THIS IS MY 173RD BLOG ON UNDERSTANDING MONEY
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August, 2019
We are going to discuss current economics. Simply put, economics is the finance
related to government bodies such as towns, cities, counties, states and
countries. It includes production
of goods, consumption and distributions of money or wealth.
We have been manipulating our way around a normal free
market downturn that should happen every 5 to 8 years; the economic cycle. How? A “Ponzi Scheme” for lack of a
better term (you might kindly say “uber Keynesian Economics”). The cycle is such that we print
trillions of dollars, those dollars go to banks and large businesses, then
workers such as middle class people receive paychecks (not very large) and
loans. That money is spent and
taxed as income taxes or sales taxes on goods and services. Goods and services are referred to as
Gross Domestic Product (GDP), and the cycle starts once again with printing
more money, etc. Our current
government debt to GDP is the worst in the world, around 110%.
Countries around the world, especially third world countries
were lent money by the World Bank and International Money Fund. The definition of “well intended
lending” may be misconstrued by people like me. If countries like Greece can’t pay their loans on a timely
basis, country assets will be sold off to pay the loans and normally to the
rich around the world. Argentina
may be the next country to watch.
Argentina’s currency and stock market have tanked.
I’m afraid we are heading toward a world recession because
of many reasons. One might be over too high of expectations, but the biggest in
my mind is debt. Politicians
promise the world at election time, and then can’t deliver. In 2010 our US balance sheet debt was
approximately $10.5 trillion, today it sits at $22.3 trillion. We are going to cover debt more closely
in this blog, however if you are interested in tracing our US debt from about
1772 to present mainly from our involvement in wars please read my blogs 133
through 145.
Let’s talk first of our country. We hear little about the USA needing another $1.3 trillion
or thereabouts to keep the doors open October 1st (our fiscal year
end), and to tide us into next year.
Mr. Trump is alienating politicians around the world when he needs
cohesion and good trading partners.
It is proving that tariffs are not helping us, and hurting the middle
class. Tariff taxes are a pass
through of costs to the consumer if they want and need products. Now, we are looking at adding more
tariff taxes to Chinese goods.
China is not being hurt the way Mr. Trump thinks. First, China has about 1.3 billion
people. They have downgraded their
expected GDP to 6% from 8%, however that is 4 times more than our current
GDP. China has already filled in
trading gaps with other countries like wheat from Russia and soybeans from
Brazil. The two biggest future
economies in the world are India and China. With sanctions and tariffs aimed at
China they recently sold off about $200 billion of our US bonds; now owning
$1.1 trillion. Somehow Japan was
able to purchase $200 billion of our bonds, now making them the largest holders
of our debt. Russia was the 4th
largest holder of our bonds, but when we sanctioned their country on goods and
services they sold most of their holdings. We are not harming these economies, we are hurting
ourselves.
I am a good American, but let’s make some comparisons
here. Let’s compare China and the
US on a few points. China runs an
autocratic government that moves quicker than our two party system that
accomplishes little and argues about everything. China has greatly improved their infrastructure and cities
making them examples to the world. (I have been in Asia six times and to China
to witness this.) Staying out of
wars China is more nationalistic and spends their money within their
country. China has moved 300
million of their people into the middle class category over the last 9 years
where we have significantly decreased our middle class. Being quite well-off financially they
are large buyers of gold to support their currency. They are able to keep their currency low to make goods
inexpensively and available at low prices worldwide. China’s debt to GDP is roughly 50%, or half of our burden.
In light of our problems, our US dollar remains strong to
other currencies. What are the
pros and cons of a strong currency?
Pros:
- A
strong dollar backs the strength of our debt and bonds.
- The
strong dollar makes imported goods less expensive to the consumer. It offsets some of the cost of tariffs.
- More
Americans can travel abroad cheaper.
Cons:
- More
travel abroad takes our dollars out of this country.
- Our
US manufactured goods are more expensive to buy elsewhere, thus our exports
decline.
- With
exports declining, fewer manufactures will want to set up plants in the US, and
production decreases, thus tax revenue declines.
More countries are slipping downward. Permit me to explain. Germany the week of August 19th
issued new bonds with a negative interest rate similar to Switzerland. Denmark has a zero interest mortgage
rate. Our inversion curve of
long-term bonds to short term has only become worse; related to recession. Why? Smart people are hedging. They are giving up risk, including higher risk stocks and
seeking shelter in low risk bonds.
The more demand for bonds, the lower the interest rate needs to be to
sell the bonds. Well then, who is
propping up our stock market? I
watch the trading patterns of stock markets and my speculation is our largest
banks with government approval are stepping in. (Please refer to The Plunge Protection Team Act of March,
1988.) So why might this be bad
for all of us with retirement programs that hold stocks? At some point the banks may have to
“mark to market” like they needed to do with real estate loans in 2008. They could not meet capital
requirements and many banks went out of business. There too we saw our government select banks to save, and
which ones to let go. Life is not
fair! Here’s a point for you to
ponder. What will happen if the
government makes the big banks “mark to market” on their loans if the stock
markets return to a normal/historical P/E of 15:1 when the DOW is now at 27.5:1? I would render the answer to be another
collapse of our banking system. We
caused it, we will have to suffer the effect.
Other countries are a mess. The exit of Britain has been miserable, and a new Prime
Minister has replaced Mrs. May, that being Boris Johnson. We’ll watch to see if he can handle the
situation. The big thing here is
trading, and it is affecting all European countries. The Prime Minister of Italy resigned this past week, and
Italy is in a mess along with France, Spain, Portugal and many others. Mexico this week needed to re-do their
earnings (GDP) and appears to be heading into recession.
I hope you have gained new information from this blog.
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