Huge Economic Collapse Looming in the US?

[Looger]

to preface this i've been hearing rumblings for months that countries the world over are inching towards the door to dump US currency as a reserve note, as well there is more and more open discussion of non-dollar transactions being used to buy oil.

i'm NO economist. hopefully one chimes in here.

yeah, i know, it's 'the post' but it's an interesting article:

http://www.nypost.com/seven/12072006...paul_tharp.htm

TOP-LEVEL INSIDERS SELLING THEIR STOCK

December 7, 2006 -- America's corporate chiefs are unloading their own stocks at one of the boldest paces in 20 years.
In cases of the very rich, such as Microsoft's Bill Gates and Google's top brass, the executives are selling a whopping $63 for each $1 of stock they bought, says a report by Bloomberg.
In November alone, leaders of public companies dumped $8.4 billion worth of stock they owned as insiders, most of it awarded as compensation, bonuses or other management incentives. But the vast majority of the executives put their windfall cash to work elsewhere, with just $133 million being plowed back into purchases of more company stock.

there's very little qualification in this article. maybe this kind of dividend turnover is normal, i really don't know. just the latest in a long line of recently gloomy articles.

this article sums up much of what i've heard in the general sense of america's economic problems:

http://www.safehaven.com/article-6462.htm

We are all aware of the reasons for the long term negative outlook for the U.S.D. There is the trade deficit mandating we entice foreigners to commit 2 billion dollars per day into our markets in order to maintain dollar stability. In addition, the total U.S. debt is now over $8.6 trillion. This debt has allowed China to hold $1 trillion in foreign reserves (70% of reserves in U.S. dollars). Chinese officials have recently expressed an interest to diversify their dollar holdings. According to Bloomberg, foreigners now hold nearly 50% of our publicly traded debt. The major holders of our debt are Japan, China and the U.K. They currently hold 639.2, 342.1 and 207.8 billion dollars of our treasury debt respectively. In all, foreigners hold about $9 trillion of U.S. financial assets.
The U.S. has developed a dependency and an addiction to these foreigners who hold our dollar and subsequently our economy hostage. Former President Clinton's Treasury Sec. Robert Rubin said in November, "The U.S. is five years away from rapid acceleration of spending tied to Social Security and Medicare." At the same time the esteemed former Fed head Paul Volcker proclaimed, "It's incredible people have gone on so long holding dollars." and was unwilling to extend a prediction of a dollar crisis in the next two and one half years. Trustees from the Medicare and Social Security trust funds estimate that 26.6% of Federal income taxes will be needed to fulfill obligations in 2020, up from 6.9% today. By 2030 that number will increase to 49.7%. Bear in mind the U.S. has a negative saving rate, which further underscores our reliance on oversees borrowing.

i don't know how savings ties to the power of the dollar, there's a mystifying middle step of selling and buying here.

http://www.telegraph.co.uk/opinion/m.../07/do0702.xml

The world economy is what matters, and I don't like the smell of it. Nor, apparently, does Hank Paulson, who made $700 million at Goldman Sachs before taking over the US Treasury this year. He has reactivated a crisis team with a command centre in Washington to cope with the "systemic risk" in a market melt-down. His worry? 8,000 unregulated hedge funds with $1.3 trillion at hand, and derivative contracts now worth $370 trillion. "We need to be very careful here," he said.
A well-sourced article in Washington's Weekly Standard says Mr Paulson fears a "serious crisis that would be a body-blow to the US economy".

all i really know aboot hedge funds is that they're for the most part free and easy and that reading movements in them is like reading tea leaves. so what's the big deal with hedge funds, and what happens when they start collapsing? i have no idea, does anyone else? the sheer size of these funds seems a little unreal to me, why aren't thoise talking heads on the stock channels talking aboot them?

obviously i can always find doom-and-gloom articles, i doubt any reporting varies as much as financial reporting. just a trend i've been noticing lately.

i've always wanted to take a course in economics, who knows i may still.

any economic afficiondos out there...?

[burn_baby_burn]

Its scary isn't it. If the US falls. We will be holding their hand.

[Cube Inmate]

What type of "sound footing" (my words) would satisfy you (looger) as a basis for currency? Do you believe that currency should be pegged to a gold standard? Another standard?

[Agamemnon]

I've heard about this issue during some economics classes in university, that some countries are interested in switching to the Euro for their 'baseline' trading currencies, and divesting themselves of their dollars. I'm not sure if this is a solely-Looger created notion. I've also heard that if a lot of countries were to do this it would cripple the US currency as there would be a LOT of outstanding dollars in the world held by other countries for sale.

But then, I didn't pay a lot of attention in economics classes (BORING), so I probably don't have a clue.

[Looger]

Originally Posted by Cube Inmate

What type of "sound footing" (my words) would satisfy you (looger) as a basis for currency? Do you believe that currency should be pegged to a gold standard? Another standard?

i don't know enough aboot it, the gold standard was the old way and now we've got what many economists refer to as a 'fiat currency'.

i'm just trying to figure out why some of these economists are playing chicken little.

has the federal reserve really doubled the number of US notes in the last six years? many people are saying this.

[Claeren]

Originally Posted by Cube Inmate

What type of "sound footing" (my words) would satisfy you (looger) as a basis for currency? Do you believe that currency should be pegged to a gold standard? Another standard?

I think that is the wrong question.

It is not about it being on 'sound footing' by some standard that is not in place.

It is that there IS a standard (the dollar being reflective of the value of the economy relative to other economies) BUT that standard has been thrown out of wack for too long a period. Most obviously by China (mostly, but Dubai, India, Taiwan, Korea, Japan and others have played a part as well) providing unreasonably 'cheap money' for US consumers (and government) to borrow in order to fund further purchases of their own countries US-consumer oriented exports.

Throw in a low/negative savings rate, a housing bubble, massive social inequity, baby boomers looking to retirement, a lifestyle that is heavily energy dependent from the base up, and a less and less educated and dynamic workforce compared to the rest of the world and it is only a matter of time.



Claeren.

[Vulcan]

Originally Posted by Agamemnon

I've heard about this issue during some economics classes in university, that some countries are interested in switching to the Euro for their 'baseline' trading currencies, and divesting themselves of their dollars. I'm not sure if this is a solely-Looger created notion. I've also heard that if a lot of countries were to do this it would cripple the US currency as there would be a LOT of outstanding dollars in the world held by other countries for sale.

But then, I didn't pay a lot of attention in economics classes (BORING), so I probably don't have a clue.

I no little about economics but this is what I understand.

This issue has been brought up as a reason for the invasion of Iraq as Saddam was going to start selling oil in Euros instead of US dollars. Iran is threatening to do the same. The Saudi Arabia and OPEC sell oil in US dollars thus forcing everyone to buy US dollars in order to purchase oil. If OPEC switched to the Euro, the US is in big trouble.

[Flashpoint]

Correct me if I'm wrong, but wasn't the New York Post the newspaper that called the writers of the Iraq Report "Surrender Monkeys" and did a hack photoshop of their faces on to monkey bodies for the front page?

And don't they also employ that clown Larry Brooks as a hockey writer, even though he couldn't find his ass with both hands?

Not saying the article is without merit, just that as a publisher the NYP has very suspect crediblity.

Yup, it was them

[Looger]

yep, the new york post is the new york post.

which is EXACTLY why i stated that in my opening post.

[Bobblehead]

With respect to the Post article, Americans selling American stock will not affect the value of the US dollar. That is influenced by foreign buyers; for a British firm to purchase Microsoft stock on the NYSE they need to purchase American dollars to do so, and that increases the demand for the US dollar. Bill Gates selling his stock may result in Microsoft shares decreasing in value (because of an increased supply) which may actually entice foreign investors to buy US dollars so they can then purchase those shares at that price (if they believe it is a good deal). It all depends upon why Bill Gates sold - if it is because he thought the value of the stock was about to go down then you may be correct and this is a bad thing. If he sold because he wanted the money for some other purpose (like buying something else he believes is undervalued) then it may be a good thing.

It is long know ploy for a country to try and lower the value of it's currency (which maked the goods produced in that country "cheaper" to the rest of the world, and should increase exports). If done on purpose, this is known as a "Beggar-thy-neighbor" policy. Policies like these tend to require 2+ years before their true or full effects are known (but like the speed of business, this timeframe is shrinking).

Macro-economics is still quite a new study, and there have been many differing theories proposed in the last 50 years, but like many of the social sciences, no single unifying theory has emerged yet.

[FlamesAddiction]

Originally Posted by Agamemnon

I've heard about this issue during some economics classes in university, that some countries are interested in switching to the Euro for their 'baseline' trading currencies, and divesting themselves of their dollars. I'm not sure if this is a solely-Looger created notion. I've also heard that if a lot of countries were to do this it would cripple the US currency as there would be a LOT of outstanding dollars in the world held by other countries for sale.

But then, I didn't pay a lot of attention in economics classes (BORING), so I probably don't have a clue.

Kind of like what Iraq did just before the U.S. started pushing for invasion. Of course, the two are not connected though.

[Looger]

Originally Posted by Bobblehead

With respect to the Post article, Americans selling American stock will not affect the value of the US dollar.

i think it's pointed to as people on the 'inside' getting out, some information they have and we don't.

[Lurch]

I no little about economics but this is what I understand.

This issue has been brought up as a reason for the invasion of Iraq as Saddam was going to start selling oil in Euros instead of US dollars. Iran is threatening to do the same. The Saudi Arabia and OPEC sell oil in US dollars thus forcing everyone to buy US dollars in order to purchase oil. If OPEC switched to the Euro, the US is in big trouble.

I think Lanny trotted this out a while back - it is ridiculous really, but economic forces may end up moving the market in this direction to some extent. However, given that both the US and China will likely want to trade oil in US$ for the forseeable future, I think it will be a peripheral drag on the currency, not a catclysmic event.

I think the insider sales simply reflect a common view that we are at the end of a bull run and stock prices are high right now.

The big problem the US has IMO is that the currency float they have with the world implies a huge call on their productive capacity and standard of living. If you think about it, US$ outside the US simply indicate that the US owes the world hard goods that their economy will have a hard time producing without huge inflation. The US$ will need to fall when these notes start coming home, US imports will dry up (huring Canada) and US exports will shoot through the roof (also hurting Canada in areas where we compete).

This is the area that Harper has absolutely driven me nuts of late. He has to be smart enough to see the problem, but he has been busy putting our business relationship with China in the toilet and putting more eggs in the sinking ship, to badly mix metaphors.

[Claeren]

Originally Posted by Bobblehead

With respect to the Post article, Americans selling American stock will not affect the value of the US dollar. That is influenced by foreign buyers; for a British firm to purchase Microsoft stock on the NYSE they need to purchase American dollars to do so, and that increases the demand for the US dollar. Bill Gates selling his stock may result in Microsoft shares decreasing in value (because of an increased supply) which may actually entice foreign investors to buy US dollars so they can then purchase those shares at that price (if they believe it is a good deal). It all depends upon why Bill Gates sold - if it is because he thought the value of the stock was about to go down then you may be correct and this is a bad thing. If he sold because he wanted the money for some other purpose (like buying something else he believes is undervalued) then it may be a good thing.

I think the implication was that they were removing those dollars from US listings because the listings are going to take a beating when the dollar drops. (On a side note, despite the illusion of all time highs for the Dow these days it is actually still down if you account for the MASSIVE drop already experienced by the USD over the past ~6 years. US consumers are free to invest in outside listings, so yes it still counts as a loss)

The big question is, as you say, what they are doing with those liberated dollars.

I remember when everyone was on Bill Gates case for 'illogically' moving billions into Silver back when it was like $3.50/oz. That only earned him like a 300% return within a year or two.....

It is long know ploy for a country to try and lower the value of it's currency (which maked the goods produced in that country "cheaper" to the rest of the world, and should increase exports). If done on purpose, this is known as a "Beggar-thy-neighbor" policy. Policies like these tend to require 2+ years before their true or full effects are known (but like the speed of business, this timeframe is shrinking).

Macro-economics is still quite a new study, and there have been many differing theories proposed in the last 50 years, but like many of the social sciences, no single unifying theory has emerged yet.

That is true for small secondary economies (like Canada even) but it is not in any way a viable long term policy for a super power like America. Especially a super power addicted to energy imports from around the world just to stay afloat and a perchant for needless and expensive wars every few years. Imagine the Iraq/Afganistan price tag with a USD 20% less valuable?! It would be potentially hundreds of billions higher. Likewise with the price of oil, current $60 USD/br oil is actually $40/br with the massive ~30% loss in USD falue factored in. It could go up to $80+/br based on a USD loss alone...

There are hundreds of advantages to being the premier world currency, and all of them are lost with a weak dollar policy.



Claeren.

[Looger]

Originally Posted by Claeren

That is true for small secondary economies (like Canada even) but it is not in any way a viable long term policy for a super power like America. Especially a super power addicted to energy imports from around the world just to stay afloat and a perchant for needless and expensive wars every few years. Imagine the Iraq/Afganistan price tag with a USD 20% less valuable?! It would be potentially hundreds of billions higher. Likewise with the price of oil, current $60 USD/br oil is actually $40/br with the massive ~30% loss in USD falue factored in. It could go up to $80+/br based on a USD loss alone...

There are hundreds of advantages to being the premier world currency, and all of them are lost with a weak dollar policy.

Claeren.

is it possible that there are forces that want something of a collapse in the united states economy?

perhaps the same forces that keep the border open for 2000 illegal immigrants every day, and lobbythe government for amnesty?

the destruction of the middle class, and obviously with that the total economic power of the country?

oil companies poised to pick over the bones, foreign debtors guaranteed property rights on US soil as collateral, perhaps the private ownership of the federal reserve, to whom so much of this debt is owed?

there are always winners in economic collapses. i really wonder sometimes that if some people benefit, would they not be working the system towards collapse?

[Bobblehead]

Originally Posted by Looger

i think it's pointed to as people on the 'inside' getting out, some information they have and we don't.

Or it could just be the strength of the market allows some of the sellers to gain some liquidity of their assets or diversify without disrupting the market too much.

It may be that they sense a weakening. Other than a couple of corrections the indexes have been fairly strong, so they may worry the US Fed may hike rates.

I'm guessing that many are just taking some profits and diversifying.

One other thing to remember; Alan Greenspan retired at the start of this year and while his successor (Bernanke) is unlikely to deviate too far from what Greenspan did, Bernanke is currently an unknown.

[Looger]

Originally Posted by Bobblehead

It may be that they sense a weakening. Other than a couple of corrections the indexes have been fairly strong, so they may worry the US Fed may hike rates.

well i'd call the DOW industrial average an index, but isn't it just the top 100? does it really reflect the whole market or just the cream of the crop?

and if the currency involved has doubled in 6 years, doesn't a number of 11000 really mean something like 5500?

another indicator would be the housing market, and i hear that massachussets and texas have reported major losses in property value.

[Bobblehead]

Originally Posted by Looger

well i'd call the DOW industrial average an index, but isn't it just the top 100? does it really reflect the whole market or just the cream of the crop?

and if the currency involved has doubled in 6 years, doesn't a number of 11000 really mean something like 5500?

another indicator would be the housing market, and i hear that massachussets and texas have reported major losses in property value.

For sure, you need to look at everything.

The currency doubling in 6 years is interesting, but I don't think they are sticking that in their matress. It will be going somewhere.

Indexes can be created for different purposes. Often the stocks are chosen to be active representations of the market segments they are involved in (hi-tech, precious metals etc). You can attempt to choose "cream of the crop" stocks to be your index, but I'm not sure how much use something like that would be? Wikipedia has an excellent description:

A stock market index is a listing of stocks and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations. Many indices compiled by news or financial services firms are used to benchmark the performance of portfolios such as mutual funds.

[Lurch]

well i'd call the DOW industrial average an index, but isn't it just the top 100? does it really reflect the whole market or just the cream of the crop?

and if the currency involved has doubled in 6 years, doesn't a number of 11000 really mean something like 5500?

another indicator would be the housing market, and i hear that massachussets and texas have reported major losses in property value.

You can't value things based on the circulating currency - rather what it buys. Depreciating US$ means foreign ownership of US companies is now cheaper, but US owners do not feel the pinch as yet.

What exactly are falling property values indicative of, in your mind. To me, they represent nothing more than the wealth floating around an economy interacting with a scarce asset. Calgary is a prime example - people are either very wealthy or believe they will become wealthy, and are willing and able to put money into land in the city. If sentiment for wealth prospects change in Calgary, long-term land values will go with them.

[Looger]

that's interesting, Lurch and Bobblehead.

property values to me, seem to be simply the growth of debt and not much more. also an indicator of a boom economy i guess.

but locally there are factors like what's available, ie. supply and demand.

interesting points guys, keep it up, i'm learning quite a bit, hopefully others are as well.