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US Central Bank Head Sees Strong US Economy, Markets Rally

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US Central Bank Head Sees Strong US Economy, Markets Rally

Unread postby Euric » Mon 31 Jul 2006, 12:32:21

http://www.voanews.com/english/2006-07-19-voa60.cfm


Is he really seeing it, or hoping by saying it, that it will truly happen?
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby chakra » Mon 31 Jul 2006, 13:02:54

With all these commodity prices so much higher then a few years ago won't freezing interest rate hikes just devalue the dollar even more?

The weak American dollar is already effecting exports here in Canada. If they pretend that inflation isn't happening while printing money like crazy, how can this be good?

Will inflation get totally out of control if they don't continue to raise interest rates? Are they halting interest rate increases because of the housing crisis coming up? Will increasing interest rates also make their deficits even more difficult to pay?

With price increases coming down the pipe because of increased commodity prices, can they stop inflation at all, even if people don't make more money or they raise interest rates?

I'm sure there are people here that can answer those questions much better then me. If they don't plan on raising interest rates with all that is going on, I'm curious what the effect will be on currencies.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby mmasters » Mon 31 Jul 2006, 13:09:45

I want what he's smoking.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby Euric » Mon 31 Jul 2006, 16:28:23

$this->bbcode_second_pass_quote('ElijahJones', '
')
If you devalue the dollar enough then debt of trillions is cut in half in real terms. Fixed debts don't double in size just because the value of a dollar changes. So you spur inflation by printing money like crazy, then you put budget constraints in place and you eek out an on paper reduction of 30% in the national debt in a few years. Your the hero!


This wouldn't be the case if the debt holder would demand an increase if the dollar decreases in value. For example, if the dollar drops 30 % in value, the investor should be able to claim an additional 30 % more dollars before considering the debt paid. Thus inflation and hyperinflation can not be tools to avoid paying back debts.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby emersonbiggins » Mon 31 Jul 2006, 16:41:33

$this->bbcode_second_pass_quote('Euric', 'T')his wouldn't be the case if the debt holder would demand an increase if the dollar decreases in value.


Wouldn't that entail some sort of after-the-fact clause addition/revision for most contractual obligations? I think fixed-rate assets like most home mortgages will be greatly "helped" (relatively speaking, here...) by a hyperinflation program, which may very well be where we're headed. If the feds can distract the foreign debt holders long enough, we may see mortgages paid off in record time, in a sense "passing the buck," as it were. This, of course, would not be a solution to other impending problems, namely PO, among others...
"It's called the American Dream because you'd have to be asleep to believe it."

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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby Euric » Mon 31 Jul 2006, 23:19:00

$this->bbcode_second_pass_quote('emersonbiggins', '')$this->bbcode_second_pass_quote('Euric', 'T')his wouldn't be the case if the debt holder would demand an increase if the dollar decreases in value.


Wouldn't that entail some sort of after-the-fact clause addition/revision for most contractual obligations? I think fixed-rate assets like most home mortgages will be greatly "helped" (relatively speaking, here...) by a hyperinflation program, which may very well be where we're headed. If the feds can distract the foreign debt holders long enough, we may see mortgages paid off in record time, in a sense "passing the buck," as it were. This, of course, would not be a solution to other impending problems, namely PO, among others...


A contract would have to be written that would pay the investor in a currency other then the dollar, so that when the dollar falls the debtor would have to obtain a more expensive foreign currency to pay off the debt, which means he/she would be in the same situation no matter how intense the inflation becomes.

Yes, that is usually how you clean the slate so to speak. But cleaning the slate only solves part of the problem as far as financing one's life is concerned. Afterwards, the citizen has to worry about obtaining fresh credit or cash to buy basic necessities. Foreign investors, burned once, will not be so quick to try to help Americans suffering the effects of a destroyed economy.

A property might be considered paid off as far as the occupant is concerned, but should the occupant decide to move, or try to finance needed home improvements, find money for food and utilities, etc, the occupant may find he can't get the money. His property goes into disrepair, his belly goes empty, if he/she is sick there will be no health care, etc.

This is where the "law of the jungle" becomes the "law of the land".
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby emersonbiggins » Mon 31 Jul 2006, 23:43:25

$this->bbcode_second_pass_quote('Euric', 'A') property might be considered paid off as far as the occupant is concerned, but should the occupant decide to move, or try to finance needed home improvements, find money for food and utilities, etc, the occupant may find he can't get the money. His property goes into disrepair, his belly goes empty, if he/she is sick there will be no health care, etc.

This is where the "law of the jungle" becomes the "law of the land".


Yes, this is what I was alluding to. Owners of $500,000 mortgages will likely find themselves penniless, with no access to easy credit or prospective buyers to bail them out of their respective situations. In short, make sure your next house suits you; it could be your last...
8)
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby emersonbiggins » Tue 01 Aug 2006, 00:09:29

$this->bbcode_second_pass_quote('ElijahJones', 'I') get your point Ebig, nice thought. Yeah, but people with ARMs would still get the bad end.


Yeah, people with ARMs are screwed with a capital 'F.' I have a feeling that even if they are still given the opportunity to convert to fixed loans much farther in the future, it will undoubtedly be the 50-year, high-interest kind...
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby MrBill » Tue 01 Aug 2006, 02:53:58

$this->bbcode_second_pass_quote('emersonbiggins', '')$this->bbcode_second_pass_quote('Euric', 'T')his wouldn't be the case if the debt holder would demand an increase if the dollar decreases in value.


Wouldn't that entail some sort of after-the-fact clause addition/revision for most contractual obligations? I think fixed-rate assets like most home mortgages will be greatly "helped" (relatively speaking, here...) by a hyperinflation program, which may very well be where we're headed. If the feds can distract the foreign debt holders long enough, we may see mortgages paid off in record time, in a sense "passing the buck," as it were. This, of course, would not be a solution to other impending problems, namely PO, among others...


Yes, the examples are everywhere.

Argentina for example. They took out more debt than they could afford and instead of repaying it they caused the largest sovereign debt default in history. Screw foreign creditors. They imposed a 65% haircut on foreign bond holders (i.e. 35 cents on the dollar).

But they were not finished there. They froze the exchange rates on debt owed at 1:1 while they allowed savings to appreciate 1:1.30 at the stroke of a pen. Putting more money in Argentinian's pockets at the expense of banks.

Then they tore up all the contracts with foreign utility companies that had made fixed investments in Argentina. They froze the rates companies could charge consumers.

The irony is that Bolivia has just tore up the long term natural gas supply contract with Argentina, so now Argentina will have to pay more for their imported gas. How delicious!

Should Argentina ever have to return to the international capital markets they will a) have to pay more spread because their credit rating is ruined, b) have to borrow in hard currency because no one will buy ARG debt, c) have more restrictive covenents on their borrowing, d) find fewer investors with short memories, and e) find foreign banks and utilities less willing to invest in the Argentine economy due to lack of respect for legal rights.

And in the meantime, the debt default and economic crisis has made a lot of Argentinians poorer and wiped the state's ability to pay for pensions and healthcare.

So yes, it is always possible to screw your creditors, but at what cost?
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby Doly » Tue 01 Aug 2006, 04:06:19

$this->bbcode_second_pass_quote('MrBill', 'S')o yes, it is always possible to screw your creditors, but at what cost?


But do the US have other options at this point? Because from the look of it, they have already gone beyond the point where it could be reasonably expected that with some effort, they could pay their debt. Or am I missing something here?
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby MrBill » Tue 01 Aug 2006, 05:07:44

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', 'S')o yes, it is always possible to screw your creditors, but at what cost?


But do the US have other options at this point? Because from the look of it, they have already gone beyond the point where it could be reasonably expected that with some effort, they could pay their debt. Or am I missing something here?


As per some posts last year (too long and detailed to reproduce here, sorry) there are many positive actions that the USA could take to correct their fiscal imbalances, all of which require sacrafice, slower growth and reduced consumption as well as higher domestic taxes.

So the question becomes not if the USA can do something to address its external financial position, but does it have the will? I think clearly it does not have the will to address those imbalances, so they will continue to get worse.

However, usually in order to avoid falling off a cliff you do not need to turn around and go back, you just need to stop going forwards. With a $13.2 trillion economy and a current account deficit of $1 trillion the USA does indeed have wiggle room, but they need to act now. If they run those $1 trillion deficits for another 4-years the external position is that much worse.

$this->bbcode_second_pass_quote('', ' ') Despite all the talk about the shaky future of Social Security, its potential shortfall isn't the biggest risk for future retirees. They should be worrying about Medicare instead.

The government's health insurance plan for retirees is on a crash course with the realities of an aging population and an increasingly expensive medical system. It's projected to go bust in 2020.

That's 20 years earlier than the Social Security fund is expected to become insolvent, and -- boomers: are you getting this? -- only 14 years away.
Get ready for the Medicare crunch

The indicators are all bad, so regardless of what the FED does it is not going to be good. The true definition of a dilemma is two equally bad choices to make. Not making a decision is not an option. Either America can choose the medicine of its making or its foreign creditors will make that decision for them.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby Tyler_JC » Tue 01 Aug 2006, 11:45:15

We must never forget that many of the government's budget projections include major cuts in social spending.

Social Security payments are increased at a rate roughly equal to the government's inflation projections.

The cost of living adjustments will be very high in a period of high inflation.

Or will they?

The government can mask inflation by excluding food, energy, etc. and then claim "hey, there's no inflation!"

This accomplishes two great tasks.

1. It reduces the COLA increases and allows the government to inflate away its fiscal responsibilities.

2. It also fools foreign investors into buying dollar debt.

That's why the Federal Reserve no longer issues a report on the M-3 part of the money supply. They wish to inflate the dollar without having the global financial markets panic.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby Kingcoal » Tue 01 Aug 2006, 12:54:55

If the US abruptly stops all entitlement payments to Americans what would happen? I'm talking about unearned income, government bennies.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby MrBill » Thu 03 Aug 2006, 08:24:44

$this->bbcode_second_pass_quote('Kingcoal', 'I')f the US abruptly stops all entitlement payments to Americans what would happen? I'm talking about unearned income, government bennies.


Well, as an example in Argentina, civil servants and others who found their benefits suddenly cut, successfully sued the government into maintaining those 'agreed' upon promises, so it does complicate matters.

Given the separation between the judiciary and the government any special interest group who feels that cuts are not in their interest can try to block those changes through the courts.

For example, if overnight the government tried to alter a collective bargaining agreement that promised civil servants that they might retire at a certain age and then renegged on that agreement.

They would like argue that as the government can raise money via issuing debt that the government cannot claim insolvency or some other reason not to honor its contracts?

The outcome would be inflationary.
Last edited by MrBill on Thu 03 Aug 2006, 08:28:05, edited 1 time in total.
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby Doly » Thu 03 Aug 2006, 08:27:24

$this->bbcode_second_pass_quote('MrBill', '
')They would like argue that as the government can raise money via issuing debt that the government cannot claim insolvency or some other reason not to honor its contracts?


That is an interesting one. I mean, what happens when a government goes totally bankrupt? What did the historical precedents do?
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Re: US Central Bank Head Sees Strong US Economy, Markets Ral

Unread postby MrBill » Thu 03 Aug 2006, 08:35:40

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', '
')They would like argue that as the government can raise money via issuing debt that the government cannot claim insolvency or some other reason not to honor its contracts?


That is an interesting one. I mean, what happens when a government goes totally bankrupt? What did the historical precedents do?


Well that is the point. Governments are not legal entities like individuals or corporations. They can default on their debts, but they cannot go bankrupt. They can restructure their debts and force creditors to accept a haircut (i.e. 35 cents on the dollar in the case of Argentina). Or they can sell assets or licenses to raise money. Or they can borrow in a foreign currency via the eurobond market.

The theory being they can either print their own local currency and/or raise taxes to service those debts. When no one no longer believes they can then they simply make do without any external financing. They print local currency to pay their local debts and their currency loses its value and there is domestic inflation and falling standards of living.

Or in the case of North Korea you build nuclear weapons and then blackmail your neighbors into not using them or otherwise selling them to terrorist. You rely on food aid. And you counterfeit US dollars which you sell to criminal gangs abroad to cover your hard currency needs.

UPDATE: sorry, or you rely on your workers to emmigrate to somewhere else, work in a solvent foreign country, and send home remittances to cover your hard currency needs.
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