Sunday, August 12, 2007

America's Debt Economy

America's boom economy is a debt economy, based on consumer credit thus consumer debt. Americans have financed the boom by mortgaging their homes. Even free market, gold bug, libertarians get it.

When a society is stable and prosperous, you can cast your lot along with everyone else and prosper along with your neighbours. That was the situation in the United States and Europe after WWII. Almost everyone became richer.

But since the mid-70s…it has been harder. In America, for example, hourly wages of working men have gone nowhere. And since the money in which wages are paid has been cut loose from gold, it is hard to know what anything is really worth…hard to keep track of what you have…and hard to hold onto it. The dollar, for example, lost half its purchasing power during the short time when Alan Greenspan was chairman of the Federal Reserve.

More recently, the bubble economy of the 21st century has been rewarding certain groups of elite traders and financial mavens, while punishing the average person with higher debt - personal, mortgage, and governmental. Soon, average investors will be hit hard too…and average homeowners…and average consumers.

Bill Bonner, The Daily Reckoning Australia

And gosh who is carrying America's debt? Why China of course. And if they cash in their chips well......

“China has accumulated a large sum of US dollars,” said He Fan, an official at China’s Academy for Social Sciences. He wasn’t exactly speaking for the government. But he was clearly articulating what’s on everyone’s mind. “Such a big sum,” he continued, “of which a considerable portion is in US Treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency.” But…?

“Russia, Switzerland, and several other countries have reduced their dollar holdings. China is unlikely to follow suit…as long as the yuan’s exchange rate is stable against the dollar. The Chinese Central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar.”

Well then, there you have it. US Treasury Secretary Henry Paulson has pushed China to allow the yuan to appreciate, driven by nationalist and protectionist sentiments in the US Senate. China knows the US Congress is keen to act, and blame the foreigner in an election year for American economic woes. Its well-timed reminder of the leverage it has over the dollar is a warning to the Americans to be careful what they ask for.

Yes, it sure looks like China has announced to America what it has known all along. Its investment in US Treasuries, and the support that offers both to the American dollar and the American consumer, were always driven by what was best for China. And what’s best for China now? Well, we don’t know for sure. But buying the US dollar doesn’t seem look a good idea for anyone right now. Selling it, on the other hand, or trading it for tangible assets…that seems like a much better idea.

Will America be sent to debtors prison?

Or just face foreclosure from their global competitor and lender of first choice.


China Burps Greenspan Farts Dow Hiccups

Wall Street Deja Vu

Housing Crash the New S&L Crisis

Turning Lead into Gold


Petro Dollars and U.S. Debt

Housing Bubble


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