Tuesday, 24 November 2009

the next US shock: will that be bonds?

I've never studied Economics at uni, I spent my time there in Chemistry, Computing and Environmental Science instead.

So as a self confessed non-economist you can take this how you will.

Right now the USA owes heaps to China, there is discussion that the Current Account Deficit in the US is blowing out big time, for instance:

The current-account shortfall could rise from 6 per cent to 15 per cent of gross domestic product by 2030 and net foreign debt could explode to $US50 trillion ($54.4 trillion).

The budget deficit could remain close to $US1 trillion until 2020 or later.

Scary stuff ... that same writer makes an interesting assertion which I happen to agree with:

Most analysis underplays the root cause of the crisis: the US political system’s refusal to adjust to the global labour supply shock - the sudden increase of workers leading to a sudden drop in the price of labour - from China’s industrialisation.

We all live on the same planet, so it has been obvious to me for some decades that if the standard of living in China goes up, then it will likely mean that has to come from somewhere ... well that would be from the west wouldn't it :-)

It gets worse with the USA facing nations turning away from Oil trading in US$ to possibly trading Oil in Euro ... noone will need those US$ as much anymore ...

Now, let me cast your mind back to 1971 to the time when the US economy was in deep trouble for all of its spending in the Vietnam war. They had printed bucket loads dollars and exported them off shore.

Soon enough European countries were presenting the USA with demands to fulfill their "promiary note" of gold for US$. This lead to what was called the Nixon Shock. At this time Nikon (without consultation with the IMF essentially betrayed the Bentton Woods agreement and decoupled Gold from the US$

So, with China investing heavilly in the USA at the moment (to allow the US to get at cheap imports), I wonder if the USA will do something similar again but with bonds?

"Hello, My name is Bond ... "

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