A friend of mine was telling me the US can't default on its loans because it would destroy the financial world. I asked her how it would affect the price of tea in China if the dollar crashed and she didn't really have a coherent answer other than that if the dollar falls so will every other currency. Is she right? Why so, or why not?
Think of how much money, we owe to various countries around the world. They have these loans in the form of the U.S treasury bonds. What do you think it would mean for a country if suddenly 600 billion dollars of assets suddenly became worthlees? What do you think it would mean for all the countries in the world that use the dollar as their primary reserve currency? What does it mean for the world economy if the worls largest economy is now completely bankrupt? It would be an enourmous catastrophe!
From the international trade aspect alone, USA is one of the major player. Here is the schematic of overall volume of the world trade in 2003 (the thickest line is $300 billions): Please Register or Log in to view the hidden image!
For those heavily invested in the dollar it would be a hit. For those invested in other things it would be a small bump in the road. The only world wide problem I can think of is the petrodollar which can be replaced by a more sound currency than the US dollar. It seems to me people who buy or hold t bills want to lose money because the US debt is nonsustainable and there is no indication that the US will become fiscally responsible any time soon. Is it a case of a lack of options among the other currencies to invest in or is it a form of mass hysteria in favor of the dollar?
The thing is, the largest creditors to the United States are China and Japan, so they would be hit hard (to put it mildly) by a default. Since they are among the world leading export countries, it would be devastating for world. There are other reserve currecnies to use. Since its introduction, the Euro has steadily gained more and more importance as a reserve currency, and Swiss Franc is also around... The usage of U.S Dollar as the major reserve currency has more to do with the Bretton Woods system, than it does with mass hysteria.
I suggest you sign up for some economics courses. A chat forum such as this is no place to conduct a classroom. If 25 percent of the world economy dies, it is going to take with it a lot of other countries. We live in a very interrelated world. Each country is dependent on other countries for various items. No country, especially and industrial country lives without a dependency on another country.
So says the fellow who endorses an administration which is currently deflating the dollar into oblivion by irresponsible government spending. It doesn't matter how much business you do with someone. If their checks start bouncing, eventually you have to stop sending them whatever they are buying from you or your checks will start bouncing too. It would be nice if the US treasury had geese that laid golden eggs but sady, all they have is printing presses that make little cloths with pictures of deceased notables on them. The more they make the less they are worth, pretty as they are.
This has been explained to you before, but it never seems to sink in. One, you need to get your facts and terms straight. Deflation is what we have been experiencing due to the recession. The dollar buys more goods, not fewer goods. That is very different from inflation where the each dollar buys fewer and fewer goods. And we have not seen any signficant inflation for some time. Two, let's get the facts straight. The dollar has been rising in value against other currencies. That means other currencies like the Euro are loosing value against the dollar. The dollar has been rising in value. That means it is becoming more valueable not less. The chart in the link below shows that the Euro was trading for 1.5 US dollars. It is now trading for 1.33 dollars. So you need to get your facts straight. http://www.euro-vs-dollar.com/ If you were worried about a strong dollar, you should not have elected george II because during his reign the dollar lost a third of its value against the Euro. Now the dollar is appreciating against the dollar and other currencies. So you need to get your facts straight. Three, the irresponsible government spending of which you speak occured 10 years ago by the very people you are supporting now (not Obama). So you want to talk about crazy! How crazy is it, that the guys screwed you and the nation by doubling the national debt without a single thing to show for it and yet you continue to support them and blame it on the guy who is trying to fix the mess your guys left behind....a little late and you are blaming the guy trying to give you a life raft versus the guys who torpedoed your ship. How smart is that? Four, where are you getting the bouncing check business? No US government checks have bounced nor will they bounce. The US government if need be can always print money. So this nonsense about US government checks bouncing is sheer right wing nonsense....straight out of the limbaugh 10 minute MBA program. You might also want to know that 30 - 50 percent of the US debt is held by the Federal Reserve. That means the government owes the money to itself. http://en.wikipedia.org/wiki/United_States_public_debt
The U.S currently uses a fiat currency system as you are well aware of. The dollar's value comes from the widespread usage of it as a reserve currency, and the fact that the United States is the world's largest economy. And by the way, U.S government bonds are still rated AAA by the various credit rating companies.
No - they will get their money (dollars) back with the interest promised, but it may not be worth much.
If the US is "too big to fail" (and it seems to be, in the sense of attracting bailouts when in danger) it's because of two factors: the huge role that the US plays in security arrangements at both the global and regional levels, and the huge consumer market that the US exhibits which allows developing countries to industrialize via mercantilist approaches (supposing they play politics, of course). It's not really the size of the economy as such or the presence in finance. It's that geopolitics and development strategies are premised on certain assumptions about the US, and nobody is prepared to cope with the fallout of upending those if they don't have to.
It is really all of the above including economics and finance. You cannot have the collapse of 25 percent of the global GPD and not expect other countries to not be adversely impacted. We saw what almost happened a year ago. But security agreements are also a crucial aspect of world economic health.
The global financial structure (US dollar dominate) will not quickly change until there is a run on the dollar. That will come as interest rates rise (ten year T bill now paying 4% and rising) and the total debt to pay this increasing interest rate on is rising at about 1.5 trillion per year now. None the less I suspect Obama will be able to hold off the run on the dollar until he has finished his first term. One can see already that the world is beginning to adjust to state where the US purchasing is not very important. It must because as the dollar weakens, Joe American cannot afford to buy imported goods like he once did. Also the right wing of the US electorate may get their wish for an increase in the value of the Yuan. Then what China sends to Wal-Mart etc will be more expensive for Joe to buy. I.e. it is mainly China that has been keeping inflation in the US under control. Even if the Yuan does not appreciate, the fact that China is the number one car sales market (and India rapidly growing in cars sale, thanks to Tata Motors and some other makers of cheap cars) the price of oil will climb about $40/ barrel each year for several years and hurt Joe's pocket book more than most Europeans as he commutes to/ from his suburban home. Most of the world’s GDP growth is now in the developing world and an increasing percent of it is BETWEEN the developing countries. For example, last year China passed the US as Brazil’s number one trading partner. For many years now I have predicted that the run on the dollar will occur before Halloween 2014 and that the run will be quickly be followed by world’s worst depression IN US & EU, but not in Brazil and other suppliers of raw material and energy to Asia. I.e. the thread’s premise is wrong. The US is NOT forever too big /important to fail –only too big and important to fail now and for a few years more.
I can hear the thundering hoofs of the bond vigilanties approaching in the temporal distance, Can you? "... Facing an onslaught of government bond issuance, investors are demanding higher yields on Treasury debt. The yield on the 10-year Treasury note hit 4% Monday for the first time since October 2008, the height of the financial crisis. The government is preparing to sell $167 billion worth of Treasury debt this week. The rise in yields comes after a number of Treasury auctions in recent weeks drew tepid demand. An auction of 10-year notes this Wednesday "could be problematic," Larkin said. He recommends investors who want to add bond exposure stick to maturities of three years or less. ..." From: http://money.cnn.com/2010/04/05/news/economy/fed.rates.fortune/index.htm
I missed your post until now. Sure would be nice to see same presentation for 2009 or 2008. Where did this come from? The mid east to elsewhere lines are surprisingly thin, considering that is where more than half the oil comes from - was it really cheap back in 2003?
