ahoy mateys!

i have a question fer anyone who is learned in this type 'o subject matter. i done meself some readin' and thinkin' on it, and i still can't figure it all out *points to chalk marked calculations done on the deck of his vessel*.

this be me question;

imma investin' kind 'o pirate, so i got me monies in stocks (big pharm, tech stocks) and real estate. so far, i done okies dokies during the last few years. me bidness has been doin' good too, makin' more monies each 'o the last six years.

i read the unemployment be low, that the market be soarin', and all signs seem kinda positive. thar hasn't been a breakdown in government services. folks in washington be funded so well that i been seein' a big expansion 'o government under mr. bush's captaincy 'o our country. so i'd say things be good!

then, i reads about how alot 'o what our country be doin' is being funded on borrowed monies, that them chinese folk be helpin' us with. i also reads that we be owing more and more and more monies to them folk in the far east.

*takes a deep breath*

is the boom and wealth we be seeing all illusory? meanin', if the creditor came 'a callin' and asked us to start payin' up, or if they just plain 'ol decided that they'd be lendin' us no more monies, would the good times end? who, in the end, is going to pay fer all this debt? or is this just 'nother one of them economic machinations that the common folk like me don't understand, and everything is really okie dokies?

i don't know how to square the gold this country be swimmin' in, with the debt that the government is piling up. should i be worried, or is this one of them abstract things that me betters got under control and i can go back to bein' a happy pirate, and not worry too much about it?

i honestly don't understand this dynamic, and imma not using this question as a set up fer a "gotcha" partisan quip.

*bows humbly*

grrrrr....

*lobs pies at his fellow pirates on USPOL*

c'mon mates, i know this be not one 'o them fun and stirrin' threads on Ron Paul (i've found them threads informative and illuminating, i gotta admits), but can someone, just one informed matey, fill me in on this dry topic?

AYEEEEEEE!

-meadhallpirate

I'm not posting much at this forum these days, but I'm getting bored of explaining the nuts and bolts of the sub-prime mortgage issue and related Collateralized Debt Obligations (CDO's) at another forum so I'll indulge your request here just for a change of pace.

Yes, the US economy has been posting fairly strong numbers over the last few years. And yes, the equity markets have been quite prosperous over the same period.

However, the key issue to keep your eye on is the "savings rate". The US savings rate has been negative for over 15 years now. That means that the average US consumer has been spending more money per year than they make in income.

On the surface, this seems counter-intuitive - how can so many people spend more than they earn? This has been possible for several reasons, not the least of which was the 'dot-com bubble' in the equity markets in the late 1990's produced large capital gains for people that allowed them to spend at a higher rate (beyond their paycheque, as it were). Likewise, the housing price bubble has done the same thing. With ever rising house prices, people who own houses 'feel richer' and thus spend more on credit. Also, the ever rising house prices make it possible to just sell the house and use the capital gains to pay off any debts incurred in the short term.

The problem is that many are predicting that these 'enablers' are coming to an end as the housing bubble shifts over into a housing slump. With flat or falling housing prices, and rising interest rates, the opposite effect kicks in.

Thus, economists are predicting that it will be fundamentally impossible for the US consumer to continue spending more than they make in income in the near future. And given that the US consumer spending has been the driving force of the US economy for the last 15 years, it all logically follows that the US is in for a prolonged recession in the near future.

The high deficit spending on the part of the Bush Administration creates a huge demand for credit financing - and thus, raises demand for credit and increasing demand (with semi-limited supply) means an increase in price for credit. That means higher interest rates.

Higher interest rates in turn tend to act to reduce demand for housing, which is a self-reinforcing cycle that will drive housing prices downwards, further reducing US consumer spending.

And that's how and why many economists are predicting that the US economy is heading for a recession in 2008.

As for the Chinese (they who are the primary financiers of US government debt), they have indicated that they are diversifying their reserve holdings. Traditionally, they have bought and held US Treasury bonds as a currency reserve in China. This enabled the US government to sell Treasuries easily in order to finance US public spending (i.e. the deficit between what the US government collects in taxes and what it spends). If the Chinese do diversify their reserve holdings, that means they will only buy half as much US treasury bonds as they normally would (as they would buy Eurobonds to make up the difference). This 'reduced demand' for US Treasury bonds means that the US Government will have to offer slightly higher interest rates on these Treasury bonds for them to be attractive in the market. This adds further upward pressure to interest rates that have a negative effect on housing prices and this just feeds the cycle described above.

So, the long and the short of this is that holding lots of equities going into a recessionary/bear market is not generally considered wise financial planning. Wise investors convert to cash and prepare to jump back in the minute the recession turns. Sell at the top of the market and then buy back in at the bottom and ride it up again. The trick is in the timing - predicting the 'top' of the market and the 'bottom'.

*bows to white rabbit*

you obviously know alot more 'o this stuff than me, matey. *waves his bachelor of fine arts*

i don't really handle me own monies, and all me investments are long term things. i do follow your analysis 'o the amount of monies, or percieved value, most folks have via their homes and such.

if i may, i wanted to amplify me final question, though...

is this huge debt a real problem, one that will "come home to roost" and wreak havoc upon our ports? or is it just "one of those things", that will be addressed by our wise folk in the government, whar the common sailors like me will feel nary a thing?

-MeadHallPirate

*rereads the mighty rabbit's post carefully*

actually, check that response matey. i think i understand now, me friend.
the way me and me fellow pirates will feel the national debt will be the tightening 'o credit, aye?

-MeadHallPirate

Basically to me it goes like this...
67 cents of every dollar spent in America is debt spending.
Maintaining an economy that is built on high debt spending takes some real inventive ideas...ideas that we have witnessed especially in the last 5 years...such as 3rd mortgages that have interest-only payments for 5 years...loans where there are NO payments for as long as 2 years..and now we have "reverse mortgages".... no matter how inventive or "creative" you get - maintaining said economy cannot sustain itself indefinitely..logically there will come a day when enough people "run out of credit" or enough people default on credit payments whereby the 67% of "available" spending diminishes rapidly.
We are experiencing this right now.
Banks across America are reporting MAJOR losses due to record loan defaults...2007 has seen numerous records that are not the kind you want... - record low small business spending, record low durable goods spending, record low retail spending etc.
When you add in a horrendous Real Estate market and Auto markets in the tank - America is facing a real possibility of a recession.
I believe we WILL see a recession in mid 2008.

No, not a huge problem. US public debt per capita (aka 'national debt') is among the lowest in the western world. Many European nations (and Japan) have much higher public debt ratios and no one is expecting them to default, so I'd say that present US public debt ratios are quite manageable (though they are rising fast under GWBush administration).

The only real 'downside' of such public debt is A) a slight upward pressure on interest rates (due to simple supply/demand principles) and B) the cost of servicing the interest on the debt which comes out of general tax revenues. Increasing public debt means increasing taxes just to pay for the interest on the debt.

Given that US public debt levels are among the lowest in the world and that US tax rates are among the lowest in the world, I'd say that present US public debt levels are entirely manageable and not a serious problem.

However, US private debt levels are among the highest in the world. Iamwhatiseem touches upon this issue in his reply above.

The average American citizen carries more debt (per person) than just about anyone on the planet (mortgage debts plus consumer credit debts). This is a very serious economic problem (it is measured by the "savings rate" which as I noted above, is 'negative' in the USA and has been for some 15 years now) and constrains the ability of US consumers to continue spending at the same rate they have been doing so. One can't spend on credit forever.

This 'negative' savings rate also has the 'unintended' effect of transfering most US public debt outside the country (into China & Japan for example - where they hold approximately 1/3 of all US public or national debt) for the simple reason that Americans don't have enough savings available to use to buy US Treasury bonds that finances the US public debt.

So, in conclusion, US public debt is comparatively low and quite manageable. US private debt levels are extremely (some say dangerously) high. This suggests that any potential recession in the USA in the near future is likely to be rather severe since consumers cannot be relied upon to spend their way out of the recession (as has happened in the past).

Short answer is "aye".

And higher taxes too!

*salutes IamwhatiSeem and the white rabbit*

thanks to both of you mateys...them posts told me exactly what i was lookin' fer. thanks much, mateys.

aye.

-meadhallpirate

I couldn't find a source to back this up. Do you have one?




Oh, and Pirate, you may want to consider diversifying your portfolio to holdings outside of the USA. We've been discussing this particular topic in my multinational finance class recently. Seems that the best balance only holds ~40% US stocks.

__________________
When they come a wull staun ma groon
Staun ma groon al nae be afraid
Thoughts awe hame tak awa ma fear
Sweat an bluid hide ma veil awe tears

No, only 'off-line' sources (my handy-dandy Economist 'factbook' that comes free with a subscription to the Economist).

For an online source, you have to do it manually - check out each nation's public debts and compare them (using total debt as a percentage of GDP).

On this basis, USA and Canada are in the 30-40% zone, most of the nations of Western Europe and Japan are in the 60-90% zone with Italy I believe actually topping the 100% mark.

And I'm not crazy about the CIA Factbook as a source for this. The numbers they list for many countries is wildly out of date.

Yes, international diversification is becoming increasingly important for a healthy portfolio (oddly enough given that globalization ought to make it less important).

But as a US dollar hedge alone, it is still a good policy.

White Rabbit,
"..Yes, the US economy has been posting fairly strong numbers over the last few years.."



Yo, wake up! The rest of us are about to dump your Ford Mustang way of living )

What the fuck does that even mean?


Perhaps a few more English lessons would be helpful?

__________________
When they come a wull staun ma groon
Staun ma groon al nae be afraid
Thoughts awe hame tak awa ma fear
Sweat an bluid hide ma veil awe tears