Webdiary - Founded and Inspired by Margo Kingston

Personally, I haven't known a time when there was so much conflicting opinion.

Dear me. Maybe the Bank of International Settlements was on the right track after all:

The head of the International Monetary Fund has warned that the world economy is trapped between "fire and ice" - the threats of slumping growth and of rising inflation.

Opening the IMF's spring meetings, Dominique Strauss-Kahn told ministers coming to Washington that there was only limited time to repair the financial system after the worst crisis since the Great Depression. [my emphasis]

He declared that, with oil prices at record highs, "inflation may be back" and warned the relentless rise of food prices would hit efforts to reduce poverty in Africa and Asia.

In a final blow to the so-called "Goldilocks theory" that developing nations' growth will help keep the world economy supported in the coming months, he debunked the idea that rich and poorer countries could "decouple". However, he added that while the economic impact of the financial crisis would be more severe than that of the dotcom bubble, it would leave a smaller dent on growth than had previous crises.

 

MORE than $2.2 billion was wiped from the market value of the gambling giants Tatts Group and Tabcorp yesterday as the market digested the shock loss of their poker machine duopoly which will take effect in four years.

Shares in Tatts Group were hit the hardest, as it is perceived to have the most to lose, falling 27 per cent.

Tabcorp closed down 21 per cent as it is less reliant on the poker machine business.

Another loss of over $2.2 billion; who is the loser? Superannuation funds and the future fund I suspect. That's right, you and me.

"The US economy, the world's biggest, is likely in a "mild recession" and will stagnate through much of 2009 as housing prices slide further and credit conditions remain difficult."

- IMF today.

I don't think I can recall a time when there's been more hysteria about a correction to the business cycle. Even in recession, the US economy will still be growing.

Roger Fedyk: "Eliot and Paul, you can take your lead from any lot of numbers that you like, it does not alter the fact that the US sees China as its greatest threat for world dominance."

Oh, I suppose so, Though perhaps not to the extent that the USSR and Japan were. But I don't want to dampen anyone's enthusiasm with mere data.

What has happened here in a nutshell is that clients of Opes Prime invested considerable sums of money buying stock through the firm, and in most cases then borrowed against the value of those shares to buy further stock. That stock was often in smaller companies traded on the Australian Stock Exchange that other more traditional broking houses would not allow margin lending against. Opes Prime financed all this trading (much of it at the more speculative end of the market) through loan facilities provided by the ANZ Bank and to a lesser extent Merrill Lynch.

Untested evidence emerging arising from the wreckage so far would indicate that many clients of Opes Prime believed that the shares they purchased actually belonged to them – subject, of course, to these clients meeting any margin calls if the market moved against them. Sadly, no. Opes Prime, in collusion with ANZ, devised a scheme whereby the broking house ended up with ownership of the stock so that it could be used to "lend" to other big traders looking to cover short-selling positions. ANZ, as the financier, effectively had first mortgage over the shares. So when the music stopped, ANZ just sold the farm – often at firesale prices . . . and this included the assets of investors who didn't owe Opes Prime a cent.

The sell-off has been nothing short of cold-blooded and the ripples from the collapse are still washing around the market amid a flurry of injunctions and other legal action.

The surprising thing is that unlike the collapse of the subprime debt market in the US – where numerous warnings about the need for more regulation were aired – no one seemed to see this particular train wreck coming.

Many of Opes Prime's victims have lost their life savings. The ANZ bank has a lot to answer for.

Fiona: It will be a fascinating one to watch, John.

"AUSTRALIA'S overvalued housing markets and high levels of debt put it at risk of being hit by the financial tsunami swamping markets in the United States, the International Monetary Fund has warned....

It warns that, just as asset prices such as house and share values were built up by debt-fuelled borrowing, in the reverse way, they could collapse as debt contracts, slowing economic activity and shrinking wealth."

Scott Dunmore:“I hadn't in my previous post advocated the use of unqualified people in positions of responsibility in professional fields.”

Yes you did. Accountants, surveyors, nurses and some managers are “unqualified’ if they lack tertiary qualifications.

The International Monetary Fund (IMF) says the worldwide losses stemming from the US subprime mortgage crisis could hit $US945 billion ($1.01 trillion) as the impact spreads in the global economy.

The IMF, in a particularly stark biannual report, said that falling US housing prices and rising delinquencies on the residential mortgage market could lead to losses of $US565 billion.

Combined with other categories of loans originated and securities issued in the United States related to commercial real estate, the consumer credit market, and corporations "increases aggregate potential losses to about $US945 billion," it said.

As more bad news comes out of the US the world is in for more financial shocks. 

Yes Scott, we most definitely agree.  (The explanation in my view lies in a mistaken enlightenment ideology which priveleges instrumental reason, but that's a big topic.)

Hi Gareth,

No, you can't teach experience.  It is experience that teaches or more technically experience and reflection upon it.

 I wish employers to pay for what they want, not their employees.  The qualifications industry - people having to obtain qualificatios for what they already do I regard as a moral scandal.  If you don't believe it happens you can't have been around universities much lately.

I think the whole qualifications and professionalism approach is a mistake.  And it only survives because this is admitted in practice.  Job interviews for instance are used in deciding who to employ, not just sorting through transcripts.  I realise mine is a minority view - and that I advocate great changes.  However the scandalous waste of time and effort involved in (what is sometimes humorously referred to as) education means that big changes are entirely appropriate. 

 The hypocrisy and power games that are a part of this I could bore you (as I have others) with for hours.  But I'll spare you.

Evan and Scott, Re Evan’s comment “So skip Uni and the whole futile qualification treadmill” and Scott’s comment “Consider the waste of not only the aforementioned but the five years of productive working life taken up by secondary and tertiary education.”

Of course it’s possible to obtain legal, financial, medical, scientific etc knowledge outside a tertiary institution. However, a degree is the only real evidence an employer or regulator has that a person actually knows anything about the particular area in question. In Australia professional bodies and regulators require tertiary qualifications before a person can practise as a lawyer, accountant, teacher, doctor and so on. In theory any of these jobs could be learnt ‘on the job.’ I don’t think I’d be willing to use the services of any professional service provider without qualifications and professional membership.

Re “It should take about six months full time” this is fanciful, Evan: you can’t teach experience.

Re “I want the employers to pay for what they want, not off load the cost onto the employee or the community”, they do; that’s what a wage/salary is for. An employer pays more for a qualified/experienced person than one straight out of high school. To cut the cost to the ‘community’ (i.e. federal taxpayers) you could charge students the real cost (e.g. full fee degrees) of providing education, rather expecting all taxpayers to subsidise qualifications earned by a few.

So skip Uni and the whole futile qualification treadmill.  Train them for the job.  It should take about six months full time - if you eliminate the unnecessary padding and focus on what they need to be actually able to do.

I want the employers to pay for what they want, not off load the cost onto the employee or the community. 

Perhaps it would depend on the field, it would be possible to re-design the jobs.  If Volvo can re-do the production so line so that a group is able to build a car, then much is possible.

Until I see some evidence that these proposals have at least been seriously considered I think it is fair to ask of business: Why don't you train them?

Evan Hadkins: “I don't see why every demand by big business for more workers is not met with the question: Why don't you train them?” I don’t think this is a feasible option for a lot of “big business.”

A lot of the so called “skills shortage” relates to professional fields like engineering and accounting. While it is possible to take a high school graduate and train them up to be an experienced accountant, auditor, actuary or engineer, the process takes years and almost a decade (if you include uni) for a manager. A “big business” can’t exactly twiddle its thumbs for ten years while it trains up its workforce. People don’t stay in the same role for that long anyway, by the time you trained someone up, they’d be wanting to look for something different.

My own employer advertises roles and receives minimal suitable (industry experience and/or CA/CPA) local applicants. For that reason, a number of my colleagues are employed under 457 visas.

I don't see why every demand by big business for more workers is not met with the question: Why don't you train them? (They could then be treated to a patronising lecture of the kind they are so fond - there are no free lunches etc).

Ten of Australia's richest businesspeople have lost $5 billion between them over the past three months due to the global financial upheaval.

Some of the executives have recorded losses on paper of up to half of their fortunes, New Limited newspapers report.

Australia's richest man, Andrew Forrest, has recorded the biggest losses, having watched his share in Fortescue Metals fall by $1.01 billion.

If ten of Australia's richest have lost $5 billion how many mums and dads have lost a good part of their superannuation savings?

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (George Soros):

“We are in the midst of the worst financial crisis since the 1930s.”

"The United States is facing both a recession and a flight from the dollar. The decline in housing prices, the weight of accumulated household debt, and the losses and uncertainties in the banking system threaten to push the economy into a self-reinforcing decline.

Measures to combat this threat increase the supply of dollars. At the same time, the flight from the dollar has set up inflationary pressures through higher energy, commodity, and food prices.

The European Central Bank, whose mission is to maintain price stability, is reluctant to lower interest rates. This has created a discord between U.S. and E.U. monetary policy and put upward pressure on the euro. The euro has appreciated more than the renminbi, creating trade tension between Europe and China.

The renminbi can be expected to catch up with the euro both to avoid protectionism in the United States and increasingly in Europe, and to contain imported price inflation in China. This will, in turn, increase prices at Wal-Mart and put additional pressure on the already beleaguered U.S. consumer.

Unfortunately this administration shows no understanding of the predicament in which it finds itself."

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (9781586486846, $22.95) will be released exclusively as an e-book by PublicAffairs on April 3.

There are more predictions of skyrocketing rents across Australia, with 50 per cent rises predicted by a property monitoring group.

The latest quarterly report on rents from Australian Property Monitors says median asking rents in the major cities have already risen at double-digit rates over the past 12 months.

It expects a further 50 per cent increase in most capitals over the next four years.

It says strong migration levels are outpacing residential construction, while renters are being discouraged from moving into home ownership by rising mortgage interest rates.

While the government continues with immigration levels at record highs no thought is given to the pressure that puts on housing affordability.  

IMMIGRATION, already at a record high, will need to almost double to 316,000 by 2051 to meet labour market needs, but the country is ill prepared to deal with the increase, according to a new report.

"It is the inevitable story of Australian history," said Peter McDonald, co-author of Population And Australia's Future Labour Force. "Migration is driven by labour demand."

The report, published by the Academy of Social Sciences in Australia, estimates migration will rise from 160,000 in 2006 (when the population was 20.6 million) to 316,000 in 2051 (when the population is expected to reach 36.2 million).

Professor McDonald and his co-author, Professor Glen Withers, are calling for an independent enquiry to determine the best planning and policy to meet the country's future labour needs. "It needs to be done precisely, not just the total, but the types of skills, and then the capacity of the domestic population to meet that demand," Professor McDonald said.

Obviously big business needs more workers. The Australian government has been obliging and huge numbers of immigrants are making Australia home. But little planning has been put in place for the infrastructure these new immigrants demand. The immigration level of over 160,000 means adding a city the size of Cairns every year. It means we need to build at least 80,000 new homes every year. Not to speak of extra schools, roads and hospitals. While big business profits many in our community suffer, with the costs of houses and rent skyrocketing. The government gains from the extra taxes being paid and must also take responsibility  and plan for the increase in population by providing the extra infrastructure and most importantly public housing.

Richard, thanks for the invitation but . . .

I have three projects underway, apart from some contract work.  

One on water conservation, another on generating electricity, the third on fuel.  

A knowledgeable friend got stuck into me recently for bothering with anything other than the electricity generator as he believes this project is worth ‘a lot’.  

The final project was something that I worked upon years ago and put aside as I could not get any worthwhile results.

Recently I came across a piece of information that caused me to ‘slap together’ a quick ‘cell’ to access the effect of the added info.  

I am only prepared to say that I bought for $20 a piece of material that appears to be matching the results of a material produced by a multi million $US research program that was recently patented by a US Company.  

The results are such that I need some serious test equipment and this project has come to the top of the list.  

In spite of the foregoing, I stress that ‘glitches’ can, and do, kill off the most promising design concepts. There is a reason that millions, sometimes billions, are spent on getting ‘interesting concepts’ to practical reality.  

This has to be the longest-winded ‘sorry, but I cannot’, ever!

Richard: ... but a very informative one! Thanks Peter, and good luck with it all!

I have very little time to dip into WD at present. Discussing/ debating with engineers and searching for test equipment that I need/can afford/justify.

Noted an earlier reply that I will answer but need time to research.

Roger, I am not an ‘Ossie!’ However I agree entirely with: ‘The capacity for China to match the US in technological, financial as well as military might is undisputed. Only the time frame is debatable.

The Chinese internal market is growing and with it will come an economic engine that has never been seen in the world before.’

And it takes only a very small increase in average earnings to massively increase that market.

Jenny, guess we were brought up the same way. My question is, why did they ever think/believe that they needed a house that big?

Another question is why isn’t there a tax on houses over a certain size?

In the past few days a young woman — just about to turn 18 — is coming into approximately $60,000. She is moving from a room that she shares with her partner, to a flat. She is putting ‘some’ of it into fixed deposit. However she is keeping $10, 000 out to furnish the flat.

She hadn’t checked out term deposit interest rates available, and when I told her that I had just done some checking for an old friend, and that the best rates going were 7 . 5 % (actually checked again and they are at 8 . 10% for 9 months) she said that the ‘bank didn’t have branches everywhere, so it wasn’t convenient’.

She was being offered 5 . something.

One of the ‘necessary’ purchases was a TV — don’t remember the actual size, but think half a wall!

Anything I suggested ‘would take time, and I cannot afford to take time off work’.

She is on a trainee scheme of some sort, earning less than $40 a day. Pointing out the money she could earn/save, against the loss of $40 simply didn’t compute.

I gave up and drove her to a JP friend's place so she could get her papers signed/witnessed.

Richard: The story reminds me of the couple in the trailer park who recently won $42 mil in a US lottery. They were arguing over what kind of car to buy.

Peter, when you have time, would you care to write a short Webdiary piece on the progress of your work?

Justin Obodie: "Yes the family depicted in Four Corners last night were living in fairy land but even if they were given sound unbiased advice they would probably have believed their lender anyway."

I tend to agree. What is described sounds like the classic emotional purchase (the very worst kind).

Teaching prudent financial management in school is a good idea but from my experience teachers are usually an easy touch (financially naive) and understand little about finance and the complexities of financial markets etc. making such a course difficult for the young to appreciate or understand.

I don't think you can blame schools or governments in this case. A basic understanding of finance is social - knowledge is power, and knowledge is social thing (the closest social circle is of course the family) - nobody here should be surprised what children absorb - both good and bad.

Anyway how many testosterone fuelled young lads would turn down a loan to buy that chick magnet on four wheels?

Yes, and this works across the board. What you've described is a depreciating asset. And it attracts charges higher than an appreciating asset would. The moral of the story is that the (individual) buyer will eventually lose. Most young lads (knowing it or not) wouldn't care.

Unfortunately this is where the economic divide in society comes into play (a whole different subject). Life is indeed unfair, unequal and whole lot of other things. Showing people the true reality of their situation is the first step to the success of improving their situation. If people spent as much time, and effort, understanding the power as they do fighting it, many of these sad stories would be very avoidable.

A basic scenario

The young lads or ladies may not care (not yet) about the basic economic fact of the depreciating assest; however, for the most part their parents probably will. This results in that special birthday present or perhaps that interest free parental loan or that special end of the line (asset backed) guarantee etc. Once the impulse of the buy wears off, and the reality sinks in; what you have left is: one group (poorest) with a debt (behind from the beginning), and the other group (wealthiest) a "learned experience". Thus the cycle has started.

"What is it with this current generation?"

Jenny I suspect the current generation is little different to previous generations. They only thing to change is opportunity.

Human nature over time changes little. The old maxims will always apply. Events during the 1920s confirm that when credit (good) or debt (bad) is freely available people will get sucked in.

The ordinary punter will always have their dreams and the banks and lenders exploit those dreams to the max. They are experts at doing so and have the knowledge and resources at their fingertips.

Yes the family depicted in Four Corners last night were living in fairy land but even if they were given sound unbiased advice they would probably have believed their lender anyway.

Dreams usually trump commonsense and prudence.

Teaching prudent financial management in school is a good idea but from my experience teachers are usually an easy touch (financially naive) and understand little about finance and the complexities of financial markets etc. making such a course difficult for the young to appreciate or understand.

At best we could teach children how to budget and live within their means, but they have to be able to add, subtract and multiply first. Many struggle with even that, even moi believes that 6 times 9 = 42.

Anyway how many testosterone fuelled young lads would turn down a loan to buy that chick magnet on four wheels?

It's all the fault of girls really, if they weren't so damned lovely maybe prudence would override the sexual expectations and dreams of randy young men.

Some things never change as mother nature knows well.

It was hard not to feel sorry for the family losing their home as shown on Four Corners last night. But at the same time I thought how unbelievably foolish can people be. Those unfortunate folk said they needed more than 650 000 for the sale of their McMansion (as it clearly was) to clear their debts. It was passed in at less than that. They had a young family and the husband was in a trade that was bound to downturn with any downturn in home building.

But even if he was earning a hundred grand a year I still cannot see how anyone with a young family to raise and educate could hope to finance over a half a million in debt. Even without the interest rate rises they must have been struggling to service their debt.

Until young families realise that funding a McMansion, and all that consumer stuff they go after from day one on credit, carries with it enormous risk, then they really have only themselves to blame when it all goes belly up.

To say we took the credit simply because it was offered to us is about as dumb as one can get. Come into my parlour said the spider to the fly - and the flies rush in.

Surely it is better to have a modest home and exercise restraint on discretionary spending rather that go through the heartache of losing it all.

I guess being children of Depression era parents my generation learnt that debt is something to be avoided if at all possible. Starting our family life in a bush shack also taught us that you do not need a mansion to have a happy home. I am sure that family last night wishes it had started with something more modest, something about the same size as the garage they finished up in. Hell the kitchen alone had me gaping, let alone the vast living areas.

I was really happy recently that I could upgrade the old farm kitchen for eight grand. Nothing fancy, but it is at least now rat proof, clean and bright. Cheap stock lino, keep the old stove as it was not in bad condition, cheap laminated cupboards and benchtop (none of this granite stuff) and I am very happy. And all paid for too.

What is it with this current generation? What sort of lesson has some of our generation passed onto their children? Certainly not the ones we learned for ourselves from our own parents. Then again, maybe it is just greed that drives people into such foolishness. They know the risks, but just have to have it all, have the best, and have it now.

If parents are unable or unwilling to get the message home to their kids then maybe the schools should introduce a course in financial management and budgeting for year 12s. There are any number of case studies out there now to teach them the consequences of falling for the hard sell of banks and other lenders and of accruing debt unwisely.

Meanwhile the hard sell goes on. I see signs on new housing developments saying 100% finance and on TV every night, offers of this and that, no payments for four years, no interest and so forth. No doubt more families bought that today as a good deal. More debt to come home to roost, but never mind, not for four years at least.

There is no such thing as an interest free purchase with time payment. Anyone should know that, but clearly a lot don't.

Still, it was hard not to feel sorry for that young family.

Perhaps you should have a read of this.

Things aren't looking too cosy.

The controversial share market practice of "stock lending" has spectacularly imploded, with the $1billion-plus collapse of a stockbroking firm, threatening millions of dollars worth of Australian retirees' superannuation savings.

Melbourne-based Opes Prime - a significant provider of margin loans for investors to buy shares - has been put into administration amid accusations of financial irregularities.

ANZ and investment bank Merrill Lynch, which lent $1billion to Opes, yesterday began dumping shares held by Opes on customers' behalf as they sought to recoup their loans. It is thought that customers could lose between $200million and $300million from the fire sale, with some shares being sold at half of current market prices.

Our superannuation is looking a little bit more dicey. The big end of town has been playing poker with your dollars.

John Pratt

A sign of the times and a shift in power, India is buying the prestige brands of Jaguar and Landrover from Ford who are struggling with a $16.65 billion loss. Great icons of US industry are failing as the economic power moves to India and China.

Gas guzzlers such as Jag, and Landrover, are only great icons of US industry if you count the UK as an American State. Personally, I think this is a very good deal for Ford. Anybody even slightly up to date with the latest Detroit motor show would know that car design, and trends are a changing - something I'd think you'd be applauding. Though this latest break through does give hope to the Australian car industry ex-worker - that's if they're happy to work for two bits a day.

India's Tata Motors says it has agreed to buy British luxury icons Jaguar and Land Rover from ailing United States carmaker Ford for $2.5 billion.

The cash purchase, part of plans by India's top vehicle maker to expand its reach beyond Asia, capped months of talks with Ford Motor Co, which is selling the prestige brands to focus on turning around its North American operations after losing $16.65 billion over the past two years.

A sign of the times and a shift in power, India is buying the prestige brands of Jaguar and Landrover from Ford who are struggling with a $16.65 billion loss. Great icons of US industry are failing as the economic power moves to India and China.

Fiona: I rather liked the remark that I heard through the mists of early morning sleep: "Reverse colonisation".

The depletion of nonrenewable fossil fuels is about to radically change life as we know it, and much sooner than we think. As a result of artificially cheap fossil-fuel energy we have developed global models of industry, commerce, food production, and finance that will collapse. "The Long Emergency tells us just what to expect after we pass the tipping point of global peak oil production and the honeymoon of affordable energy is over, preparing us for economic, political, and social changes of an unimaginable scale. Are we laboring under a Jiminy Cricket syndrome when we tell ourselves that alternative means of energy are just a few years away? Even once they are developed, will they ever be able to sustain us in the way that fossil fuels once did? What will happen when our current plagues of global warming, epidemic disease, and overpopulation collide to exacerbate the end of the oil age? Will the new global economy be able to persevere, or will we be forced to revert to the more agrarian, localised economy we once knew? Could corporations like Wal-Mart and McDonald's, built on the premise of cheap transportation, become a thing of the past? Will the misguided experiment of suburbia--considered a birthright and a reality by millions of Americans--collapse when the car culture becomes obsolete? Riveting and authoritative. "The Long Emergency is a devastating indictment that brings new urgency and accessibility to the critical issues that will shape our future, and that we can no longer afford to ignore. It is bound to become a classic of social science.

In his book "The Long Emergency" James Howard Kunstler gives us a picture of what the near future is likely to be. When the 2020 meeting takes place how much time will be spent looking at ways to meet the problems that Kunstler alludes too? It  seems to me that we are like  emu's with our heads in the sand not  wanting to change  until  disaster is at our doorstep.

Here's another interesting fact...

According to the same source below, Marwick 1998, the United States share in world trade was just over 10 per cent in 1969

But the US share of World Trade is here shown as 14 per cent in 2003 - and note the growth in exports as well as imports in just 2004!!

Well, what do you know. The USA "spreads it wings". China must be doomed.

One thing for sure this financial crisis can't be too bad; not one banker or such has jumped from a window. I suppose when the Fed has a big safety net why bother?

Sadly the punters don't have such a safety net. Tent city here they come.

 Eliot Ramsey, Not only is growth stronger the debt-to-GDP ratio is also much smaller then it was in the sixties. Actually the debt-to-GDP was at its highest in 1950 - at around 80% - most people would probably be shocked when finding that out. Using the argument of debt in raw dollars is misleading and is most often used as a political tool.

Paul Morrella says;

Roger Fedyk: "To offset the effect of servicing foreign debt the US must raise its GDP. As the US economy is now in recession in everything but name, GDP is falling and not rising therefore level of foreign ownership is rising."

The GDP must grow to service "future debt". That is if accept current debt levels will continue to rising (far from certain). There is no doubt (and I have already gone through this) that the current debt levels are serviceable. "Foreign ownership" of goods and services btw isn't debt.

For the US GDP to rise, it must sell more to the outside world. Here it immediately confronts the problem of overcoming Chinese expansion. Even with a falling US dollar, there is not enough differential in the value of USD/yuan to give the US any competitive advantage.

The Yuan isn't a floating currency. The Yuan is artificially pegged against the US dollar. This situation has been a major cause of double digit inflation in China (a big problem for them and the world) - this inflation is being exported. Eventually this situation with the Yuan will have to be addressed - whether China likes it or not.

Nothing in the potential future of US economic expansion can rival the upside that China will experience.

China is dependent on cheap (below market) labor. This situation will not last indefinitely - it never does and history proves this. China will also not continue with its present massive growth without the USA's economy. There can't be one without the other. Some believe there can be - they are wrong.

The US cannot grow its GDP if its skilled workforce leaves the country in droves.

There is little proof that anything like that is taking place. American multinationals have had skilled American workers posted across the globe for well on half a century. This situation hasn't suddenly take on new meaning.

Nothing will stop the the US decline and China's (later on India's) rise.

They may or they may not. I'm dealing with today not what might happen at some future date - a lot can happen between then and now.

Peter Hindrup: "That is called 'inflation'! Nothing devalues a currency quicker. Most will remember the various ‘banana republics’ where people upon being paid rushed out and spent the money which had already depreciated in value by the time they reached the shops."

US forecast inflation for 2008 is 2.5%. China and India both have inflation in the double digits.

The slide in the dollar can only hasten the move away from writing contracts in $US.  The day cannot be far off when oil and gold prices will be quoted in Euros.

This would be a silly move at this point in time. The US currency is still easily the most stable long-term currency in existence. It is also easier to price commodities such as oil in dollars because the USA is the largest buyer.

About 80% of debt is internal debt. The myth that the USA is owned by lenders abroad is just that - a myth.

We will know when the US has achieved third world status; when the ‘wetbacks’ are US citizens working in Mexico and Canada and sending ‘hard currency’ home.  When people are pinning US currency notes on the wall along with the various other all but worthless currencies and the sex tourists are heading to the US for cheap services!

This has to be one of the most absurd statements ever made on this site. A view such as this would be considered financial lunacy in most circles.

Peter Hindrup, I don't do links.

Paul: "Treasury bills, notes, bonds are issued at an auction (price is decided) with a fixed maturity date. For one to "pull in the marker" one must sell the bond on the secondary market (which I wont bother going into). And which is not "pulling in the marker" from the bond issuer."

Absolutely true. And the price of these instruments is continually fluctuating as they are traded between the holders of these notes and those wishing to acquire them. However as the perceived value of these notes drops, so does the dollar. (As the dollar value drops so does the value of all US government ‘paper’.)

Paul: "The Treasury is considered rightly risk free for the United States government - and outside of an unbelievable catastrophic turn of events it is - the risk of the Treasury is taken on by the purchaser (if international). The reason for this: The US Treasury bond, bill, and note are only EVER marketed in US dollars. This means the Treasury is covered, if the need arises, by either fiscal policy (raising taxes) or; you guessed it - printing more "funny money". So if the US dollar was to slide against say the Yuan; guess who takes the haircut?"

That is called 'inflation'! Nothing devalues a currency quicker. Most will remember the various ‘banana republics’ where people upon being paid rushed out and spent the money which had already depreciated in value by the time they reached the shops.

As a trade/business deal those countries that have supported the US economy by buying government paper have lost heavily — and will lose much more before this is over!

Politically it may prove to be a bargain.  If we compare the massive losses incurred in the ‘investment’ in US instruments against the cost of confronting the world bully militarily, then it begins to look like a bargain.

The slide in the dollar can only hasten the move away from writing contracts in $US.  The day cannot be far off when oil and gold prices will be quoted in Euros.

We will know when the US has achieved third world status; when the ‘wetbacks’ are US citizens working in Mexico and Canada and sending ‘hard currency’ home.  When people are pinning US currency notes on the wall along with the various other all but worthless currencies and the sex tourists are heading to the US for cheap services!

A few references

1.  http://www.truthin2008.org. A ‘truth in accounting organisation. Have a look at ‘Two Views’.

2.  http://www.thestreet.com/s/the-state-of-the-union--and-its-debt/markets/marketfeatures/10400586.html. (This site is quite difficult to reach.  I found it easier to first get http://www.thestreet.com/ and then add the remainder.) The State of the Union -- and Its Debt:

“As central banks have been recognizing that the U.S. is on a collision course with debt. The result is evident in the value of the U.S. dollar, which has collapsed over the past year. Foreign central banks have been dumping their dollars in favor of other currencies, as well as commodities like gold.

In previous recessions the government could "stimulate" the economy and get growth back on track. Now, because we're so indebted to the rest of the world, our options are limited. If they won't buy our new debt, who will?’”

3.  http://www.brillig.com/debt_clock/faq.html. As you can see, the largest slice of the pie, over 40%, is owed to the Federal Reserve, the central bank of the United States, and to other government accounts. BTW, The Fed is actually quasi-public (part private, part government) so calling it "part of the government" is not strictly true. You can find out more about The Fed by reading Wikipedia's excellent article.

The remaining 60% of the Debt is privately held by individuals, corporations, states, and foreign governments. As of November 2007, Japan ($580 billion), China ($390 billon) and the United Kingdom ($320 billion) are the biggest foreign holders of our Debt.

4. http://www.treas.gov/tic/mfh.txt. Major foreign holders of treasury securities (in billions of dollars) Holdings 1/ at end of period

peter hindrup: "How long until the US population realises that they are broke, and that when the bailiffs call is entirely up to their creditors?"

Which United States agency (or citizen) should play debt collector? After all more than half the debt is internal - owed within the United States. You will find that third world nations (like you hope the United States one day becomes) have debt almost exclusively external.

Of the internal United States debt, much of it is under funded future promises made by the United States government; things like future tax cuts, and social programs such as medicaid etc.

Roger Fedyk: "'For the time being (actually for as long as Japan, Saudi Arabia, China, the UK and other agree not to pull in their Treasury bill markers) the US can print "funny" money to pay for oil with relative impunity. Goods need to flow in and out of the US and USD greases the rails' more or less says it all."

Economic death through Treasury bond is another urban legend I've only ever been lucky enough to come across on the net. Believe it or not here is actually no deciding when to "pull" in the "marker". Treasury bills, notes, bonds are issued at an auction (price is decided) with a fixed maturity date. For one to "pull in the marker" one must sell the bond on the secondary market (which I wont bother going into). And which is not "pulling in the marker" from the bond issuer.

The Treasury is considered rightly risk free for the United States government - and outside of an unbelievable catastrophic turn of events it is - the risk of the Treasury is taken on by the purchaser (if international). The reason for this: The US Treasury bond, bill, and note are only EVER marketed in US dollars. This means the Treasury is covered, if the need arises, by either fiscal policy (raising taxes) or; you guessed it - printing more "funny money". So if the US dollar was to slide against say the Yuan; guess who takes the haircut?

None of the above is to say that the continual dollar slide is a good long-term trend for United States debt financing mechanisms (it does certainly have ramifications for later issues). I can though assure any person (and I know how much the economic good health of the USA means to the Webdiary community) that nations won't be pulling the pin with existing Treasuries.

Roger Fedyk

The US meets all of the qualifications for ranking as an empire. They have military might posted all over the world.  They are a financial hegemon. They are a political hegemon. They are a technological hegemon.

Who are you referring to when you write "they"? Does the homeless guy in Queens qualify as a "they"? Perhaps you mean the illegal immigrant scratching together a few dollars? Or is it the one parent family, without health coverage, that's scaring the little cotton socks off the empire adverse world? If you give me some examples I may be able to reply as to whether or not it's all in aid of the "empire".

The plaintive cry "why do they hate us?" is born in that confusion.

If I were homeless, and living in Queens; I would probably wonder the same thing.

David R: so, do you think the existence of slaves in most of the empires Roger listed disqualified them from being empires, on the same grounds? If so there have never been any empires, and the term is a strange entry in the dictionary with no application. If not, then why should your homeless Queen discount the American Empire?

Roger: 'For the time being (actually for as long as Japan, Saudi Arabia, China, the UK and other agree not to pull in their Treasury bill markers) the US can print "funny" money to pay for oil with relative impunity. Goods need to flow in and out of the US and USD greases the rails'  more or less says it all.

Add 'or decide to dump their gold stocks' and you have the whole picture.

The US blunders  along in the delusion, or the pretence, that they are still 'wealthy'. The fact is they are broke.

How long until the US population realises that they are broke, and that when the bailiffs call is entirely up to their creditors?

Scott Dunmore, re “You’re not a bank employee are you? Only joking.”

I am actually, been in the banking industry since I finished Uni, currently in Assurance.

Re “I’ll leave it there.” Me too.

Roger Fedyk: "Paul, while it is not disputed that we will survive the current situation, the US will suffer the same fate as Britain. In a mere 30 odd years the British went from world masters to bankrupt with two world wars exacerbating their plight. If you asked an Englishman in 1900 what were the chances of the sun setting on "the empire on which the sun never sets" you would have gotten a right royal bollocking."

I don't agree that the United States is an empire; hence making this line of discussion difficult from the quick. I believe the United States to be a confederation of states in the classic sense. "They", the states, make up a union if you will, more advanced (time issue) than the European Union, though a "united" union all the same.

The use of the term "empire" is a rather recent phenomenon, and it is used more to convey a political message (and it does), more so than a factual one.