Something I Often Wonder About

Once you’re in debt enough, you no longer have creditors. You have partners. Extortion through threats of self-immolation, when the fire will bring down every house, is a powerful threat.

Harry’s post reminds me of the joke: when you owe the local bank $50,000 and can’t pay, the bank owns you. But when you owe the local bank $50,000,000 and can’t pay, you own the bank.

That said…

I don’t know what the structure of foriegn holdings of US debt is. There could be a number of reasons for the purchase of dollar denominated assets, e.g., maintaining assets in dollar form that won’t depreciate as quickly as the dollar itself? Prevent or at least mitigate dollar depreciation so as to maintain or manage American demand for your products and services?

That aside, dollar depreciation is happening. I blogged it in this post at the PBA HQ blog. That was back on the 6th; now the Euro is going upwards of $1.30US, and the Yen seems to be moving along with it. Basically, a weaker dollar means higher prices for foreign goods and (one hopes) a lower trade deficit. Also, Murkan goods and services might become more attractive at a lower price (as denominated in foreign currencies, that is)

So maybe a steady dollar decline might close the trade deficit, and foreign nations hold dollar assets so the dollar doesn’t just drop is the key to that. But since Harry punked me good today, you should take what I say with a large grain o’ salt <wink />

I believe that i understand more or less the same thing as you two wiseacres have explained … that said, what i was mainly pondering with furrowed brow was …is it not the case then that the foreign debtholders are, practically speaking, funding the invasion and occupation of Iraq ?

If they were intentional about withdrawing support for same, couldn’t they take some relatively direct economic measures ?

They are funding the invasion. It must be like riding in a car with an angry drunk. If you say or do anything, he might crash the car, hoping only your side of it gets crushed.

I don’t think they could do anything without hurting their bottom line. Central bankers and economic advisors to state power structures are the ultimate conservatives in the realpolitick world.

It’s wealth bondage, after all.

To do what I usually do and just say the same thing as Harry, but in a more long winded and boring way:

Let’s say large foreign holders of dollar denominated assets dumped them abruptly. The gut of dollar assets causes the dollar itself to make a sharp and sudden drop, rather than a slow steady one.

Now if you want to just punish ‘Murika–and who could blame you? I wouldn’t–that’s no big deal. But you can’t ignore the effect this will have on your own economy. The American trade deficit has been the demand engine that keeps numerous foreign economies going. But with a suddenly devalued dollar, that trade deficit will shrink immediately and the demand engine it fueled will sputter off because us ‘Murkans are suddenly transformed into ‘Murkants–we kant afford to buy them foreign goods no more.

Now you, Mr. Central Banker and/or Policy Advisor of a major ‘Mukian trading partner see the trade deficit as unsustainable anyway, so you’re putting in place policies that will stimulate your own domestic consumption to replace the foreign consumption that ‘Murka has been providing so far. But you can’t put these in action too fast, because such things are inflationary to begin with–so you have to go slow. Just like you’re slowly getting rid of your dollar assets and praying to God that BushCo doesn’t do something really-o, truly-o stupid.

Oh, that Iraq business? Dreadful. But don’t you see–our hands are tied! (Besides, the lousy SOB Bush wants to cancel the debts and deals Saddam made with us–cheap chisling bastard. We’ll fix his wagon) More pâte? It’s marvellous with the d’Yquem ‘82, you really shouldn’t drink it until it’s at least 10 years old, and even then that’s pushing it….

The fly in the ointment: the Chinese yuan, which does not float on the foreign exchange markets. IIRC, it trades at a fixed 3 yuan to a US dollar. The world’s premier supplier of cheap labor in conditions reminiscent of 19th century England–and they don’t want free capital flows in and out of the country, they want real capital investiment in building factories, etc. Allow the yuan to float, and it’ll rise, seriously putting an end to America’s source of cheap labor. What happens then, I dunno. I’m a pure amateur on this, but I try to read the pros who seem honest.

Meanwhile, you’re doin’ OK there, Jon. The Canadian dollar is up almost 10% in the last year over the US dollar, just like the Euro. A few years from now, when the Iraqi mujahadeen have made slaves and house servants of the ‘Murikan soldiers they haven’t killed, you’ll be able to travel south of the border with your strong Canadian currency (3 USD = 1 CAD–maybe better!) and have a great meal, stay in a fine hotel, and have a different, beautiful virgin in your bed every night during your sojourn here. And I’m sure for an extra 5% you could have her strangled the following morning, and her family will weep with gratitude for the extra money. The Dems will insist that the jus primus nocte for foreign tourists are unfair: the fee for strangulation should be no less than 7.5%, although individual states may set them even higher. The red states will insist that this federal interference puts their trade in maidens at a disadvantage, and will want greater liberalization of the trade in females (see Exodus 21:7). This all troubles you, as you pass by the teeming illiterate hordes in your soundproofed limo, and you wonder what become of guys like me and Harry.

I understand most if not all of this (I think), and I continue to wonder …. whther the Chinese, perhaps in conjunction at some point in time withthe Japanese and Indians … are better at patience and timing, and are waiting for the time when there is enough of a regional market to keep their economies going and then more drastically “punish” the Americans.

Maybe this slow devaluation of the US $ is an early warning signal, that deficit financing that keeps growing is not forever sustainable … taht someday, somehow, the paper comes due.

But as you and Harry have pointed out, if you owe the bank $50,000 it owns you … if you owe it $5,000,000,000,000,000,000 you own it.

And I don’t really feel good about feeling like I need to say this … I do understand that it would of course have a massive effect on the Canadian economy. I am not that clueless, I don’t think. We are after all the 51st state in many ways …

but at least we said “no” to going into Iraq as part of the coalition of the willing … a small symbolic gesture but on record, nevertheless.

What I am really wondering about, I suppose, is just how much blatant disregard for humanity the rest of the world will tolerate, and for how long - when there are perhaps, collectively, the means to change directions.

The answer to all your questions is ‘yes’. When you’re in a speeding car as the hostage of a lunatic hijacker, your inaction is complicitous. But it takes exceptional courage to confront the driver with the realization that the resultant car wreck is just as likely to kill you as it is him.

A pedantic point, John, and maybe I’m just misreading you and you already know this: there’s the gov’t deficit and the trade deficit.

The gov’t deficit is the indebtedness of the US gov’t as expressed in the amount of US backed securities–T notes, T bills, 10 year treasuries–outstanding. That’s BushCo’s doing. How much is held domestically and how much is held by foreign companies or central banks, I don’t know. Knowing the allocation of debt among foreign entities and their relative positions as US trading partners could explain a lot, I think.

The trade deficit is the imbalance between the value of goods the US exports and the value of goods we import; we import more than we export. (If we exported more than we imported, we’d have a trade surplus) That’s a function of US consumer and commercial spending. Since Murikan wages are stagnant, this has been driven by increasing Murikan househeld indebtedness–specifically, home equity loans, or what the economic journalist Doug Henwood sneeringly called “using your house as an ATM.” Many have taken to this because of the real Murikan religion–housing price inflation. So other countries rightly regard this as unsustainable, and want to ween their economies from the Yankee dollar.

How much blatant disregard for humanity will the rest of the world tolerate? I think the people of most civilized nations have made their disgust for ‘Murikan aggression clear. The governments of their nations are another matter.

Thanks, et alia. Yes, I do understand. Actually, i was a banker at one stage in my life … my first grown-up job after university … did it for 6 or so years, and quit suddenly one day when I found myself asking myself ..”if I believe that banks are in a significant way one of the responsible parties to soem of the more egregious economic - and social justice - imbalances around trhe world, why am I working for one ?” Quit that day.

Not that being a banker makes me an expert on economics … but I’ve also taken various post-graduate courses in economics during an aborted MBA program, and I read various economic information more or less assiduously.

No, it’s my unable-to-let-go-of idealism that makes me so naive … ‘cuz I don’t want to believe what I see unfolding all around us