[smiley]

$this->bbcode_second_pass_quote('', 'Y')eah that's what I'm seeing too. Lots of people throwing caution to the wind and continuing on as usual. I had dinner with my neighbor the other night, and after 2 years he only has $3,000 equity in his $135,000 house. Nobody I know pays extra on their house like I do. Any disruption in his life and his family is back to living in a small apartment and will have lost thousands from ever buying the house. The rising costs of peak oil will cause a lot of these people to default and send big ripples through the economy

[KiddieKorral]

Cashing out one's 401(k) doesn't seem like an entirely bad idea to me.

[smiley]

Hey kiddie. If I'm not mistaken you're 17 now. You gotta start thinking about your retirement.

But you're right. Taking out your 401k is not such a bad idea if you invest it in an alternative retirement plan. But somehow I've got troubles believing that these people are that smart. In that case it would be better to leave it at the bank instead of "investing" it in a flat panel tv.

[KiddieKorral]

$this->bbcode_second_pass_quote('smiley', 'H')ey kiddie. If I'm not mistaken you're 17 now. You gotta start thinking about your retirement.

[The_Virginian]

Yes invest in the future.

will that be sheep or goats? (no Joke!)

[Free]

$this->bbcode_second_pass_quote('Falconoffury', '
')
And lastly, what is the difference between a depression and recession in the economy? Is there something quantifiable that seperates them, or is it just a matter of opinion?

[I_Like_Plants]

In a book called "The Working Poor" one of the people "followed" is a single mother trying to get ahead, by some miracle she's able to buy a house, but after a few years the whole deal ends up a total loss.

Here's an interesting upside-down idea. It's better to buy when the interest rate is high, because you can wait for it to go down and refinance. But when the interest rate is low, it has nowhere to go but up. Keep in mind that when interest is high, houses are valued lower, and when interest rates are low, values are high, like we have going on now, and this becomes clearer.

Here's another thing to consider. As a general rule, your maintenance will cost about the same as your taxes. Houses apparently are always crying out for all kinds of shit, rewiring here and roof work there, etc. Or the city wants to put a new sidewalk in and here's the bill for your part. And so on.

Over the past few years I've talked with a few people who bought houses and as another rule of thumb, once they buy the house their credit card debt, which they often had little or none of before, skyrockets. Furniture and all kinds of stuff to buy buy buy! Regular expenses and bills to take care of, and every extra penny was put towards paying the "down" and closing costs etc for the new house. So, suddenly you're a new home"owner", have 10 or even 20K in CC debt you never had before, plus the house payment which is more than rent typically, plus taxes plus assessements and repairs ......... This is the best kind of slavery, because you'll slave the rest of your life away and you think you're free!

[Doly]

$this->bbcode_second_pass_quote('I_Like_Plants', 'p')lus the house payment which is more than rent typically

[Roy]

Doly,

In my case, rent for a comparable house (much closer to my work) is about $100 more. Not having to spend 1.5-2 hours a day in my car to go a 25 mile roundtrip is worth much more than $100 a month. Quality of life is much better here with many things in walking/biking distance. In my old neighborhood (sprawl-ville estates) it was far too dangerous to bike or walk anywhere due to narrow roads and the complete absence of sidewalks or bike lanes.

My main reason for selling my house in April was the deterioration of my neighborhood due to numerous foreclosures in the last year, absentee owners renting thier homes to trashy people (you know, junk cars in the yard etc--maybe its a southern phenomenon), and the roads in the subdivision turning to rubble quite noticeably.

Last year there was a homeowner's association meeting to discuss and solve the street problem.

The parish government was willing to assume maintenance responsibility for the streets, IF the neighborhood would pay for the initial repairs to the streets. Problem, it would have cost each homeowner $1000.

We had a vote, over half voted no. So the streets are crap and nothing's changing. That was the proverbial "straw that broke the camel's back" in my case. I sold within a month of that vote.

IMV, renting protects me from the inevitable crash in housing prices that's coming. Once the prices return to reasonable levels, I'll buy again. Only next time it will be in a small town or rural area where I can sell my telecom engineering skills, at least for the near future.

[marko]

Just briefly on the price difference between renting and owning: This varies a lot by region. Under normal conditions, it should be slightly cheaper to own. This is the reward for coming up with the big downpayment. This may still be true in some parts of the US that do not have a big bubble, such as upstate New York, Louisiana, Oklahoma, etc.

However, in the bubbly areas, such as the coastal Northeast and the Pacific coast states, renting is now MUCH cheaper than owning. This is virtual proof that real estate is overpriced. I am renting a one-bedroom apartment for $800 -- rock bottom for the Boston area, because I am in a low-prestige neighborhood. If I were to buy the same apartment as a condo in the same low-prestige neighborhood, my monthly costs would be something like $2200 (including condo fee, mortgage, taxes, and insurance). Instead, I am paying rent and saving more than $1000 a month. Whereas if I had a mortgage, I would be lucky to add $200 a month to my equity, at least in the early years of the mortgage.

Doly asked how rent can be cheaper than mortgage costs, since landlords have to pay mortgage costs. The answer is that rent is set by supply and demand, and there is not much demand for rental housing, since almost everyone with a job has bought something, and since there is not a lot of new hiring going on. Many landlords have owned their properties for years and don't have a big mortgage. Those who have bought rental properties in bubbly areas have generally done so even though the rent doesn't come close to covering the mortgage costs because they expect the property to appreciate in value still further so that they can sell it at a profit. Many of them are in for a nasty surprise.

[MonteQuest]

Moderator's Note:

Topic of thread is:

USA current account deficit breaking point?

Let's steer back to it.

[Falconoffury]

This is good stuff, Monte. I like threads to stray off topic if the information is interesting, and I honestly find this information very good reading.

[MonteQuest]

$this->bbcode_second_pass_quote('Falconoffury', 'T')his is good stuff, Monte. I like threads to stray off topic if the information is interesting, and I honestly find this information very good reading.

[smiley]

Well, I think it goes with the territory.

I mean the account deficit is very broadly defined. It therefore it touches upon a lot of subjects like the trade deficit, consumption, the federal deficit, the housing market etc.. It is almost impossible not to stray off.

But in attempt to answer the original question: How long will the USA be allowed to overspend? I guess the only correct answer is: as long as 'they' allow it. 'They' being a rag tag group of central banks, institutional investors etc..

As long as they believe that Goldilocks is faring well they will keep pouring money in the pit, keeping the interest rates low and keeping the deficits manageable. As long as China benefits from a healthy US market they will be importing those bonds by the shipload.

I think that before anything else you should be looking for an attitude change. And it has to be pretty big to break the current deadlock.

When it comes to attitude I think China is the linchpin.

Of course they benefit from the current situation by their large trade surplus with the US. At the same time they are providing the US companies (their competitors) with easy money by keeping interest rates low. But as Unocal demonstrates they are now faced with the choice between securing their trade surplus and securing their future energy supplies.

[Falconoffury]

I think the FED has the most power over the economy of the USA. Would you say their eventual response to too much deficit would be higher interest rates, or do they have any other tricks up their sleeve?

You could say one trick was pressure to unpeg China's currency from the dollar, but the benefits will take years to be realized and ultimately not make much difference in the big picture.

Can they do anything else?

[MonteQuest]

$this->bbcode_second_pass_quote('Falconoffury', 'I') think the FED has the most power over the economy of the USA. Would you say their eventual response to too much deficit would be higher interest rates, or do they have any other tricks up their sleeve?

You could say one trick was pressure to unpeg China's currency from the dollar, but the benefits will take years to be realized and ultimately not make much difference in the big picture.

Can they do anything else?

[Falconoffury]

I guess you are right Monte. China holds the USA by the neck.

Do you think the FED would one day panic and raise interest rates by a large amount to reign in too much inflation, or will they let inflation run mad and keep printing increasingly less valuable currency?

Thanks for being patient with me.

[MonteQuest]

$this->bbcode_second_pass_quote('Falconoffury', 'I') guess you are right Monte. China holds the USA by the neck.

Do you think the FED would one day panic and raise interest rates by a large amount to reign in too much inflation, or will they let inflation run mad and keep printing increasingly less valuable currency?

Thanks for being patient with me.

[marko]

Sorry for straying off topic earlier.

I just finished reading the latest edition of The Dollar Crisis by Richard Duncan, which explores the US current account deficit and its implications. It is well written and, in my opinion, convincing.

He argues that East Asian countries are so dependent upon US consumption that they will go on funding the current account deficit until something breaks. Until something does break, the current account deficit will remain larger than the US budget deficit, as it is now. In fact the current account deficit is likely to grow.

Because the current account deficit is larger than the budget deficit, the number of dollars to be recycled in a given year exceeds that year's supply of US debt (Treasury bills). This means that Asian country have to buy up existing debt, driving up the price of Treasury bills and driving their yields down. Since yields on long-term T-bills set the interest rate for mortgages, mortgage interest rates are likely to keep falling. This will perpetuate and expand the credit and housing bubble until something breaks.

Expanding the credit and housing bubble means expanding US consumption means expanding the current account deficit means still lower interest rates, and so on, in a vicious cycle.

The Fed has no control over this, since interest rates for T-bills (and hence mortgages) are set by the market, not by the Fed. Hence Greenspan's "conundrum," which is no conundrum at all if you understand how the current account deficit is recycled. (Either Greenspan does not understand this, in which case he is incompetent, or he understands it and pretends not to in order to maintain the illusion that the Fed is in control.)

The question is, what will break, and when?

One possibility is that this cycle continues until long-term interest rates approach zero. At that point, interest rates will not be able to fall any lower, and the housing and credit bubbles will not be able to expand any further. As soon as they stop expanding, they have to contract. At this point, the growth of those bubbles accounts for all of our economic growth, and then some.

Without those bubbles, we have economic contraction, or recession. If interest rates stop falling and house prices stop rising, we will see an end to refinancing, and consumer spending will drop. Consumer spending accounts for roughly 70% of the US economy at this point. If it drops, we have a recession, almost invariably. Meanwhile, the financial sector accounts for around a third of US profits today (I think not including companies like Ford that depend on their financial operations). Financial sector profits depend heavily on the expansion of the credit bubble. As soon as it ceases to expand, the financial sector will see profits shrink and layoffs take off. Ditto construction.

The resulting recession, with its job losses, would lead to widespread defaults on mortgages and other debts, as millions have overextended themselves to buy housing at inflated prices and piled on consumer debt. This massive wave of defaults, I believe, would lead to bank failures and seriously threaten US financial stability. This would lead to a sharp drop in US consumption, with a corresponding drop in the current account deficit, but with the consequence of a global depression.

No doubt the Fed will print money at this point to try to reinflate the bubble, but with banks struggling to cover their losses and people out of work, the expanded money supply will not lead to an extension of credit.

The Fed's expansion of the money supply is also likely to lead to a vicious cycle known as hyperinflation. In this scenario, the federal budget deficit will mushroom due to the drop in revenues and the rise in outlays that accompanies even a mild recession. Meanwhile, the current account deficit will shrink or disappear. Asian central banks will no longer have the dollars to recycle to fund the US budget deficit. The Fed will have to create money with which to purchase US government debt. However, its creation of money will likely lead to price inflation, which will increase the budget deficit, which will require it to create still more money, and so on, until a loaf of bread costs $1 million.

Another possibility is that peak oil will pop the bubble before interest rates fall to zero. The continued fall in long-term interest rates implies a steadily expanding global economy. When the global economy expands, so does the demand for oil, particularly when the expansion involves developing countries such as China and India, where development means the construction of energy-intensive infrastructure and the expansion of car ownership.

Given the likelihood of static or falling oil supplies, the price of oil has to soar in this scenario. It could easily rise within 2-3 years to $100 a barrel. This kind of increase in energy prices could counteract the drop in interest rates and bring a recession and an end to the expansion of the credit bubble before interest rates fall to zero. The recession and reversal of bubble expansion would bring on the cascading financial collapse and global depression (with a current account correction) and probable hyperinflation that I described above.

In either case, I suspect that we may have another year or two of bubble and current account deficit expansion. But I seriously doubt that we will have another four years. Republicans in Washington and at the Fed will do everything they can to keep the bubble inflated up to the 2008 elections. But if they succeed, look for a collapse in 2009.

[Permanently_Baffled]

Excellent post , succint and well written, even I can understand it !

Is this currency recycling unique to the dollar (as the worlds reserve currency) or do all countries do this?

PB