"US facing long recession"

Discussion in 'Current Affairs, News and Analysis' started by hong_kong_fuey, Apr 25, 2008.

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  1. Joseph Stiglitz stated today that the US faces a protracted recession that may echo the 1930s.


    I take what Stiglitz says seriously. The man is a heavyweight and not prone to hyperbole.
  2. IMHO, we are going through a fundamental shift in global dynamics.

    In my simplistic way, I think of the 18/19th Centuries as being European , where we were the big kids in terms of Economic, Military and Political power.

    Towards the end of the 19th Century and for most of the 20th, the Americans were the significant world power. They had untapped resources, a disproportionately young society, new infrastructure and a rapidly growing economy. However they have now reached the end of their growth spurt, and are in a similar situation to Europe. Economics will drive a fundamental shift in their economy, and they will not be able to rely on underlying growth making up for inefficiencies.

    The new kids in town are the Asian countries - they're big, they're efficient and they're gobbling up natural resources all over the place. For the last 20 years or so, they have been a cheap production adjunct to the US and Europe, however this seems to be changing and they are less focused on these export markets. I was speaking to someone recently back from Beijing and there is almost no talk of the credit crisis there.
  3. Stiglitz was the economist who said the Irqi/Ganistan adventures where costing 7 trillion $ Yankee.
    I read one artical that says China is behind so much of the recent prices rises as it is spending its Yanke $s as fast as it can, before they become worthless. China will be left with shedloads of stuff, tradeable on world markets.
    Another artical by a jap economist says that as folk move over to using the euro the $ accumulated overseas will be exported back to US and the currency will collapse, for the Yank has printed far too many $, enough for its self and the same amount for rest of world.
    Live in interesting times.
  4. Thank you Jon. Those of us who get our income in UD$ really don't want to hear that - but I think you're right :(
  5. This is a complex subject matter you raise. You are likely right in your assertion that we are experiencing a shift in global dynamics. The hegemony of the US is probably nearing its end, with the power to be shifted to China, India, Russia and, to a lesser extent, Brazil (the BRIC nations). However, things really aren't as simple as they may appear and, whilst the shift in the balance of power could be argued as inevitable, it may not run smoothly for the BRIC nations. There is a potential spanner that the US and, to a lesser extent, the Eurozone and the UK could throw into the works. Indeed, they maybe forced to follow this course and the process may already have begun. If so, then this action could be defined as economic warfare and could weaken the positions of the BRIC nations, and partially limit the damage from the economic crisis to the western economies. Here's how:

    Central to the issue is the US national debt. Currently it runs at just under $10 trillion.

    US National Debt Clock

    The US national debt is not the US total debt-- the debt that it owes for things such as Medicare, Medicaid, social security, etc, nor the debt of consumers and businesses. In total the US is in debt to the tune of approximately $53 trillion, and it's rising rapidly. As things stand the US has a GDP of $13.3 trillion. We can see, therefore, that the US is bankrupt and there is no way for it to pay its debts. The US owes approximately 45 per cent of this debt to foreign governments, banks, sovereign wealth funds and financial institutions. So, what is the US to do? If foreign institutions were to call this debt in then the US would have three choices, none of them attractive.

    Firstly, it could raise taxes. This wouldn't be popular and it wouldn't work, considering the sheer scale of the debt and the fact that the US is in recession and, therefore, that its tax base is about to shrink.

    Secondly, the US could print more dollars and try to pay its debt in this way. This is not feasible since the printing of so many dollars would simply lead to a complete devaluation of the greenback. Hyperinflation would follow. Furthermore, if the US were to increase the money supply so massively then foreign holders of dollars would dump the currency quickly. This would mean that the dollar would become absolutely worthless, thus assuring the complete destruction of the US economy.

    Thirdly, it could renege on its foreign debts, similar to what Russia did in the 1990s. This is, in my view, the most likely scenario. I believe that the Fed and the US government are devising a fiscal policy where, initially, they are trying to inflate their way out of debt. However, eventually they will have to renege on their debts and possibly create a new currency to start over again. This would have serious ramifications for the BRIC nations as well as the OPEC nations and their economic development. A vast percentage of the BRIC and OPEC nations' capital and income would be wiped out. We must also consider not just the debt that these foreign nations hold, but also their vast dollar reserves.

    Foreign dollar reserves:

    The US dollar truly asserted its status as the world's reserve currency after agreements between the US and OPEC in 1971 and 1973. At the time the US was oil self sufficient. The OPEC nations were still developing and wanted an entry into the vast US market. The US administration at the time agreed for the importation of OPEC oil -- with one condition. This was that OPEC nations must only accept dollars in payment for oil. This agreement is still in place today. Therefore, in order to buy oil from OPEC nations you must first convert your currency to dollars. It logically follows, therefore, that upon completion of the oil transaction the OPEC suppliers are left with dollars in their reserves. The more oil they sell, then the more dollars they accrue. As the price of oil and the demand for oil has 'skyrocketed' so their dollar reserves have increased. But where did all these dollars come from? Simple, the US printed them out of thin air. This arrangement assured that the US, at least for the past twenty five years, has held onto its position as the world's superpower whilst its core economic activity has diminished. It's a Ponzi scheme of epic dimensions.

    If foreign oil producers were to begin to accept alternative currencies for oil then the dollar's status as the world's reserve currency would be threatened. Therefore, America's hegemony would be threatened. It's interesting to note that in 2000 Saddam Hussain began to accept only Euros in exchange for Iraq's oil. Furthermore, Iran proposed a motion to accept alternative currencies to the dollar for its oil. The motion was proposed to come into play in 2005/06. It's still a work in progress.

    So, we see that the OPEC nations are threatened by the continued weakening of the dollar (the dollar has been devalued by 96 per cent since 1913) since as the dollar weakens so does the value of their reserves. Furthermore, the emerging economies which act as creditors to the US are threatened by the sheer scale of the US debt, as well as the devaluation of the currency. Add to this mix the complex investment vehicles that have come out of the US in recent years, which have spread across the globe, and the situation is even more perilous. Take a look at the $600 trillion derivatives market for an even more frightening insight.
  6. Kack.

    DEMOGRAPHICS people!

    No way Russia or China can catch the USA. India, Brazil, maybe, but a very long way off.
  7. HKF,

    If that is your location, I undersand that the locals are concerned about the HKD USD peg.

    I agree with everything you say, except the US being bankrupt. I don't know the duration of the debt, but suspect that it would be impossible for the various counterparties to 'call' the debt before maturity.

    Andy, it's not about absolutes, it's about trends. A big shock to the system is bad for everybody.
  8. I have found one of the articals I quoted from. It was printed in last Sundays, Bangkok Post and is by Kenichai Ohmae a japanese economist.

    "One so far unacknowledged consequence of this shift (from $ to euro) is that America will be increasingly forced to engage in "international trade" like the rest of us for the first time since it became the world's reserve currancy because it's tradeing partners are shunning the greenback. Americans will have to pay for Toyota in yen, Chinese toys in remimmbi and Louis Vutton in euros just like everyone else. The Trajectory is set for the battle of the Atlantic, between the Euro and the $ as Americas heads for relative decline. it will be very hard for America to control this flight from the dollar as it accelerates. When this happens, all those dollars out there in the world (the US has minted double what it needs for it's domestic economy) will head home and stimulate the kind of hyperinflation we once associated with Brazil. This in turn will drive many Americans themselves to seek Euro's and other currencies besides the Dollar that will hold their value."

    The above was copied Mandhydraulically.
  9. Demographics is an important issue. The thing with China is that they have a massive competitive advantage with the cost of the means of production. They have a massive workforce willing to work for a fraction of the cost of the US workforce. So demographics, on the one hand, provides China with an advantage. Therefore, unless the US specialises in manufacturing that is beyond the capabilities of the Chinese, or unless US workers accept a reduction in earnings, close to parity with Chinese workers, or unless the US initiates protectionism and heavy import tariffs on Chinese goods, then it doesn't stand a chance competitively in the manufacturing sector.

    Furthermore, China does not have debt but, rather, a vast sovereign wealth fund to invest in future growth. The tipping point for China will be when it develops a strong internal market so that, in the event of global slowdown, it could continue pulling along on the back of domestic demand.

    However, China does have major demographic obstacles to overcome. Its GDP per capita is well below that of the established economic powers. Though, on the one hand this creates a competitive advantage; on the other hand, it's also perhaps the biggest challenge it faces. How can China distribute the wealth it's creating more evenly to one billion poor people? Already China is witnessing discontent internally as peasants complain that a few get rich while they remain trapped in poverty. With nearly a billion people in this position, it could be a ticking time bomb. However, if China does make concerted efforts to redistribute to the majority poor they risk inflation, so it's a balancing act between avoiding inflation and avoiding civil strife.

    The thing about the USA is that it no longer has the manufacturing base it once did. It outsources manufacturing to China. Since 1985 it has gone from being the world's biggest creditor to being the world's biggest debtor. And, I repeat, it's bankrupt and it's only a matter of time before it must default on its debt.

    I'm not in HK but I know it quite well. The issue of the HKD is similar to that of the Renminbi. They are both artificially manipulated in order to provide competitive advantages on the export side. Of course, this is great for manufacturers and exporters. However, the people do see problems with price inflation of imported goods and, in particular, foodstuffs. China must feed twenty per cent of the world's population, and yet it only has seven per cent of the world's arable land. It is forced to, therefore, import vast quantities of food and, with a weak Yuan, finds itself at a competitive disadvantage. Therefore, the poorest are being hit the hardest and there is discontent.

    About the USA being bankrupt. Take a look at this report (.pdf file) from the Federal Reserve Bank of St. Louis:

    Federal Reserve Bank of St. Louis

    It's quite heavy going at times, but even if you just head straight for the conclusion you'll be interested to see the Federal Reserve formally admitting that the US is bankrupt. This report came out in 2006 and the position of the US is now much, much worse. Also, going back to what I discussed earlier about the US total debt including Medicare, Medicaid and social security, you may want to look at the section in the report on the 'Baby Boomers', who have recently come into the equation.

    The US is bust, though maybe one thing can save it but this would be a double edged sword. If the US can attract massive amounts of foreign investments then it may reverse away from the abyss. Already we're seeing this happen. However, does the US want foreign governments from China to Saudi Arabia owning the majority of its major businesses? Look at the banking sector in the US, with Chinese, Singaporean and Gulf region businesses having voting rights in major US investment banks. Interesting times ahead.
  10. This is the real problem as IMHO the western nations realy dont want to acknowledge the fundemental truths that the west has broken its manufacturing base and is being pushed past on the research and development lead it had in many places now also...
  11. 1. Offshore your tiresome industrial base
    2. Put the entire wad on deeply dodgy financial services
    3. Bale the hapless bankers out with taxes harvested from a heavily indebted populace.

    Good plan. Not dissimilar to Britain. A welfare state for erring Kapital. Marx would be most amused.
  12. What a bizarre bunch of disinformation and distortions.

    This old canard over the U.S. national debt just never ends and gets perpetuated by idiot journalists and internet hype. It just never, never, never ends.

    The $53 trillion isn't part the debt. It's the long term amount of money promises made by the Social Security and Medicare/Medicaid programs spread out over decades will cost. And before any reforms are initiated.

    Social Security is in a different pot of money from the Fed Budget and is currently in the black.

    The Medicare trust fund is currently expected to remain solvent until late next decade though reform is needed before then.

    Here (again) is a chart of who owns the US nat'l debt:


    Here (again) is a comparison of the U.S. national debt per capita relative the rest of the world. As you can see the debt load is fairly manageable:

  13. Not politiking, but why does Cameron keep claiming we have the largest debt in the Western World when the thermometer diagram above apparently shows something different
  14. in_the_cheapseats

    in_the_cheapseats LE Moderator

    Course not :roll: Sven, start another thread , if you wish to start your normal bitching. This discussion is interesting enough without your games pulling it off thread.
  15. Ord_Sgt

    Ord_Sgt RIP

    I don't know, perhaps you can give us a link to all the times he's said it.