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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: GST who wrote (36618)7/22/2005 2:06:39 PM
From: mishedlo  Read Replies (1) of 110194
 
1. Our government deficit will INCREASE -- it will balloon when our economy is weak and this will continue to be mainly financed from abroad, even if I accept that US savings rates will go up the gap will still be of the Grand Canyon variety.

2. Our current account deficit will INCREASE -- it will balloon because we will buy MORE from China et al and not less as we turn to the lowest cost producers for everything as a way to offset our newfound status -- relative poverty. Shopping at Walmart will no longer be the province of the working poor -- it will be the place where the former middle class struggles to adjust to the post bubble realities of their day to day life. You yourself realize that the price gap between China and the US is so huge that currency revaluation does nothing for our trade balance. A bursting of the housing bubble will ADD to the pressure to buy things as cheaply as possible -- unfortunately all we will have to offer in trade is an increasingly worthless pocket full of dollars.

The financing of the current account deficit will put further strain on the dollar.

Finally a reasonable discussion after a bunch of blatant and purposeful misrepresentations of what I said.

1) You are making assumptions that may or may not be true.
Even IF they are true the US$ is likely to drop off the cliff only if they are relatively worse than say a basket of the (UK, China, Japan, Europe). Once Issing is gone, we will see just what Europe does or does not do to try and get out of the recession they are in. What happens to Japan's balance of trade when the US stops buying a lot of Japanese goods? As I said, even Faber who is generally bearish on treasuries, does not see a huge decline in the US$ because there really is no place to turn. China is still (for now) dependent on the US consumer. Down the road (possibly after the next lengthy recession) that may change but I suspect for now the RMB is not going to be the answer.

As you say, busting of the housing bubble will impact consumer spending across the board. Demand for loans will drop. Willingness of banks (underwater in mortgage loan equities) will also drop. Interest rates are not rise in that environment. I keep pointing to the UK but no one wants to look. The same thing happened in Japan. No one wants to look. Somehow the US is different and rates will rise in that environment. I do not buy it. Not currently happening in the EU either and if you look you will see money supply soaring and officials saying rates are very accommodative. Well if they are accommodative then why is no one spending? The US savings rate is zero. That is not suatainable. When we start saving and stop spending where are treasury rates going? I suggest down even if the FED monetizes a bit. The whole world will probably be doing it.

2) Conventional wisdom is that the CA deficit will get worse no matter what happens. I am not sure that is true. It is an assumption you are making that I am not. When we stop buying cars and houses and computers and start shopping at Walmart instead of Marshall Fields I am not sure conventional wisdom is correct. Even if you are correct, will that necessarily mean interest rates rise? Once again look at the UK. In other words, two assumptions that just may not hold up judging from what we see happening elsewhere right now.

Mish
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