Currently, the Fed has created the largest equity bubble of all time; the $9 trillion housing bubble, slapped together over the last 3 years by lowering rates to an unbelievable 1.5% (at one point) and facilitated through shabby lending practices. As rates continue to rise to satisfy America’s need for $2 billion cash inflows from foreign lenders every day, the carnage from the housing-bomb is bound to be extensive and agonizing.

ESTIMATES of the growing pile of non-performing loans (NPLs) in China appear to have caught many by surprise, especially because Beijing's efforts to clean up its rickety state-owned banks were thought to have greatly reduced NPLs and the risk of a full-blown financial crisis.
According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.

This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.

The housing bubble has been made possible by low interest rates and shakey financing schemes. Higher rates would sink a lot of folks, flooding the market with distressed sales, popping the housing bubble and much of our economic strength at the same time.

Anyone who doesn't see the coming real estate "correction" is hopelessly blind IMHO. We're reliving the late 70's/early 80's. Housing values around SF, the hottest of hot markets, are moving down for the first time in over 20 years. Got gold?

Karl,
How has the current trend in interest rates affected the housing bubble? And what "shakey financial schemes" are you talking about?

http://www.nfsn.com/...rts/ratecharts17.gif

blah blah blah

Personally, I don't think the sky is falling yet but I think chips are coming off the ceiling and it's time to put on a helmet. I do think the sky might fall but I'm usually wrong. Sell Sky

Peace

Karl

Since becoming president, George Bush has presided over one of the steepest peacetime rises ever in the federal debt. The gross federal debt now exceeds $8.3 trillion. There are three reasons for the post-2000 increase: reduced revenue during the 2001 recession, generous tax cuts for higher income groups and increased expenditures not only on warfare abroad but also on welfare at home. And if projections from the Congressional Budget Office turn out to be correct, we are just a decade away from a $12.8 trillion debt — more than double what it was when Bush took office.

The trouble is that the officially stated borrowings of the federal government are only one part of the U.S. debt problem. Ordinary American households have also gone on prodigious borrowing sprees.

In the past five years alone, the value of U.S. home-mortgage debt has increased by nearly $3 trillion. Not all of that borrowing went to pay for real estate, the traditional function of mortgages. In 2004, net mortgage borrowing not used for the purchase of new homes amounted to nearly $600 billion. The International Monetary Fund estimates that this kind of equity extraction has risen from less than 2 percent of household disposable income in the year 2000 to more than 9 percent in the third quarter of last year.

Not only do Americans borrow as never before; they also save remarkably little. The impressive resilience of American consumer spending in the past 15 years has been based partly on a collapse in the personal savings rate from around 7.5 percent of income to below zero. The aggregate national savings rate, which includes the public sector and corporations, averaged 13 percent in the 1960's. Last year it was just 0.8 percent.

Already, Social Security, Medicare and Medicaid consume nearly half of federal tax revenues. And that proportion is bound to rise, not only because the number of retirees is going up but also because benefits programs are out of control. Over the past four years, Medicare benefits per recipient grew 16 times as fast as the real wages of the workers paying for them through taxation.

In short, the federal government seems to have much larger unfinanced liabilities than official data imply. If you compare the present value of all projected future government expenditures, including debt-service payments, with the present value of all projected future government receipts, the gap is about $66 trillion, according to calculations by the economists Jagadeesh Gokhale and Kent Smetters. That's almost eight times the size of the official gross federal debt.

In almost every year since 1992, the gap between the amount of goods and services the United States exports and the amount it imports has grown wider. This year the current account deficit, which is largely a trade deficit, could rise as high as 7 percent of G.D.P., nearly double its peak in the mid-1980's. What results is a remarkable accumulation of foreign debt. Estimates of the net international investment position of the United States — the difference between the overseas assets owned by Americans and the American assets owned by foreigners — have declined from a modest positive balance of around 5 percent of G.D.P. in the mid-80's to a huge net debt of minus 20 percent today.

What this means is that foreigners are accumulating large claims on the future output of the United States. However the borrowed money is used, whether productively or not, a proportion of the future returns on U.S. investments will end up flowing abroad as dividends or interest payments.

Foreign ownership of the U.S. federal debt passed the halfway mark in June 2004. About a third of corporate bonds are now in foreign hands, as is more than 13 percent of the U.S. stock market. One analyst has half-seriously calculated that at the current rate of foreign accumulation, the last U.S. Treasury held by an American will be purchased by the People's Bank of China on Feb. 9, 2012.

It's a pretty safe bet that if a dollar decline shows signs of boosting inflation, the Federal Reserve will raise interest rates. Even a federal-funds rate above 5 percent might seem too low. Bear in mind that the federal-funds rate (the overnight rate at which the Fed lends to the banking system) has been going up for two years, from its nadir of below 1 percent in June 2004. Now ask yourself, Who has been most affected by this monetary tightening?

Two important categories of debtor spring to mind. First, there are the households with adjustable-rate mortgages. More Americans have variable-rate mortgages than ever before, even if most existing mortgage rates remain fixed. Since March 2004, there has been a 59 percent increase in one-year adjustable-rate mortgages. But that just means that they have become more expensive for new borrowers. The key question is, When do existing A.R.M.'s reset? The answer: Soon.

According to calculations published by Barron's in February, over the next two years the monthly payments on about $600 billion of mortgages taken out by borrowers in the so-called subprime market (those with checkered or nonexistent credit histories) will increase by as much as 50 percent. This is because many A.R.M.'s have two-year teaser periods to entice borrowers. After that, the meaning of "adjustable" suddenly becomes (in this case, painfully) apparent.

Yet the surprising thing is that the second category of debtor vulnerable to higher short-term rates can scarcely plead ignorance or naïveté. For it is none other than the federal government itself.

The protracted decline of long-term interest rates since the 80's has been a boon for an indebted government. Since 1990, the cost of servicing the federal debt has actually declined from 3.2 percent of G.D.P. in 1990 to 1.5 percent in 2005, even as the absolute size of the debt has soared. But that decline has been achieved partly thanks to the term structure of the debt — that is, to the relatively short duration of the bonds issued by the Treasury, which has allowed the government to take maximum advantage of falling rates. At the end of fiscal year 2005, for example, fully a third of the federal debt had a maturity of less than one year, and the average maturity of the entire debt was just 57 months (down from 74 months at the end of 2000).

This was wonderful so long as interest rates were falling. But now that they have started going up, it creates a potential fiscal nightmare: big slices of the federal debt that have to be refinanced at higher market rates. And that creates a new source of budgetary red ink: rising interest payments. It turns out that George Bush has the biggest A.R.M. in the world.

Yet this time may be different. For sinking like a velociraptor's fangs into the tail of the debtlodocus are interest-rate hikes that may outpace and check any increase in inflation. And no one knows when and how violently the leviathan may react to this slowly discernible pain.

any recommended books on the subject - especailly fundamentals of economics - would be much appreciated.

I'm just a humanities major and junk so I don't know anything about economics and I might be asking the wrong question but...

If things keep going as they currently are going - i.e., we spend more than we make through deficits in borrowing, trade and so on - then inflation will occur???.

The Feds will then increase interest rates in response to inflation because they don't want the dollar to depreciate. The depreciation of the dollar is bad for the US economy because our economy has a "liberalized capital market system." This means that the investor's capital/money will flow from dollars to some other such currency because the depreciation of the dollar would mean that they would lose quite a lot (if investors invested in US dollars)????? Am I wrong so far?????

So rising interest rates will curb inflation so capital doesn't flow out of the US economy. But if inflation doesn't occur owing to a rise in interest rates, then the US dollar can't depreciate relative to the currency of other countries and, therefore, the US cannot export more of their goods abroad in order to offset the trade deficit????

Interestingly enough, before the Argentine economy collapsed from the double edged sword of trade deficit and massive debt, the country experienced several years of recession and DEFLATION. So there's no necessary relationship between trade deficit+debt and inflation. On the other hand, part of the problem here was that local currency was artificially overvalued. The economy had become locked in on 1 peso=1 dollar currency and it was literally impossible to get out of that trap without shafting at least one big group of people. In the end the government decided to shaft the people who had saved their money in the banks in order to protect the people and businesses who had borrowed internally. Another big group of losers (at least in the short term) were the foreign investors who had borrowed externally to produce and sell in Argentina. Some of these companies are now recovering (e.g. Spain's Telefonica) while others have fled the country. At any rate, the people who had saved in banks just plain got screwed, as they watched the value of their life-savings get cut by almost 70%. In the end though, it seems the government made the best decision, because the country rapidly recovered from it's collapse and is now experiencing brisk economic growth.

Here you go:
http://www.leeds.ac.uk/...book/pics/keynes.jpg

cant....resist....myself....

bhwaaahahhahaha

so you agree with Keynsian economic theory do you thorne??? thanks for agreeing with me buddy that what we need is spending by the government on social welfare programs instead of neo-liberal/reaganomics policies.

Considering that you regularly display a poor understanding of a given topic, I'm not going to bother trying to explain where you missed the boat this time. :roll:

hmmmmm......that's interesting but do you think that there was something else that interfered with Argentina's currency and prevented it from devaluing.

Please show me where John Maynard Keynes proposed social welfare programs financed by the government.

Well don't get picky. His theories supported active government spending against the business cycle. Yep, then government never stopped spending...my problem with it is he overestimates the benefit multiplier of government spending compared to private sector. He's associated with the welfare state because politicians used his theories to pump up government spending, even when they didn't need to.

The only thing interfering with Argentina's currency was the Argentines themselves. They implemented what's called a "currency board". The 1/1 exchange rate was a matter of Argentine Law. They called it "convertibility".

At first, the law was a godsend. It put an end to screaming hyperinflation and allowed people to lead ordinary lives.

It became a millstone and overvalued the currency because Argentina has no fiscal discipline whatever (structural problems in government) and their production doesn't compete well in the global economy.

If you don't know much about economics, where do you come off with the paranoid stuff about the IMF, loans, etc.? The fundamental thing about loans is the the debtor has to ask for them. The friggin' Argentines are following this same line. You shouldn't have made the loans. You knew we weren't to be trusted. Crap!

PS - I trade goods into Latin America and am formally educated in international finance.

unabonger, isn't Milton Friedman part of the Chicago Boys? He also won some Nobel Peace Prize or whatever right? I heard that he's also a major jerk and had a part in doing horrible things for human beings or something.

Dude, then I hope you been doing business in Argentina for the past three years. If so, you musta made a shitload of money.

But it was a trap. All contracts were made in dollars and not pesos. That was insane. Argentine pesos are not green and they don't have George Washington's face on them, no matter what the law says.

My point is that the US shares exactly these same two problems: no fiscal discipline what-so-ever and their production doesn't compete well in the global economy.

In 2000, the year before Argentina's economy collapsed, if you took away the cost of financing the debt (i.e. high interest payments) the Argentine national government actually had a small SURPLUS, although some of the provinces were doing much worse.

What I said about the IMF (if I have not imputed any of my own thinking on it, which I might have done) was based on Stiglitz's views. He says that the IMF follows the ideology and interests of the Western Financial Community in imposing its policies.

What I said about the IMF (if I have not imputed any of my own thinking on it, which I might have done) was based on Stiglitz's views. He says that the IMF follows the ideology and interests of the Western Financial Community in imposing its policies. He means this categorically. Thus, the IMF "recommendations" for Argentina, in my opinion, has to do with this agenda most likely.

You've got to know all the jokes about Argentina. There's some basis in fact about the national character. Argentina's been jodido since Juan Perón.

I don't think we're arguing. We probably both have the same hopes for ourselves, our communities and the world. If more people had a reasonable understanding of economics (you seem to be well-informed) the policy debate would be more reasonable. That's why I suggest that EVERY college student take macro & micro.

BTW - my first education is in Math/Physics (ABD). What kind of math do you do?

In my opinion, Stiglitz's criticisms of the IMF with respect to Argentina are valid, although he does have the advantage of hindsight. But you are mixing things around quite a bit in your interpretation. Stiglitz is not antiglobalization, he also thinks the IMF has a valid role to play and he doesn't ever accuse them of outright malice. Nor is Stilglitz against the the financial community, western or otherwise. I'd say the point is this: if you wanna milk a cow, you gotta to feed it grass.

For example, some of the privatized companies (telephone and other utilities, YPF petroleum, etc.) had made a ton of money in the 90s charging very high rates in dollars. They could do this in part, because of convertibilty. So they did have a vested interest in maintaing the status quo. A devalued peso could mean smaller profits for them, in dollars. Obviously this had some influence on the IMF's decisions. On the other hand, as far as I'm concerned the very high cost of utilities, INDEPENDENT of the convertibilty system was one of the most important factors destroying Argentina's competitivity.

Consider YPF petroleum (a Spanish company privatized from the government), which had the benefit of a whole infrastructure of oil production built by the government. In spite of this, Argentines paid THREE times as much for gasoline as what people paid in the US. And this in a very big and poor country where energy costs (especially transportation) play a big role in production costs. Meanwhile, YPF invested almost nothing in exploration of new oil sources, although the did invest quite a bit in opening new service stations to sell some of the most expensive gas in the world. And they made HUGE profits.

This is not malice, gene723. The point is these companies entered a 'risky' market and felt they deserved some guarantees of short term payback. And the country (at least Menen) gave it to them. However, in my opinion, they might have made a little less money and operated in a more sustainable fashion.

One of the best companies (in terms of benefits for the people) has been Telefonica, which has survived the tide of economic turmoil. In spite of the fact that rates have been frozen by government (this means we pay less than a third of what we used to pay for telephone) Telefonica is once again making money, because the economy is working well. My point here is that privatized companies are not necessarily bad, and they don't necessarily need artificially high currencies or exorbitant rates to make money. They can also make money with cheap rates, especially if those cheap rates help the economy take off.

Why don't you switch from humanities to economics and see if you can help? You seem to be interested. Without some kind of underlying science, we're (as a society and world community) just making all this stuff up as we go along. How can we do any different?

the decision made for "what is in the best interest of the client country" is all done in secrecy.

Also, the IMF and World Bank were reluctant to do research to discover why East Asian Economies were so successful

After the 97 crisis, East Asian Economies tried to create their own "IMF" that would make loans during times of crisis without forcing policies that seemd to devast their economies further. But Washington or the US treasury I believe (can't remember) as well as the other world financial institutions forestalled such an institution from forming.

made an agreement that served purposes similar to the IMF. They had to do this in secrecy (which is sort of weird).

Now the question I ask is: "just what is this ideology and interests" of this community?

But my interests are pretty broad and what interests me currently (when I'm not doing things strictly in my discipline) is world politics: the economic, the political, and the military aspects.

I don't think anybody knows the root causes of development. In 1750, most of the world's nations lived at roughly the same level. Why did some develop and others not? Dunno. We're all just trying to make things better. Sometimes it works....sometimes it don't.

You ever read "Guns, Germs, and Steel" by Jared Diamond?