US Deficit Woes: Where's the money going?

The Greenspan Man has had his last say and it ain’t encouraging:

[quote]LONDON, Dec. 2 (Xinhuanet) – US Federal Reserve Chairman Alan Greenspan Friday cautioned that the adjustment of the world economy could be “painful” if the United States fails to cut its high budget deficit and if the trade barriers remain across borders.

Addressing a meeting of Group of Seven (G7) economic powers in London, Greenspan said the rise of the US current account deficit over the past decade appears to have coincided with a pronounced new phase of globalization. 

He mentioned that [b]so far the United States has had no problem financing its current account trade deficit, which last year hit record high 668 billion US dollars, because of the flexibility of the American economy[/b]. 

But he also expressed concerns about the possibility that US debts grow to unsustainable levels and the move to open global markets is halted. 

"Deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely," Greenspan said, repeating one of his frequent warnings. "At some point, foreign investors will balk at a growing concentration of claims against US residents." 

[b]Greenspan said if the global economy remains open and flexible, the US deficits will eventually be corrected by market forces[/b][/quote]

So, if there is a correction, where is the money going to be lost? Tech? Is this money going back into blue chips and REITS?

What about commodities as an inflation hedge? What about inflation?

What he means is that the US economy will stagger backwards for a few years.

The US$ will take a massive dive south, and stay there for some time, IE making imports more expensive and exports from the new low cost mnufacturer - US of A - much cheapeIt will be very painful, and there will be investment losses more or less all the way around.

I would put my US$ into Euro government bonds. Will most likely minimize the potential losses.

TANSAFL - There ain’t no such thing as a free lunch. Countries like individuals can’t live off their credit cards forever. Greeny has a hide talking like this now, I gotta say. One of the reasons he backed the Bush tax cuts in the early '00s was because, cop this, he thought the Fed was loosing the capacity to conduct monetary policy as there weren’t enough govt securities out there to buy and sell… Sheesh!

Prior to 2000, who was lending to the US? It was private investors wanting to cash in on the tech boom. Who is lending to the US now? Half a dozen central banks in East Asia. If they collectively loose faith in the capacity or willingness of the US to repay its debts, then the whole pack of cards could come undone overnight. US dollar plummets, US and world interest rates go up, US and world goes into recession (to reinforce the personal severity of this chain of events, insert ‘property owners with mortgages hit the wall’ between the second and third effects).

How to avoid all this? Look for a safe haven where the economy is run with some prudence. I’m no Ozzie nationalist, but you could do a lot worse than the Australian asset market just at the moment… Either that, or buy gold. Hope you’ve been watching old shiny in the last couple of months; seems the flight to quality has already begun.

[quote=“jdsmith”]

So, if there is a correction, where is the money going to be lost? Tech? Is this money going back into blue chips and REITS?

What about commodities as an inflation hedge? What about inflation?[/quote]

Well the US (and Australia) are really quite heavily in debt, and much of this is financed by the housing boom. It is estimated that the Australian housing market is perhaps 50% overpriced. It wont drop by that much (based on past history), but I would say that over the coming year or 2 that the value could drop by ~ 10%. So to answer your first question, I would say that money is going to be lost on property (well actually its property value to some degree is speculative too and at the moment prices are quite inflated!) If you are borrowing off of this or using this extra “value” to create a spending splurge thats when u get into heavy debt. After this property market flattens out it will remain level for the next 5-6 years or so before it goes up again.

So when u have a property bubble (or might I say a recent strong rise in the value of property…it doesn’t have to be a bubble), combined with initially low interest rates as we have see over the past decade or so this fuels spending! (esp with unemployment at an all time low in Aus)

For the 2nd part, I can’t see how commodities can be a hedge against inflation, since many have risen in price! (steel has probably just passed its cyclical peak). Inflation hasn’t (like in the 70’s oil crisis - Stagflation) hit like usual due to cheap Chinese imports.

I think personally the biggest problem could arise when interest rates are further increased (which needs to be done anyway) to discourage further spending. If the US stops spending (or someone else doesn’t start), then the world economy is in trouble. China’s economy hinges on exports… unlike Australia and US it doesn’t have an internal economy. That could mean massive unemployment at a crucial time during China’s development.

I can see this happening just after the Olympics…and then look out world economy.

[quote=“guangtou”]
How to avoid all this? Look for a safe haven where the economy is run with some prudence. I’m no Ozzie nationalist, but you could do a lot worse than the Australian asset market just at the moment… Either that, or buy gold. Hope you’ve been watching old shiny in the last couple of months; seems the flight to quality has already begun.[/quote]

Be careful… when the Australian property market starts to drop, it could take a few other things with it. The sharemarket is looking a little shaky at the moment, and I would say that many Australian assets are overpriced. I think many investors have already seen the safety / stability of our economy and that has pushed up the price. (don’t confuse price and value… price is what you pay, value is what you get)

Gold is at an all time high yes… and I do have investments in gold. I think it could go much higher…

I’m watching the market at the moment for overselling of all kinds of stocks. Recently we’ve seen some LPT’s diving significantly below their NTA’s. I got Multiplex after the Wembley scare trading halt for $2.3

The value of all its property trusts combined were worth more than $3…

Keep an eye out on Flight Centre…I think its a good buy now, but I already have some… if they go down to $7 I’m gonna buy more.

[quote=“Mr He”]What he means is that the US economy will stagger backwards for a few years.

The US$ will take a massive dive south, and stay there for some time, IE making imports more expensive and exports from the new low cost mnufacturer - US of A - much cheapeIt will be very painful, and there will be investment losses more or less all the way around.

I would put my US$ into Euro government bonds. Will most likely minimize the potential losses.[/quote]

It will unless the Chinese government decide to fully float their currency (which I don’t see happening). That would result in more reasonable terms of trade, a rising Chinese dollar, and a shift from some low end manufacturing out of China! (probably to Vietnam).

[quote=“Mr He”]What he means is that the US economy will stagger backwards for a few years.

The US$ will take a massive dive south, and stay there for some time, IE making imports more expensive and exports from the new low cost mnufacturer - US of A - much cheapeIt will be very painful, and there will be investment losses more or less all the way around.

I would put my US$ into Euro government bonds. Will most likely minimize the potential losses.[/quote]

I’m not very knowledgeable with overseas investments, so I need to ask…do you think it would be wiser to save money in Euros than in US$? And, can Americans purchase Euro gov. bonds?

[quote=“Indiana”][quote=“Mr He”]What he means is that the US economy will stagger backwards for a few years.

The US$ will take a massive dive south, and stay there for some time, IE making imports more expensive and exports from the new low cost mnufacturer - US of A - much cheapeIt will be very painful, and there will be investment losses more or less all the way around.

I would put my US$ into Euro government bonds. Will most likely minimize the potential losses.[/quote]

I’m not very knowledgeable with overseas investments, so I need to ask…do you think it would be wiser to save money in Euros than in US$? And, can Americans purchase Euro gov. bonds?[/quote]
Yeah, sure, why not?

As far as wiser, depends on which way things go. Personally, given double-digit unemployment in Germany, a demographic crunch that’s hitting Europe much harder than the U.S., and so on and so forth, I’d spread things around a bit more. Last time I looked, my Oz mutual fund was up 33% in the last year. The pan-European one did ok, around 10% IIRC, but the Eastern Europe fund was up almost as much as Oz’s.

I still think puts on AAPL are the best thing going right now, though. :smiley: Even though I’ve been blown out of the water on them in the last few weeks.

I have a paper in my hands now called “Facts and fantasies about commodities Futures”(can be found and downloaded in the net) which says that commodities futures are positively correlated to inflantion, and that the correlation is larger over longer periods of time.

It’s a very good read.

If there’s a positive correlation, then they would be a good inflation hedge.

Awesome analysis here! :notworthy:

[quote=“jdsmith”]

I have a paper in my hands now called “Facts and fantasies about commodities Futures”(can be found and downloaded in the net) which says that commodities futures are positively correlated to inflantion, and that the correlation is larger over longer periods of time.

It’s a very good read.[/quote]

Is that because buying futures is in a way equivalent to buying commodities themselves which drives up prices? Commodities, being the raw materials for most finished products, of course will lead to higher prices and hence inflation. Or am I wrong?

:stuck_out_tongue: I think q to invest in some Asian currency to be the investment of the future, when the single currency of Asia will be created? :fume:

Commodities tend to have a high correlation with inflation b/c they are limited assets (and not financial assets). You can not have unlimited oil or copper today b/c they have to be found and produced into products. They have consumption value (unlike stocks) and so are much more volatile in general.

Commodity futures are essentially trading the spot asset for delivery at different points in time. You get greater financial leverage than equities and spot (more risk too) but you can also lower this risk (even lower than equities) if you choose to do so.

Futures are inherently risky if your intent is to speculate and so you must manage your positions and risks more vigorously.

I forget about this in my prior thread.

The US easily finances this deficit. B/c foreign investors (not just foreign central banks) continue to plow the USD they earn selling Americans stuff right back into US financial assets (bonds, stocks, etc.). You may say that the USA has the most dynamic and flexible house in the world but the mortgage on the house is financed and held (like a bank) by foreigners.

The current account deficit is large as hell and an imbalance like this could easily tip the US (and world) economy into recession if a reasonable shock or downturn occurs. If a run on the USD occurs (not likely) it would really hurt bonds and the US economy is increasingly driven by financing costs and not labor/production costs b/c of freer and freer investment flows around the world.