Dangers of a deficit

Discussion in 'Business & Economics' started by Jagger, Nov 25, 2004.

1. JaggerRegistered Senior Member

Messages:
315
Over the last few weeks, I have has a couple of interesting conversations concerning the economy. The first was with a man of 49, well educated, fairly conservative and a republican, who stated he didn't care about the deficit. The US can handle it. The second was with a woman of about 42, also a republican and well educated who stated the deficit and the economy scared the hell out of her. I agreed with her.

For some reason, the deficit wasn't much of an issue in this years election race. The media pretty much ignored it. Perhaps it should have been a bigger issue.

I watch the market indices, gold, oil and the dollar, sometimes once a week and sometimes once a day. It is not looking good out there.

What is scary is apparantly the Russians are substantially reducing their dollar holdings. The asians are watching very closely. And the europeans want the Euro as the world currency. And of course, we don't have a friend left in the world to support us after the last four years. Who wants dollars when they lose value every day? Investments with a negative interest rate aren't very attractive.

From the Asia Times:

http://www.atimes.com/atimes/Global_Economy/FK25Dj03.html

Global Economy

SPEAKING FREELY
Crisis towers over the dollar
By W Joseph Stroupe

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

When analyzing such matters as the vulnerability of the US economy and the chances of its collapse, it is vital to avoid the two extremes of "calamity howling" on one hand and investing blind faith in the status quo on the other. Unforeseen and unexpected attack-induced collapses of grand proportions can and do occur. The sudden collapse of both towers of New York's World Trade Center, for example, took everyone by surprise - who could have foreseen that the two towers, which survived the massive lateral impact of two huge planes, would, only minutes later, collapse vertically upon themselves, their own massive weight ensuring their demise?

Structurally, the two towers were impressive indeed...

Last edited by a moderator: Dec 3, 2004

3. dixonmasseyValued Senior Member

Messages:
2,151
Russia is also steadily decreasing the percentage of its reserves denominated in dollars, moving toward a level of 50:50 split between dollars and euros. Russia is the key player here, the one the entire world is intently watching.

How so? Russian economy is less than that of a tiny Netherlands. Russian government has roughly 100 billions of $(invested in the Western Banks). Russians do not know what to do with their recent boost in$ income due to the high oil prices. All that their braniacs managed to do is "to place all state $income$ in the western banks". 100 billions is too small droplet in the sea of $. I think all world economies are in trouble because of the wold wide "credit expansion economy". Too put it roughly, there are 600 times (I am not kidding) more money of all colors than real goods worldwide (expressed in the current prices). Financial and phisical goods/services spheres, frequently, exist in parallel. Money make money independently of the "physical" world. What will happen if fat cats will decide to "cash in" their money for goods? Super worldwide depression is the only solution to the credit expansion disaster (unfortunately). After depression, survivors must prohibit credit once and forever. 4. Google AdSenseGuest Advertisement to hide all adverts. 5. Repo ManValued Senior Member Messages: 4,955 What goes up must come down. Economic Armageddon' predicted By Brett Arends/ On State Street Tuesday, November 23, 2004 Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish. But you should hear what he's saying in private. Roach met select groups of fund managers downtown last week, including a group at Fidelity. His prediction: America has no better than a 10 percent chance of avoiding economic `armageddon.'' [snip] To finance its current account deficit with the rest of the world, he said, America has to import$2.6 billion in cash. Every working day.
That is an amazing 80 percent of the entire world's net savings.
Sustainable? Hardly.
Meanwhile, he notes that household debt is at record levels.
Twenty years ago the total debt of U.S. households was equal to half the size of the economy.
Today the figure is 85 percent.
Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.
Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet.
You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.

As a poor slob who gets by on low wages, I don't know how much this can effect me. But things can always get worse. You take having enough to eat for granted in the U.S., just about no matter how poor you are. I'd hate to see that change.

7. marvJust a dumb hillbilly...Registered Senior Member

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743
We look at the deficit and see dollar numbers. We forget, or maybe never bothered to investigate, that todays deficit, as a percentage of GDP, is smaller than it was during WWII.

8. Fukushi-meta consciousness-Registered Senior Member

Messages:
1,231
It's the intrest really that bothers me a lot.

9. wkirbyRegistered Member

Messages:
29
The prevailing thought is that, as has been the case in the past, that inflation and GDP growth will allow U.S. deficits to not be much of an issue.

That being said, there certainly is a point where relying on GDP growth and inflation to make the deficit a small issue will cease. We're not there yet, and I don't think we're relatively close to it, but the status quo can not continue for 15-20 years unless we see rapid GDP growth.

-Will

10. BlueMooseGuest

To allow such a deficit to be cant happen just by a chance, can it ? Who is benefitting in this current situation / how and why it did happen ? Just a thought...

11. Shifty RussianInternational Man of MysteryRegistered Senior Member

Messages:
78
hey,

No, the deficit didn't happen by chance, the war was responsible. Although I am not from America - I believe there are a number of other things that are costing the Americans alot of money. For example I believe there is currently a lot of concern for the medical system that you have in place. Plus the reform that the Government is likely to bring in place is going to cost (and currently costing) alot of money that the Government doesn't have. With the more developed dynamics of the global market - tarrifs are currently being reduced everywhere. The problem with that - is it helps foreign countries that are more competitive with lower production cost. Not only are they shifting the USD overseas, plus they are reducing the number of jobs in the manufacturing industry in the US, therefore driving the economy down with a double slap to the face.

Who is benefiting from the current situation? For starters anyone who is funding the deficit. Secondly countries that could have been competing with the US in certain manufacturing fields... Since it's now a more common practice to outsource R&D, many countries are now feeling the benefits of this shift - away from not only the silicon valley but other fields of scientific and other misc. research.

Also the I would imagine G.W.Bush is hoping that the Americans will benefit in the longer term, after the economic slow down and restructuring of what will make the money for America in the long term... From the oil in Iraq. If the oil wasn't there, it's likely that the deficit would be also. I guess this answers the second part of the question more, as to "how did it happen?".

Marv mentioned that as a percentage of GDP the deficit is smaller then during WWII - How ever the dynamics of the economy at that time were very different... and back then every man and his dog didn't have a mortage, also they didn't worry as much about their jobs moving overseas, etc...

"Economic armageddon"... could happen, but not for while. There's too much money still flowing around for it to occur. There definetly seems to be some major diseconomies floating around - how ever the affects a while away yet.

And as for the original post about the USD... firstly with the Russians, it may not be the Russian Government that's holding the reserves of USD - but the people. There's used to be a big problem with everyone trading in USD - which caused some internal diseconomies - to which the Government replied with a ban, on buying with the USD - how ever it's still commonly passed around. I remember before I came to Australia in the Early 90's the USD was almost as common as the Rubel (or atleast commonly available). (Although mind you I lived in Moscow - I doubt they knew the color the USD in the sticks of Russia.)

Here in Australia at the moment - the Australian dollar buys about .78c. nearly hitting 80 a week ago. I havent seen these sought of highs here in almost 10years (during the 2000 Olympics the AUD bought .52c USD) - 50% is quite a hike.

Take care,
Shifty Russian