Bank of Canada won't raise interest rates to cool housing

[daveto]

Going further along that theme...
Even if China choose to dump it's $800b of bonds into the market, what prevents the us from simply buying those via quantitative easing funding? (ie printing money). Sure, that should create inflation and probably would eventually, but we haven't seen much inflation yet from the prior quantitative easing).

In any event, I think most agree that it is unlikely that China would want to devalue the US dollar, given their interest in keeping their own exports affordable via a low Renmimbi.

 

[CN Tower]

So you believe that the United States government can continue print their way out of debt and that there will be no adverse consequences to interest rates? I strongly disagree. I believe that sometime soon the value of longer maturity US Bonds will plummet and rates will skyrocket. That's just my opinion but I base it on common sense.

Your friend owes you a lump of money, and you know he can't pay up. Will you ask for the lump sum, potentially lose the friend ship, or continue receiving interest payments.

It depends whether I believe he is capable of ever paying me back and whether he has any assets that I can realize on. One thing is for sure- if he can't pay me back I will want a higher interest rate on the loan.

 

[interested]

If you believe he can never pay you back, you would set up a repayment schedule over time and not even worry about the interest, I would think.

the problem being described of course is very complicated in the case of US debt and say China. As was pointed out before, the US is about 23% of the world's GDP. China is 5%. Even if it doubles in 5 years, then it will be 10% even if the US does not increase or decrease. It would be catastrophic for China to "pull the plug on the debt". US can't/doesn't pay: goes into default, China's economy (now the largest exporter in the world having passed Germany) loses it biggest market. In turn, its economy is severely impacted and they lose far more than their trillion $ reserves. the above said, you are absolutely right that the current system is unsustainable in its present form. The US will have to get its financial house in order. Expect taxes to increase in the US. It has the lowest tax rates of the developed world. Expect a reigning in of government expenses. And eventually one would epect the economy to grow into debt level survicing ratios that are more acceptable. The fact that China defacto has the US as its currency since it won't allow the Renminbi to escalate to any degree it will support the US dollar though like a parent it will start to impose limits on its "child" and the US consumer/government who have to date spent beyond their means having a benevolent uncle(china and the rest of the world) financing them, will be scolded and told to reign in its desires.

 

[daveto]

So you believe that the United States government can continue print their way out of debt and that there will be no adverse consequences to interest rates?

I believe no such thing.

That was not our original topic. Our topic was about whether China has some sort of stranglehold on the US via their ownership of US treasury bonds.

My comments wrt China were that contrary to the bizarre and superficial comments in the MSM, they actually make up a very small portion of America's debt (7%). Further, that even if they choose to sell it all, that is not a nuclear bomb type economic event. And finally, that we exist in a deflationary period which has thus far allowed many governments to print money without any inflationary consequences to date.

In addressing your comments about the consequences of quantitative easing...
Increasing the money supply will not cause inflation if the velocity of money circulation decreases by an equal or greater amount. Also, in the same way that the US gov't (and others) have increased the money supply, they also have the power to decrease the money supply in the future (if the velocity of circulation increases).

Whether or not the truly have the power to fully regulate inflation/deflation through monetary policy...?? I doubt it. Not because it cannot work mathematically, but rather because I think it creates a moral hazard which will eventually undermine it as an effective tool.

 

[CN Tower]

http://www.theglobeandmail.com/glob...education/how-inflation-works/article1428332/

I found this useful. Hope others do as well

 

[cdr108]

http://www.theglobeandmail.com/glob...education/how-inflation-works/article1428332/

I found this useful. Hope others do as well

what part, the article or the comments by Lightworker: Inflation is not an increase in prices. Inflation is an increase in the money supply, which dilutes the existing money already in the economy causing prices on average to rise. Rising prices are a symptom of inflation, not the cause of it.

 

[X2 Buyer]

My comments wrt China were that contrary to the bizarre and superficial comments in the MSM, they actually make up a very small portion of America's debt (7%).

http://en.wikipedia.org/wiki/United_States_public_debt

China, Hong Kong and Tai Wan will make up 30% of total

Foreign owners of US Treasury Securities (September 2009)
Nation billions of dollars percentage
People's Republic of China 798.9 23.35%
Japan 751.5 21.13%
United Kingdom 249.3 6.42%
Oil exporters 185.3 5.52%
Caribbean banking centers 171.7 5.64%
Brazil 144.9 4.03%
Russia 118.0 3.44%
Hong Kong 115.3 3.36%
Luxembourg 92.2 2.69%
Taiwan R.O.C. 77.4 2.26%
Switzerland 68.1 1.99%
Germany 56.3 1.64%
Singapore 42.4 1.24%
India 38.9 1.13%
Republic of Ireland 38.6 1.13%
Korea 37.6 1.10%
Thailand 31.4 0.92%
Norway 28.9 0.84%
Mexico 27.7 0.81%
Turkey 27.3 0.80%
France 24.6 0.72%
Netherlands 21.5 0.63%
Canada 20.2 0.59%
Egypt 18.6 0.54%
Italy 17.4 0.51%
Israel 16.9 0.49%
Sweden 16.5 0.48%
Belgium 15.7 0.46%
Colombia 14.8 0.43%
Chile 13.5 0.39%
Malaysia 11.9 0.35%
Philippines 11.4 0.33%
Malaysia 11.3 0.32%
Australia 10.2 0.31%
All other 156.8 4.03%
Grand Total 3428.0

 

[daveto]

??...
...sure, 30% of the foreign held debt...which is appox 24% of the total debt...

30% x 24% =approx 7%.

CN Tower, thanks for posting that article. For the casual reader, note that the "amount of money" referred to equals the money supply multiplied by the velocity of circulation. For more information you can read this article on the "quantity theory of money"
http://www.investopedia.com/articles/05/010705.asp

This is subtlety that the Lightworker did not seem to understand in his/her post.

 

[TrickyRicky]

"all those people calling a crash b/c the rates will increase five fold will be really disappointed. They will increase it ever so slightly ..... 1/4 percentage points at a time and it won't even increase that fast. It's in the best interest of the country (say 75% of the pop) to keep this market going rather than popping the bubble"

I tend to agree. This is a waiting game. The intention is to allow time to depreciate real estate assets while maintaining absolute values as close as possible to present levels in absolute dollars, while trending rates slowly back to sustainable levels. I think the objective is to have, for example a property worth $400,000 in 2010 be worth $400,000 well into the future. How far into the future? I don't really know. The fundamental consequence however would be that real estate capital appreciation averaged over the next decade would under-preform, perhaps seriously, relative to historic post-1950 norms.

The flip side is that we could still experience a crash or mini-crash during this period. This remains a possibility, however it is less likely because it is not the preferred course of action for those with their hands on the levers of power. From the point of view of the market's equilibrium a crash, or long period of under-performance accomplish the same thing. For Mr. and Mrs. average Canadian these two scenerios are not equivalent.

There are those who believe that neither a long period of under-preformance, nor a crash or mini-crash will occur. Instead prices will continue to rise from this present level at average historical norms. Personally I cannot see what underlying factors would drive prices forward from their present levels in the near long-term. Even though we may see prices jump once again in the next 6-months.

 

[Eug]

Yes, I expect going forward after summer 2010, real estate price increases will underperform recent historical "norms".

However, that could mean continued but slight increases, flatlining, or drops.

 

[X2 Buyer]

??...
...sure, 30% of the foreign held debt...which is appox 24% of the total debt...

30% x 24% =approx 7%.

For me, no matter if it is US social security debt, employee pension/healthcare debt, mortgage debt or household/business debt - these are all US real spending that exceeds their receipt. Only treasury bill is the primary instrument US government can issue, borrow and hopefully to cover the over-spending.

So 30% of China owned treasury bills is huge. That was why US urged China to invest more in it the beginning of the year 2009. No one wants to see one day if China / Japan drops off the ball. It will hurt both US and China for sure, but China government is looking for options to replace US dollars for their reserves.

China Argues to Replace US Dollar

 

[daveto]

For me, no matter if it is US social security debt, employee pension/healthcare debt, mortgage debt or household/business debt - these are all US real spending that exceeds their receipt. Only treasury bill is the primary instrument US government can issue, borrow and hopefully to cover the over-spending.

So 30% of China owned treasury bills is huge.

X2, you don't understand. Let me try this one last time.(note that these figures are all approx, depending upon which point in time you pick)

The US has $12T of Treasury bills. $2.8T of that is owned by foreign countries such as China/etc. China owns $0.8T of the $2.8T. (ie 30% of the foreign owned treasuries.)

Once again, let me clarify.

China's $0.8T is 30% of the $2.8T foreign owned US Treasuries..
The $2.8T is approx 24% of the total $12.T. (the rest is domestically owned)

30% of 24%=approx 7%.
or alternatively....
$0.8T of $12.0T equals approx 7%

Do you understand? China does not own 30% of the US Treasuries. It owns 7% of the US Treasuries.

 

[X2 Buyer]

Ok, calculation wise you are correct, depending on how you look at each of the items I guess. I have taken a look at them again and I only still consider the following as the ones for the big poor instead of the 12 trillions.

Debt held by Public (in millions)
Marketable:
Bills...................................................................... 1,986,173
Notes.................................................................... 3,772,964
Bonds................................................................... 677,491
Treasury Inflation-Protected Securities................. 551,308
Federal Financing Bank 1 ................................... 0
Total Marketable a................................................... 6,987,937

The rest for instance the non-marketable or the intragovernmental holdings those are what I just mentioned such as military, social securities and medicare, housing spending etc.

So 30% of 50% maybe something around 15% should make sense.