The U.S. is heading towards a major depression

[DuncanK]

Originally posted by Dissident
Actually I don't plan on investing in gold. But I thought about it.

Gold varies too widely. Yes it has been rising lately, but that is probalby not going to last much longer. If I was going to do it, I should have done it 6 months ago. It will probably peak soon.

I'm still undecided on bonds. Right now I feel the economy is at a crossroads. It's a 50/50 thing. There is a chance it could improve greatly, or an equal chance it could head into a depression. I just get this uneasy feeling when I look at the state of america.

Get a monkey and have him through darts. That's a good way to choose. But seriously, good luck.

First for you economists out there. I have some questions.

Originally posted by Dissident
First off it is our workforce. I can't see how most of our economy can be based off of service jobs. This can't be good can it? Nothing is actually being produced. And it's not like we are servicing other nations (with exception of foreign tourists- which is obviously good). but much of the service is for ourselves. This could work if all the rich people were making money off of other nations and spending it here. But I doubt that is happening.

Service jobs can be very productive. Think of teachers, or consultants. It's all about division of labor. The thing about service is that the productivity is hard to measure.

Originally posted by Dissident
The second issue is debt. Debt is at all time highs from corporations, goverment, and private citizens. Sure we've had some budget surpluses with Clinton, but little if any of that has been used to pay off our debt. Now if the economy is growing, this is now big deal. Because you are making plenty of money to pay off interest. But if the economy is too slow, or not growing at all, it seems to me interest could eat us alive. The debt problem in America worries me. If the economy doesn't start improving soon, debt could bring us down into a depression. Again I'm no expert at this. Just my opinion.

That's called a credit crunch. It caused the 1991 recession. I haven't heard that it's so high to cause another recession right now, but it's a possibility.

[Solly]

"Not really. If you follow the argument... if they can make goods better and cheaper, then it follows they should focus on those goods and export them... and import those that they can't make as good."

While your point in a good one to convince laymen of the usefulness of trade, it is still absolute advantage and not relative, as you state.

"How so? Making goods better and cheaper necessarily encompases capital."

Yeah, but by only considering Smith's and Ricardo's arguments about trade, you ignore capital.

"That's why you have a WTO"

The WTO is weak.

[DuncanK]

Originally posted by Imran Siddiqui
That's why you have a WTO .

They have been unsuccessfull in the past.

[DuncanK]

Imran,

For the record the fact that you have advocated the WTO means that you have admitted that they invisable hand does not work

[Imran Siddiqui]

Who ever said I was a proponent of the invisibile hand?

I'm a capitalist, not an anarcho-capitalist!

And Spink, do read up on comparative advantage, will you? Basically, countries focus those goods that they can make cheapest (and more efficiently) and other countries focus on those goods they can make cheapest and then both trade. Even if one country can make one good cheaper than the other, they are focusing on the goods they, themselves, make cheapest.

[DuncanK]

fair enough

[Solly]

True. But it's the first time you've said that Siddy.

[Imran Siddiqui]

It was implied in the discussion, Spinky .

Duncan has a Bachelorate in Economics and so do I.

[Solly]

I couldn't tell.

[Kramerman]

Gold varies too widely. Yes it has been rising lately, but that is probalby not going to last much longer. If I was going to do it, I should have done it 6 months ago. It will probably peak soon.

The thing about gold, is that its a damn good bet that it will always be worth something. Since the begining of civilization, it has had value, along with other metals, and probably will for a long, long time to come.

You cant say the same about paper currency of anytype. It could just as easily one day be worth its weight in gold, and the next be worth nothin

[Velociryx]

That's true, Kman, but you gotta think in terms of utility!

Do you realize how hard it is to slip a gold coin in the dancer's g-string and get it to stay put?

-=Vel=-

[Kramerman]

Originally posted by Velociryx
That's true, Kman, but you gotta think in terms of utility!

Do you realize how hard it is to slip a gold coin in the dancer's g-string and get it to stay put?

-=Vel=-

*nods* ...this is true, Vel... too true...

[DuncanK]

It is possible that gold will become worthless, but not likely. It's a cultural thing. One of two things would have to happen. One people just stop liking the stuff. That seems ridiculous, because its sooo pretty. Or two there is so much deflation that no one will buy it regardless of how pretty it is. The second one is kind of hypothetical, because there has been deflation before and the price of gold really didn't go down too much.

[Tripledoc]

Here is an interesting article. Seemingly the Asian central banks are moving some of their reserves over into gold.

This article appears in the Feb. 7, 2003 issue of Executive Intelligence Review.

First Casualty of an Iraq War Will Be the U.S. Dollar
by Edward Spannaus


While President George W. Bush thinks he's going to war in the Middle East, he's being warned that the U.S. economy may not come back. U.S. forces may return, but the dollar won't. This is the admonition that has been directed at the United States from a number of sources recently.

The threat to the dollar results, of course, from a long-term process, reflecting what Lyndon LaRouche has identified as the 35-year transformation of the United States from a producer society to a consumer society. The dollar's decline has accelerated in recent months, and it is now in its worst fall against European currencies since 1987. The point that is being made to the President, is that if he marches off to war in defiance of the rest of the world, he will face a sharply-increased capital flight out of U.S. markets, and should not expect much help in bailing out the dollar when it crashes.

While a unilateral U.S. attack on Iraq could detonate a precipitous fall of the dollar, the attack would not be the cause of the problem. While market commentators have their excuse-of-the-day as to why the markets continue to collapse, David Coxe, the chairman and chief strategist for the Bank of Montreal's Harris Investment Management in Chicago, says correctly that one can't blame all of the financial markets' current problems on nervousness over an Iraq war. "Iraq is the excuse everyone is using," Coxe said. "But I would assign it no more than a 10% weighting of what is really wrong with our economy and our stock market."

Living Off the Rest of the World
The U.S. current-account deficit—what the United States owes the rest of the world because of trade and financial imbalances—is the largest in world history. It is officially estimated at least $500 billion for 2002, and is anticipated to rise to $600 billion in 2003. (EIR regards these official estimates as grossly understated.) Presently, financing this deficit requires a capital inflow of at least $1.9 billion every trading day.

Prior to the scuttling of the Bretton Woods monetary system in 1971-72, no country was permitted to run up such a huge imbalance; a much smaller imbalance would trigger what was then called a "balance of payments" crisis, and the offending country would have to settle up. But since the dollar is no longer linked to gold, nor pegged to a fixed exchange rate, the United States has been free to run up a massive deficit and flood the world with dollars.

The physical reality underlying this, is that the post-industrial United States economy produces far less—in real terms—than it used to. About 80% of the current-account deficit consists of the trade deficit, the excess of imports over exports. What we used to manufacture, we now import. We have been living off the rest of the world, much of which produces the things that we consume, under slave-labor conditions. And American consumers have been paying for this flood of imports, with the greatest consumer debt bubble ever created. Now, the day of reckoning is rapidly approaching.

A fitting metaphor for this mess—as well as a demonstration of the absurdity of President Bush's so-called "stimulus" program—was what happened when he was scheduled to give a speech at a warehouse in St. Louis on Jan. 22, touting the supposed job-creating benefits of his tax cuts. The President's remarks were to be delivered against a backdrop of a huge stack of cartons, as befitting a warehouse. But before the television cameras could be turned on, someone had to put tape on all the boxes, to cover over the "Made in China" markings.

Now, let's look at recent developments. The dollar is down, by some estimates, about 20% when measured against a basket of currencies over the past year. (It is far more, if properly measured against hard commodities,and about 30% against gold.) For foreign investors, this depreciation magnifies their losses in the U.S. stock market; for example, while the Dow is down about 18% over the past year in dollar terms, that represents a loss of 27% in Japanese yen, and 35% in euros.

Now, consider again the $1.9 billion needed every day to finance the U.S. economy's profligacy. Where is it going to come from? Europeans have become net sellers of U.S. securities over the past year. Taking note of this phenomenon, the Wall Street Journal ran a major story on Jan. 20 entitled, "Sliding Dollar's Fate May Be Decided in Asia." The Journal noted that Japanese, Chinese, and other Asians have now become the largest overseas investors in U.S. securities, in terms of net new money pumped into U.S. stocks and bonds. Last year, Asians accounted for 40% of the foreign-investment flows into the United States, somewhat counterbalancing Europe's pullback.

The question asked by the Journal is, how much longer can this Asian support for the dollar last? Asian central bankers are beginning to move into other currencies, especially the euro, and also into gold , whose price has jumped by 31% since Sept. 11, 2001. "If Asians pull back from investing in the U.S., there isn't much else to support the dollar," warned an economist at Morgan Stanley investment bank.

Russian, Chinese, Other Warnings
Meanwhile, omninous signs for the future of the dollar have come out in statements by both the Russian and Chinese central banks.

On Jan. 25, the Russian Central Bank announced that it now has "no less than 50%" of its reserves—which amount to almost $50 billion—invested in dollar assets. But this is going to change: The Central Bank said that it will cut its share of dollar-denominated assets, and instead buy euros, British pounds, or Swiss francs.

Two days earlier, Zhu Min, general manager of the Bank of China—one of the world's top 30 banks, with $400 billion in assets—warned that the purchase of dollar-denominated investments on a large scale, by China and the nations of Asia, may not be sustainable.

Because of its huge trade surplus with the United States, China is paid for its American exports in dollars, and then normally buys U.S. Treasury securities (and other instruments), bringing the dollars back into the United States. China has become one of the world's five largest holders of U.S. Treasury securities.

Speaking at the World Economic Forum in Davos, Switzerland, Zhu explained that "Asia has been exporting to the U.S. and buying U.S. Treasury bills, and so far everybody has been happy. But I don't think it [the U.S. current account deficit] is sustainable. Dependence on Asian flows to sustain the deficit is not healthy."

"I think this year the foreign exchange regime will be very much volatile," he added.

A City of London financial source told EIR that the Russian and Chinese statements were not statements of intent, but announcements of ongoing operations; he called this is a chief reason for the dollar's dive. "The dollar will continue to weaken," the source said. "There are central bank sellers about. My reading, is that what we heard the other day from the Russian Central Bank, is not something for the future, but was a statement made, after they have begun to move out of the dollar. That is probably one of the reasons for the dollar loss in respect to the euro. The Russians know the Iraq war is brewing, and, by doing this, they can exert some pressure, while making moves to ensure that their holdings are not hostage to an American action in event of war. All this suggests that the Russians are taking a harder line respecting [war in] Iraq than some had thought. The same goes for the Chinese."

The Danger for President Bush
This brings us to the recent warnings about the effect that a unilateral U.S. launching of war on Iraq, will have on the dollar's fortunes. This point was made with particular force in the Jan. 26 Sunday Observer of London, by its senior commentator Will Hutton. Because of the weakness of the U.S. economy and the threat to the dollar, the United States needs multilateral support for an Iraq war even more economically than militarily and diplomatically, Hutton wrote. "The United States' military capacity may allow unilateralism; its soft economic underbelly ... does not." He argued, that "The multilateralism that Bush scorns is, in truth, an economic necessity," and noted that while the United States may be a military superpower, "it is a strategic position built on economic sand."

Hutton noted the massive U.S. indebtedness to the rest of the world, citing net liabilities of more than $2.7 trillion—nearly 30% of GDP—which puts the United States at a Latin American, basket-case level. Pointing out, as we have shown above, that this makes the United States dependent on a substantial flow of foreign capital into American markets, Hutton noted with some irony: "The Old Europe that Donald Rumsfeld mocked last week has been helping to prop up the U.S. economy."

Hutton's commentary concluded that if the United States and Britain go to war without support of key members of the UN Security Council like France and China, the flow of dollars from abroad into America will slow down dramatically, and there will be a stampede of foreigners trying to sell. If the war is prolonged, or the post-war situation unstable, the pressure on Wall Street and the dollar would be severe, and "Bush might even have to turn to his despised European allies to ask for a multibillion-euro support package for the dollar, because they hold the only currency capable of shouldering the burden."

Another version of the same scenario was posed in a Jan. 25 Dow Jones story, which warned that a prolonged Iraq war could set off a vicious downward spiral in the markets, in which foreign investors liquidate their dollar holdings. The story noted the fact that Russian and Asian central banks are already beginning to dump dollars.

Business Week Online on Jan. 31 predicted that the biggest danger facing the U.S. economy "is that war could turn the dollar decline into a rout." It noted that the economy "is extremely vulnerable to a dollar decline, since America has never been so dependent on foreign capital," and added, "The threat that war may spark a run on the dollar is the largest macroeconomic threat to the economy."

President Bush, take heed.

Maybe gold is a good investment. The demand is there.

[Sten Sture]

(edit in: that article is full of bizarre assumptions -> 30% debt to GDP is much better than most of the world, and certainly not South American levels; household debt is lower as a percentage of income than it was 10 years ago, etc, etc. Strange article)


A third possible scenario with gold is that improvements in extraction technology will undermine the longterm value of the metal. That is basically what has happened of late, the cost of finding and mining the stuff has declined, so production of $350oz researves can come on line once the strike price is reached, such as we are seeing now. This caps any upward move and limits the potential returns. A similar thing happens in the oil business. As the price per barrell declines, production at expensive sites are shut down. Conversely at a time like this, rig counts are going up pretty strongly.

For what it is worth right now, I would not be a casual buyer of oil, gold, bonds or the euro. The four places that hot money has been going for the past couple of months. The contrarian in me is concerned about how soon the hot money will flow away from those areas...

[DanS]

Lyndon LaRouche

[Tripledoc]

Originally posted by Sten Sture
(edit in: that article is full of bizarre assumptions -> 30% debt to GDP is much better than most of the world, and certainly not South American levels; household debt is lower as a percentage of income than it was 10 years ago, etc, etc. Strange article)

Yes the article is politically slanted, but the facts on gold are right, maybe.

A third possible scenario with gold is that improvements in extraction technology will undermine the longterm value of the metal. That is basically what has happened of late, the cost of finding and mining the stuff has declined, so production of $350oz researves can come on line once the strike price is reached, such as we are seeing now. This caps any upward move and limits the potential returns. A similar thing happens in the oil business. As the price per barrell declines, production at expensive sites are shut down. Conversely at a time like this, rig counts are going up pretty strongly.

If the costs of mining gold are declining that might be because miner's pay is being eroded. Also an expansion of gold supply would that not mean that some of it would be kept in reserve, like diamonds, artificially stabilizing the price.

Also I don't know where gold is mined (Australia and South Africa?) but certainly some gold producing countries are vulnerable to political destabilization, which might increase the price of gold too.

Of cause in the very long term gold will decline in value as it has since antiquity. But the value has been declining at a very steady an miniscule rate. And in times of economic crisis there is a surge. Or rather the relative value is increased as fiduciary money goes down, which then in turn means a further increase in the value of gold as the demand for it rises. Sort of a self perpetuating process.

[Tripledoc]

Originally posted by DanS
Lyndon LaRouche

Yes he is WEIRD!

[el freako]

Originally posted by Sten Sture
that article is full of bizarre assumptions -> 30% debt to GDP is much better than most of the world, and certainly not South American levels; household debt is lower as a percentage of income than it was 10 years ago, etc, etc.

Well both the EU and Japan have net assets relative to GDP, but 30% is not disasterous being around the level that Australia has (but bear in mind that 10 years ago that figure was 10%).

Originally posted by Sten Sture
Household debt is lower as a percentage of income than it was 10 years ago, etc, etc.

Sorry Sten that's incorrect.

US household's debt as % of disposable income:
1991: 88%
2001: 109%

Souce:
OECD, tab six (HldWealth&Indebt) in the workbook.

[Sten Sture]

el freako - You are again correct - I should have said: debt to net worth and debt service to income are better than they were. And those two are substantially more pertinent.

According to the just published Survey of Consumer Finances, Household debt as a percentage of total assets declined from 14.5% in 1992, to 12.1% in 2001. (SCF table #10, pg 21) and the debt service declined from 14.0% of household income in 1992 to 12.5% in 2001.

Households with more than 40% debt service to income was 10.8% in 1992 versus 11.0% in 2001, and households with some debt payments 60 days late increased from 6.0% in 1992 to 7.0% in 2001, though that was down from 8.1% in 1998.

www.federalreserve.gov/pubs


Curiously, interest payments by individuals through the third quarter (saar) were $189.3B the lowest level in years, while interest INCOME still dwarfs payments at $1,080.7B according to the BEA's most recent release. www.bea.gov/bea/rels.htm

[Lawrence of Arabia]

About that article

1. As it is right now, the US dollar is overvalued. The Economist did a survey once of big mac prices in the rest of the world, and then used the official conversion rate to change the local currency into dollars. On nearly all of the countries surveyed, the US dollar bought more then the exchange rate was. In otherwords, its overvalued

2. Because the dollar is overvalued, other countries goods seem cheaper for us. Which is why webuy so much stuff from other countries, and which is why he have a huge current account deficity. Who cares? As long as the capital account surplus cancels it out, we dont have a problem

3. The US has a huge capital account surplus because the dollar is overvalued. People invest more into the US then into any other country because once they get the dollars, they can spend it almost anywhere and the goods will be much cheaper.

4. When the dollar loses value against other currencies, our goods appear cheaper which will increase exports and decrease the current account deficit

Sure, we are buying more and more goods from abroad. But more and more countries are investing into us. Its necessary. As the price of labor goes up, due to employment and education, these heavy industries will move to cheaper locations. Our economy has become one of services. Is there anything wrong with that? Not at all.

Conclusion: this author is making a whole lot of noise out of nothing.

[el freako]

Originally posted by Sten Sture
el freako - You are again correct - I should have said: debt to net worth and debt service to income are better than they were. And those two are substantially more pertinent.

According to the just published Survey of Consumer Finances, Household debt as a percentage of total assets declined from 14.5% in 1992, to 12.1% in 2001. (SCF table #10, pg 21) and the debt service declined from 14.0% of household income in 1992 to 12.5% in 2001.

Yup debt service is lower (hardly surprising with the huge fall in interest rates over the last 10 years).

But debt as % of assets has not declined (according to the OECD survey above anyway) - it increased slightly, from 15.2% in 1991 (debt was 88% of disposable income and assets were 578%) to 16.4%in 2001 (debt was 109% and assets were 665%)

As for the figures for 2002 well I'm pretty certain that debt rose one helluva lot faster than assets!