Okay, I know that some of you rabid anti-American types believe as a gospel truth that America is on the verge of economic collapse! And as much as some of you Fringies would like that to happen, Toro is here to set you straight!

Now I am concerned about the long-term fiscal imbalances in the US economy, but let's keep it in perspective. The CBO is projecting the debt/GDP ratio to be 2.7%, below France and Germany. Here's what the CBO released today;

Look at all those awful corporations paying all that tax!

The CBO is also projecting that the deficit will be essentially wiped out by 2012, assuming the Bush tax cuts are rescinded as expected. Otherwise, the deficit will fall from $331 billion this year to $218 billion in 2011. Now I don't take a lot of stock in those long-term forecasts, but the CBO is using 2.9% growth in its long-term forecasts, which is reasonable.

http://www.cbo.gov/ftpdocs/66xx/doc6609/08...tlookUpdate.pdf

So Fringies, if you're holding your breath waiting for the economic collapse of America, keep holding!

HO! HA!

   

I don't think you will find anyone arguing about the collapse of the US economy unless it is America's over reaction to losing its position. That is not to say it is all smooth sailing for the good ship America either. There are great challenges ahead and even as you said your faith in the long-term forecasts is provisional at best.

Your argument about Germany and France having a greater debt load to GDP ratio fails to address the fact that national savings in Europe is far higher than in the US (less than 1%) and that although not growing the EU is not shrinking either. It's holding fast. There is a hiccup for the unemployed in the socialist EU to be sure but such considerations are modest when put in contrast to the fact that the US is in danger of losing control of the world reserve currency. Imagine if oil was sold in RMB or Euros what would happen to the greenback? America's forecasts for financial health are based on assumptions that should not be taken for granted. The foundation of that financial empire is based on trust and as the RMB appreciates 40% the trillions in US Treasuries will lose value and thus the US dollar as well. This is only the RMB of course and as it rises it will raise the entire pacific rim with it and all those currencies will be able to buy far more than before and the US will be a bargain to be bought.

Fear not, the US will and still does have a few aces in the hole but it has wasted most of them keeping the housing bubble afloat. This has undermined the feds control of interest rates, yes they can change the rate of interest but it is investors and most importantly foreign investors who now determine the worth. With the US only able to pay off the debt in long-term forecasts that only a fool would take stock in you see the future of the US economy.

   

Actually, I have argued with people who think the US economy is on the verge of collapse. Not you though Scape. You're too rational. And I don't disagree that the US economy will probably see below normal growth in the future. But that is true of America, it will be true of most industrialized nations, including Canada because the US consumer is the engine of global growth at the moment.



That matters but only to an extent. The country with the highest debt/GDP is Japan at about 150%, more than double Canada and the US. They also have the highest savings rate. In fact, because of all that, they have the worst of all worlds - too much debt, not enough consumption, an appreciating currency and still falling asset values. Also, the "national savings rate" is a statistical anomoly. That is the difference between net disposable income and consumption. It doesn't measure true savings. Thsi is clearly true since Americans' net worth has been rising the past few years.



No question the US benefits from having the reserve currency, but that ain't gonna change anytime soon. What are they going to go in? Euros? Yen? Yuan? The probability of the euro collapsing, though not large, rose when France and Holland voted against the EU constitution. Plus, who wants to hold a currency where there is no growth? The yen? Are you kidding? There is deflation in Japan. The yuan? Not for several decades will it even be considered. Scape, for a country to be a serious currency, it first must be freely convertibel, which it is not. Let's not forget the rotten banking system. China is a long, long way from being the global reserve currency.



The bid to cover ratio for the US treasury auction last week was 2.4 times. That means that for every $1 in US debt issues, there were bids for $2.40. Now, that's about average. During last week's auction, foreign buyers were down as a percentage of purchases, but only slightly.

And despite soaring housing prices in the US, according to the Economist, the US lags most of the developed world in appreciating real estate prices.

   

How about a combination of all three that are interchangeable as per the market demand. Such an alliance would be both profitable, likely and not at all in the US interests and your also neglecting Gold. That is internationally interchangeable and in time of uncertainly and change will always go up.

And has since faded. They will sign on in due time, the squawking will subside once the worth of the union becomes clear.

Seems to have plenty of growth. Besides, even with China's rotting banking system it is metals, from scrap yards that are selling like there is no tomorrow, that is the growth you can bank on for a long time to come from any market that provides China with anything from copper to coal. Because they own the 2nd largest amount of the US treasuries. Their fate is linked to the greenback. Gold is and the interchangeability need not be as flexible as you suggesting. It need only be used in the dominate market in that part of the economic sphere. Example Euro's for Europe, RMB for the Pacific rim and a combination or even gold for South America or the Middle east.

I haven't, but sheer volume of commerce has outweighed that consideration for now. It will and does have an effect but the US debt is doing far more damage to US credibility than the Chinese banking system.

   

That makes sense. I wouldn't be surprised to see that happen. In financial theory, you are taught the benefits of diversification. Yet, oddly enough, the central banks of the world don't heed this sage advice. The US accounts for about 40% of global output, yet about 65% of global currency reserves are in dollars. It only makes sense that greenbacks are drawn out of the system. But the US will continue to be the most important currency. It has since WWII, and the US went through a much worse crisis in the 1970s than they are today or will in the imediate future.



Economic growth, Scape, not currency price appreciation. A country whose economy is growing faster has a more desireable and liquid currency because more capital flows to that country. Europe is sclerotic.




No, actually, Japan is a classic bubble. When property and stocks went through the roof in Japan in the late 1980s, investors and property developers extrapolated those returns ad infinitum. That, of course, didn't happen, as it never does. The effect of a bubble is over-investment since investors overestimate the return they will receive on their investment. This leads to excess capacity, which leads to deflation. Classic stuff. The exact same thing happened in the teleconomy of the late 1990s in America and around the world. Of course, bubbles cannot happen if there isn't excess liquidity. Oh, and Japan is the largest holder of US treasuries outside of America, far outstripping China.



Your idea of regional currency blocks may unfold, but its decades away. As for gold, it is only 2.75% of the world's reserves, and central banks are dumping it. In fact, the selling got so bad in the late 1990s that the central banks signed The Washington Accord which limits central bank sales to 500 tons a year. (Global supply is about 3500 tonnes per year.) Also, central banks hold about 20,000 tons of gold out of about 160,000 tons on the planet. There is no where near the availability to make it a meaningful reserve currency on any scale. And I own gold!



No country can have a global reserve currency that is neither convertible nor when the banking system is so sick. Estimates of non-performing loans in China are as high as 40%. Since currency is essentially a draw on a country's financial system, nations would be crazy to hold yuan in size, even if it were fully convertible.

   

Yes, however the Union is expanding. If Turkey is delayed the Ukraine will join and more and more of the former Soviet Union is lining up. This is the growth I am looking at. Your appraisal of the sclerotic growth of the EU is correct as long as it remains static. Membership has its privileges and you will see more joining bringing a growth curve that is not covered in the standard economic forecasts.




1st a correction, the UK is the 2nd largest holder and Japan is the largest with China coming up third. I made a mistake in the order, thanks for pointing that out. That being said that has even further highlights the original point that the Japanese economy is linked, perhaps fatally so, to the greenback. Isn't there a housing bubble in the US?



It need only be the 'glue' to hold the three economic spheres of influence together. 2.75% is ample supply as the heavy lifting will be done by the regional currencies themselves. There is rumor that the Amero will replace the greenback in much the same fashion.



What you may see in future is the outsourcing of the banking system to countries who have a reputation for banking and setting up shop in China. China would do well to reform the banking system but there is far to much graft and they have become dependent upon it. Since power abhors a vacuum and since Banks from the US as seen as sinking as well, European and swiss banks may pop up in China faster than you can say ING, save your money.

   

Yes, I agree with you. The Eastern European countries are going to put pressure on the likes of France and Germany, reform that is certainly needed. If this happens, then Europe can certainly become an engine of growth again. Let's hope because the world needs another engine of growth. But a currency union is only as strong as its weakest link. And the weakest links are in pain now



Its a symptom of the problem, not the actual problem itself. Japan is not hooked on the US dollar but rather to the US consumer. There's a difference. The reason why central banks in Japan have purchased something like $800 billion in US bonds the past few years is to stop the dollar from depreciating because Japan relies so heavily on the US consumer since domestic demand in Japan is so bad. You are correct that this keeps interest rates down in the US and spurs the housing bubble (when I refinanced a few years ago, I thought about sending a thank you note to the Japanese embassy in Washington), but the machinations of the central banks in the currency markets are a reflection of the structural problems and imbalances in the global economy as opposed to a problem with the US dollar itself.



Gold can't be when its being sold by central banks. Central banks, rightly or wrongly, both want a yielding asset, which gold is not, and the ability to control the money supply, which you cannot with gold.

The Amero is an interesting idea, but in reality, its a backdoor policy to adopt the US dollar, which was a topic brought up several years ago. I strongly believe it would be a bad idea for Canada to adopt the US dollar. This issue may be the only issue on which I have ever agreed with the Council of Canadians.



And that is happening. Very slowly, Beijing is letting foreign banks come into China to increase market pressures on the domestic banks so they'll stop making such irrational loans.

   

Italy is balking for a better deal. They will settle down only when they see the benefits out weight the bickering and in the process abdicate their seat at the EU table. This will happen when the Eastern European members force reforms upon Germany and France. They will have the clout for they are the future and the momentum of the EU not Italy, France and Netherlands. The center of mass will be Germany and Eastern Europe, not Germany/France. France and 'old Europe' had their chance and blew it now they will take a back seat. In Germany the Socialist system is coming to a head and reform will take place. France/Italy is the past and Lithuania is the future.

The Amero being used as a backdoor approach to bring the greenback in south America I think is camouflage. If anything that is a minor perk from a much larger objective and that is economic domination of the trade block. By taking the lessons of FTA and NAFTA, CAFTA will build upon that and make the Amero the dominate currency and flush out all the national currencies thus deftly freeing minor and middle powers from the responsibility of fiscal policies and have one unified policy. That will make even the US dollar 2nd fiddle but it could secure the greenback as the currency of the of the world reserve and would be better suited (even with the debt) than gold. Eventually even the dollar will be sucked under by the power of Amero and become retired.

   

The Death Tax is causing a huge problem. The elderly population is the most wealthy in the US. However, a lot of capital is just sitting there on hold, because the Death Tax discourages the elderly from passing down their wealth. In most previous generations wealth was passed from generation to generation until the last generation, when the Government decided it deserved a piece of the action. In 1948, an average family of four could shield 85% of their income from taxation with personal exemptions alone. In 1992, the average family of four could shield only 20.6% of their income from taxation with personal exemptions. This is causing the current generation to actually be less wealthy then its predecessors (at 180 change), while having to pay a higher percentage of their incomes to the elderly through Social Security. Social Security is the highest payroll tax. The higher percentage is the key to the tax load of the working population. Previous generations paid a much lower percentage (sometimes nothing) of their income to Social Security. Furthermore, the elderly, through AARP disinformation, are voting themselves larger benefits every year, now to include a Rx program.