Pledge to China's Leaders: You Will Lose Money on Government Bonds
The battle over China's role as an investor in U.S. government bonds is taking ever more bizarre turns. According to the New York Times, China's Prime Minister, Wen Jiabao, warned the United States about running large deficits and inflation, saying that protecting the value of the dollar is a matter of "national credibility" for the United States.
The NYT then quotes Mr. Wen as saying: "any fluctuation in the value of the U.S. currency is a big concern for us. ... I hope the United States will take concrete steps to reassure investors. It is not only in the interests of the investors, but also the United States itself."
Mr. Wen is apparently badly mistaken about the assets he is buying. Not only is there a serious risk that the value of the dollar denominated assets (like government bonds) that he is buying will fall, it is an absolute certainty. Anyone with any understanding of the U.S. economy can assure Mr. Wen that he will lose money on his investment in the U.S. economy; the dollar will fall in value. If he is concerned about this prospect, then he absolutely should take China's money elsewhere, and let the dollar fall against the yuan now.
The logic is very simple. At the current exchange rate, the United States is running a massive trade deficit. The deficit has temporarily shrunk due to the downturn, but it is still running at an annual rate of $450 billion a year, more than 3 percent of GDP. Once the economy picks up, the trade deficit will expand and likely get back near its 2006 peak of 6.0 percent of GDP.
This is of course unsustainable. The only way that this deficit can be corrected is by reducing the value of the dollar. China can opt to delay this correction as long as it wants by buying ever more U.S. government bonds and other U.S. assets, but this just means that its losses will be even larger when it does eventually decide to cash in its chips. There is simply no one else out there who is willing to buy $1.5 trillion at the current international exchange rate. If China waits 3 or 4 years and accumulates another $1-2 trillion in dollar assets in the meantime, then its losses will be even larger. This is not a questionable proposition - it is sure money (on the downside).
While Washington is chock full of deficit hawks running around insisting that we have to cut Social Security and Medicare or China will stop investing in the U.S., they actually have the story completely backward. (It is necessary to talk slowly when speaking with deficit hawks. Remember, these people could not see an $8 trillion housing bubble.) The United States has absolutely nothing to fear from China's decision to reduce its investments in the United States and allow the dollar to fall and the yuan to rise.
This decision would mean that the United States could finally get its trade deficit down to a manageable level. The trade deficit has been the leading imbalance in the U.S. economy over the last decade. The large trade deficit required very low private savings and/or large budget deficits. This is an accounting identity. If the country is a net borrower from abroad (this is what a trade deficit means), then it must have low national savings. There is no way around this story.
In reality, China is pointing a water gun at our heads. We should beg them to become unhappy with our fiscal and monetary policies and stop investing in Treasury bonds. The improvement in the trade deficit that will result from the fall in the dollar will create ten times as many jobs as any "jobs bill" that President Obama can possibly get through Congress.
So, if Mr. Wen is considering pulling back from his dollar investments because he doesn't have confidence that the dollar will hold its value, then we should do everything in our power to reassure him. We have to tell Mr. Wen that the dollar will absolutely not hold its value. He must know that China will take a bath on its purchases of Treasury bonds. That way, maybe he will stop propping up the dollar. If the dollar then falls to a sustainable level, then Mr. Wen will no longer have to worry about its decline and millions more workers will have jobs. That way both Mr. Wen and workers in the United States will be able to sleep better at night.
Thanks for explaining this situation. No one else has bothered (or knows what you know).
March 14, 2010 4:58 PM | Reply | Permalink
And, what happens when China must finally face the fact that the USA is deliberately cheating them by selling them bonds that there is no intention of repaying at face value?
Wars have been started over less.
.
March 14, 2010 8:44 PM | Reply | Permalink
You apparently have information about a crime being committed. I suggest you inform the FBI. You do know, I hope, that all government bonds have to be paid back and a government official who even suggests that they won't be is violating the Constitution. Who is the criminal you refer to?
March 14, 2010 9:47 PM | Reply | Permalink
Hoppy:
From the article itself:
"Not only is there a serious risk that the value of the dollar denominated assets (like government bonds) that he (Mr. Wen) is buying will fall, it is an absolute certainty."
Also, you may remember George W. Bush at the Social Security depository in West Virginia stating that the T-Notes held by the Social Security Administration are "Worthless Pieces of Paper".
Does that make GWB a criminal in your mind?
.
March 15, 2010 9:12 AM | Reply | Permalink
George W. Bush is a criminal. I thought that had been settled long ago, and for more crimes than violating just one part of the Constitution. He belongs in a federal prison.
March 15, 2010 11:36 AM | Reply | Permalink
I suppose you think it is OK to borrow money from someone with the intention to repay them with inflated dollars worth less than what was borrowed? Especially if it is the Chinese?
You also must think that the Chinese will keep on loaning money to the USA under those terms?
The word that comes to mind is delusional.
.
March 16, 2010 10:23 AM | Reply | Permalink
Is is ok for inflation to occur, so that a dollar saved is worth only 50 cents in buying power in 10 years? That is routine for all currencies, and is accounted for when money is invested. China is manipulating the value of its currency to keep it undervalued, so they have a huge advantage in foreign trading. If you want to look at things that are wrong, look there. Read Krugman's column occasionally if you need information about that real problem.
March 16, 2010 11:22 AM | Reply | Permalink
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February 21, 2011 2:16 AM | Reply | Permalink
And what do you suppose will happen then? When the US can't sell the bonds to raise the money to finance Obama's spending spree? The only option then is to print money. That means the value of the dollar will go into free fall, and inflation will come back to make the 70's look like the good old days. I mean, this is all fine with me, all my investments are bet against the dollar. But this would cause more of a dollar catastrophe than even I feared.
March 14, 2010 5:22 PM | Reply | Permalink
Simplistic.
"Printing money" is inflationary if it gets out into the economy. Thus far, Obama has acted to prevent that from happening by stuffing that money into the Wall Street banks which have no intention of letting it escape into the Main Street economy.
March 14, 2010 5:40 PM | Reply | Permalink
What ??? Of course the money has to get into the economy, if it is being used to finance government expenditures, which is what treasury bonds fund. You can't replace bond issuance with printing money and not expect to see inflation.
March 14, 2010 6:15 PM | Reply | Permalink
Well, they're doing it.
Check out the Fed's balance sheet. Where -- if not via the printing press -- do you think the Fed got all that money which funded its purchases of agency debt and MBSs?
March 14, 2010 6:54 PM | Reply | Permalink
You are not following this thread. The author is talking about China not buying t bonds. My comment was that if the bond auction fails to attract buyers, and the gov't can't raise money by selling bonds, they will have to print it, and that will cause runaway inflation. This is the money that goes to pay all the bills of the gov't, nothing to do with the FED's actions.
March 14, 2010 9:37 PM | Reply | Permalink
The government prints all of the money that circulates in our economy. Nothing new about that. The Federal Reserve issues money any time they want to, and they have to print money to do so.
March 14, 2010 9:50 PM | Reply | Permalink
Nothing new about it at all, they did a lot of it in the late 70's.
March 14, 2010 11:05 PM | Reply | Permalink
That printing money causes inflation seems to be a difficult concept for commenters on this blog.
It doesn't as long as the overall supply of money is kept constant by taking old currency out of circulation.
It does when the anount of currency in circulation increases.
There is a large, but limited amount of goods and services available in the USA (or the world) and a large, but definite amount of currency available to purchase those goods and services. Increasing the amount of currency without a corresponding increase in goods and services available must result in the costs for those goods and services rising to meet the amount of currency available for their purchase.
As an example, doubling the supply of currency without increasing the amount of goods and services available will eventually double the cost of everything.
There will be a temporary advantage to those who get the new currency at the beginning of this process since there is a lag between the increase in the amount of currency available and the rise in the cost of goods and services.
The US government is using this lag to their advantage. It is a "hidden" tax on everybody and affects the poor much more than it affects the rich.
.
March 15, 2010 9:35 AM | Reply | Permalink
There are plenty of buyers of Treasuries before the Fed would have to step in more than it has. As Ellen says, for better or for worse, big US banks will remain big buyers.
March 16, 2010 11:23 AM | Reply | Permalink
As long as the FED gives them money at 0% interest and T-Bills are paying 1%, they will continue to take money from the FED and loan that money to the US Government.
.
March 16, 2010 4:09 PM | Reply | Permalink
March 14, 2010 5:30 PM | Reply | Permalink
Not really, it's pretty stupid. What the hell does being a deficit hawk have to do with the housing bubble?
March 14, 2010 5:32 PM | Reply | Permalink
I suspect there is a correlation between deficit hawks and those who didn't see the housing bubble coming, but without empirical evidence, I won't push the point doggie. Run along and get your bone! Good dog!
March 14, 2010 5:52 PM | Reply | Permalink
Holy Toledo!
I thought you were clever, bulldog. Some people have noted that the housing bubble contributed to the financial crash of 2008 that led Hank Paulson and George Bush and the Federal Reserve to funnel trillions of dollars into propping up banks. Those trillions of dollars are a major contribution to the deficit that deficit hawks are whining about.
Maybe you missed it.
March 14, 2010 6:19 PM | Reply | Permalink
Well, first off the TARP was 750 or so billion, not trillions. Secondly, it was paid back, so it had no impact on the debt (though it was re spent on other things like cash for clunkers by Obama, so then it did affect the debt). But thirdly, and most important, the housing bubble was not caused or created by deficit hawks. It had nothing to do with concern over the deficit in any way, so blaming the housing bubble on those concerned about the deficit is just stupid.
March 14, 2010 6:29 PM | Reply | Permalink
None of which has anything to do with Dean's point.
Name a current deficit hawk who saw "an $8 trillion housing bubble." Then, you'll be answering and disputing Dean's claim, directly, rather than talking past him about an issue he hasn't raised.
March 14, 2010 6:59 PM | Reply | Permalink
Name a non deficit hawk who saw it. Name a Mississippi cotton farmer who saw it. What the hell does that prove? Nothing. Being concerned about the deficit has nothing to do with the real estate market, there is no direct connection. His point is idiotic.
March 14, 2010 9:39 PM | Reply | Permalink
One electrical engineer and his wife.
We feel fortunate to have pulled enough out of the fake market to preserve most of our savings between December 2007 and January 2008. Seeing all the off-budget deficit spending in Washington and the (for a few financiers) bubblicious housing market, the decision was easy.
We bought and are fixing up one house and are considering more.
Unlike the financiers who collect excessive fees for monumental failure, we are building productive assets to participate in a real marketplace.
March 14, 2010 11:16 PM | Reply | Permalink
I'll take a stab at this :
Think of the correlation versus causation question.
In my experience, and apparently that of the author, there is a strong correlation between today's deficit hawks, and people who did not see the housing bubble. Both these traits also track closely with Republican Party, and Tea Partiers.
That's all.
March 15, 2010 1:46 AM | Reply | Permalink
There is a strong correlation between deficit hawks and people who eat every day. The fact there was a housing bubble proves the majority did not 'see' it coming, or you couldn't have had a massive bubble in the first place.
March 15, 2010 7:44 AM | Reply | Permalink
The fact that the bubble happened does not prove the majority did not see it coming. I shows that the people who could do something about the bubble chose not to. Care to guess why? Bonuses perhaps?
The only people who "didn't see it coming" were the willfully blind, the stupid, and those who just aren't aware that housing prices can not increase at 20% annually indefinitely while wages remain stagnant.
If you can do math, and you paid even the slightest attention to what was going on, you knew the bubble was there and the burst was imminent.
The people controlling the flow of money - the people who had the ABILITY to do something - they knew too, but they were making money hand over fist, while throwing all the risk onto the US Dollar, and therefor the US Taxpayer.
You think the fellows at Goldman Sachs and at Lehman Brothers didn't know there was a bubble?
BULLSHIT!!
They knew there was a bubble, but for them to try to change it would have meant a smaller year end bonus.
The masters of the universe on Wall Street, The ones who had the power to stop this. . . The walked away with $100 million plus in bonuses - while all the downside has fallen on us, the US taxpayer.
The dopes who watch Fox News, may have not seen the bubble. But us fancy dancy, college-edumucated-liberuls. We saw it, and we were screaming about it. We were pointing to the unfunded obligations that were being created selling the mortgages that no one could pay. Where were you deficit hawks then?
So there you have it. a high correlations between people who :
1. eat
2. Believe what they hear on FoxNews
3. Didn't see the bubble
4. are now pretending to be deficit hawks even though they never were deficit hawks during the previous 8 years, while W spent like a drunken frat boy all the while reducing government revenue and gutting the financial regulators who'd help establish America as a safe investment haven.
So, unless you can produce some documentation that you were worried about deficits while the previous administration was cutting revenue, and increasing on and off budget spending then please just stop pretending that you give a rats ass about deficits.
Of course, if you are an honest deficit hawk who has always shown concern about balanced budgets, then I apologize if I have implied you belong to this group of fake deficit hawk that are screaming so loudly now.
March 16, 2010 4:34 AM | Reply | Permalink
Dean saw it.
March 15, 2010 7:48 AM | Reply | Permalink
Well, hell, Destor. Everybody saw it.
Bush and Greenspan helped create it as a way to keep the economy running while fighting two off the books wars and reducing taxes for their friends.
But few people wanted to talk about it because everyone was getting fat, while it lasted.
The reason today's deficit hawks are squawking about Obama's so-called spending spree now is to divert attention from the tsunami of debt and default they engineered while Bush was President.
These are the same deficit hawks who predicted the world was ending because of spending under Clinton, then shut up and grabbed everything they could get while Bush emptied the treasury and mortgaged the future.
It really isn't that they didn't see the bubble. It's that they played it for all it was worth and now want to put the blame somewhere else.
March 15, 2010 11:14 AM | Reply | Permalink
A hedge fund manager that saw it made 3.7 billion dollars in 2008. So, if you saw it also I guess you made a fortune as well, right?
March 15, 2010 12:29 PM | Reply | Permalink
You didn't see it?
March 15, 2010 12:53 PM | Reply | Permalink
If I'd had the ability to invest in markets that could bet against this, then I would have made a bundle. But you can't "short sell" houses when you're in my income bracket.
I did try to bet against the dollar based on the inflation that would come from trying to cover these losses, but that hasn't happened yet. But I'm afraid the inflation fallout from this last decade of borrow and spend lifestyle still might be coming home to roost.
March 16, 2010 4:42 AM | Reply | Permalink
Using the "fractional Reserve" system of accounting, the government giving the major banks $350 Billion in TARP and bailout funds at 0% interest allowed those banks to buy $3.5 Trillion dollars worth of T-Bills at 1% interest, making $35 Billion dollars per year for those banks.
The "advantages" are that the interest rates are being artificially kept down and the day of reckoning is being pushed off into the future. How far is anyone's guess, but in this type of ponzi scheme, the further into the future that day is pushed, the worse that day of reckoning will be.
.
March 16, 2010 10:37 AM | Reply | Permalink
Just saw it referenced over at Delong's place
July 25, 2005.
Dean Baker is more than worried about the housing bubble:
March 15, 2010 2:17 PM | Reply | Permalink
[A] large trade deficit require[s] very low private savings and/or large budget deficits. This is an accounting identity. If the country is a net borrower from abroad (this is what a trade deficit means), then it must have low national savings.
A truism but one which must be regularly highlighted in these discussions.
Another "accounting identity" --
Private savings + government savings = 0
If consumers and firms save more, government must run an increasing deficit. The issue is who gets to increase their savings -- the people or the Wall Street banks.
March 14, 2010 5:34 PM | Reply | Permalink
So the cowardly genius continues to speak with absolute authority.
I'd like to know the positions of the REAL geniuses, those who put their money where their mouths were; John Paulson and George Soros. I've read that for awhile Soros was shorting the pound but then pulled back. I haven't heard anything since.
March 14, 2010 5:38 PM | Reply | Permalink
What does "shorting the pound" have to do with the U.S. trade deficit, unemployment, and Chinese grumbling?
March 14, 2010 7:02 PM | Reply | Permalink
Like M. Litvinov's peace, fiscal responsibility is indivisible.
March 14, 2010 8:30 PM | Reply | Permalink
Shorting the dollar is just like shorting the pound. You do it if you think it will fall in value relative to other currencies, to commodities, to whatever.
That's pretty damn basic. I shouldn't have to explain that to anybody with any sophistication so you must be making an argument I don't understand. What is it?
March 14, 2010 9:23 PM | Reply | Permalink
Very good post on a fascinating important subject.
This link takes you to one of the best discussions on these issues I have seen: http://mpettis.com/2010/02/
March 14, 2010 6:07 PM | Reply | Permalink
I especially like this line from Pettis' posting --
". . . since almost everyone would agree that losses in the banking system should be paid directly out of fiscal revenues, and not indirectly by the central bank . . . ."
"Almost everyone" with the exception of Obama, Geithner, and Summers.
March 14, 2010 7:13 PM | Reply | Permalink
I know what you mean - handing out the keys to the US treasury seemed like a radical idea to me.
Did you like the article ? Pettis is very clear I think.
March 14, 2010 8:37 PM | Reply | Permalink
Yes and yes.
Dean's argument is that the deficit hawks are plumping this red herring -- unless we curtail the deficit right now, the Chinese are going to abandon the UST market and interest rates will go through the roof -- and getting no questions or push-back from the MSM's business journalists (WaPo, Dean's morning paper, is the absolute worst).
Thankfully, we have some knowledgeable bloggers out there, but who reads blogs.
March 14, 2010 9:14 PM | Reply | Permalink
Look, it is pretty basic, If the Chinese stop buying, then we will have no option on how to finance the gov't other than (1) raising interest rates dramatically to attract other buyers, or (2) just print more money - which devalues the currency further and leads to massive inflation. Which part of this do you (and Dean) dispute?
March 14, 2010 9:43 PM | Reply | Permalink
News Flash! No one owns US Treasuries except China. This should be on the front page of all US newspapers. That is, it should be if it were true, which it isn't. The last I heard the US Treasury had no problem selling their bonds, even at the virtually non-existent interest rates now in effect. If there were a problem the interest rates on those bonds would be a lot higher than they are. I think the real situation is that US Treasuries are still the safest investment in the world and are widely acknowledged as such, and the US doesn't have to compete by raising interest rates.
The Sky is Falling!!! Oh, sorry, that was pigeon.
March 14, 2010 9:56 PM | Reply | Permalink
http://sbynews.blogspot.com/2010/02/china-reducing-its-holdings-of-treasury.html
There is a link for you referring to the poor treasury auction rate. Which would be a whole lot worse if China completely walks away, or if Obama keeps spending like he has been and flooding the market. Supply is already exceeding demand.
March 14, 2010 11:03 PM | Reply | Permalink
Hey! I just got a novel idea! Maybe the USA could fund it's government by REPEALING THE REAGAN TAX CUTS TO RICH PEOPLE! And the added bonus would be to discourage CEOs from taking astronomical saleries and bonuses. I know it's insane but maybe the country could get back on something resembling a paying basis.
Next return to targeted tariffs on manufactured goods like every other contry does so we can get back to making things in America.
Oh crap, I must have forgotten to take my lithium again.
March 15, 2010 4:43 AM | Reply | Permalink
Well now there is a stupid idea! Sure, let's tax ourselves to prosperity! That should work great. I'm sure doubling the tax rate won't affect the economy any. And consumers will be happy to pay multiple times more for products to support a few union workers.
March 15, 2010 7:39 AM | Reply | Permalink
What nobody on this blog is even considering is that the US Government could curtail its spending to match its income.
I know, that is to radical a concept to be considered here.
.
March 15, 2010 9:47 AM | Reply | Permalink
I don't know how old you are but I'm old enough to remember when Americans could get real jobs making real things and bought those things with real money that wasn't borrowed at 20% interest. And that is real prosperity not trickle down Republican CleverBullsh#t that has been destroying America for three decades.
Reaganomics has been tried and has failed. Now it's just deadenders like you trying to keep the ponzi scheem floating long enough to suck just a little more out of the middle class.
GOPers can always justify borrowing a few trillion for some pointless war or some insanely expensive weapons system to enrich the military/industrial complex but ask them to pay their fair share of taxes or suggest supporting the infrastructure, provide healthcare, education, renewable energy,... and out comes the ashes and sackcloth and oh we need to be practical.
theCleverBullSh#t is an apt handle. Well not really so clever.
Now there. I never got rude on line before so I would like to apologize to everyone for venting on this space but it just needed to be said.
March 15, 2010 10:17 AM | Reply | Permalink
Ah yes, the ever popular " ask them to pay their fair share of taxes", by which a liberal means "pay my share so I can have lots of stuff for free".
March 15, 2010 10:50 AM | Reply | Permalink
Can we agree that the government should make decisions based on what benefits the nation as a whole, the majority of our citizens and not the minority? If so, you have to accept that our nation benefits most if the majority have prosperity, and the least if a tiny minority accumulate the majority of the nation's wealth. Progressive tax rates accomplish that.
March 15, 2010 11:34 AM | Reply | Permalink
Your argument could also be used to justify a return of slavery. It benefitted the majority, and the nation as a whole prospered from it. So it must be a good thing, right?
March 15, 2010 12:27 PM | Reply | Permalink
Not quite ... with the orifice sniffer . . .
It may not have crossed what this clown calls it's mind, but plantation/slave owners were not in the majority. Nor were the manufacturers, industry entities, or distributors of the products the plantation owners produced. But why sweat the details when discussing anything of a rational nature with a dog?
Now ... like a good puppy, it should stop wiping it's butt on the carpet.
That's what that slobbering tongue is for.
~OGD~
March 15, 2010 4:24 PM | Reply | Permalink
Well idiot, try to pay attention. Slavery benefitted more than plantation owners, it benefitted everyone except the slaves. And the point of the argument was that his notion that is something benefitted a larger group than it harmed it was a good thing. Which is clearly a faulty argument. You are just too dimwitted to comprehend that.
March 15, 2010 9:33 PM | Reply | Permalink
Ya know . . .
If you'd pull that slurping tongue of yours out of your asteroid-orifice you'd be much more understandable...
woof woof . . .
~OGD~
March 16, 2010 3:07 AM | Reply | Permalink
TCB
"Ah yes, the ever popular "ask them to pay their fair share of taxes","
Instead of looking at how much people pay in taxes, look at how much they have left after they pay their taxes and how much of the American dream they can afford at that time.
It is an eye opener.
.
March 16, 2010 2:09 AM | Reply | Permalink
Thank you, Dean, for the informative posting. I had surmised that somehow this logic you describe must be a part of Geithner's strategy.
Your explanation ties up some loose ends in my efforts to understand the dynamics of it all.
It's a helpful analysis. Keep it up.
March 14, 2010 8:48 PM | Reply | Permalink
Paul Krugman has a column about this in the Monday NYT. Recommended reading.
http://www.nytimes.com/2010/03/15/opinion/15krugman.html?hp
Here's how his piece begins:
March 15, 2010 2:41 AM | Reply | Permalink
Why does everybody assume that China has the sole right to value it's currency against the currency of other nations?
Why can't the USA value it's currency in relation to China's currency?
What is it I am missing here?
.
March 15, 2010 9:50 AM | Reply | Permalink
Most currencies are traded openly, so their value rises or falls based the market's judgements about supply, demand, risk, etc.
China does not allow its currency to be traded. You can't even take it out of the country. And China supports the value of the dollar by purchasing enormous sums of US bonds.
March 15, 2010 11:04 AM | Reply | Permalink
So, the USA wants China to stop supporting the US Dollar?
.
March 16, 2010 2:12 AM | Reply | Permalink
So, the USA wants China to stop supporting the US Dollar?
.
March 16, 2010 2:14 AM | Reply | Permalink
Mr. Baker has either taken leave of his senses or badly needs to better proof-read. As any of his professors in economics could have told him decades ago, there is no such thing as an "absolute certainty" in economic forecasting. This blog entry makes a few useful points later on, and the overall CASE, i.e. the PROBABILITY (which is not the same thing as "certainty"), that the international value of the dollar is headed lower rather than higher in the medium term is compelling, but it is difficult to get past this boneheaded error to read the sensible stuff that follows it.
March 15, 2010 4:39 AM | Reply | Permalink
If you were a betting man, PTroub, which way would you bet?
March 15, 2010 11:36 AM | Reply | Permalink
I am personally betting on the dollar going up short term (despite China) and down long term, partly for the reasons Baker mentioned. But no Better ever thinks in terms of certainty in a game of chance or he soon loses all his poker chips. Maybe Baker never even goes in to the poker hall. A wise decision no doubt, but no excuse for claiming that its a dead "certainty" that Cool Hand Luke will "absolutely" walk away from the table with everyone else's money.
March 16, 2010 3:22 PM | Reply | Permalink
So Dean, my question for you is "What does the world look like when China loses its dough?" You say the trade gap closes and jobs are created here. But what kind of jobs? And won't the middle class suffer for a weaker dollar? Most of the goods we buy are imported after all and other countries with appreciating currency will outcompete the American consumer for oil. Sounds like a recipe for $5 a gallon gas, really high heating oil bills and reduced living standards if we don't manage this really carefully.
March 15, 2010 7:51 AM | Reply | Permalink
Here's an example, Destor.
One of my clients is the North American distributor for a brand of sport aircraft manufactured in the Czech Republic. Five years ago, this little airplane could be sold here for about $90K. Today, the price is about $140K, simply because the dollar has lost so much value against the Euro. This field (light sport aircraft or LSAs) is dominated by Eastern European manufacturers, because they have the skilled labor and their labor is still cheap.
There are a handful of competitive aircraft manufactured in this country that are beginning to do quite well, though. American manufacturers pay higher wages but lower shipping costs, and their overall costs are predictable in a way that my client's costs are not, since the Euro/Dollar exchange rate varies minute to minute.
In the future, I believe American manufacturers will dominate this particular market as the dollar value declines, which means there will be more skilled manufacturing jobs available in places like Kansas and Texas and Washington state.
One of my client's top competitors is Cessna, which recently entered the market with a sport airplane they are having built in China. Cessna is playing one-upsmanship in the cheap labor game. There aren't many brands that are as American as Cessna, but now it is outsourcing skilled jobs to China like everyone else. Perhaps even Cessna could be convinced to manufacture these sport aircraft in Wichita, if Chinese and US currencies were fairly valued.
March 15, 2010 11:31 AM | Reply | Permalink
That's a good and interesting point Red Planet. So on one hand, yes, we'll make more of our own things. But we still import material and commodities and with the dollar falling those prices will go up. So it's hard for me to see a weaker dollar really helping people have rising living standards.
I guess one other thing that will have to happen is we'll have to use more of our own commodities.
March 15, 2010 5:39 PM | Reply | Permalink
Thanks for the explanation, it seems a lot of the US economy is dependent on China.
May 27, 2010 11:28 AM | Reply | Permalink
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December 16, 2010 3:40 AM | Reply | Permalink
I agree with you. Really, we should beg them to become unhappy with our fiscal and monetary policies and stop investing in Treasury bonds. The improvement in the trade deficit that will result from the fall in the dollar will create ten times as many jobs as any "jobs bill" that President Obama can possibly get through Congress.
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December 21, 2010 7:53 AM | Reply | Permalink
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January 14, 2011 2:07 AM | Reply | Permalink
Cheap Heels
Jan you have the wrong end of the stick, see how rich and corrupt the leaders of Nigeria and the other oil rich West African countries are. Only so much the poil majors can do, its the political leaders you should be looking at and don't for a moment try and tell me they have nothing to do with it
January 17, 2011 2:00 AM | Reply | Permalink
Shemale
Next month the administration is going to have to change directions. A lot of air will come out of that Chinese currency bubble that was allowed to build up over the past several years, but the result will be a world starting to return to balance -- and jobs here.
January 17, 2011 8:14 AM | Reply | Permalink
It's really important to know what you're getting into and where does your money go (regarding investments anyway). For example not many people have heard of spread betting. People don't know that they can make money from the comfort of their own homes... it's just sad sometimes.
Alan - Specialist on spread betting
January 28, 2011 7:08 AM | Reply | Permalink
Using the "fractional Reserve" system of accounting, the government giving the major banks $350 Billion in TARP and bailout funds at 0% interest allowed those banks to buy $3.5 Trillion dollars worth of T-Bills at 1% interest, making $35 Billion dollars per year for those banks. check the dallas mortgage rate right now and you will see for yourself..
The "advantages" are that the interest rates are being artificially kept down and the day of reckoning is being pushed off into the future. How far is anyone's guess, but in this type of ponzi scheme, the further into the future that day is pushed, the worse that day of reckoning will be. get aluminum cases today for any needs!
February 2, 2011 7:52 PM | Reply | Permalink
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