I may have my facts wrong, but it appears that there will be 5 votes in the next 2 weeks over the Greek bailouts and if any of them fail, then Greece will default on July 20.
Vote #1, on June 28 or 29, in the Greek Parliament on tax increases and spending cuts of E28.4bn.
Vote #2, on Thurs June 30, on selling Greek assets such as shares in electricity and telecom companies to raise E30bn.
Vote #3, in a special meeting of banks by July 3, to agree to extend the length of their loans by 7 years. This appears to already be a done deal: Banks "understand very well" that they must "voluntarily" participate in the Greece bailout, said Christian Noyer of the ECB.
Vote #4, on Sun July 3, in a special meeting of eurozone finance ministers. Apparently, this requires unanimous approval, and Austria is poised to block it.
Vote #5, on Tues July 5, the German high court will begin hearings on whether the bailout violates the German constitution. However, it may not rule for some time.
========
Update: None of these seem to be a problem. However, there is a 6th hurdle to overcome, that of the rating agencies, that may be the fatal flaw.
Saturday, June 25, 2011
Friday, June 24, 2011
Sunday, June 19, 2011
It is now illegal to buy and sell gold and silver futures
See: http://www.zerohedge.com/article/trading-over-counter-gold-and-silver-be-illegal-beginning-july-15
"We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.
In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET."
Comment: The way I understand this, the above article overstates the regulations. It is not illegal to own gold or silver, or to buy or sell them, or to enter into a contract for purchase in which physical delivery will be made within 28 days. However, it is illegal to enter into futures contracts unless the person is a sophisticated investor with a net worth of over $1 million.
"There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period."
"We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.
In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET."
Comment: The way I understand this, the above article overstates the regulations. It is not illegal to own gold or silver, or to buy or sell them, or to enter into a contract for purchase in which physical delivery will be made within 28 days. However, it is illegal to enter into futures contracts unless the person is a sophisticated investor with a net worth of over $1 million.
"There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period."
The Stock Market Crash of 2011
First, read this blog post: The Stock Market Crash of 2011.
The author is predicting that, based on S&P 500 charts, the market will within the next week briefly drop below the lows of mid-March, then bounce back up about 3%, and then about July 5 the market will crash 20% through about August 15, at which point the Fed will panic and initiate QE3. I don't quite understand it, but it makes sense.
I prefer to look at the Dow Jones numbers as I find them easier to follow. Right now the Dow is at 12,000. The March low was just above 11,600 on March 16, actually 11,613. So if the Dow drops below 11,600 in the next 2 weeks, even briefly, then that is a signal that the crash is coming even if it doesn't start right away.
====================
On a related note, I find it interesting that at the same time that the Treasury doesn't need money, because of the debt ceiling, that the Fed has quit buying. The Treasury will need massive buying beginning August 1, when the debt ceiling will be raised. So QE3 will have to begin about mid-August to provide the funds, and some of this money will go back into the stock market.
So bottom line, sell all your stocks by the end of June before the crash begins.
The author is predicting that, based on S&P 500 charts, the market will within the next week briefly drop below the lows of mid-March, then bounce back up about 3%, and then about July 5 the market will crash 20% through about August 15, at which point the Fed will panic and initiate QE3. I don't quite understand it, but it makes sense.
I prefer to look at the Dow Jones numbers as I find them easier to follow. Right now the Dow is at 12,000. The March low was just above 11,600 on March 16, actually 11,613. So if the Dow drops below 11,600 in the next 2 weeks, even briefly, then that is a signal that the crash is coming even if it doesn't start right away.
====================
On a related note, I find it interesting that at the same time that the Treasury doesn't need money, because of the debt ceiling, that the Fed has quit buying. The Treasury will need massive buying beginning August 1, when the debt ceiling will be raised. So QE3 will have to begin about mid-August to provide the funds, and some of this money will go back into the stock market.
So bottom line, sell all your stocks by the end of June before the crash begins.
Friday, June 17, 2011
Thursday, June 16, 2011
Europe
There are some similarities between the US and Europe.
The President of Europe is Jose Manuel Barroso, the President of the European Commission. He has been in power since 11/22/2004. The European Commission is located in Brussels, which could be considered the capital of Europe. However, the President is elected by the European Parliament instead of by popular vote.
The European Parliament is the counterpart of the House of Representatives. It meets in Strausbourg, France.
The European Council is the equivalent of the Senate, and it meets in Brussels. However, instead of having elected representatives, it is made up of the heads of state or government of the EU member states. The European Council of Ministers aka the Council of the European Union is made up of ministers who deal with specialized issues. For example, if they are dealing with agriculture policy, the ministers of agriculture meet to discuss it.
The European Court of Justice is the equivalent of the Supreme Court, and it meets in Luxembourg. It is made up of 27 judges. Most decisions are made by chambers made up of three or five judges. The language used is French.
The European Central Bank is the equivalent of the Federal Reserve, and it is based in Frankfurt, Germany. Its president is Jean-Claude Trichet.
The European Defense Agency is the equivalent of the Pentagon. However, it has a budget of only about 30 million Euros/year as opposed to the $600 billion annual budget of the U.S. military. In practice, NATO handles the security of Europe.
The President of Europe is Jose Manuel Barroso, the President of the European Commission. He has been in power since 11/22/2004. The European Commission is located in Brussels, which could be considered the capital of Europe. However, the President is elected by the European Parliament instead of by popular vote.
The European Parliament is the counterpart of the House of Representatives. It meets in Strausbourg, France.
The European Council is the equivalent of the Senate, and it meets in Brussels. However, instead of having elected representatives, it is made up of the heads of state or government of the EU member states. The European Council of Ministers aka the Council of the European Union is made up of ministers who deal with specialized issues. For example, if they are dealing with agriculture policy, the ministers of agriculture meet to discuss it.
The European Court of Justice is the equivalent of the Supreme Court, and it meets in Luxembourg. It is made up of 27 judges. Most decisions are made by chambers made up of three or five judges. The language used is French.
The European Central Bank is the equivalent of the Federal Reserve, and it is based in Frankfurt, Germany. Its president is Jean-Claude Trichet.
The European Defense Agency is the equivalent of the Pentagon. However, it has a budget of only about 30 million Euros/year as opposed to the $600 billion annual budget of the U.S. military. In practice, NATO handles the security of Europe.
Credit-default swaps on Greece soared 435 basis points to 2,189
http://www.bloomberg.com/news/2011-06-16/greece-ireland-portugal-lead-sovereign-credit-default-swaps-to-records.html
Here is what I think will happen: Greece will pretend to agree to austerity measures, the IMF and EU will bail them out again (which really isn't that expensive, I just saw a price tag of $17 billion), and they will kick the can down the road for another year. And the default swap insurers will make out like bandits - for now.
Here is what I think will happen: Greece will pretend to agree to austerity measures, the IMF and EU will bail them out again (which really isn't that expensive, I just saw a price tag of $17 billion), and they will kick the can down the road for another year. And the default swap insurers will make out like bandits - for now.
Tuesday, June 14, 2011
Is the Federal Reserve the International Lender of Last Resort
First, there is a policy statement advocating this from 1999:
An International Lender of Last Resort,The IMF, and the Federal Reserve
Summary: "Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make quick decisions, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, however, does meet the essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities."
Second, there is evidence that the Fed did in fact act this way during the 2008 financial crisis:
Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
"Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank." Dexia borrowed $31.5 billion from the Fed on 10/24/2008, which, it should be noted, has all been paid back.
So the truth is that the Fed is the international LOLR, and the dollar is the world's currency.
An International Lender of Last Resort,The IMF, and the Federal Reserve
Summary: "Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make quick decisions, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, however, does meet the essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities."
Second, there is evidence that the Fed did in fact act this way during the 2008 financial crisis:
Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went
"Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank." Dexia borrowed $31.5 billion from the Fed on 10/24/2008, which, it should be noted, has all been paid back.
So the truth is that the Fed is the international LOLR, and the dollar is the world's currency.
Sunday, June 12, 2011
Africom
Camp Lemonnier, is a former French foreign legion base and it is now the only US military base in Africa. It is the de facto headquarters of the US African Command, (official site) which however remains officially headquartered in Stuttgart, Germany. It seems that Africom has a vision for Africa which nobody else has.
The way I understand it, Africa is divided into 7 regions:
1) Southern Africa, headquartered in Gaborone, Botswana, which I previously posted about
2) West Africa (ECOWAS), headquartered in Abuja, Nigeria, previously posted
3) Central Africa, headquartered in Libreville, Gabon
4) East Africa, headquartered in Arusha, Tanzania
5) Arab Maghreb Union, headquartered in Rabat, Morocco
6) Horn of Africa/IGAD, including Kenya and Sudan, headquartered in Djibouti
7) Egypt, which is in a class of its own
Here is an alternative point of view: New Colonialism: Pentagon Carves Africa Into Military Zones. "The U.S. is not dragging almost every nation in Africa into its military network because of altruism or concerns for the security of the continent’s people. AFRICOM’s function is that of every predatory military power: The threat and use of armed violence to gain economic and geopolitical advantages."
Libya has been hostile to Africom and the US/NATO activities there could be an attempt to establish bases in Africa.
=======
Update: There is some Africom presence at Cap Draa, Morocco. Also at Camp Simba, Manda Bay, Kenya.
The way I understand it, Africa is divided into 7 regions:
1) Southern Africa, headquartered in Gaborone, Botswana, which I previously posted about
2) West Africa (ECOWAS), headquartered in Abuja, Nigeria, previously posted
3) Central Africa, headquartered in Libreville, Gabon
4) East Africa, headquartered in Arusha, Tanzania
5) Arab Maghreb Union, headquartered in Rabat, Morocco
6) Horn of Africa/IGAD, including Kenya and Sudan, headquartered in Djibouti
7) Egypt, which is in a class of its own
Here is an alternative point of view: New Colonialism: Pentagon Carves Africa Into Military Zones. "The U.S. is not dragging almost every nation in Africa into its military network because of altruism or concerns for the security of the continent’s people. AFRICOM’s function is that of every predatory military power: The threat and use of armed violence to gain economic and geopolitical advantages."
Libya has been hostile to Africom and the US/NATO activities there could be an attempt to establish bases in Africa.
=======
Update: There is some Africom presence at Cap Draa, Morocco. Also at Camp Simba, Manda Bay, Kenya.
Abuja, Nigeria
Abuja is also one of the most important cities in Africa. It is the "capital" of West Africa, the Economic Community of West African States (ECOWAS), as well as the capital of Nigeria, which is the world's seventh largest country by population and which is English-speaking. ECOWAS uses the West African CFA franc as its currency although Nigeria uses the "naira". There is a plan or hope to replace these with a new currency called the "eco" by 2015.
Gaborone, Botswana
SADC HeadquartersGaborone, Botswana is a planned city which was built in the 1960s. It has the headquarters of the Southern African Development Community (SADC). It is only 9 miles from the South African border. Its role as the "capital" of Southern Africa makes it one of the most important cities in Africa.
Botswana is primarily English-speaking and has a per capita income of $7,627, and if viewed on a purchasing power parity basis it is much higher. The IMF states it at $15,489, which is 53rd in the world, and 3rd in Africa behind Seychelles and Equatorial Guinea.
The SADC could become an economic union using the Rand as its currency. The Rand is one of only 17 currencies in the world that are continuously linked.
Saturday, June 11, 2011
Debt Saturation
Debt saturation occurs when each additional dollar of debt adds nothing to productivity. This is called the "marginal productivity of debt". In the 4th quarter of 2009, it was less than zero. Here are a couple of articles that explain the concept:
http://economicedge.blogspot.com/2010/03/most-important-chart-of-century.html
http://www.zerohedge.com/article/guest-post-debt-saturation-and-money-illusion
After the debt saturation point, for productivity to increase, debt must decrease.
http://economicedge.blogspot.com/2010/03/most-important-chart-of-century.html
http://www.zerohedge.com/article/guest-post-debt-saturation-and-money-illusion
After the debt saturation point, for productivity to increase, debt must decrease.
Possible catastrophe coming
What happens if the debt limit is not raised by August 2?
- interest payments to bondholders would stop
- Social Security, Medicare, Medicaid and federal retirement benefits would cease
- federal civil and military salaries would stop, meaning everyone working for the US government would be temporarily laid off
- payments to federal contractors would stop
- unemployment benefits would stop
- student loans would be halted
There would be a run on mutual funds which would lead to a stock market plummet. All markets would freeze up as everyone tries to conserve cash. It would be a repeat of the Sept. 2008 liquidity freeze, and it would push the economy back into a double-dip.
Even a temporary technical default would lead to a 0.5% increase in interest rates, costing tens of billions a year in additional interest.
I can see both sides on this issue. Yes, the Democrats spend way too much and they are very arrogant, refusing even to have a Plan B or to contemplate the possibility of default. The Tea Party Republicans want too many short term cuts at a time when the economy is fragile.
But I side with the Republicans on this one to a point. The Democrats need to show some humility and identify trillions of cuts that will be made. There is no "right" to a federal job or Social Security or anything else that comes from the government. We will have to address the issue of out-of-control spending and borrowing sometime and we might as well do it now instead of kicking the can down the road a couple of years and prolonging the agony.
- interest payments to bondholders would stop
- Social Security, Medicare, Medicaid and federal retirement benefits would cease
- federal civil and military salaries would stop, meaning everyone working for the US government would be temporarily laid off
- payments to federal contractors would stop
- unemployment benefits would stop
- student loans would be halted
There would be a run on mutual funds which would lead to a stock market plummet. All markets would freeze up as everyone tries to conserve cash. It would be a repeat of the Sept. 2008 liquidity freeze, and it would push the economy back into a double-dip.
Even a temporary technical default would lead to a 0.5% increase in interest rates, costing tens of billions a year in additional interest.
I can see both sides on this issue. Yes, the Democrats spend way too much and they are very arrogant, refusing even to have a Plan B or to contemplate the possibility of default. The Tea Party Republicans want too many short term cuts at a time when the economy is fragile.
But I side with the Republicans on this one to a point. The Democrats need to show some humility and identify trillions of cuts that will be made. There is no "right" to a federal job or Social Security or anything else that comes from the government. We will have to address the issue of out-of-control spending and borrowing sometime and we might as well do it now instead of kicking the can down the road a couple of years and prolonging the agony.
Wednesday, June 8, 2011
Dept of Education sends in the SWAT over defaulted student loans
http://www.alternet.org/newsandviews/article/609535/s.w.a.t._team_breaks_down_doors_looking_for_student_loan_defaulters/
"Federal agents confirmed that the Department of Education was behind the raid on Wright's house. They were in search of his estranged wife, who had defaulted on her loans."
"Federal agents confirmed that the Department of Education was behind the raid on Wright's house. They were in search of his estranged wife, who had defaulted on her loans."
New danger signs
Just when I was getting comfortable thinking things were ok, two new threats appear on the horizon from different directions.
1. Republican Mainstream Flirts with Brief US Default
Summary: Many Republicans doubt the Aug. 2 deadline, and are willing to go into short-term technical default in order to force spending cuts. David Frum and others believe that this could hurt mutual funds and lead to a bank run and provoke another global crisis. Quote: "Foreigners don't buy Treasuries for the yield but for the safe-haven status".
2.Obama Presses Europe, Pledges Help for Greek Crisis
Summary: It is all in the headline. Obama urges Merkel to bail out Greece and "pledged U.S. support".
The "alchemy" I have been talking about that allows us to go into almost infinite debt relies on the special place of the US in the world and the dollar's reserve status. Anything that weakens the reserve status will hurt this magic. Even a brief US default will make foreigners question the legendary safety of the US dollar.
The 2nd article requires more explanation. The US could easily afford to send $100 billion to Greece and keep it afloat for 2 more years. The problem is the precedent that it sets. Once you starting helping someone, when do you stop? Greece is a black hole that will swallow all aid and bailout money sent to it. The money sent to Greece won't help it, instead it will just go to the international bankers. The best thing to do for Greece is to not help, and let it default and escape from the EU. That is what the people of Greece want. And yes it would damage the euro in the short-run, and help the dollar. The US can't afford to bail the entire planet out, and if the US tries then it will overextend itself and collapse. Let Greece go - it is better for the Greeks and it is better for us.
1. Republican Mainstream Flirts with Brief US Default
Summary: Many Republicans doubt the Aug. 2 deadline, and are willing to go into short-term technical default in order to force spending cuts. David Frum and others believe that this could hurt mutual funds and lead to a bank run and provoke another global crisis. Quote: "Foreigners don't buy Treasuries for the yield but for the safe-haven status".
2.Obama Presses Europe, Pledges Help for Greek Crisis
Summary: It is all in the headline. Obama urges Merkel to bail out Greece and "pledged U.S. support".
The "alchemy" I have been talking about that allows us to go into almost infinite debt relies on the special place of the US in the world and the dollar's reserve status. Anything that weakens the reserve status will hurt this magic. Even a brief US default will make foreigners question the legendary safety of the US dollar.
The 2nd article requires more explanation. The US could easily afford to send $100 billion to Greece and keep it afloat for 2 more years. The problem is the precedent that it sets. Once you starting helping someone, when do you stop? Greece is a black hole that will swallow all aid and bailout money sent to it. The money sent to Greece won't help it, instead it will just go to the international bankers. The best thing to do for Greece is to not help, and let it default and escape from the EU. That is what the people of Greece want. And yes it would damage the euro in the short-run, and help the dollar. The US can't afford to bail the entire planet out, and if the US tries then it will overextend itself and collapse. Let Greece go - it is better for the Greeks and it is better for us.
Sunday, June 5, 2011
How long will it take us to spend $2.4 trillion?
There was a vote on May 31 to increase the debt limit by $2.4 trillion, which failed. I was just wondering that if it had passed, how long until we take up the issue again. The current limit is 14294 billion, so it would have increased to 16694.
On 9/30/2010, the debt was 13562, and with a projected deficit of 1425 for FY2011, the debt on 9/30/2011 will be 14987. The projected deficit for FY2012 will be 1164, making the total debt 16151 on 9/30/2012. To spend the remaining 543 would take only about 5 months, at the rate of 100 billion per month, so we would be facing the same question of raising the debt limit again on March 1, 2013.
So the answer is that we will spend the 2.4 trillion in only 20 months.
On 9/30/2010, the debt was 13562, and with a projected deficit of 1425 for FY2011, the debt on 9/30/2011 will be 14987. The projected deficit for FY2012 will be 1164, making the total debt 16151 on 9/30/2012. To spend the remaining 543 would take only about 5 months, at the rate of 100 billion per month, so we would be facing the same question of raising the debt limit again on March 1, 2013.
So the answer is that we will spend the 2.4 trillion in only 20 months.
The reign of the US dollar
The US dollar is used by many other countries around the world beside the US, and this usage is called dollarization. Here is a list I have compiled (which may have some errors on it).
In countries that use the US dollar, the US profits by having them use it. A user of a US dollar is in effect giving an interest-free loan to the Federal Reserve. In countries that have a fixed-exchange rate to the dollar, or have a floating rate within a narrow band, the effect isn't quite as dramatic, but they are still tied into the US economy. Their local currencies are extensions of the US dollar.
If the dollar collapsed or went to hyperinflation, all these other countries would be directly affected. If the Fed monetizes some of the national debt, all of these other countries end up shouldering some of the cost.
My point here is to emphasize the unique position of the US dollar in the world.
Countries that officially use the US dollar
American Samoa
Bonaire, Saba and Saint Eustatius (formerly part of Netherlands Antilles)
British Virgin Islands
Cambodia
East Timor
Ecuador
El Salvador
Guam
Marshall Islands
Federated States of Micronesia
Northern Mariana Islands
Palau
Panama
Puerto Rico
Turks and Caicos Islands
US Virgin Islands
Zimbabwe
Countries that use currency pegged to the dollar
Afghanistan: 1 USD =45.2 afghanis
Aruba: 1 USD = 1.79 Aruban florins
Bahamas: 1 USD = 1 bahamian dollar
Bahrain: 1 USD = .376 Bahraini dinars
Barbados: 1 USD = 2 Barbados dollars
Belize: 1 USD = 2 Belize dollars
Bermuda: 1 USD = 1 bermudan dollar
Bolivia: 1 USD = 7 bolivanos
Cayman Islands: 1 Cayman Islands dollar = 1.2 USD
China: 1 USD = ~6.49 yuan
Cuba: 1 USD = 1 Cuban convertible peso
Djibouti: 1 USD = ~ 175 Djibouti francs
Eastern Caribbean States: 1 USD = 2.70 East Caribbean dollars
Eritrea: 1 USD = 15 Nakfa
Honduras: 1 USD = 18.89 honduran Lempiras
Hong Kong: 1 USD = ~ HK$7.8
Iraq: 1 USD = ~1200 Iraqi dinars
Jordan: 1 USD = 0.709 jordanian dinars
Lebanon: 1 USD = ~1500 Lebanese pounds
Liberia: 1 USD = ~72.5 Liberia dollars
Macau: 1 USD = ~8 Macanese patacas (1 MOP$=1.03 HK$)
Maldives: 1 USD = 12.85 maldivian rufiyaas
Myanmar: 1 USD = 6.51 kyats
former Netherlands Antilles: 1 USD = 1.79 Caribbean guilders
Oman: 1 USD = .385 Omani rials
Qatar: 1 USD = 3.64 Qatari riyals
Saudia Arabia: 1 USD = 3.75 Saudi riyals
Taiwan: 1 USD = 32.84 NT$
Trinidad and Tobago: 1 USD = 6.25 Trinidad and Tobago dollars
United Arab Emirates: 1 USD = 3.6725 UAE dirhams
Venezuela: 1 USD = 2.60 Venezuelan bolivars
============================
I see that there are 4 categories of countries that use the US dollar. First are those nearby small countries whose economy is dominated by the US, such as the Bahamas. Second, those whose economies are completely unstable and see the dollar as being stable, such as East Timor and Zimbabwe. Third, the oil producing countries, and fourth, China and chinese territories.
It is the last 2 categories that are important. The oil-producing gulf countries could create their own currency, such as the GCC Dinar and demand that it be used to buy oil. However, this is only in the conceptual stage. China could make the yuan convertible; however, it is still tightly controlled. Here is an article about making the yuan convertible, which says that it will be fully internationalized by 2020: For Yuan, Convertibility Countdown Starts Now
So still, there is no replacement for the US dollar anytime soon. Ironically one of the things that helps the dollar is that so much debt is issued in it.
In countries that use the US dollar, the US profits by having them use it. A user of a US dollar is in effect giving an interest-free loan to the Federal Reserve. In countries that have a fixed-exchange rate to the dollar, or have a floating rate within a narrow band, the effect isn't quite as dramatic, but they are still tied into the US economy. Their local currencies are extensions of the US dollar.
If the dollar collapsed or went to hyperinflation, all these other countries would be directly affected. If the Fed monetizes some of the national debt, all of these other countries end up shouldering some of the cost.
My point here is to emphasize the unique position of the US dollar in the world.
Countries that officially use the US dollar
American Samoa
Bonaire, Saba and Saint Eustatius (formerly part of Netherlands Antilles)
British Virgin Islands
Cambodia
East Timor
Ecuador
El Salvador
Guam
Marshall Islands
Federated States of Micronesia
Northern Mariana Islands
Palau
Panama
Puerto Rico
Turks and Caicos Islands
US Virgin Islands
Zimbabwe
Countries that use currency pegged to the dollar
Afghanistan: 1 USD =45.2 afghanis
Aruba: 1 USD = 1.79 Aruban florins
Bahamas: 1 USD = 1 bahamian dollar
Bahrain: 1 USD = .376 Bahraini dinars
Barbados: 1 USD = 2 Barbados dollars
Belize: 1 USD = 2 Belize dollars
Bermuda: 1 USD = 1 bermudan dollar
Bolivia: 1 USD = 7 bolivanos
Cayman Islands: 1 Cayman Islands dollar = 1.2 USD
China: 1 USD = ~6.49 yuan
Cuba: 1 USD = 1 Cuban convertible peso
Djibouti: 1 USD = ~ 175 Djibouti francs
Eastern Caribbean States: 1 USD = 2.70 East Caribbean dollars
Eritrea: 1 USD = 15 Nakfa
Honduras: 1 USD = 18.89 honduran Lempiras
Hong Kong: 1 USD = ~ HK$7.8
Iraq: 1 USD = ~1200 Iraqi dinars
Jordan: 1 USD = 0.709 jordanian dinars
Lebanon: 1 USD = ~1500 Lebanese pounds
Liberia: 1 USD = ~72.5 Liberia dollars
Macau: 1 USD = ~8 Macanese patacas (1 MOP$=1.03 HK$)
Maldives: 1 USD = 12.85 maldivian rufiyaas
Myanmar: 1 USD = 6.51 kyats
former Netherlands Antilles: 1 USD = 1.79 Caribbean guilders
Oman: 1 USD = .385 Omani rials
Qatar: 1 USD = 3.64 Qatari riyals
Saudia Arabia: 1 USD = 3.75 Saudi riyals
Taiwan: 1 USD = 32.84 NT$
Trinidad and Tobago: 1 USD = 6.25 Trinidad and Tobago dollars
United Arab Emirates: 1 USD = 3.6725 UAE dirhams
Venezuela: 1 USD = 2.60 Venezuelan bolivars
============================
I see that there are 4 categories of countries that use the US dollar. First are those nearby small countries whose economy is dominated by the US, such as the Bahamas. Second, those whose economies are completely unstable and see the dollar as being stable, such as East Timor and Zimbabwe. Third, the oil producing countries, and fourth, China and chinese territories.
It is the last 2 categories that are important. The oil-producing gulf countries could create their own currency, such as the GCC Dinar and demand that it be used to buy oil. However, this is only in the conceptual stage. China could make the yuan convertible; however, it is still tightly controlled. Here is an article about making the yuan convertible, which says that it will be fully internationalized by 2020: For Yuan, Convertibility Countdown Starts Now
So still, there is no replacement for the US dollar anytime soon. Ironically one of the things that helps the dollar is that so much debt is issued in it.
Saturday, June 4, 2011
Thursday, June 2, 2011
A positive projection
I have speculated that with some minor tweaks, it might be possible to show that the debt is sustainable indefinitely. So here is a projection based on some more positive numbers. I am not going to show all of the numbers because formatting is such a pain in blogger, so I will just list my assumptions.
1. Start with the most recent CBO's estimate of the President's budget, available at http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf All the numbers listed are in billions.
2. For revenue, I accept its estimates through 2012, but then assume a 5% increase thereafter. The 2012 amount is 2544, 2013 is 2671 through 2032 which is 6750.
3. For outlays, I accept its estimates through 2021, but then assume a 5% increase. The 2021 amount is 5756, and the 2032 amount is 9845.
4. I assume that the assets of the Federal Reserve can be used to offset the debt. I am estimating the balance on 9/30/2011 will be 2700 and that it will increase by 7% annually, so the 2032 amount will be 11,180.
Here are some of the lines:
2021: revenue 3947, outlays 5756, annual deficit 1809, total national debt 29163, Fed assets 5311, net national debt 23852
2032: revenue 6750, outlays 9845, annual deficit 3095, total national debt 56154, Fed assets 11180, net national debt 44975
By the way, at this rate, the national debt will first exceed $1 quadrillion dollars in 2089.
My conclusion from this thought exercise is that it is possible to increase the national debt indefinitely, even if the annual deficits never decrease below $1 trillion/year. What is important is that the outlays not increase by a greater percent than revenues.
The Fed can continue to monetize part of the debt to pay for it. Anything the Fed monetizes is free money because the interest paid on that portion goes back to the Treasury.
The biggest threat to the long-term sustainability of the system that I see at this point is that the Fed will monetize an excessive amount of debt and introduce hyperinflation this way. So I think it is as important to monitor the Fed's balance sheet as it is to monitor the national debt. The current numbers are available here: http://research.stlouisfed.org/fred2/series/BASE and the latest number for the monetary base is 2625, which is up more than 30% since January. (There is a minor difference between Federal Reserve assets and the Adjusted Monetary Base which I am ignoring for this calculation).
Anyways, good news. The apocalypse has been delayed indefinitely.
Update: A $1 quadrillion national debt offset by a Fed balance sheet of $500 trillion seems unlikely, so I will call this a crisis in 2089.
Update 6/19/12: I call this Model E-1. I will have to think about this some more.
1. Start with the most recent CBO's estimate of the President's budget, available at http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf All the numbers listed are in billions.
2. For revenue, I accept its estimates through 2012, but then assume a 5% increase thereafter. The 2012 amount is 2544, 2013 is 2671 through 2032 which is 6750.
3. For outlays, I accept its estimates through 2021, but then assume a 5% increase. The 2021 amount is 5756, and the 2032 amount is 9845.
4. I assume that the assets of the Federal Reserve can be used to offset the debt. I am estimating the balance on 9/30/2011 will be 2700 and that it will increase by 7% annually, so the 2032 amount will be 11,180.
Here are some of the lines:
2021: revenue 3947, outlays 5756, annual deficit 1809, total national debt 29163, Fed assets 5311, net national debt 23852
2032: revenue 6750, outlays 9845, annual deficit 3095, total national debt 56154, Fed assets 11180, net national debt 44975
By the way, at this rate, the national debt will first exceed $1 quadrillion dollars in 2089.
My conclusion from this thought exercise is that it is possible to increase the national debt indefinitely, even if the annual deficits never decrease below $1 trillion/year. What is important is that the outlays not increase by a greater percent than revenues.
The Fed can continue to monetize part of the debt to pay for it. Anything the Fed monetizes is free money because the interest paid on that portion goes back to the Treasury.
The biggest threat to the long-term sustainability of the system that I see at this point is that the Fed will monetize an excessive amount of debt and introduce hyperinflation this way. So I think it is as important to monitor the Fed's balance sheet as it is to monitor the national debt. The current numbers are available here: http://research.stlouisfed.org/fred2/series/BASE and the latest number for the monetary base is 2625, which is up more than 30% since January. (There is a minor difference between Federal Reserve assets and the Adjusted Monetary Base which I am ignoring for this calculation).
Anyways, good news. The apocalypse has been delayed indefinitely.
Update: A $1 quadrillion national debt offset by a Fed balance sheet of $500 trillion seems unlikely, so I will call this a crisis in 2089.
Update 6/19/12: I call this Model E-1. I will have to think about this some more.
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