patrick.net

MrPerfect,

I love my job, and under normal circumstances my pay would be considered excellent. The problem is the massive housing bubble has created abnormal circumstances in which all but the very wealthy are shut out of the housing market. As I said, I supposedly have an upper class income and yet can't even begin to afford a decent home in the L.A. area. Something that at one time was well within the means of most middle class wage earners. I am not optimistic about my economic prospects in this region and that is entirely due to the high cost of housing here. I would, however, describe my feelings about the situation as disappointed rather than "bitter". This is the area that I have lived in my entire life and as a result the vast majority of my family and friends are here, so Ill stick around for a couple more years at least to see if the much needed correction takes place while I continue to build up my downpayment. If thing don't change I'll have no choice but to leave.

I honestly don't understand how anyone can say that everything is fine and the economy is wonderful when the only way for most of us to afford a home is through a gun to the head suicide loan. Interst only serves only the banks interest and option arms ultimately leave you with no option but forclosure.

Malcom says: I agree with you that if buying power falls on imports that is inflationary, however the biggest trade partner is China and they are forcing their currency down giving us increasing buying power.

Hence why China is diversifying away from U.S. Treasuries. They are buying select companies and equity portfolios (higher returns, possible inflation hedges), as well as establishing diversified currency positions with Euros. The Euro has really changed the economic landscape in the last few years. Prior to the Euro, only the Soviet Union really had a universal currency to rival the U.S. dollar. And of course, the USSR's money wasn't accepted in the majority of the world's wealthy areas. Nobody in the first world could muster the same throw weight as the United States. You could argue for the GBP, but I don't think there's enough of them out there, at least not for the level of foreign ownership that Japan and China have in the USD.

Anyway, China is going to unpeg their currency eventually. First they have to get diversified, otherwise they would just devalue the USD overnight and torpedo their biggest foreign investment. The Chinese aren't ones to cut off their nose to spite their face.

I often think that this could be a really a brilliant strategy on China's part. Their government is buying U.S. Treasuries. This funds our demand for their products, producing a positive feedback cycle. Instead of forcing payback and hyperinflation, the Chinese could simply start buying up more of U.S. firms. Or they can purchase excellent U.S. equipment for things like power plants, coal mines, oil rigs and other heavy industry, thus securing their own energy and financial future. Right now they're funding their own space program.

Point being, since most of the world takes U.S. dollars, you can do a lot as a cash-positive government earning a lot of interest every year.

I have wondered this, though. Is currency like energy? The rules say that it is neither created nor destroyed, save by the government itself. Which means that if the Chinese are buying U.S. Treasuries in USD, they must be exchanging their own currency somewhere. Are there huge piles of Chinese money somewhere in the first world? Maybe buying Chinese currency would be a good hedge, because if they ever unpeg, it's going to surge like crazy.

Oh, and how can they remain pegged, and still have such superheated economic growth relative to the rest of the world. Is it internally driven or what?

One more point for you to think about if I may. There would also be an effect if our economy goes to pot. I believe that the rest of the world has benefitted from our illusionary prosperity. I would venture a speculation that there is a multiplier effect as our national value (things you describe: corporate stocks, the US dollar, equipment) drops. Like you said, a lot of that money finds its way back here in the form of investments which lose value as we become recessionary. Great article a couple of days ago about all the English investors losing money in FL condos.

My crystal ball says in 6 months we will officially be in recession with two consecutive periods of declining GNP. The latest figure is 1/3 of what was forecast putting us a .6%. That basically means our economy is stagnant.

Brand Says:
June 3rd, 2007 at 9:48 pm
"Oh, and how can they remain pegged, and still have such superheated economic growth relative to the rest of the world. Is it internally driven or what? "

It is externally driven by our Walmart model of using the currency difference as a way of getting cheap labor in relation to our currency value. They peg it because on the flip side of what you said earlier, lower currency value makes your goods more desireable for export because they are so cheap for someone to import.

Now, the free market is a very powerful force. As their workers who turn consumers gain more wealth and power, in theory they then want products of their own. So, do they buy from themselves or do they buy from us. We do have some things uniquely American, such as arts and entertainment, great tourism places to visit, and of course raw materials. China pays $200 a ton for cardboard and paper. It is only worth $50 a ton here.