Safety of US Treasuries?
Today I realized for the first time that the financial crisis might be mainly a political tool for the political game of stability. Around 1997, the Asia financial crisis was mainly caused by western financial manipulation of the Asia financial systems under the clouds of political stability. At the end, the Asia countries were rubbed financially, but politically, they become more stable.
During the current round of the financial crisis, it was designed by the western countries to take financial gains from China and other developing countries. But the financial calamity did not occur in China or the major developing countries such as India, Brazil, and Russia, or the so-called BRIC countries. It is fully developed in the US and major developed countries such as the European countries. Why has this time the damage mainly occurred in the developed countries?
First, it is due to the massive holdings of US currency by BRIC countries. In this world, the real money has two forms, gold and the US dollars. The price of gold can change wildly depending on the supply and demand of gold. The price of gold is a purely economic phenomenon. The price fluctuation of gold can make money for someone but can destroy wealth for someone else. In the end, or in total, the world wealth as a whole did not increase or decrease due to the price change of gold. But the price change of US dollar will have totally different impacts on people of various countries.
The top 7 major foreign countries/regions hold about 2.3 trillion US dollars, which is about 20% of the US GDP. China alone holds about 1 trillion US dollars in the form of US treasuries. So the damage of US dollar price fluctuation will have impacts to the American and the Chinese at the same time. At one side, the US dollar at one side has similar characteristics of gold; at another side, it is a government tool for adjusting US economic growth. If the price of US dollar devalues (e.g. the government prints more money), the American and the Chinese lose their wealth relative to the rest of the world, or the holders of gold.
If the US borrowing trends before 2007 had continued for another five years, the housing price in the United States would have continued to rise; more people would have borrowed from the banks; more money would have been printed by the government; the Chinese would have owned about 6 trillion US dollars, or about 50% of the US GDP. The two countries would have been combined as one economy, or the Chimerica economy, as been called by some scholars. This trend would not been a good trend for some US interests. So the US governments have to engineering a financial crisis to stop the ballooning debts for the country and its citizens. That is why the governments have hired the most qualified financial crisis engineer Ben Bernanke, who has studied the Great Depression for his entire career before becoming the Fed Chairman. With the careful preparation and fine execution, the current financial crisis is probably at the worst time now. Economic recovery is at the horizon.
If this theory is true, then the financial lending for mortgages will resume. The great borrowing power is one of the main characteristics of the Americans. The governments can fine-tune this power for the short time. But the long term trend will continue as long as the current financial crisis passes. So the integration of the world economy will continue no matter what the US government does in the short term.
For the Chinese side, its strategy is very simple. They will continue to buy US treasuries as long as they can afford, or as long as they keep producing goods to export. In this way, the Chinese bind themselves to the greatest country in the world. If US fail, the US treasuries will fail, then all the wealth the Chinese government have accumulated over the years will vanish. That is OK for the Chinese because it has dreamed about the up-side potential. If the US governments win this financial crisis, the US treasuries will worth more than before because the Chimerica economy is stronger than a single US economy or a single Chinese economy. The US dollars will be accepted by more countries as their reserve currencies.
The Chinese have openly stated many times domestically and internationally that they will diversify their foreign reserve holdings. But they act just in the opposite way, by buying more US treasuries. I do not know if the higher politicians have already made agreements to bind the two economies for the long term. But I can feel that if they have not reached the final agreements, they must be working on such agreements.
If my theory is right, the US currency will become stronger over the long term. The US borrowing trend will grow even bigger. If we assume 50% of the world outside of US use the US dollar as their reserve currency after the current financial crisis, then the US government debt can double its current debt amount without any problem. The current US debt is a little less than 12 trillion dollars. In ten years, the US debt could grow to 24 billion dollars if we assume the growth rate was 6%. Even by then, that 24 billion debt is only 40% of the current world GDP, which is about $60 trillion dollars. Ultimately, if all countries use US currency as their reserve currency, the US debt can grow happily for at least another 30 to 50 years depending on the growth rate of world economy and the inflation rate.
Fifty years is a long time. So the world economy is not without hope. As soon as the world reserve currency is determined, the US currency or some other forms, there will always be a better future, as long as the principle of zero-sum game applies: debt + wealth = zero. The world had no money before it was created by various governments.
During the current round of the financial crisis, it was designed by the western countries to take financial gains from China and other developing countries. But the financial calamity did not occur in China or the major developing countries such as India, Brazil, and Russia, or the so-called BRIC countries. It is fully developed in the US and major developed countries such as the European countries. Why has this time the damage mainly occurred in the developed countries?
First, it is due to the massive holdings of US currency by BRIC countries. In this world, the real money has two forms, gold and the US dollars. The price of gold can change wildly depending on the supply and demand of gold. The price of gold is a purely economic phenomenon. The price fluctuation of gold can make money for someone but can destroy wealth for someone else. In the end, or in total, the world wealth as a whole did not increase or decrease due to the price change of gold. But the price change of US dollar will have totally different impacts on people of various countries.
The top 7 major foreign countries/regions hold about 2.3 trillion US dollars, which is about 20% of the US GDP. China alone holds about 1 trillion US dollars in the form of US treasuries. So the damage of US dollar price fluctuation will have impacts to the American and the Chinese at the same time. At one side, the US dollar at one side has similar characteristics of gold; at another side, it is a government tool for adjusting US economic growth. If the price of US dollar devalues (e.g. the government prints more money), the American and the Chinese lose their wealth relative to the rest of the world, or the holders of gold.
If the US borrowing trends before 2007 had continued for another five years, the housing price in the United States would have continued to rise; more people would have borrowed from the banks; more money would have been printed by the government; the Chinese would have owned about 6 trillion US dollars, or about 50% of the US GDP. The two countries would have been combined as one economy, or the Chimerica economy, as been called by some scholars. This trend would not been a good trend for some US interests. So the US governments have to engineering a financial crisis to stop the ballooning debts for the country and its citizens. That is why the governments have hired the most qualified financial crisis engineer Ben Bernanke, who has studied the Great Depression for his entire career before becoming the Fed Chairman. With the careful preparation and fine execution, the current financial crisis is probably at the worst time now. Economic recovery is at the horizon.
If this theory is true, then the financial lending for mortgages will resume. The great borrowing power is one of the main characteristics of the Americans. The governments can fine-tune this power for the short time. But the long term trend will continue as long as the current financial crisis passes. So the integration of the world economy will continue no matter what the US government does in the short term.
For the Chinese side, its strategy is very simple. They will continue to buy US treasuries as long as they can afford, or as long as they keep producing goods to export. In this way, the Chinese bind themselves to the greatest country in the world. If US fail, the US treasuries will fail, then all the wealth the Chinese government have accumulated over the years will vanish. That is OK for the Chinese because it has dreamed about the up-side potential. If the US governments win this financial crisis, the US treasuries will worth more than before because the Chimerica economy is stronger than a single US economy or a single Chinese economy. The US dollars will be accepted by more countries as their reserve currencies.
The Chinese have openly stated many times domestically and internationally that they will diversify their foreign reserve holdings. But they act just in the opposite way, by buying more US treasuries. I do not know if the higher politicians have already made agreements to bind the two economies for the long term. But I can feel that if they have not reached the final agreements, they must be working on such agreements.
If my theory is right, the US currency will become stronger over the long term. The US borrowing trend will grow even bigger. If we assume 50% of the world outside of US use the US dollar as their reserve currency after the current financial crisis, then the US government debt can double its current debt amount without any problem. The current US debt is a little less than 12 trillion dollars. In ten years, the US debt could grow to 24 billion dollars if we assume the growth rate was 6%. Even by then, that 24 billion debt is only 40% of the current world GDP, which is about $60 trillion dollars. Ultimately, if all countries use US currency as their reserve currency, the US debt can grow happily for at least another 30 to 50 years depending on the growth rate of world economy and the inflation rate.
Fifty years is a long time. So the world economy is not without hope. As soon as the world reserve currency is determined, the US currency or some other forms, there will always be a better future, as long as the principle of zero-sum game applies: debt + wealth = zero. The world had no money before it was created by various governments.
posted by Unknown at 11:13 AM
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