at the same time stoke US demand for Chinese goods.

The short term result is that Europe, rather than China, is forced to suffer the pain of scapping excess manufacturing capacity, and the USA makes a rapid but sickly recovery. In the longer term, the USA heads the way of Argentina, and gradually sheds its empire and hegemony.

What's not to like?

I don't think the Chinese are at that point yet. But sooner or later they will wake up and realise that devaluation is the only way out for the USA - and they can work this into their own plans. They can manage the slide of the US dollar down in a controlled fashion by carrying out currency operations in Euros, dollar and gold, avoiding any sudden lurches.

Not so much "competive currency devaluation" as "co-operative currency devaluation". Engineer the devaluation of the yuan-dollar pair in order to stimulate "recovery".

Of course "recovery" allows them to continue the process of transfering power, technology and manufacturing from the USA to China, eroding the status of the USA as hyper-power and leading to a more multipolar world.
The process ends with the USA as a fallen giant. A steadily declining currency dismantles the empire far more effectively than any weapon could. I don't think they would want to cripple the USA - just graduallly deflate it down to a manageable level.

Maybe China accumulated those huge dollar reserves so they could engineer a long slow dollar slide by selling them off? Could they be that longsighted? Probably not, but they make wake up and realise what they are holding.

Very well said, I share many of the same thoughts. I just don't understand, at least at this point, how anyone is going to dictate policy to the US effectively. It looks to me that the US holds most of the important cards and that it will be in everyone's best interest to play along in the sandbox as the debt is deflated away: a long slow process of dollar and global currency devaluation in general, with the possibility of a black swan entering and spoiling the party. Own the deflator.

[thousandmilemargin]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

What can they do to the US that won't rebound and hurt them even more? The US is the epicenter of the world economy, finance, agriculture, and military might. I would hazard that the US options are vast if things get bumpy, no? All of those countries will be on tip-toes until the debt is deflated. How do they dictate anything to us? Am I just being jingoistic here?

Has it occurred to you that China may WANT the USA to devalue to dollar...or may eventually come to see that this is necessary?
They have an export dependent economy. Restructuring it to rely on domestic consumption may take decades, and may be impossible due to their own surplus of cheap labour. The easiest thing for them is to "allow" the USA to devalue the dollar 50% to stimulate a "recovery" ( and effectively reduce debt/GDP by 50%).
Remember that the Chinese government bought their US assets using yuan they printed up at no cost. They exchanged printed fiat yuan for dollars (through sterilisation operations), then parked them in bonds. If their assets decline in value by 50%, so what? They were always STRATEGIC assets to begin with, not economic assets. It was all about gaining the ability to peg the yuan at any level they chose and transfering the manufacturing base from the USA to China.

If the USA dollar lost 50% of its value, that doesn't necessarily mean the yuan rises against the US dollar. China has the resources to peg the yuan against the dollar regardless of how far the dollar slides - they too have a printing press.

They could allow or - here's a thought - PROVOKE a slide in the US dollar, while maintaining the yuan peg - which would allow them to devalue the yuan in lockstep with the dollar while claiming total innocence. This would give them a further export advantage relative to Europe at a time when their exports were crashing, and at the same time stoke US demand for Chinese goods.

The short term result is that Europe, rather than China, is forced to suffer the pain of scapping excess manufacturing capacity, and the USA makes a rapid but sickly recovery. In the longer term, the USA heads the way of Argentina, and gradually sheds its empire and hegemony.

What's not to like?

I don't think the Chinese are at that point yet. But sooner or later they will wake up and realise that devaluation is the only way out for the USA - and they can work this into their own plans. They can manage the slide of the US dollar down in a controlled fashion by carrying out currency operations in Euros, dollar and gold, avoiding any sudden lurches.

Not so much "competive currency devaluation" as "co-operative currency devaluation". Engineer the devaluation of the yuan-dollar pair in order to stimulate "recovery".

Of course "recovery" allows them to continue the process of transfering power, technology and manufacturing from the USA to China, eroding the status of the USA as hyper-power and leading to a more multipolar world.
The process ends with the USA as a fallen giant. A steadily declining currency dismantles the empire far more effectively than any weapon could. I don't think they would want to cripple the USA - just graduallly deflate it down to a manageable level.

Maybe China accumulated those huge dollar reserves so they could engineer a long slow dollar slide by selling them off? Could they be that longsighted? Probably not, but they make wake up and realise what they are holding.

[Jay]

Re: Mission Accomplished – Part I: Wrecking the Economy - Eric Janszen

If the US were not simultaneously borrowing more money for trade (currency account deficit = $380B in 2009, give or take) as well as borrowing more money to fund federal deficit spending ($1.6T or $2.2T in FY2009 depending on the estimate source), then the US could theoretically get away with a devaluation without major consequences.

As EJ notes - in the '80s the US was owed more than it owed, thus could dictate the terms.

Today the situation has changed; those nations holding US debt and continuing to borrow are the ones who could hold the whip hand.

Whether they do so and how thus is important to know.

What can they do to the US that won't rebound and hurt them even more? The US is the epicenter of the world economy, finance, agriculture, and military might. I would hazard that the US options are vast if things get bumpy, no? All of those countries will be on tip-toes until the debt is deflated. How do they dictate anything to us? Am I just being jingoistic here?