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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: RockyBalboa who wrote (1228)	9/30/2007 1:28:20 AM
From: stan_hughes	Read Replies (2) \| Respond to of 71409

"could any company support debt standing at two thirds of their gross turnover" A company, no -- but a government, yes, at least for a considerable period of time. There's nothing quite like those extra options at your disposal if you're a nation-state, e.g. the ability to create more currency and/or tax the citizenry. However, if resorting to such things becomes your primary method of operation, over the long haul you effectively remove that layer of additional power from the equation by the abuse of it, as the market prices in expectations of what it sees is in its own best interests as well as what it expects state responses will be. Which in itself begs the real question, i.e. how high is too high, or at what level does a nation-state's debt:GDP apple cart tip over? FWIW Japan has been getting away with high ratios for many moons -- but Japan is very different than the USA in many ways that I'm sure you're familiar with. Since a country can never default in a system where it's allowed to print its own money to make its interest payments and as long as people are willing to accept the newly printed money, nosebleed debt levels can go on indefinitely, until for some reason confidence in the country (i.e. the currency) is lost on a wholesale basis and buyers refuse to roll over or re-fund maturing debt. At that point the offending country becomes faced with being unable to meet its existing obligations and defaults, which comes to weigh heavily on the market value of the currency. Under such a circumstance, the rest of the planet holding that country's scrip immediately heads for the door, triggering an even larger but quick collapse -- which is why these situations always end parabolically. Unfortunately in terms of forecasting, predicting "the" confidence-losing trigger event depends on so many different variables (not all of which are strictly financial) that it's fairly impossible to foresee the exact timing of a collapse, except perhaps when it gets very close to the event itself (e.g. like an Argentine peso, and more than once). The Japanese situation I think may be a bit of a red herring -- it has massive current account savings and has purposely manipulated its currency downward, which is hardly the case of the USA. The latest reference I could find is that only 6% of Japanese debt is held by foreigners, whereas foreign ownership of US debt is 4-5 times that level. So what is probably most germane to the overall analysis is how much of a country's debt is held by foreigners, and whose actions are beyond the direct political reach and control of the issuing country's government (although they can arguably still be "herded" by exchange controls). FWIW, the USA is currently either #30 or #32 on the debt:GDP list depending on which link you prefer -- en.wikipedia.org cia.gov

To: RockyBalboa who wrote (1228)	9/30/2007 2:52:55 AM
From: stan_hughes	Respond to of 71409

One other thing I should have raised on the question of "how high is too high" -- many use a rule of thumb that sovereign debt remains attractive to the extent that the interest payments on the debt remain less than 10% of tax receipts. Based on the most recent CBO figures for the current fiscal year as of July 2007, the current US experience is running around 10.2% ($233 billions versus $2,282 billions) cbo.gov By way of comparison, the same data from two years ago (2005) from the same source show US debt interest payments as then being 8.8% of receipts. Two years before that (2003) it was 9.2%. The increase to 10.2% currently should not surprise anybody considering the deficits the US has been running thanks to Iraq, etc. If you picture the US as Joe Sixpack Homeowner with a gigantic ARM that resets in multiple pieces rather than all at once, you can easily appreciate that part of what makes everything work is the current low level of interest rates on the national debt. Any combination of higher interest rates or nominal amount of debt that raises the interest payments beyond the proportional growth in GDP is going to drive that 10.2% yardstick higher. So if one assumes that at 10%, the US is already running more or less at its "debt comfort ceiling" from a lender's perspective, aside from higher global rates or foreigners bolting the USD, even a recession is to be genuinely feared here, because that's the equivalent of Joe Sixpack Homeowner losing his overtime or taking a pay cut, and therefore losing his ability to keep his payments in line (as well as the preferred interest rates he's been enjoying from his lenders). Might help explain why the Fed seems so acutely interested in preventing even a mild recession from developing -- it's because they have to keep the GDP up in proportion to the rising debt levels or they're screwed for sure (instead of just 'maybe' screwed by inflating a bit)