Finally, some common sense from the Obama administration...

http://abcnews.go.com/Politics/russi...ry?id=13104936

His comments on N. Korea also seem to be straight.

 

I can find no fault with what he is saying. I don't trust China at all. They basically own our butt and can call in the chips whenever they feel like it. No country can go up against the US militarily but that's not how you take over a super power country in modern times anyway.

 

This is one of those internet rumors that has been circling around for some time.

If the holder of a US investment instrument wants to convert it to cash, and it is not due yet, they have to sell it on the open market, does not matter if it is an individual or a country that holds the instrument.

Same concept as owning a bond from a corporation.

Selling the bond on a secondary market would be price adjusted to the length of time left on it, and what the current rates are, with a bit of bid - ask haggle that would discount it further. What this would mean to anyone selling a bond ( from the US Treas or a corporation ) is the seller might break even on the deal ( purchase price ) and forfeit interest, or worst case, lose some principal on the deal.

Bonds ( if marketed as such ) can be sold as callable, but usually give a minimum date that they could be called early ( i.e. bond matures JAN-2015, callable JAN-2012 ).

If a US Treas bond is defaulted for some reason, there is no actual asset that is used as collateral, it is backed by the faith of the US Government.
Take the default of Argentina in the early 2000s. No country came in and took over, or picked up tanks and helicopters as collateral for a bond default.
Given the currency in Argentina took a hit on the nose, and the interest amount on bonds went way up ( to adjust for what would be junk bond status ). The country has a mess on its hands, but no holder of the defaulted bonds was allowed to come in an take over.

So the internet rumor that China can cash in bonds at any time they want, and the US treas is left holding the bag is just that, a rumor.

Think about the deal China has, the US gov is going to be sending money to them for a long time. It was a smart investment on the Chinese government's part. This will fund quite a bit of expansion, and economy building in the PRC for a long time. Why would they take a golden investment structure and sell it off on the secondary market, and who on the secondary market has that kind of money sitting to purchase the total amount ?

 

What SScully wrote is technically true. How China would screw us is by dumping the bonds on the market a a very low price. They own enough that if done wisely it would greatly increase the interest we would pay for our new bonds. This has a double effect. China, which is a major purchaser of our bonds, quits buying making us pay more interest to encourage new customer of our debt. Add to that the increase we would have to pay to counter China dumping their bonds for pennies on the dollar to make our new bonds desirable. Hit with both of those would make our government extremely vulnerable. I almost wish China would do it. It would act as a wake up call for the spend thrifts in Congress and we would have to have a balanced budget, because we couldn't issue anymore bonds.

 

Exactly. And with over 3,000,000,000,000, yes trillion of reserves in the bank, their economy wouldn't miss a beat if they dumped their 1.2 trillion in treasuries. The Chinese would be foolish to do it now, but in the future, who knows? How soon we forget their antics such as the American AWACS plane they hijacked in 2001 or 2002.

This is a point that is never mentioned on the financial or investment sites.

 

Reserves or Foreign exchange reserves ?

Foreign exchange reserves would include the $1.2T in US Treas notes they hold, and what else makes up the 3T number ( other countries bonds & currencies ). The last Foreign exchange reserves I found in a quick search for China was 2.4T, but this was 12 months ago.

What does previous actions have to do with them buying, on the open market, US Treas notes ?

This makes as much sense as someone that was involved in a share holder law suit, being barred from purchasing that companies stock on the open stock exchange......

 

China currently has approximately 2.8T in Foreign exchange reserves and this figure does not include "all" of China's holdings in precious metals.

http://www.bloomberg.com/news/2011-0...ds-target.html


It is unwise for our own politicians to not be planning for all of China's possible future moves. And that includes a possible future protracted liquidation of Treasuries. As there are fewer buyers (nations) willing to fund our deficit spending on the backs of their own people.

 

You confirmed what I put in Post #3:
With this in mind, if China ever decides to cut off their nose to spite their face ( i.e. take a huge loss on a long term investment ) who is going to buy the bonds on the secondary market ?

Your post indicates they have more than enough capitol to do what they need to do, why shoot a good long term investment in the foot ?

You are thinking too much like a politician with "China's possible future moves", and the Chinese are thinking like a business, how to make money.

And you wonder why China owns such a high volume of US Treas notes, this is going to be paying them back until 2040, at least.
Thanks to Walmart, China has pallets of US dollars sitting around, why not put them back to work, get 2x the return. China is basically loaning the US money so we can buy a bunch of stuff from China.
This is just like the guys that hang around colleges back in the 80s loaning money to sell pots and pans to college students, what a racket, loan you money so you can buy something from me. It is the OC business model, done legally.

You forget how close the Yuan is being kept to the Dollar, why largest trading partner. If the Yuan was allowed to float free, the bricks would be put on the line of ships waiting to off load China goods on the coasts of the US. The cannot let that happen.
Again think like a business, China is. They want to shoot the largest trading partner in the head, why ?
What would it do if China started dumping US treas notes on the open market ( aside from the money they would loose on the principal they already paid out ). loss of long term interest, and loss of a large trading partner ( things would turn upside down, and the flow of products would go from a river to a squirt gun ).

Only a person that is underhanded would come up with underhanded scenarios that their largest trading partner might do to them.

China has enough to worry about keeping the natives happy an keeping Vietnam, Laos and India out of their business.
I think they learned the lesson from WW-II, do not open a second battle front when you are using the majority of your resources on the 1st front, it cannot lead to anything good.

 

I agree with much of what you are saying, but your assumptions are based on a continuing high standard of living in the US.

As the dollar continues it's protracted slide, Chinese products will gradually become more expensive against the Yuan. And that obviously means less reason for the Chinese to continue supporting our profligate gov't spending in the future.

Our best bet is to decrease gov't spending and live within our means.

 

The Yuan being able to float to the market level is still being artificially held, just like the last time is was allowed to free float. Once it reaches the pain threshold that China will stand, they will lock it again.

The 120 day range on the Yaun is 0.20 drop to 1 dollar. The Chinese government will not let it move too far away from the dollar, else it would float to a level that would make Chinese products too expensive anywhere in the world, not just with the largest trading partner.

Is China going to follow the slide, I would say yes. They did not blink before when the dollar slid against the Euro or the CAN dollar.

We are back to China needs to loan the US our own money, so we keep buying products. Without that, the Chinese economy is going to fall apart ( that 8% growth that they are artificially making would come to a halt ).

The part about not spending money we do not have, that is common sense, and therefore has no place in the thought process with a politician.

It would make too much sense not to spend money you don't have, but the gov can always hold the "IRS gun" t the taxpayers head. The Governor in IL is doing it, that is how IL politics works.
Rob from everyone ( rich and poor alike ) and give to the upper middle class.
Notice the POTUS came out on the side of the teachers union in WI, screw the tax payers was the message I saw.

ID has it correct, write the bill, pass the bill and put it on the governors desk waiting for a signature. No 3 ring circus to be had there. The message, don't like it get a job in another state.

The can replace the gov union employees much easier than another state, due to the size of the work force, but that in itself is another potential sign things are wrong.

 

China is as dependent on the US as we are on them. The last thing they want is for the US economy to do is get too bad. At the same rate they don't want our economy to get too good either.

If it erodes too far, then we can't buy their stuff. If it gets too good we will seek higher quality goods that are made here at home or places known for quality goods.

While we have to cut spending, we are going to have to raise taxes too in order to get our budget in order.

While the debt sounds scary at 14 trillion dollars, as long as we are dominant currency, it really is of little consequence.

I do wish someone would answer this honestly. Why wasn't the debt a concern when Bush was in office?

 

This is one of the many areas you are wrong. It was a concern under Bush, but it was still at a manageable level. Something to think about, Bush ran the debt up about $5 trillion in 8 years. Obama has run the debt up about 4 trillion in two years. If you straight line extrapolate that out, the debt will be $16 trillion more when Obama leaves office (if he gets another term) than it was when he took office. A little debt is fine a lot of debt is not. We are hitting the lot of debt stage. The debt is getting so bad we can not maintain or improve the infrastructure we have.

 

The debt absolutely was a concern when Bush was in office. With Bush, it blossomed under a Democratic congress and it is far worse today under Obama.

The debt IS of large consequence, precisely because the government can't manage to significantly cut spending, so we will HAVE to raise (hidden?) taxes.

That's a BIG consequence to employers, who will take the jobs elsewhere.

Oh, and the 'dominance' of our currency is eroding, in part because our debt poses a long term threat our economy.

So, in conclusion, the debt more than just 'sounds scary'. It is already significantly damaging our economy, and the not so little consequences of this debt are getting worse and worse. How is this not obvious?

 

True, very much so.
There is a small problem when the cuts are looked at for expenditures for fed, state and local combined ( so the fed money that is transferred from the fed to the state is accounted for ), the result is: 'this is not the cause of the budget short fall, there are only a little amount of cuts to be had here, there are bigger problems'.
FY2010 Spending ( in B$ )
Health Care : 1,021.6
Pensions : 952.3
Education : 900.1
Defense : 848.1
- This includes the Military, Veterans, Foreign military aid, and Foreign economic aid. There was no R&D in FY2010, all that money was cut from the budget.
Welfare : 749.4

If the largest expenses are considered off limits for cuts, where are cuts to me made ?

This is one of those relative terms.

When looking at budget deficit in terms of % of GDP, there are much worse years than this range ( or the current range )
1943 - 30.3% of GDP
1944 - 22.8% of GDP
1945 - 21.5% of GDP
1942 - 14.2% of GDP
1983 - 6.0% of GDP

2009 & 2010 estimates are in the 10% + range of deficit to GDP, ~ double ( 09 is estimated in the 12-13% range ) what Ronnie did in terms of short fall, and he gets the biggest knock of creating a budget deficit.

If the budget short fall is inflation adjusted to current dollars, 1993 was on par with 2003. Was anyone worried about the short fall in 1993 ?
This is 1993 @ 275 B vs 2003 @ 430 B ( adjusted to 2010 money ).

Now take the worst of the GW Bush ( 2004 @ 463 B in 2010 money ) to 2009 estimated short fall of 1416 B ( in 2010 money ). FY 2011 is estimated to be 1650 B !

We are really to be concerned more about a number that is 25% of what it is now ( adjusted to 2010 numbers ), not taking into account as a % of GDP.

This should put the short falls in perspective ( adjust to 2010 dollar ) for 1940 on the left and 2010 on the right ( notice WW-II on the left ).

 

While it is true the US dollar is eroding, what currency is not ?

What would be the dominate currency ? The Yuan, it is still artificially held in a tight range against the dollar.

The Euro, sure Europe might have stated that is enough with trying to keep the economy running by pumping tax dollars into it, but only time will tell what this will do to the Euro.

CD$ ? They do not have a large enough GDP to support this.

It has gone from which is the best to which is not the worst.