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Friday, January 06, 2006

But It's Just a SMALL Hole In the Dike, Right?

One hundred years ago, America was a creditor nation. We exported much more than we imported, our people had an ever-increasing standard of living, and that prosperity -- not the "Paris-Hilton-rich" kind, but the "My-family-is-safe" kind -- enabled middle-class Americans to build a truly great, and generous, country. The original Progressives were, essentially, middle class people who had enough and felt a moral obligation to give others a hand up.

Today, America is the world's largest debtor nation. We are running unbelievably huge deficits, and facing even larger deficits as we confront a demographic bump that will require the government to start paying back all the money it borrowed from the Social Security system and to fully fund Medicare. Our government borrows money by selling bonds to foreign governments, including China, and our people borrow money, largely in the form of mortgages, a large percentage of which ultimately are bought in the secondary market by, again, China.

So what happens if foreign governments, especially China, decide to stop investing in the U.S.? The cost of borrowing money skyrockets. The interest payments on the national debt become so huge that other government prorams can't be funded. Mortgage interest rates increase to late 70s levels. The construction industry tanks, and the jobless rate increases. Ignore everyone who tells you that our country's financial position is strong, or that there's nowhere else for foreign countries to put their money. We are not invulnerable; we are increasingly beholden economically to other countries, and that weakness makes our military strength irrelevant. He who owns our debt, owns our policies and our destiny.

Well, here's bad news: it's happening. China has announced it will start selling off U.S. bonds. Which, of course, means that it won't be buying as many of our new offerings. Which could be really, really bad news.

And, as if to confirm that institutional investors are seeing the same thing I am, gold futures just topped $540/ounce.

If China stops buying our debt, it could be a perfect storm that brings down the entire U.S. economy, domino by domino. It won't happen suddenly -- foreign investors will want to pad our landing somewhat to preserve the value of their investments as much as possible -- but it will still be severe and longlasting, not just a cyclical recession but a complete structural change to our economy, and to our position in the world. The end game may not come for another decade or more, but we can see it coming.

I love my country and I hate the fact that our leaders, of both parties, have not positioned us to avoid what's coming. Being able to say "I told you so" will be no solace at all if what I fear comes to pass. In the time we have left, the U.S. needs to rapidly rebalance its budget, strengthen our domestic manufacturing base, educate our people for a more diverse and self-sufficient economy, create tax disincentives for U.S. companies moving jobs overseas, dump wads of cash into an Apollo program to end our dependence on foreign oil and make us energy-self-sufficient, disentangle ourselves from our expensive overseas commitments (including Iraq, which is costing $2 billion per week that we cannot afford), and bolster Social Security and Medicare while we still have the leverage to do so. We need to be self-sufficient again, and we need to have something to sell to the rest of the world, neither of which we can claim at present.

No pithy conclusion. I hope I'm wrong. But we may not have three more years to start making significant change to salvage our position in the world, and we all need to WAKE UP a.s.a.p.


Anonymous Anonymous said...

Few may understand the import of this decision. China holds $1 billion + of US Bonds which are backed by nothing other than the fact that it is the reserve currency of the world due to the fact that countries must hold US dollars in order to buy oil (oil is sold in dollars). HOwever, if the oil producing countries decide to sell in say Euros, then there is no longer any reason to hold US dollars! I think the Chinese are going to unload their dollars because Iran will be establishing its own Bourse (stockmarket) to sell its oil in Euros. This will have devastating effects on the dollar. With nothing else holding the dollar up except the willingness of foreign countries to buy our currency (not on the gold standard since Nixon) the dollar will PLUNGE! Making the Great Depression look like a cake walk.

1/06/2006 5:06 PM  
Anonymous Anonymous said...

Great point. I've said for a while now that a big, if undiscussed, reason for going to war is that Saddam announced he was going to start selling oil in Euros rather than dollars. Had he done so, Iraq would have been the first OPEC nation to move away from the dollar standard -- something that could have triggered a disastrous slide in the dollar and a weakening, if not collapse, of our economy.

So now Iran is doing so, and now there are signs that Iran may be in our sights militarily. I hadn't thought we seriously would consider war with Iran over its nuclear program -- we just don't have the horsepower -- but over the currency of oil trading AND its nuclear program?

Sadly, we may be right to militarily enforce the world's use of the dollar as a trading standard. Not morally right, but out of necessity, and only until we can wean ourselves off our debtor lifestyle. Otherwise, the repercussions to the U.S. and world economies may be overwhelming.

And saddest of all, there are no serious efforts afoot in the current administration to give up that teat.

1/06/2006 5:46 PM  
Anonymous Anonymous said...

It should be noted also that when we invaded Iraq, all of their oil contracts that had been negotiated with China et al were cancelled. China now has contracts with Iran. If the US does nuke Iran (not enought boots to mount land invasion), do you think China will sit idlly by and watch these contracts disappear when their economy (Booming as it is)is in jeopardy. Especially when they have the power to destroy the dollar. NOTE: China also has contracts with Chavez.


1/07/2006 2:32 AM  
Anonymous Anonymous said...

Sadly, we may be right to militarily enforce the world's use of the dollar as a trading standard. Not morally right, but out of necessity, and only until we can wean ourselves off our debtor lifestyle. Otherwise, the repercussions to the U.S. and world economies may be overwhelming.

This stuff, and I agree but would take it one step farther, enrages me. The sheer unbridled arrogance of the American people is surely unequaled since the Roman era. Our self-absorption and the lifestyle it fosters is simply not subject to review. It's almost as though we're expecting Jesus or aliens to change the laws of physics to accommodate our desire for unreasonable, gluttonous things like five-ton SUVs, 5,000 square foot homes and other indulgences that simply cannot be justified and come at the expense of others struggling with far less. We will actually start wars backed with popular support before we will ever agree to reflect on our lifestyle and the impact it is having on the future world.

1/10/2006 2:47 PM  

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