Another recession?

[Topaz]

Some economists in the US are predicating another recession and a deeper one that could wipe out billionaires fortune in half. The US debt is approaching 16 TRILLION and China and the fed.reserve holds most of it, with China holding most. I can't see how the US can go on and not go down as Russia did. I guess its time again for the middle-class to prepare for a rough time again. http://www.moneynews.com/MKTNews/Massive-wealth-destruction-economy/2013/06/20/id/511043/?promo_code=1447F-1

[segnosaur]

Some economists in the US are predicating another recession and a deeper one that could wipe out billionaires fortune in half. The US debt is approaching 16 TRILLION and China and the fed.reserve holds most of it, with China holding most. I can't see how the US can go on and not go down as Russia did. I guess its time again for the middle-class to prepare for a rough time again. http://www.moneynews.com/MKTNews/Massive-wealth-destruction-economy/2013/06/20/id/511043/?promo_code=1447F-1

Ok, a couple of points:

First of all, your referenced article is "money news"... a few seconds on that site and I found that its related to NewsMax, a site that has a specifically right-wing orientation (and has articles from such intellectual midgets as Dr. Laura Schlessinger. Granted, that doesn't guarantee that its shoddy reporting, but it doesn't give a lot of hope.

Secondly, keep in mind that predictions of "doom and gloom" are very common. Yes, eventually I'm sure that we'll have another recession. That doesn't mean that each and every prediction is accurate or useful. And heck, the article uses Donald Trump as an expert, someone who's declared bankruptcy in the past (so he's certainly not fallible, at least when it comes to his own finances.)

ETA: and take a look at the article... the economist says there will be problems "down the line"... how far down? who knows. People will loose "Up to" 50% of their wealth.... that's a rather big range: 0-50%. All rather vague predictions.

Something else to consider... yes, China holds some U.S. debt. But in reality, its probably a smaller amount than most people realize. More importantly, its irrelevant. It is of absolutely no benefit for China to try to bankrupt the U.S., since it would harm them almost as much as it would harm the U.S.

The economy is not perfect. I do think that the U.S. government hasn't does as much to tighten up financial regulations as it could, and there are demographics issues to deal with.. But, believe it or not, American manufacturing is hitting record levels, they actually hold almost as much debt of other countries than china owns of theirs (and they earn money off it too), and the deficit is slowly coming under control.

I'd suggest reading the following article. Yeah, its from a comedy web site, but sometimes they make more sense than the mainstream news sites:

http://www.cracked.com/article_20454_5-scary-myths-you-probably-believe-about-economy.html

Edited August 27, 2013 by segnosaur

[Moonlight Graham]

Something else to consider... yes, China holds some U.S. debt. But in reality, its probably a smaller amount than most people realize.

Exactly. China doesn't hold most of the US's debt. They don't even own most US treasury securities. But they do own more than any other country, but that isn't as big an amount as the media makes out:

As of May 2011 the largest single holder of U.S. government debt was China, with 26 percent of all foreign-held U.S. Treasury securities (8% of total U.S. public debt).

http://en.wikipedia.org/wiki/National_debt_of_the_United_States#Foreign_holdings

So the Chinese government owns 26% of 8%, which = 2% of total US debt. Unless they own more US debt I'm somehow missing, that's not a lot.

Also, economists usually can't predict bullocks. Some do in retrospect, but there are many, many more that get grand predictions wrong. If these economists could predict things accurately they'd be filthy rich, which the vast majority aren't.

Edited August 28, 2013 by Moonlight Graham

[dre]

Also, economists usually can't predict bullocks. Some do in retrospect, but there are many, many more that get grand predictions wrong. If these economists could predict things accurately they'd be filthy rich, which the vast majority aren't.

Thats mostly true, at least in terms of specific events and their timelines.

But in terms of US economy and the sales of all this paper, it definately cant go on forever... any more than you or I could just stop working and borrow money to live for the rest of our lives.

The only reason its gone on for this long is because countries like China, and pacific rim countries, and oil producing companies have been propping up the US by buying all this paper, in order to keep the US dollar strong enough for Americans to keep buying their stuff.

[segnosaur]

But in terms of US economy and the sales of all this paper, it definately cant go on forever...

It doesn't need to. But there is no guarantee that there will be an automatic crash. Its possible that at some point, the economy will pick up enough, and the government will ease back on the printing of currency. (And in the past, the size of the debt has been overshadowed by a strong growing economy.)

The only reason its gone on for this long is because countries like China, and pacific rim countries, and oil producing companies have been propping up the US by buying all this paper, in order to keep the US dollar strong enough for Americans to keep buying their stuff

Keep in mind that those countries are not "propping up the U.S." just to be generous.

China buys U.S. debt because they think its a wise investment.... safe enough, with enough of a return to justify whatever risk is involved. Investment in U.S. treasury bills is not necessarily a sign of weakness in the economy (i.e. "OMG we have to prop them up") but more a sign of strength (i.e. "we think they're running things good enough to trust them with our cash").

[dre]

China buys U.S. debt because they think its a wise investment.... safe enough, with enough of a return to justify whatever risk is involved. Investment in U.S. treasury bills is not necessarily a sign of weakness in the economy (i.e. "OMG we have to prop them up") but more a sign of strength (i.e. "we think they're running things good enough to trust them with our cash").

No this is not the case at all. The reason China buys US paper is to manipulate currency values.

China floods the market with yuans, and buys up as much US dollars as they can, which keeps the yuan low and the dollar high. It has nothing to do with any faith in US economic management. It really is all about them propping up the purchasing power of US consumers so that they can keep buying chinese goods and keep their factories open.

Picture a store that sells something to a customer, then gives the money that customer just paid, back to the customer so that they can come back and get more stuff. Thats basically what US creditors are doing.

The chinese do not buy greenbacks, bonds, bills, and notes because these things are a good investment. They are a terrible investment. The US dollar has lost half of its purcashing power in the last ten years, and more than 95% of its purchasing power since the federal reserve was created a century ago. The upside for China is that by keeping the US dollar artificially high and the yuan artificially low, millions of jobs that would have been created in the US are created in China instead.

[segnosaur]

No this is not the case at all. The reason China buys US paper is to manipulate currency values.

A few things to keep in mind...

- As has been pointed out, "China" is not the sole holder of U.S. debt. They don't even hold the majority. The central bank holds 8%. That's not exactly enough to "manipulate" currency values.

- Hundreds of billions of dollars of U.S. debt are held by countries like Russia and Switzerland... these companies have a much more limited trading relationship with the U.S., so they have little benefit in seeing a reduced dollar. Yet they feel it is in their interest in holding U.S. debt.

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

I believe you have the whole cause-and-effect thing incorrect. They are not buying U.S. debt and currency to keep the dollar low... they are buying U.S. debt because a trade imbalance (caused by cheap labor) has given them the extra cash and a need to invest it. (Any effects on currency values is secondary.)

The chinese do not buy greenbacks, bonds, bills, and notes because these things are a good investment. They are a terrible investment.

The U.S. credit rating from the major ratings firms is currently AA+. Although it was downgraded from AAA a couple of years ago, it is still amongst the top ratings for countries globally. It indicates that there is very little if any risk in holding U.S. T-bills or bonds (and many investors do consider safety to be a primary concern.)

http://money.cnn.com/2013/06/10/news/economy/sp-u-s-credit-rating/index.html

[dre]

I believe you have the whole cause-and-effect thing incorrect. They are not buying U.S. debt and currency to keep the dollar low... they are buying U.S. debt because a trade imbalance (caused by cheap labor) has given them the extra cash and a need to invest it. (Any effects on currency values is secondary.)

8% is a huge number. And they ARENT trying to keep the dollar low, they are trying to keep it high. The Chinese central bank prints huge ammounts of yuan and sells them, and then they buy greenbacks. This keeps labor costs in China down because workers are paid in yuan, and it keeps the US dollar higher so that US consumers can afford to keep buying Chinese goods. And no... effects on currency values are not secondary. Currency values are the WHOLE POINT of the yuan/dollar peg, and Chinas monetary policy.

The U.S. credit rating from the major ratings firms is currently AA+. Although it was downgraded from AAA a couple of years ago, it is still amongst the top ratings for countries globally. It indicates that there is very little if any risk in holding U.S. T-bills or bonds (and many investors do consider safety to be a primary concern.)

Yeah those are the same credit ratings firms, that stamped AAA on securities derived from mortgages given to the unemployed ROFLMAO. Again China and other countries that run huge trade suprluses with the US are propping up the value of the US dollar so that American consumers have more relative purchasing power, because thats the whole reason why they run trade suprluses in the first place.

If the value of the yuan went up and the value of the dollar went down, then China wouldnt be able to sell as much stuff to the US anymore.

[sharkman]

US job numbers are reflecting a continued weak recovery. The only reason that the US unemployment rate went down was that many more Americans left the job market and gave up.

Not only did hiring miss expectations last month, but the job count for June and July was revised to show 74,000 fewer positions added than previously reported.

While the unemployment rate fell a tenth of a percentage point to 7.3 percent, its lowest level since December 2008, the decline reflected a drop in the share of working-age Americans who either have a job or are looking for one.

That participation measure reached its lowest point since August 1978, a further sign of underlying economic weakness. The rate for men touched a record low.

[eyeball]

more Americans left the job market and gave up

Where do these people who give up go? Underground, do they drift away on an ice floe or donate themselves to medical research?

How does one actually give up in a world where you either produce or die? Crime seems to be the only reasonable alternative to dying.

What a weird little world we're spinning around on. It seems to me we should have been able to make more of it than we have.

[sharkman]

They don't go anywhere.

[segnosaur]

more Americans left the job market and gave up

Where do these people who give up go? Underground, do they drift away on an ice floe or donate themselves to medical research?

How does one actually give up in a world where you either produce or die? Crime seems to be the only reasonable alternative to dying.

Often, 'unemployment rates' are measured by counting people who are actively looking for work (handing out resumes, going to interveiws, etc.) and/or are on unemployment. Some individuals may 'give up' at some point... they may resort to welfare, they may move in with relatives ("Hi mom, can I live in your basement?"), etc. So the "Unemployment" rate doesn't necessarily count those who could work but aren't.

The claim that 'unemployed people have left the job market' is a rather common one made by economic analysts, so I don't mind seeing it (since it does explain why a decreasing unemployment rate isn't matched by a corresponding increase in jobs in some cases.) But, the problem is when it gets too much emphasis.

[segnosaur]

US job numbers are reflecting a continued weak recovery. The only reason that the US unemployment rate went down was that many more Americans left the job market and gave up.

[i[Not only did hiring miss expectations last month, but the job count for June and July was revised to show 74,000 fewer positions added than previously reported. While the unemployment rate fell a tenth of a percentage point to 7.3 percent, its lowest level since December 2008, the decline reflected a drop in the share of working-age Americans who either have a job or are looking for one.[/i]

Ok, first of all, your statement was incorrect. While there were fewer positions added than originally forecast, that doesn't mean that the job market contracted. In fact, 10s of thousands of jobs were added... just not as many as they were hoping.

Secondly, the fact that there are continued economic problems is not surprising. There are still a lot of issues out there... gridlock in congress, political instability in the middle east, etc. Some months the economy will do better than expected, some months it will do worse. A couple of months ago, growth in the U.S exceeded expectations. (See: http://www.bloomberg.com/news/2013-06-27/canadian-dollar-gains-as-european-confidence-fuels-risk-appetite.html). That doesn't mean that we were entering some sort of "boom" period.... it just means that there was a minor fluctuation.

Heck, even the article you referenced was not all bad news... while fewer jobs were added than expected, hourly wages and dividends were both up. And factory jobs also increased (which is a good sign for the manufacturing sector.)

[Michael Hardner]

. So the "Unemployment" rate doesn't necessarily count those who could work but aren't.

The claim that 'unemployed people have left the job market' is a rather common one made by economic analysts, so I don't mind seeing it (since it does explain why a decreasing unemployment rate isn't matched by a corresponding increase in jobs in some cases.) But, the problem is when it gets too much emphasis.

Hi Segno,

I think what you're looking for is the 'labour force participation rate' which is listed in this Wall Street Journal blog from last week:

http://blogs.wsj.com/economics/2013/09/06/unemployment-rate-drop-for-wrong-reasons/

The labor force participation rate, which is the percent of the population either working or looking to work, took a tumble to 63.2% — its lowest level since 1978.

[segnosaur]

I believe you have the whole cause-and-effect thing incorrect. They are not buying U.S. debt and currency to keep the dollar low... they are buying U.S. debt because a trade imbalance (caused by cheap labor) has given them the extra cash and a need to invest it. (Any effects on currency values is secondary.)

8% is a huge number.

Err.. no its not. Remember, there's still 92% of people who hold U.S. debt that are not China. Most of those people who have purchased that debt are not doing so because they want to affect the value of the dollar; as I pointed out (and you seem to have ignored) countries like Russia hold hundreds of millions in U.S. debt, even though they don't do significant trade with the U.S.

And they ARENT trying to keep the dollar low, they are trying to keep it high.

You're right... that was a typo on my part. But that's all it was... a typo.

The Chinese central bank prints huge ammounts of yuan and sells them, and then they buy greenbacks. This keeps labor costs in China down...

Actually what keeps labor costs down is the lower standard of living exhibited by workers in China. Regardless of whatever currency fluctuations happen, labor in china will probably always be cheaper (at least in the forseable future) because they're used to working long hours in poor conditions.

And no... effects on currency values are not secondary. Currency values are the WHOLE POINT of the yuan/dollar peg, and Chinas monetary policy.

Not really.

In the long run, currency values become irrelevant. We use money as a medium of exchange, but ultimately its the flow of products, resources and services which dictate the true value of trade and the economy.

The U.S. credit rating from the major ratings firms is currently AA+. Although it was downgraded from AAA a couple of years ago, it is still amongst the top ratings for countries globally. It indicates that there is very little if any risk in holding U.S. T-bills or bonds (and many investors do consider safety to be a primary concern.

Yeah those are the same credit ratings firms, that stamped AAA on securities derived from mortgages...

Ok, a few things...

Yes, the credit rating agencies were complicit in the financial problems causing the meltdown of 2008. Yes they overrated certain securities. But context is important. The reason it was giving those high ratings was because they had incentives to give higher ratings to those securities. (e.g. they were paid more for "higher ratings"). On the other hand, there is no such incentive for giving false ratings for the U.S. government. They do not get paid more for saying "U.S. bonds are AOK".

Secondly, these latest ratings were done after the meltdown of 2008. Following the meltdown, the rating agencies reevaluated the investments to give proper rating values. Hey had their hand in the cookie jar, got slapped, and are behaving better now. (New regulations certainly helped.)

Lastly, as I have pointed out before... there are plenty of countries and private individuals who have invested in American bonds and T-bills (and who do not benefit by currency functions and their effect on trade.). The central banks have people who are capable financial analysts, and they recognize the safety and value of purchasing American debt. Why do you think that is?

Again China and other countries that run huge trade suprluses with the US are propping up the value of the US dollar so that American consumers have more relative purchasing power, because thats the whole reason why they run trade suprluses in the first place.

Uh, no.... they run trade surpluses because they're capable of producing more than they need to purchase, and having citizens with jobs is better than having citizens without jobs.

[segnosaur]

Hi Segno,

I think what you're looking for is the 'labour force participation rate' which is listed in this Wall Street Journal blog from last week:

Thanks.

Its been a long time since I took an economics course, so my terminology is a little... rusty.

[sharkman]

Ok, first of all, your statement was incorrect. While there were fewer positions added than originally forecast, that doesn't mean that the job market contracted. In fact, 10s of thousands of jobs were added... just not as many as they were hoping.

Secondly, the fact that there are continued economic problems is not surprising. There are still a lot of issues out there... gridlock in congress, political instability in the middle east, etc. Some months the economy will do better than expected, some months it will do worse. A couple of months ago, growth in the U.S exceeded expectations. (See: http://www.bloomberg.com/news/2013-06-27/canadian-dollar-gains-as-european-confidence-fuels-risk-appetite.html). That doesn't mean that we were entering some sort of "boom" period.... it just means that there was a minor fluctuation.

Heck, even the article you referenced was not all bad news... while fewer jobs were added than expected, hourly wages and dividends were both up. And factory jobs also increased (which is a good sign for the manufacturing sector.)

Hi there, thanks for your thoughts, I may not have made myself clear. I was not suggesting that the job market contracted, I was saying that it is a continued weak recovery, more of the same if you will. Also the fact that they corrected the job numbers for the summer downward by over 70,000 is somewhat stunning. I believe you see the glass as half full. I am not sure yet, it's been 5 years after all.

[dre]

In the long run, currency values become irrelevant. We use money as a medium of exchange, but ultimately its the flow of products, resources and services which dictate the true value of trade and the economy.

Only in a floating exchange rate regime. Chinese workers are paid in yuan, and American consumers pay for those products with dollars, so as long as china floods the market with yuan they will be able to keep the prices of thier products artificially low.

On a floating exchange rate system trade imbalances cant get out of control because the currency values of the countries doing all the exporting will rise and the currency values for the countries doing all the importing will fall. Thats the ENTIRE POINT of the entire floating exchange rate system. China however does not allow the value of its currencies to float. If it did the yuan would be worth 20-40% more now than it currenty is, and chinese goods would cost 20-40% more for American consumers, which would encourage domestic production in the US. China prints yuan and uses it to buy US treasuries to keep the value of the yuan artificial low and prevent a correction in the trade imbalance.

Uh, no.... they run trade surpluses because they're capable of producing more than they need to purchase, and having citizens with jobs is better than having citizens without jobs.

The US is capable of producing more than it consumes as well. Do you really think Americans couldnt build their own Iphones, computers, etc? The only reason they dont is because the current exchange rate between the yuan and the dollar means that those goods would be more expensive. But in a floating exchange rate paradigm, most of this trade imbalance would have already dried up. Its simply not economically possible for real goods/services to flow in one direction between two nations while nothing but bits of paper flow in the other unless theres currency manipulation going on.

Heres a laymens explanation of what CHina is doing.

By buying U.S. government debt. In a free market, a trade surplus should increase the value of a country’s currency. People want to be paid in local money, creating demand for the currency, which in turn raises its value. Over time, this provides a counterweight against runaway trade imbalances. That process doesn’t happen in China, because the government constantly prints new currency and uses it to buy U.S. dollars and U.S. government debt, thereby flooding the market with Chinese currency and increasing demand for American dollars. As of this writing, China holds $1.15 trillion in U.S. government debt, and the country’s foreign exchange reserves are nearly as great as those of all advanced economies combined.

http://www.slate.com/articles/news_and_politics/explainer/2012/10/china_currency_manipulation_how_does_it_harm_the_u_s_and_what_can_we_do.html

Lastly, as I have pointed out before... there are plenty of countries and private individuals who have invested in American bonds and T-bills (and who do not benefit by currency functions and their effect on trade.). The central banks have people who are capable financial analysts, and they recognize the safety and value of purchasing American debt. Why do you think that is?

I never said that there isnt real speculative purchases of US treasuries. Most of them are bought by US citizens in the form of savings bonds. What I said is that chinas purchases are not speculative they are strategic. They are a key part of how they manage and grow their own economy, and keep the flow of goods going from east to west and the flow of production going from west to east.

China has actually gotten a little bit better, and have allowed their currency to appreciate a fair bit over the last couple of years. You could argue that countries like singapore, japan, and switzerland are worse now but they dont get the attention china gets because their economies are much smaller.

as I pointed out (and you seem to have ignored) countries like Russia hold hundreds of millions in U.S. debt, even though they don't do significant trade with the U.S.

Russia and other oil exports are buying for strategic reasons as well, and its really easy to see why. Russia accounts for about 12% of the worlds oil exports, and oil is still traded mostly in US dollars on exchanges like the nymex.

In other words, it would stand to reason the countries that hold the most US debt would be countries that run huge trade surpluses with the US, and oil exporting nations. Lets have a look!

1. China, Mainland

2. Japan

4. Oil Exporters (Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,
Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria)

www.treasury.gov

They arent buying these things as "investments" as you claim. In fact US treasures as an investment are the worse they have been since the 1940's

For god sakes these countries would make more money by putting their cash into term desposits at the bank of montreal.

Edited September 12, 2013 by dre

[sharkman]

So is today's decision by the Fed a glass half empty or glass half full move?

In its statement, the Fed says that the rise in interest rates "could slow the pace of improvement in the economy and labor market" if they are sustained.

The Fed also lowered its economic growth forecasts for this year and next year slightly

The Fed's statement is saying that the economy STILL can't grow on its own without stimulus spending on a rate of 85 billion per month. I remember when critics of Bush used to complain about 9 billion a month he spent on the Iraq war, but this is over 9 times that amount, all of it new debt, because if they stopped the 85 billion spending suddenly, the economy would shrink drastically.

Does that sound like a thriving economy?

[dre]

So is today's decision by the Fed a glass half empty or glass half full move?

The Fed's statement is saying that the economy STILL can't grow on its own without stimulus spending on a rate of 85 billion per month. I remember when critics of Bush used to complain about 9 billion a month he spent on the Iraq war, but this is over 9 times that amount, all of it new debt, because if they stopped the 85 billion spending suddenly, the economy would shrink drastically.

Does that sound like a thriving economy?

No but its an excuse to steal money from taxpayers. You cant waste a good crisis! The FED is actually a consortium of 12 private banks... its not a government agency like a lot of people believe. And normally they put this money into the economy by buying US treasuries. They COULD buy them from the treasuries department, but instead they buy them from outfits like goldman sachs at a higher rate.

Basically... the whole US financial system is a grift...

[bleeding heart]

They COULD buy them from the treasuries department, but instead they buy them from outfits like goldman sachs at a higher rate.

Basically... the whole US financial system is a grift...

Incidentally, I hear that the new Ambassador to Canada is a Goldman Sachs guy.

The lucrative (or prestigious) offers must never stop for these fine fellows!

Edited September 20, 2013 by bleeding heart