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Who owns AmericaViews: 196
Apr 11, 2009 8:44 amWho owns America#

Sekar Narasimhamurthy

Uncle Sam seems to be living in a fool's paradise, using other's money.

A classmate says of this economy .. "If it's too scary to be true .. it probably is true" .



Who owns America's debt?
Find out which countries are propping the US economy

As of Dec 2008:
(In Billion Dollars)

China:727.4
Japan:579.9
Uk:157.9
Brazil:129.9
Russia:116.4
Luxemborg:97.4
Hongkong:97.4
Taiwan:97.4


China is worried about its vast United States treasury holdings and premier Wen Jiabao has urged Washington to safeguard their value. This is how the US - and all governments for that matter - borrow money: they issue government securities, which other countries and institutions buy. So, the US national debt is owned predominantly by Asian economies. The US Treasury releases the figures on this - here they are in a more useable form.

Let's get clear on this. Unless the US dramatically cuts its spending, the US will always run deficits. Who will fund these deficits? (1) Foreigners, (2) the Federal Reserve - by printing more dollars and/or raising taxes. The possibility for the US citizens to cover its own govt finance is remote. They now only constitute less than 5% of current US debt holders. Not only that, they now can't even pay their own mortgages/credit cards, are losing jobs and their homes, and you expect them to lend their own govt money? Isn't that the opposite of the stimulus plan = give money to the people?

Out of the total $10 trillion US debt, 50% is held by the Federal Reserve or US govt agencies, and 30% by foreigners. So if foreigners lose taste of US debts, expect more dollars to be printed = hyperinflation and dollar devaluation = further diminishing the attractiveness of US assets in addition to making the lives of ordinary Americans harder - see Zimbabwe.

And, unless US corporates and investors like Warren Buffett become fervent patriots who keep their money only at home, they will always invest outside USA. The reason is not because of benevolence, simply they are in search of higher rate of returns (ROR).

But should they really decide to keep money at home, then there will be excess liquidity in the US which will drive down US Treasuries yield (thus lower ROR), and it will result in asset (property and stock market) bubble = high inflation.

So, I will end with an all-hell-break-out-loose scenario. China needs the US consumers (20% of China's export market) for economic growth and thus have to fund the US deficit by buying US debt. But should China dump all the US debt, not only China will lose 20% of its export market but its current holding of US debt in its forex reserves (70% of China FX reserves in USD) will be worthless. But, hey, 30% of that $2 trillion forex reserve = $600 billion would still be the world's second largest (well actually Japan's FX reserve will also plunge making China's FX reserve still the world's largest). Since China will lose 20% of its export market, it will probably have either to boost export to the rest of the world, or risk losing 100 million jobs or more - very bad. It would take China probably 10 years (for its domestic service industry to catch up) to be able to absorb these job losses. Not to mention that China would be extremely lucky if there is no domestic riots and...revolution.

Now, what happens to the US? If either the US default on its debt (sovereign credit rating will go to junk immediately), or foreigners refuse to fund US debt, then the US will have to either go super-thrifty or fund its deficit by raising tax/printing more dollars. Raising tax will obviously worsen current problems, so cross that out. Printing more dollars will mean dollar devaluation and hyperinflation. Americans will not be able to afford those Middle-Eastern oil and those nice European cars. A $5 burger today will cost $50 the next day, and $500 the day after that. The US would then have to be self-subsistent and restart its own manufacturing industry. Happy now? Wait, it's not that easy. Those manufacturing needs natural resources that not all the US self-produces - oil, iron ores etc. The US now have to buy these resources at higher price because dollar gets devalued. Inflation and a $1000 burger is there to stay forever. American standard of living drops drastically.

Oh, and if the US goes super-thrifty? Okay, health and defense (see www.federalbudget.com) each account for roughly 25% of govt spending. Don't forget now that the US Social Security Trust Fund, which is composed of more US debts, is now completely worthless. The Americans has just basically lost its social safety net and the govt still has to cut spending on health+education. Defense will probably receive the biggest cut. Say goodbye to American military hegemony.

US ownership of global assets was a process of annexation underwritten by funny money capital. That means all the off balance sheet debt was re-leveraged into investments in the global economy. When those hedge funds and US banks implode as their balance sheet risks get properly accounted the foreign assets are sold off in a fire sale. That is what happened to global commodity prices. That is why there is no trade finance around for even profitable and otherwise liquid international trade inventories.

But let me get to the bottom line. You Americans own very little of you global empire of asset investments. You might still have the title on paper for a while as it all works through but what remains needs to come home to the US and be redeemed at 0.10c in the dollar to the sorry investors.

As for paying for your own government. Give me us break, do the numbers, look at the deficit, look at the value of your services economy, look at its structure - things like financial services and the bubble growth now being reversed - look at the retail industry with all those malls that have traded discretionary imported manufactures to fill up McMansions. It is all over mate. No tax receipts to pay for your obscene military expenditure, your bailouts, or your daily bread when your job gets neutered or your savings get wasted in the coming inflationary conflagration



Private Reply to Sekar Narasimhamurthy

Apr 11, 2009 9:31 amre: Who owns America#

Dhakshina Moorthy K M
Dear Sekar Narasimhamurthy,

1. This is an old story with new ramifications.

2. You have missed / over looked the contribution from India. Major forex reserve of India is in USD and holds it interest free for US. Where as the PLR is 10.5% for the citizens of India.

3. You should have a look at the writings of Mr Gurumurthy on this topic.

4. I sincerely believe that today's USD : INR exchange should be at Rs 30 per USD. The people "concerned / responsbile" for managing this are in "deep slumber" for a long time. They have missed the opportunity and continue to doze.

Dhakshina Moorthy, K.M.

More on this at http://moorthykmd.blogspot.com

Private Reply to Dhakshina Moorthy K M

Apr 11, 2009 10:03 amre: re: Who owns America#

Lavanya Karalkar
Not my cup of tea..

Private Reply to Lavanya Karalkar

Apr 11, 2009 10:33 amre: re: re: Who owns America#

Sekar Narasimhamurthy

Dear Dhakshina Moorthy,


Thanks for the additional inputs.


I was happy that India is not their in the list.


When is this bubble going to break and turn into another big problem for these countries....

Private Reply to Sekar Narasimhamurthy

Apr 11, 2009 12:59 pmre: re: re: re: Who owns America#

padmanabhan ramasubban
Dear DM & SN,

This makes a very shocking reading and that too when PLR is 10.5% ???!!!

Are we (Asians )sitting ducks for yankees to take us for a ride like this?

I feel this should be given more importance and let us initiate a discussion further on this.

Private Reply to padmanabhan ramasubban

Apr 11, 2009 6:34 pmre: re: re: re: re: Who owns America#

SOEB FATEHI
not my pomegranate juice

Private Reply to SOEB FATEHI

Apr 11, 2009 6:47 pmre: re: re: re: re: re: Who owns America#

Charles Pradeep
Can't differentiate if it is a 'bomb' or a 'grenade'.....

Cheers!

Private Reply to Charles Pradeep

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