Inflation is devastating in a poor country. It can cause unrest, uprisings, starvation, and other awful effects. But, in a country with abundant natural resources, vibrant entrepreneurial activity, access to capital and equity markets, and a skilled and available labor force, inflation isn't all bad! In fact, it can actually lead to very positive outcomes such as job creation!
I realize that those higher costs put pressures on the economy, but we also need to consider the benefits they lead to. Inflation can also lead to greater profitability which in turn leads to job creation. Take oil producers today. With the recent inflation in oil prices oil companies are making windfall profits. The cost of producing a barrel of oil isn't going up. The price has simply skyrocketed over fears of Libya disrupting the supply. Take the rising price of copper, silver and gold. Miners are making a fortune from higher prices because the cost of mining those materials hasn't gone up.
Greater profitability attracts more competition. There is more oil exploration > more jobs. More equipment is purchased to drill for more oil and mine metals > more jobs. More research is done to create alternatives to higher material costs > more jobs. Consumers purchase energy inefficient cars and therefore car manufacturers make and sell newer automobile models > more jobs. Homeowners buy replacement windows and a new furnace so they burn less oil > more jobs. Manufactures replace old inefficient equipment and look for ways to consume less oil and materials > more jobs.
Eventually, the extra profitability attracts enough competition and a more robust supply which in turn drives the price back down again. In the process the supply of those materials has been increased to meet greater demand while at the same time producing greater output at a lower cost. And there are consumer benefits too. Take the automobile engine as an example. Today you can purchase a car with 300 horsepower that get's nearly 30 miles to the gallon! Or, you can purchase a hybrid that gets 50+ miles to the gallon. Or an all electric vehicle. These developments would not have happened if oil hadn't spiked to over $100 a gallon in recent years. Think about all the green jobs that have been created due in large part to the rising cost of oil!
When the cost of any commodity rises it can lead to inflation in goods that are made with it or are used in the process. But eventually the free market works its way in order to either drive raw material costs back down, or lessen the impact of those material costs, or provide alternatives altogether. In the process typically jobs are created! And consumers end up with better products that require or use less of that commodity. Advances in automobiles and solar energy and new materials are just the beginning of what happens of what happens as a result oil price inflation!
In conclusion, a healthy economy adjusts to inflation. America has a healthy free market entrepreneurial based capitalistic system that naturally adjusts to inflation, unlike a closed dictatorship like there was in Egypt or still is in Libya and other underdeveloped countries. In fact, you might even say that inflation is what really caused the uprising in Egypt! Countries that don't have an economy like America are vulnerable to inflation. In the end, it may be the Federal Reserve that over throws Iran!
Wednesday, March 9, 2011
Everyday Versus Someday
Everyday the Federal government borrows nearly $4 billion dollars and puts in the hands of consumers! How so? The Federal deficit is some $1.5 trillion which works out too approximately $4.1 billion dollars a day on average that the Federal government spends more than it brings in revenue. Where does that money go? Everywhere, but at the end of the day it's ultimately in consumers' hands. The consumer may get it through social security benefits, a medicaid payment, salaries at some defense contractor, school teacher pensions, or some government workers paycheck. Some slips off to foreign countries, but one way or another the bulk of it ends up in the American economy somehow. And, because Americans buy products from all over the world, that $4 billion dollars a day impacts economies around the world!!
To come up with this money the Federal government borrows it from all over the USA and the world. We borrow and spend. Nothing new. What is new is the scale to which we borrow and spend. The size of the debt and deficit is staggering. It's such a big number that it's too difficult to read or calculate it with all the zeros, so people HAVE to use the word trillions!
Someday that has to stop! One day soon the Government is going to hit the borrowing wall. The $15 trillion dollar question is what will happen when the government stops spending $4 billion a day? To put it in perspective, how would you're household feel if you cut your spending by over 10%? How would your employer react if revenues were down 10% plus? How would your county or town or school deal with a 10% budget cut? Is your answer "not too good?" That's probably how the economy will do when "someday" is "everyday!"
To come up with this money the Federal government borrows it from all over the USA and the world. We borrow and spend. Nothing new. What is new is the scale to which we borrow and spend. The size of the debt and deficit is staggering. It's such a big number that it's too difficult to read or calculate it with all the zeros, so people HAVE to use the word trillions!
Someday that has to stop! One day soon the Government is going to hit the borrowing wall. The $15 trillion dollar question is what will happen when the government stops spending $4 billion a day? To put it in perspective, how would you're household feel if you cut your spending by over 10%? How would your employer react if revenues were down 10% plus? How would your county or town or school deal with a 10% budget cut? Is your answer "not too good?" That's probably how the economy will do when "someday" is "everyday!"
Friday, March 4, 2011
It's A New Day for Business
I believe it has actually finely dawned on nearly ever senator and congressman countrywide at the federal and state level as well as every state governor and the president that they need to get business friendly as fast as they can. It's their only hope for jobs, tax revenues, and a means to meet their debt obligations and keep their bond ratings.
It's not that all of politicians have really become pro businesses, it's just that they have so many constituents who love their pensions, health care, union benefits, and social security. And the thought of cutting what their voters love scares the heck out of them. The bold writing on the wall which reads, "You can't raise taxes rates to close the budget shortfall!" Just as clear is the message that the only way they can pay for what their voters love is if the economy dramatically and rapidly advances sending employment and tax revenues way up!
With no time to lose, and may even be too late, it will be interesting to watch statehouses and the federal government racing to encourage business expansion. Frightened politicians and desperate officials will be slashing excess regulations, granting permits, knocking down walls, and opening doors to do as much as they can to stimulate business as fast as they can, even if it makes them sick to do it. From the FDA to the EPA, from the Nuclear Regulatory Commission to the Commission on Transportation, to the Federal Communications Commission, anyone standing in the way, be they environmentalist, union leader, or regulator, will be pushed aside. Conversely, anyone with good ideas and plans that will lead to business investment and jobs is a hero!
Although it's a risky way to get where we need to be, the best thing to happen for business in decades is for government to have a financial crisis. It's the only thing that forces government to shrink and cut needless regulations and agencies. It's also the only way to get unions to give back. As government borrows less, businesses will be competing less with government for investment dollars. Capital will be able to flow more to business development instead of government borrowing. Plus, by making it easier on businesses to do business more business will be done. It's such a simple concept. Along the way entrepreneurial opportunities will be given life. Yes, it's a new day for business - a brighter day is dawning. And when it does it will bring with it a truly sustainable recovery.
It's not that all of politicians have really become pro businesses, it's just that they have so many constituents who love their pensions, health care, union benefits, and social security. And the thought of cutting what their voters love scares the heck out of them. The bold writing on the wall which reads, "You can't raise taxes rates to close the budget shortfall!" Just as clear is the message that the only way they can pay for what their voters love is if the economy dramatically and rapidly advances sending employment and tax revenues way up!
With no time to lose, and may even be too late, it will be interesting to watch statehouses and the federal government racing to encourage business expansion. Frightened politicians and desperate officials will be slashing excess regulations, granting permits, knocking down walls, and opening doors to do as much as they can to stimulate business as fast as they can, even if it makes them sick to do it. From the FDA to the EPA, from the Nuclear Regulatory Commission to the Commission on Transportation, to the Federal Communications Commission, anyone standing in the way, be they environmentalist, union leader, or regulator, will be pushed aside. Conversely, anyone with good ideas and plans that will lead to business investment and jobs is a hero!
Although it's a risky way to get where we need to be, the best thing to happen for business in decades is for government to have a financial crisis. It's the only thing that forces government to shrink and cut needless regulations and agencies. It's also the only way to get unions to give back. As government borrows less, businesses will be competing less with government for investment dollars. Capital will be able to flow more to business development instead of government borrowing. Plus, by making it easier on businesses to do business more business will be done. It's such a simple concept. Along the way entrepreneurial opportunities will be given life. Yes, it's a new day for business - a brighter day is dawning. And when it does it will bring with it a truly sustainable recovery.
Thursday, February 24, 2011
Fiddling While Rome Burns
The expression "fiddling while Rome burns" may not be historically accurate, but the meaning of the expression, which is "to occupy oneself with unimportant matters and neglect priorities during a crisis," is an appropriate way to describe the leadership of President Obama when it comes to the budget crisis.
Back on Feb. 12th President Obama sent his $3.7 trillion fiscal 2012 budget plan to Congress. Since the President's State of the Union speech announcing his intention to freeze spending at this unsustainable level there has been a fire burning in congress. Yet the the President's leadership has been absent. Obama is seriously risking that growing possibility that a government shutdown will be the defining moment for his presidency.
It's been said, "For now, Obama is content to let lawmakers snipe at each other, with a little more than a week before the March 4 shutdown deadline." Does he think that congress, a dysfunctional partisan body that is as divided as ever can reach a decision on the most contentious and enormous political challenge in a generation without leadership?
The parties are not negotiating! They are arguing over $60 billion out of a $3.7 trillion budget! They have drawn battle lines and Washington can't agree on cutting even 2% of the budget! Time is on the side of the Republicans and the Tea Party since if a continuous spending resolution is not passed much of the Federal Government will automatically come to a screeching halt.
As both parties in congress play a game of chicken, betting the other will blink first, the risk is rising. "Shutdown" is fast becoming the buzzword used by both parties in Washington, and those covering the situation. Each party believes Americans will blame the other for any shutdown. But I doubt most Americans have given much thought to the impact of either budget option (a shutdown or major cuts) on the Nation and the State's operations? While Washington is "fiddling" the States are going up in flames!
I don't care how good a speaker Obama is, when the Feds and the States face the inevitable reality that they have to restructure labor agreements, health benefits, and retirement packages/pensions there is nothing the President can say that millions of Americans expecting those entitlements will want to hear! Try to imagine angry protests and job actions across the nation backed by the likes of the Teamsters, AFL-CIO, Rail Unions, Teachers Unions, The TSA, Police Unions, Postal Workers, and dozens of others. According to a 2/24/11 Article in NPR, "In fact, he (Obama) has only made one comment on the union battles, and that was last week."
Obama is fiddling, so when the flames rise up we better hope the firemen don't go on strike!!
Other Related Stories:
Shutdown Is No Joke - NPR
What Would a Government Shutdown Look Like - PBS
Memories of 1995 Haunt GOP
State Budget Crisis Looms Over Governor Meeting
Opinion: Wisconsin Exposes Deeper State Budget Crisis
Will California Fall Into 'The Black Hole'?
Back on Feb. 12th President Obama sent his $3.7 trillion fiscal 2012 budget plan to Congress. Since the President's State of the Union speech announcing his intention to freeze spending at this unsustainable level there has been a fire burning in congress. Yet the the President's leadership has been absent. Obama is seriously risking that growing possibility that a government shutdown will be the defining moment for his presidency.
It's been said, "For now, Obama is content to let lawmakers snipe at each other, with a little more than a week before the March 4 shutdown deadline." Does he think that congress, a dysfunctional partisan body that is as divided as ever can reach a decision on the most contentious and enormous political challenge in a generation without leadership?
The parties are not negotiating! They are arguing over $60 billion out of a $3.7 trillion budget! They have drawn battle lines and Washington can't agree on cutting even 2% of the budget! Time is on the side of the Republicans and the Tea Party since if a continuous spending resolution is not passed much of the Federal Government will automatically come to a screeching halt.
As both parties in congress play a game of chicken, betting the other will blink first, the risk is rising. "Shutdown" is fast becoming the buzzword used by both parties in Washington, and those covering the situation. Each party believes Americans will blame the other for any shutdown. But I doubt most Americans have given much thought to the impact of either budget option (a shutdown or major cuts) on the Nation and the State's operations? While Washington is "fiddling" the States are going up in flames!
I don't care how good a speaker Obama is, when the Feds and the States face the inevitable reality that they have to restructure labor agreements, health benefits, and retirement packages/pensions there is nothing the President can say that millions of Americans expecting those entitlements will want to hear! Try to imagine angry protests and job actions across the nation backed by the likes of the Teamsters, AFL-CIO, Rail Unions, Teachers Unions, The TSA, Police Unions, Postal Workers, and dozens of others. According to a 2/24/11 Article in NPR, "In fact, he (Obama) has only made one comment on the union battles, and that was last week."
Obama is fiddling, so when the flames rise up we better hope the firemen don't go on strike!!
Other Related Stories:
Shutdown Is No Joke - NPR
What Would a Government Shutdown Look Like - PBS
Memories of 1995 Haunt GOP
State Budget Crisis Looms Over Governor Meeting
Opinion: Wisconsin Exposes Deeper State Budget Crisis
Will California Fall Into 'The Black Hole'?
Wednesday, February 23, 2011
Going To Get Ugly
The budget crisis, which up to this point has been merely a debate, is about to become full blown crisis. By March 4th the federal government needs to pass a Continuing Resolution (CR) in order to fund continuing federal government operations for the rest of the 2011 fiscal year, while making the largest single discretionary spending cut in the history of the nation. If the CR is not enacted before the current funding measure’s deadline of March 4th, Congress must pass another short-term funding resolution or else risk a government-wide shutdown.
The current CR is making its way through congress and about to end up on the President's desk for signature contains some $100 billion in cuts and the President has already promised to veto it because it has cuts the President doesn't support. But those cuts don't even begin to touch entitlements and the Pentagon budget! There is simply NO WAY we can seriously deal with our national deficit and debt without doing so! And, since the Federal government still lacks the will or wear-with-all to tackle the 1.5 trillion deficit, the stage is set for the next big standoff - the vote to raise the Debt Ceiling.
Federal debt could exceed the current limit by as early as April 2011. If Republicans don't raise the limit, they risk defaulting on the country's debt obligations, which would be disastrous for the economy. By the same token, the Tea Party is digging in its heels and will use the threat of a filibuster to stop a bill to raise the Debt Ceiling as a means to get what it considers serious spending cuts. It's going to get ugly.
Because States must balance their budgets and because they lack a mechanism for buying their own debt, like Washington has through the Federal Reserve, the budget shortfalls have become a critical problem that have to be addressed. What's begun to happen at the State level in Wisconsin is the beginning of what will be going on across the country. In order to address their State budget shortfalls one State house after another is squaring off against those trying to protect their entitlements (pensions, medicare, social security, union contracts, collective bargaining, etc.). It's going to get ugly.
It's going to get ugly as unions, pensioners, teachers, police, transportation workers, government employees, and other large groups of citizens have their livelihoods threatened. It's going to get ugly as municipal bond holders discover that their believed to be secure investments are being devalued. It's going to get ugly as property owners face the threat of large tax increases. It's going to get ugly when higher property taxes combined with accelerated property tax sales and foreclosures combined with fewer buyers force another leg down in housing prices.
As all these citizen groups protests mount in cities, towns, and state capitals across the nation it will seem like there is unrest everywhere which will create a very uneasy feeling. Some protesters are bound to take extreme actions and one crazy action will inspire another. Events could easily spiral and protests could put an unmanageable strain on safety officers to control crowds and the disruption they cause to traffic and the regular function of government, transportation, and other services. It's going to get ugly when workers protesting their cuts decide to walk out on their jobs. It's going to get ugly when the protesters are the same people responsible for handling the protests. It's going to get ugly when teacher walkouts close schools and parents who need to go to work have to deal with children who should be in school.
As the daily news coverage of the protests and government gridlock and other consequences brought on by the budget battles takes over the media there will be a growing feeling of uneasiness in our country and this will take a severe toll on consumer confidence. It's going to get ugly as the budget crisis begins to take its toll on consumer spending and in turn threatens the economic recovery. It's going to get ugly when the stock market prices in this change in reality. It's going to get ugly when a previously rising stock prices change their direction and declining prices start taking back the wealth effect that Bernanke and the Federal Reserve has tried so hard to bring about. It's going to get very ugly when markets and economies around the world recognize that what is going on in America is a threat to world's economy! It's going to get very ugly when sovereign debt problems, yet unresolved, become critical and unsustainable, and now the they have to factor in the USA's problems!
Related Articles:
Investors Beware, Sugar Rush Fading
Hidden Debt Makes Government Insolvent
Bankruptcy Laws for States
Gov to Feds: Avoid causing states any more pain
Obama says government shutdown imperils economy
US Budget Gap is Top Worry of NABE Economists
The current CR is making its way through congress and about to end up on the President's desk for signature contains some $100 billion in cuts and the President has already promised to veto it because it has cuts the President doesn't support. But those cuts don't even begin to touch entitlements and the Pentagon budget! There is simply NO WAY we can seriously deal with our national deficit and debt without doing so! And, since the Federal government still lacks the will or wear-with-all to tackle the 1.5 trillion deficit, the stage is set for the next big standoff - the vote to raise the Debt Ceiling.
Federal debt could exceed the current limit by as early as April 2011. If Republicans don't raise the limit, they risk defaulting on the country's debt obligations, which would be disastrous for the economy. By the same token, the Tea Party is digging in its heels and will use the threat of a filibuster to stop a bill to raise the Debt Ceiling as a means to get what it considers serious spending cuts. It's going to get ugly.
Because States must balance their budgets and because they lack a mechanism for buying their own debt, like Washington has through the Federal Reserve, the budget shortfalls have become a critical problem that have to be addressed. What's begun to happen at the State level in Wisconsin is the beginning of what will be going on across the country. In order to address their State budget shortfalls one State house after another is squaring off against those trying to protect their entitlements (pensions, medicare, social security, union contracts, collective bargaining, etc.). It's going to get ugly.
It's going to get ugly as unions, pensioners, teachers, police, transportation workers, government employees, and other large groups of citizens have their livelihoods threatened. It's going to get ugly as municipal bond holders discover that their believed to be secure investments are being devalued. It's going to get ugly as property owners face the threat of large tax increases. It's going to get ugly when higher property taxes combined with accelerated property tax sales and foreclosures combined with fewer buyers force another leg down in housing prices.
As all these citizen groups protests mount in cities, towns, and state capitals across the nation it will seem like there is unrest everywhere which will create a very uneasy feeling. Some protesters are bound to take extreme actions and one crazy action will inspire another. Events could easily spiral and protests could put an unmanageable strain on safety officers to control crowds and the disruption they cause to traffic and the regular function of government, transportation, and other services. It's going to get ugly when workers protesting their cuts decide to walk out on their jobs. It's going to get ugly when the protesters are the same people responsible for handling the protests. It's going to get ugly when teacher walkouts close schools and parents who need to go to work have to deal with children who should be in school.
As the daily news coverage of the protests and government gridlock and other consequences brought on by the budget battles takes over the media there will be a growing feeling of uneasiness in our country and this will take a severe toll on consumer confidence. It's going to get ugly as the budget crisis begins to take its toll on consumer spending and in turn threatens the economic recovery. It's going to get ugly when the stock market prices in this change in reality. It's going to get ugly when a previously rising stock prices change their direction and declining prices start taking back the wealth effect that Bernanke and the Federal Reserve has tried so hard to bring about. It's going to get very ugly when markets and economies around the world recognize that what is going on in America is a threat to world's economy! It's going to get very ugly when sovereign debt problems, yet unresolved, become critical and unsustainable, and now the they have to factor in the USA's problems!
Related Articles:
Investors Beware, Sugar Rush Fading
Hidden Debt Makes Government Insolvent
Bankruptcy Laws for States
Gov to Feds: Avoid causing states any more pain
Obama says government shutdown imperils economy
US Budget Gap is Top Worry of NABE Economists
Saturday, February 19, 2011
Keeping It Real
WARNING: This post is about stuff people don't talk about. It contains scenes that could be offensive.
Mary and I haven't gotten out of the house together for 8 days. Mary's chemo regiment is high (strongest drugs and high dosage) and the effects are cumulative, so after round 4 a week ago last Thursday, we haven't been able to get out of the house together until yesterday. Our first trip out was to the plastic surgeon to start planning for breast reconstruction. It was exciting on a few levels. One, just to get out together. Two, the idea of moving to the forth phase of a five phase breast cancer experience.
I figure there are five phases to cancer:
Phase I - Holy shit, We have cancer: The news of this disease hits you between the eyes. It's a bombshell. You're stunned and confused and scared. You go from shock to what the f' do we do now!? Your mind races non-stop as you try to figure out and come to terms with your new reality.
Phase II - The Battle: Kill the cancer with chemotherapy. As of this post, that's the phase we're in. In this phase you have to mentally prepare yourself to fight for your life! It's us against it! You have to accept that it's gonna be tough. One of the things that gave me confidence that we could face this is that I know Mary is a strong and courageous warrior. And, I was determined to stand by her side and help her fight the fight in any way I could.
Phase III - Amputation: In a battle there are injuries. We learned early on in the battle that we're going to lose the breast.
Phase IV - Healing: Breast reconstruction is the first step in the process of getting back to normal. At least a "new normal." You're looking up and looking ahead and it feels so good!
Phase V - Live: Live life with profound appreciation of how precious it is. Live with the awareness that at any moment any one of us could have it all taken away. Live life with the recognition of what matters and what doesn't matter. We're lucky that Mary's breast cancer is hormone positive because that gives us drug options to keep the cancer from coming back!
One of the important common denominators that is helping us get through it all is humor. What's so funny about this? You'd be surprised! There's a lot of funny stuff! Seeing yourself or your wife bald can be funny. Wearing your wife's wig is funny. Watching a man draw on your wife's breast is funny. Heck, it looked like the surgeon drew eyes where here nipples are (there I said it). I'm sitting there in a room with another guy, and my wife's breasts are staring at me. Can't you see the funny in that?! Mary and I will be laughing about that experience for years to come.
I realize that it's weird and awkward to talk about this stuff. But it's real. Would you rather I talk about the economy? (Don't answer that.) Shit, Mary's last blog post was about the awful constipation she's experiencing from the chemo. Who talks about being constipated, let alone their wife's breast surgery? WE DO! We do because it's our life. If we were traveling across Europe, we'd talk about that. If we purchased a new pet we'd talk about that. But we're not doing that. What we're doing is surviving cancer!
There is as much to cry about as there is to laugh about in life. Frankly, I think either reaction is applicable to the same situation. I can cry about the doctors cutting away my wife's breasts and replacing them with a "facsimile" as he called it. Either reaction, seeing the humor and/or seeing the sad is OK!!
We are just trying to "keep it real." Keeping it real is our way of keeping it honest. It's our way of sharing our lives, which is also an invitation to our friends to share their lives with us!
Mary and I haven't gotten out of the house together for 8 days. Mary's chemo regiment is high (strongest drugs and high dosage) and the effects are cumulative, so after round 4 a week ago last Thursday, we haven't been able to get out of the house together until yesterday. Our first trip out was to the plastic surgeon to start planning for breast reconstruction. It was exciting on a few levels. One, just to get out together. Two, the idea of moving to the forth phase of a five phase breast cancer experience.
I figure there are five phases to cancer:
Phase I - Holy shit, We have cancer: The news of this disease hits you between the eyes. It's a bombshell. You're stunned and confused and scared. You go from shock to what the f' do we do now!? Your mind races non-stop as you try to figure out and come to terms with your new reality.
Phase II - The Battle: Kill the cancer with chemotherapy. As of this post, that's the phase we're in. In this phase you have to mentally prepare yourself to fight for your life! It's us against it! You have to accept that it's gonna be tough. One of the things that gave me confidence that we could face this is that I know Mary is a strong and courageous warrior. And, I was determined to stand by her side and help her fight the fight in any way I could.
Phase III - Amputation: In a battle there are injuries. We learned early on in the battle that we're going to lose the breast.
Phase IV - Healing: Breast reconstruction is the first step in the process of getting back to normal. At least a "new normal." You're looking up and looking ahead and it feels so good!
Phase V - Live: Live life with profound appreciation of how precious it is. Live with the awareness that at any moment any one of us could have it all taken away. Live life with the recognition of what matters and what doesn't matter. We're lucky that Mary's breast cancer is hormone positive because that gives us drug options to keep the cancer from coming back!
One of the important common denominators that is helping us get through it all is humor. What's so funny about this? You'd be surprised! There's a lot of funny stuff! Seeing yourself or your wife bald can be funny. Wearing your wife's wig is funny. Watching a man draw on your wife's breast is funny. Heck, it looked like the surgeon drew eyes where here nipples are (there I said it). I'm sitting there in a room with another guy, and my wife's breasts are staring at me. Can't you see the funny in that?! Mary and I will be laughing about that experience for years to come.
I realize that it's weird and awkward to talk about this stuff. But it's real. Would you rather I talk about the economy? (Don't answer that.) Shit, Mary's last blog post was about the awful constipation she's experiencing from the chemo. Who talks about being constipated, let alone their wife's breast surgery? WE DO! We do because it's our life. If we were traveling across Europe, we'd talk about that. If we purchased a new pet we'd talk about that. But we're not doing that. What we're doing is surviving cancer!
There is as much to cry about as there is to laugh about in life. Frankly, I think either reaction is applicable to the same situation. I can cry about the doctors cutting away my wife's breasts and replacing them with a "facsimile" as he called it. Either reaction, seeing the humor and/or seeing the sad is OK!!
We are just trying to "keep it real." Keeping it real is our way of keeping it honest. It's our way of sharing our lives, which is also an invitation to our friends to share their lives with us!
Tuesday, February 15, 2011
The Mighty Dollar ... Really?
The USA $ is the worlds reserve currency. Where ever you travel, they'll take your USA dollars. And every country keeps USA dollars in reserve. When ever there is a crisis in the world, the term "flight to safety" is synonymous with the purchase of Treasury Bills. And while the dollar has weakened against the UK pound and the euro, we remain the worlds most trusted currency. But what if that were to change? What if a flight to safety were not to translate into Treasury Bill purchases? Or what if countries like China decided the "mighty dollar" wasn't so mighty after-all and started to reduce their holdings?
These questions are hardly improbable! To the contrary, there are economists around the world who are warning of this possibility. If it were not for the fact that there are huge problems with euro member countries finances too, the dollar would be even weaker against the euro than it already is! China which funds our debt, does so because American imports are critical to their factories. But as their massive population raises its level of consumption the need for USA imports will diminish and the potential desire to finance our debt may wain. The Chinese may be planning for this which may explain why that they've been staying much shorter in their T-bill terms they purchase (e.g. more 2 yr, 5 yr. and less 20 yr. and 30 yr.).
Rumors have been circulating for years about the collapse of the USA dollar and its replacement with a new currency that would join the USA and Canadian dollar and the Mexican peso. That seems unlikely to me, but the mighty dollar doesn't have to collapse altogether for us to have some very serious problems. All that has to happen is for the USA dollar to lose its luster.
If the world starts to favor other currencies and shy away from USA T-Bills. Rising T-Bill interest rates would push up interest rates and USA borrowing costs. In turn, our massive budget deficit and debt would be far more expensive to carry. This effect would compound the challenge of balancing our budget!
Put it all together and this is a possible sequence of events: Interest rates on T-Bills rise to attract their sale causing Federal debt costs to rise. The government is forced to dramatically raise taxes and cut even more spending. The combination of higher interest rates and higher taxes and large fiscal spending cuts would represent an enormous drag on GDP. As the economy slips so would tax revenues. At that point we've created a terrible negative spiral! Add in the expectant massive stock market reaction. Add in the likelihood that consumer and business spending would cease up. Add it all up and we have an economic disaster! But this disaster would make the last "financial crisis" and recession look like the preview to the real show, a depression!
Far fetched? Not really. It could literally begin overnight. All it would take is for the collective concern that already exists over the way the USA is dealing with its deficit, to morph into collective fear over our ability to deal with our debt. Fear often turns into panic. Panic turns into over-reaction. Over-reaction results in a sell-off. If that happens, then we're off to races!
There is an alternative scenario. A much more positive one, thank goodness. But I'll save that for another time.
NOTE: Since publishing this post I find it interesting that this last week in February, despite world tensions that rippled through the world and USA stock market, there was not the classic strengthening in the US Dollar that we typically see.
Related articles:
Three Investing Gurus See Dark Days Ahead for the Dollar
Traders 'Short' Dollars As Currency Loses Attraction
Debt Facts
The Dollar: Safe haven no more
Truth-0-Meter: USA Debt Compared to Other Countries
These questions are hardly improbable! To the contrary, there are economists around the world who are warning of this possibility. If it were not for the fact that there are huge problems with euro member countries finances too, the dollar would be even weaker against the euro than it already is! China which funds our debt, does so because American imports are critical to their factories. But as their massive population raises its level of consumption the need for USA imports will diminish and the potential desire to finance our debt may wain. The Chinese may be planning for this which may explain why that they've been staying much shorter in their T-bill terms they purchase (e.g. more 2 yr, 5 yr. and less 20 yr. and 30 yr.).
Rumors have been circulating for years about the collapse of the USA dollar and its replacement with a new currency that would join the USA and Canadian dollar and the Mexican peso. That seems unlikely to me, but the mighty dollar doesn't have to collapse altogether for us to have some very serious problems. All that has to happen is for the USA dollar to lose its luster.
If the world starts to favor other currencies and shy away from USA T-Bills. Rising T-Bill interest rates would push up interest rates and USA borrowing costs. In turn, our massive budget deficit and debt would be far more expensive to carry. This effect would compound the challenge of balancing our budget!
Put it all together and this is a possible sequence of events: Interest rates on T-Bills rise to attract their sale causing Federal debt costs to rise. The government is forced to dramatically raise taxes and cut even more spending. The combination of higher interest rates and higher taxes and large fiscal spending cuts would represent an enormous drag on GDP. As the economy slips so would tax revenues. At that point we've created a terrible negative spiral! Add in the expectant massive stock market reaction. Add in the likelihood that consumer and business spending would cease up. Add it all up and we have an economic disaster! But this disaster would make the last "financial crisis" and recession look like the preview to the real show, a depression!
Far fetched? Not really. It could literally begin overnight. All it would take is for the collective concern that already exists over the way the USA is dealing with its deficit, to morph into collective fear over our ability to deal with our debt. Fear often turns into panic. Panic turns into over-reaction. Over-reaction results in a sell-off. If that happens, then we're off to races!
There is an alternative scenario. A much more positive one, thank goodness. But I'll save that for another time.
NOTE: Since publishing this post I find it interesting that this last week in February, despite world tensions that rippled through the world and USA stock market, there was not the classic strengthening in the US Dollar that we typically see.
Related articles:
Three Investing Gurus See Dark Days Ahead for the Dollar
Traders 'Short' Dollars As Currency Loses Attraction
Debt Facts
The Dollar: Safe haven no more
Truth-0-Meter: USA Debt Compared to Other Countries
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