MONEY 101 - COUNTRIES DEBTS

THIS IS MY 101^ST BLOG ON UNDERSTANDING MONEY TOOLS

I have been very quiet when it comes to writing blogs as there has not been much to comment on, nor can I think of anything new to educate on.

Let me toss this in before we start. The stock markets still boggle my mind as they continue to go up when earnings are coming down, put in fact an old line company like IBM has had falling earnings for over 4 years now.  Verizon now is buying Yahoo at a fraction of value it was worth in year 2000.  Yahoo should have sold out years ago.  Boeing Corporation just announced their first quarterly loss in 7 years, recent years supported by international sales.  We have had the third highest stock market based upon prices to earnings, however I believe it is now the second highest only to 1999-2000.  Again, there is no place to invest safely like CD’s and bonds to get a return, so people are forced into the stock market, when they should be in low risk investments.  How do I feel about land for investment?  Not good.  Housing in general is going to downtown urban and smaller units.  Home ownership this week was announced the lowest in 50 years.  Foreign entities have bought up large parcels of farmland, but companies like Cargill and Monsanto are coming up with genetically altered product producing much more out of less needed acreage. 

We are reaching $20 trillion for US debt exclusive of future obligations and off balance sheet accounting. No matter who wins the presidential election we are going to go much more in debt.  The head of the World Trade Organization (WTO) this week mentioned that Mr. Trump blames a lot of the NAFTA and PTA Agreements however reality is that technology and robotics have done away with the need for human workers no matter what the pay level; I must agree and this is only the start.  What do we do with human beings?  There is also less demand for goods in the world then let’s say the fantastic growth years after WWII.  The other diminishing factor for growth is the significant relationship between debt, taxes and growth. The  fewer dollars in the middle income level wage earners the slower the growth (GDP).  Ir really is all simple and cause and effect!

Now the reason for this blog, we are going to discuss country economics from a standpoint of debt.  This past week (July 25, 2016) several countries like Japan, Australia and the USA have been attempting to sell bonds. As you are aware, countries like Japan have negative interest rates and yet their economies are in poor financial condition.  Enter  “Uber Keynesian” economics still grip the world. If this was a normal free market world to sell debt/bonds to people and institutions they would want a sizable return on bond yield for risk; not in these times.  Bond sales this week have been a flop.

We are playing in dangerous territory.  Most people are oblivious to the situation and non-carrying.  As I have mentioned in previous blogs the world banks now are sitting with debts of around $10-12 trillion and only getting worse.  Let’s use Japan as an example as most economists do. The country has a debt of about 240% of their GDP.  Horrible, but we aren’t far behind especially if we add in personal debt to GDP, as the people of Japan carry less personal debt than we do in the US.

Japan is experimenting with new debt to pay for infrastructure work and development.  Of course, we did something similar to a large degree under President Roosevelt starting in the early 1930’s.  How does Japan and other countries sell their bonds these days?  This is the scenario.  Japan is issuing bonds with little or no interest yield, these may be “zero coupon bonds”.  As few bonds are being sold at no yield the Bank of Japan steps in as the big buyer of their own bonds.  We have the Federal Reserve to act in this capacity.

As you can see, this is a phony situation and all countries are resorting to this to pay bills and keep things running.  The next president will face something similar; spend money we don’t have increasing the debt to attempt to keep employment up, and create GDP.  This week our Federal Reserve said the economy is “fine” although with tepid growth, thus leaving interest rates unchanged.  Election year balony.

In the end there can only be one of three resolves: 1) default on debt/bonds which will kill our reputation including the future sale of bonds 2) continue “kicking the can” of debt down the road until we implode or 3) re-negotiate our current debt with bond holders.  None of these options is a “pretty picture”.  At some point this needs to be addressed.