The world has more debt than it has income

A lot is riding on Obama and his management of the nations finances. There is an advantage to having a weak currency, it should make the products of the weaker currency nation more cost competitive. However, when you have nations like China fixing the value of the Yuan to the dollar it effectively nullifies the advantage of a weak currency for China-US trade.

 

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So what? I was responding to the part where you described the yuan as "strong."

Define "value" here.

This despite the fact that the dollar is way, way up against the pound and Euro?

And what is it that the RMB and Real have been appreciating with respect to? The dollar? But if you contend that the dollar is depreciating, where does that leave you?

Again, increasing or decreasing with respect to what? The dollar? Gold? A barrel of oil? A Big Mac?

 

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Yes I say Yuan is strong and growing stronger, has increasing "value" as it it buys more of most things, including dollars, now than it did more than a year or two ago.

Almost all currencies do suffer from inflation so this statement needs to be corrected for that. What I am trying to say is that if a basket of the world's currencies will only buy 95% of a basket of major trade items because of inflation, then the Yuan will buy a greater fraction of that basket. Say 97% just to make a numerical illustration and the dollar is "growing weaker" as it will only buy 93% of that basket of items. Take full year averages. For example buy the basket every first day of the month in 2007 and 2008 and compare total cost of the 12 buys in the two years. I am not interested in a few months up or down in the buying power, nor is the buyer of a 10, 20, or 30 year bond, and that is what we were talking about.

Yes as I am and have clearly said not looking at fluctuation of only a few months, but going back at least year, preferable two or more to talk about the long term trends. I said the pound was weak by these standards. If you like I will admit the pound is weaker than the dollar, but that does not make the dollar strong. I said the Euro has been bouncing around too much to call it either weak or strong. In July08 it was above 1.60 and five months later below 1.25 dollars so was weakening then and now is about 1.40 so has recovered some. Again as you noted, central banks buying and setting interest rates can swing the value around in the short term (for a year or even more) so exchange rates are not as good a measure of currency strength changes as are the multi-year change in purchasing power, IMHO.

Again I think is sort of silly to use exchange rates between only two currencies as either government can control them for a while instead of long term trends in purchasing power (corrected to remove the general global decreases due to inflation).

None of the above; But the multi-year changes in the relative purchasing power for buying a basket of major trade items.

If I must choose one from your list I would take the Big Mac as it is sort of a basket of items: wheat, beef (and indirectly the cow’s soy bean feed, etc.), eatable oils, energy (for cooking and store lights), building rent, labor, paper (in the box and on the tray), tomatoes, and other vegetables, but the Big Mac does not include cement, various metals, especially steel and copper, except some aluminum (in the foil wrap), which I would like to include in my "basket of trade items."

PS to Joepistole: I basicly agree with your comments in post 141 and as it is my bed time, all you get is this PS

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We are just finishing the 28 week of 2009 and 40 US banks have failed! A slightly more than 4 every 3 weeks rate, but perhaps rate is accelerating as three failed yesterday.
See: http://www.bloomberg.com/apps/news?pid=20601087&sid=a1I.wFjFiCvg

Protectionism is widely thought to have prolonged and worsened the 1929 depression. Then it was more openly done mainly via tariffs. Now it is more by reduced taxes and subsides to domestic producers, especially in agricultural production in the US and EU. In Brazil, lower than market rate loans from government agencies and tax holidays, (a few months when some taxes on manufactures are suspended), are used. China has recently followed the US lead in its stimulus program with a “buy Chinese” requirement. Germany and some others now are giving large financial rewards for scrapping your older car, if you buy a new German made one. etc.

The net effect is that trade is contracting at a much faster rate than it did in 1929. See this graphically below. (X-axis is the number of months since the down turn started, as stated under the graphs. The blue curve is the 1229 history. The red curve only goes to April 2009 but the more recent data continues it downward.)

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Another important reason why trade is collapsing more rapidly now is that Joe American and his EU counter parts were much deeper in debt when the down trurn started and credit cards were hardly known back in 1929, not used to buy your groceries etc. Also few refinanced their house and spent the appreciation it had experienced as many have recently so many are now with negative equity in the home.

See many more graphs like the one above, which illustrate that current downturn is at least as bad and in many cases like above, worse than 1929 at :
http://www.sciforums.com/showpost.php?p=2284750&postcount=93

 

From post 144 with error corrected*:

Now have just finished week 25 of 2009 and 45 have failed. That is now average of 5.40 every 3 weeks. Perhaps rate is accelerating as five failed in the last week alone. See: http://www.bloomberg.com/apps/news?pid=20601087&sid=aCbHA.m7rikc

In June 2009 the bank failure rate has been much greater than 2/week.
Any one think 2009's average rate will get to the 6 failed in 3 weeks or 2/week rate?
When will the FDIC need more funds from tax payers? (and how much?)


The big financial failure story next week may be California.

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*I counted the weeks incorrectly as 28, not 24 and can not now edit post 144.

 

"Mortgage Modification" is the re issue of a mortgage or a new mortgage for longer term and or lower rate to reduce the monthly payments, but hard to do for a bank or other investor if you have negative equity in house already. The government did this if the negative equity was no more than 5% but that has just been increased to allow owners with up to 25% negative equity to get new lower payment mortgage. This post shows why that is not a good idea. As I pointed out a year ago, the solution to the housing problem is not to try to keep owners in home they cannot afford but to get them into housing they can afford. See (2) at: http://www.sciforums.com/showpost.php?p=2025940&postcount=1
But post 99 of that thread is a more evolved version.

"... Past evidence of the effectiveness of mortgage modifications is really, really atrocious. A recent report by the Office of Thrift Supervision and the Comptroller of the Currency detailing the amount of redefaults, or troubled loans that find their way back into default after modification, ...

Of the modified loans {made in 2008 quarters and now} 30 or more days delinquent, here's what it found:
in..+3 Months..+ 6 Months..+9 Months...+1 year
Q1..... 40.4% .......53.0%........59.9% ......63.3%
Q2..... 46.6%........58.8%........61.1%.......----
Q3..... 50.4%........59.5%........----
Q4..... 45.9%
Source: Comptroller of the Currency, Office of Thrift Supervision, June 2009.

One year out, over 60% of modified mortgages end up where they started … in default. What's really amazing is how quickly things reverted: Just 90 days after modification, almost half of mortgages were back in default. That's utterly pathetic.

Rising joblessness is the most obvious answer to why so many modifications fail. But that alone hardly accounts for the ungodly redefault rate. When unemployment goes up a few percentage points while redefaults hit 60%, something else is surely at play: "underwater homeowners."

When your house is worth less than your mortgage, there's a huge incentive to give up and walk away even if you can make your monthly payments. The logic here is simple: The beauty of homeownership is based on a saying that goes something like "with every mortgage payment, you'll own a little bit more of your house." But when you're underwater, the only thing you "own" is the liability. Monthly payments decrease your debt, but you still don't own one inch of the house. The bank does.

Taking away this fundamental sense of ownership zaps the incentive to keep making payments. The sensible thing to do, many find, is to stop paying and walk away. This is suicide on your credit rating and a nightmare for housing-heavy banks. ..."

From: http://www.fool.com/investing/general/2009/07/02/dangerously-delaying-the-inevitable.aspx
with slight restructure of the table for ease of posting.
The last bold text helps explain the accelerating bank failure rate mentioned in my prior posts.

There was also a recent study that showed the rapid increase in willingness to "walk away" after the first in your neighborhood does so. Many Americans (more than 85%, as I recall) initially think it morally wrong to walk away from the mortgage payments on your under water home, if you can pay, but after one or two neighbors have done so the typical owner (70% as I recall) of the underwater home changes his POV to be:
"The banks made this mess - screw them, I'm bailing out. Why continue to pay - I don't get anything for it and my net worth DECREASES with every payment."

That why the walk-away rate is accelerating. It is more contagious than the swine flu!

 

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Graph and text FROM: http://www.economist.com/businessfinance/displaystory.cfm?story_id=14124366 (Current issue of The Economist.)

"... Owners are loth to sell into a falling market, although some distressed sales are occurring. All this sounds like a replay of the downturn in the residential-property market, where easy borrowing terms allowed homebuyers to push prices to extreme levels. To add to the sense of déjà vu, property loans have also been bundled into complex financial instruments, known as commercial mortgage-backed securities (CMBSs). The riskiest of these, mainly those issued between 2005 and 2007, are now running into trouble.

Realpoint, a credit-rating agency, says that nearly $29 billion of CMBSs, around 3.5% of the total, have become delinquent (ie, borrowers have not kept up interest payments) in the past 12 months. It thinks the delinquency rate could reach 6% by the end of the year. Richard Parkus of Deutsche Bank reckons the default rate could eventually reach 12%. Together with bad construction loans, that could push the losses of American banks on commercial property to $200 billion-230 billion. Many small banks will go under as a result. ..."

Billy T: I guess those local banks are "too small to save" but the FDIC will need more of your tax dollars to pay of the depositors. - You may be one.

 

In a few years the world will NOT have more debt than income. (If the debt represented by newly printed dollars is either ignored or expressed in purchasing power, instead of nominal terms.) I.e. the US will NOT be able to borrow a sound currency from China or Brazil etc. So US debt will cease to increase, when expressed in purchasing power of the dollar. This is called "monetizing the debt." - Make it go away by large and rapid dollar inflation.

China currently still lends to the US by buying US Treasury paper promises (Shorter term notes more than bonds now) BECAUSE they still want Wal-Mart, etc. to import and sell their cheaper goods. BTW, these cheaper than US can make goods help keep US’s inflation in check.

China is rapidly converting its economy to a domestic market economy, as I predicted it would. Their “middle class” is now 330,000,000 strong, buying more cars, TVs, cell phones, washing machines, etc than Americans are and both their numbers and purchasing power of their salaries is increased annually.

In a few years, China will cease to artificially hold the value of the Yuan (RMB) low. – Will not need to when they are no longer an export oriented economy. Then the trade balance with the USA will drop, probably even turn to the US’s favor as food from the fertile mid-west is shipped to China and essentially nothing is being shipped from China to Wal-Mart, etc.

The termination of Chinese financing the US debt (no needs to help Wal-Mart import Chinese goods) will cause the US dollar printing presses to work even harder, causing more inflation. Fact that then you must, for example, buy your new, US-made, shirt/or dress etc. also adds to the inflation as the prices will be at least 50% higher than the no longer available Chinese made shirt or dress.

SUMMARY:
The US will deeply regret getting their wish for the Yuan to float when it does. The income in China will be rapidly increasing and world’s total debt (measured in purchasing power) will be rapidly decreasing as the dollar collapses. – As the US monetizing away the debt with printing presses.

 

I'm missing the point of the thread. Since ALL money is created as debt, at ANY given time in modern western history (100 years at least) Western world had MORE debt than income. That's why constant economic growth is a must, if economy grows "new" debt (money) could be constantly issued to pay off interest on "old" debts without causing excessive inflation. It's unclear for how long this debt pyramid could continue to grow, but it appears that the end is near.