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Who will pay back the debt?


anders
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I remember when I first red the article made by WB "Americas growing trade deficit" in 2003. I revisited the article because there is a couple of words in that article that i never forget: "every time you hear that foreigners will start move out of the dollar, dismiss it".

 

When was the last time the US had a trade surplus ? Correct me if Im wrong but that hasnt happend since mid 70s and, with lower oil price the US trade deficit will most likely increase again. And with a stronger dollar, it will probably increase even more. So it continues, the US gradually giving away a part of their national net worth.

 

It easy to get lost in this credit jungle environment but it always comes down to the simple fact that credit is borrowing from the prosperity of the future. But at one point, someone will have to pay it back and, looking back at history its been through war.

 

Should the coming generations work harder days due to of our way of living ? should yellen inflate it all away by endless QE letting foreginers take the hit? or should treasury forgive the debt to the fed? what about taxpayers?

 

Simply, who will be standing left with the debt ?

 

Rgds,

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I seem to remember that no sovereign debt is ever really paid back.  It's inflated or devalued away.

 

We've already experienced some of this.  Was on a ski lift last week with a guy ranting and raving that if you made $20k in 1970 you were liven large.  Now it is 3-4x that amount to have the same lifestyle.

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I seem to remember that no sovereign debt is ever really paid back.  It's inflated or devalued away.

 

We've already experienced some of this.  Was on a ski lift last week with a guy ranting and raving that if you made $20k in 1970 you were liven large.  Now it is 3-4x that amount to have the same lifestyle.

 

Man, complaining on a ski lift...

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I seem to remember that no sovereign debt is ever really paid back.  It's inflated or devalued away.

 

We've already experienced some of this.  Was on a ski lift last week with a guy ranting and raving that if you made $20k in 1970 you were liven large.  Now it is 3-4x that amount to have the same lifestyle.

 

Man, complaining on a ski lift...

 

Yes, and yet there is a much greater percentage of the population today that is wealthy enough to get on a ski lift to complain than there was in 1970.

 

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I seem to remember that no sovereign debt is ever really paid back.  It's inflated or devalued away.

 

We've already experienced some of this.  Was on a ski lift last week with a guy ranting and raving that if you made $20k in 1970 you were liven large.  Now it is 3-4x that amount to have the same lifestyle.

 

Man, complaining on a ski lift...

 

Yes, and yet there is a much greater percentage of the population today that is wealthy enough to get on a ski lift to complain than there was in 1970.

 

I agree and disagree.  Skiing is one of those things that has skyrocketed in price.  In the 1970s and 80s there were a lot of local cheap ski hills.  This opened the sport to anyone.  Now those places are all gone, they couldn't afford to buy snowmaking systems that would keep them in business through the dry years.  What's left are resorts and giant complexes with huge systems that can keep snow on the mountain even when it's warm and dry (like this year).

 

Skiing is much more expensive, but the technology is far superior.  Lifts are much quicker, and the places that are still in business can be open even when the weather doesn't cooperate.

 

In terms of affordability it is probably less affordable to the general population.  But the experience a lift ticket purchases now verses then isn't comparable.

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I paid $350 for my 2014-2015 skiing season pass at Bear Valley here in California.  Skiing on those terms is dirt cheap.  We went for two weeks after Christmas for about 10 days of skiing and that amounted to $35 per day for lift tickets.

 

We have another week booked there for spring break, and that will only bring the average price paid down.

 

Without a season pass, it's $65 a day.

 

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I remember when I first red the article made by WB "Americas growing trade deficit" in 2003. I revisited the article because there is a couple of words in that article that i never forget: "every time you hear that foreigners will start move out of the dollar, dismiss it".

 

When was the last time the US had a trade surplus ? Correct me if Im wrong but that hasnt happend since mid 70s and, with lower oil price the US trade deficit will most likely increase again. And with a stronger dollar, it will probably increase even more. So it continues, the US gradually giving away a part of their national net worth.

 

It easy to get lost in this credit jungle environment but it always comes down to the simple fact that credit is borrowing from the prosperity of the future. But at one point, someone will have to pay it back and, looking back at history its been through war.

 

Should the coming generations work harder days due to of our way of living ? should yellen inflate it all away by endless QE letting foreginers take the hit? or should treasury forgive the debt to the fed? what about taxpayers?

 

Simply, who will be standing left with the debt ?

 

Rgds,

 

I don't want to derail a great skiing discussion, but I don't follow the point of the original post. 

1. Lower oil prices shrinks our trade deficit substantially.  We import around 2.5 billion barrels per year.  So that is a $100 to $150 billion decrease.

2. Is a trade deficit inherently bad?  We exchange x dollars for a barrel of oil.  How is that not a wash? 

3. You seem to blur a trade deficit with fiscal deficit.  Two totally different things. 

4. So far Buffett has been shown to be wrong on the whole issue.

   

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the fed has about same asset size as % of GDP back in the late 1940's (about 20% of GDP then and now). 

 

As i understand it, the treasury gradually removed money (fed notes) from the system over a 30 year period.  I definitely could be wrong on the mechanics of all this, but in 1945 fed held assets of 20% of GDP.  by 1980's it was down to 5%.  This was accomplished by taking money out of the system.  The treasury must pay back the fed, which is done by issuing new treasury notes to the public in exchange for fed notes, but at a higher interest rate.  The higher rate results is a net reduction of money held in public hands over the long term.  M2 money supply actually dropped by about 15% of GDP from 1945 to 1985, which is the exact size of the fed balance sheet reduction.

 

Main difference as i see it today, is that public and private debt is about 330% of GDP today.  it was about 150% in the years after WW2. remains to be seen whether we can calmly delever

 

 

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4. So far Buffett has been shown to be wrong on the whole issue.

 

Really? He made $2.3B on foreign currencies and silver in the early to mid 2000s. Since then his view has become more positive on the dollar's value (and he holds something like $60B in dollars). This has coincided with recent dollar strength versus other currencies.

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I seem to remember that no sovereign debt is ever really paid back.  It's inflated or devalued away.

 

We've already experienced some of this.  Was on a ski lift last week with a guy ranting and raving that if you made $20k in 1970 you were liven large.  Now it is 3-4x that amount to have the same lifestyle.

 

Man, complaining on a ski lift...

 

Yes, and yet there is a much greater percentage of the population today that is wealthy enough to get on a ski lift to complain than there was in 1970.

 

I agree and disagree.  Skiing is one of those things that has skyrocketed in price.  In the 1970s and 80s there were a lot of local cheap ski hills.  This opened the sport to anyone.  Now those places are all gone, they couldn't afford to buy snowmaking systems that would keep them in business through the dry years.  What's left are resorts and giant complexes with huge systems that can keep snow on the mountain even when it's warm and dry (like this year).

 

Skiing is much more expensive, but the technology is far superior.  Lifts are much quicker, and the places that are still in business can be open even when the weather doesn't cooperate.

 

In terms of affordability it is probably less affordable to the general population.  But the experience a lift ticket purchases now verses then isn't comparable.

 

I was away from skiing for about 20 years and started back 3 yrs. ago with my son.  The technology change, and change of experience has been dramatic, for the better.  As a kid, and in my early 20 s, I remember freezing my ass off in lift lines.  No more, now I freeze my hands and face off for less time on high speed lifts.  We do the same number of runs in 3 hours that used to take a whole day. 

 

Every hill in Ontario has snow making on every hill now, making for more consistent conditions.  The price definitely seems higher though.  Still, it is not bad for a days entertainment, especially if you take you lunch.

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I remember when I first red the article made by WB "Americas growing trade deficit" in 2003. I revisited the article because there is a couple of words in that article that i never forget: "every time you hear that foreigners will start move out of the dollar, dismiss it".

 

When was the last time the US had a trade surplus ? Correct me if Im wrong but that hasnt happend since mid 70s and, with lower oil price the US trade deficit will most likely increase again. And with a stronger dollar, it will probably increase even more. So it continues, the US gradually giving away a part of their national net worth.

 

It easy to get lost in this credit jungle environment but it always comes down to the simple fact that credit is borrowing from the prosperity of the future. But at one point, someone will have to pay it back and, looking back at history its been through war.

 

Should the coming generations work harder days due to of our way of living ? should yellen inflate it all away by endless QE letting foreginers take the hit? or should treasury forgive the debt to the fed? what about taxpayers?

 

Simply, who will be standing left with the debt ?

 

Rgds,

 

I wouldn't get too uptight about the US being given away.  It still has the most vibrant economy in the World.  300 million people make up 25% of the worlds economy, more or less.  Elon Musk didn't go to India or China to build his dreams and neither do few others.  The US strip mines the world for talent which is more important than the actual trade numbers. 

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I think humility, and an evidentiary approach, are underrated when talking about macro economics and investing.

 

The market doesn't care whether or not you understand why the dollar is economically useful.

 

By the same token. The so-called trade deficit isn't necessarily a bad thing for the U.S. and in the long term it may end up that the other side got the short end of the stick.  And the market will not care that you held the opposite opinion. 

 

Humility is indeed important. There are multiple ways to look at this, but in general trade always benefits both sides, that is true even if money always flows in one direction and goods in the other.  The trade deficit isn't necessary a "problem".

 

My trade deficit with my local grocery store is huge, they never buy anything from me, but I don't consider this a problem at all.

 

 

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I think humility, and an evidentiary approach, are underrated when talking about macro economics and investing.

 

The market doesn't care whether or not you understand why the dollar is economically useful.

 

By the same token. The so-called trade deficit isn't necessarily a bad thing for the U.S. and in the long term it may end up that the other side got the short end of the stick.  And the market will not care that you held the opposite opinion. 

 

Humility is indeed important. There are multiple ways to look at this, but in general trade always benefits both sides, that is true even if money always flows in one direction and goods in the other.  The trade deficit isn't necessary a "problem".

 

My trade deficit with my local grocery store is huge, they never buy anything from me, but I don't consider this a problem at all.

 

I think a better analogy would to think as if you're buying from your grocery store with money that you've borrowed from the grocery store.

 

If the grocery store believes that you could return the money with interest in the future, then it's not a problem at all. It becomes a problem when the grocery store stops believing in your ability to return the money..

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I think humility, and an evidentiary approach, are underrated when talking about macro economics and investing.

 

The market doesn't care whether or not you understand why the dollar is economically useful.

 

By the same token. The so-called trade deficit isn't necessarily a bad thing for the U.S. and in the long term it may end up that the other side got the short end of the stick.  And the market will not care that you held the opposite opinion. 

 

Humility is indeed important. There are multiple ways to look at this, but in general trade always benefits both sides, that is true even if money always flows in one direction and goods in the other.  The trade deficit isn't necessary a "problem".

 

My trade deficit with my local grocery store is huge, they never buy anything from me, but I don't consider this a problem at all.

 

I think a better analogy would to think as if you're buying from your grocery store with money that you've borrowed from the grocery store.

 

If the grocery store believes that you could return the money with interest in the future, then it's not a problem at all. It becomes a problem when the grocery store stops believing in your ability to return the money..

 

But to further the analogy I also have the ability to inflate the debt away.

 

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I remember when I first red the article made by WB "Americas growing trade deficit" in 2003. I revisited the article because there is a couple of words in that article that i never forget: "every time you hear that foreigners will start move out of the dollar, dismiss it".

 

When was the last time the US had a trade surplus ? Correct me if Im wrong but that hasnt happend since mid 70s and, with lower oil price the US trade deficit will most likely increase again. And with a stronger dollar, it will probably increase even more. So it continues, the US gradually giving away a part of their national net worth.

 

It easy to get lost in this credit jungle environment but it always comes down to the simple fact that credit is borrowing from the prosperity of the future. But at one point, someone will have to pay it back and, looking back at history its been through war.

 

Should the coming generations work harder days due to of our way of living ? should yellen inflate it all away by endless QE letting foreginers take the hit? or should treasury forgive the debt to the fed? what about taxpayers?

 

Simply, who will be standing left with the debt ?

 

Rgds,

 

Most of US investments overseas are ownership interests (equity, direct ownership of businesses, etc). Rest of the world owns mostly US debt. US earns very high returns on its investments and pays very little on its debt. Looking at the net returns, it is still mostly favorable to US.

 

Vinod

 

 

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I think humility, and an evidentiary approach, are underrated when talking about macro economics and investing.

 

The market doesn't care whether or not you understand why the dollar is economically useful.

 

By the same token. The so-called trade deficit isn't necessarily a bad thing for the U.S. and in the long term it may end up that the other side got the short end of the stick.  And the market will not care that you held the opposite opinion. 

 

Humility is indeed important. There are multiple ways to look at this, but in general trade always benefits both sides, that is true even if money always flows in one direction and goods in the other.  The trade deficit isn't necessary a "problem".

 

My trade deficit with my local grocery store is huge, they never buy anything from me, but I don't consider this a problem at all.

 

I think a better analogy would to think as if you're buying from your grocery store with money that you've borrowed from the grocery store.

 

If the grocery store believes that you could return the money with interest in the future, then it's not a problem at all. It becomes a problem when the grocery store stops believing in your ability to return the money..

 

But to further the analogy I also have the ability to inflate the debt away.

 

I think what you mean is that you have the ability to print your own money to return to the grocery store. In that case, you will always have the ability to return the money that the grocery store has lent you.

 

However, as you continue to borrow and print your money to return to the grocery store, will the grocery store continue to believe that the money that you've printed for them has value?

 

If not, will the grocery store continue to sell to you?

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I think humility, and an evidentiary approach, are underrated when talking about macro economics and investing.

 

The market doesn't care whether or not you understand why the dollar is economically useful.

 

By the same token. The so-called trade deficit isn't necessarily a bad thing for the U.S. and in the long term it may end up that the other side got the short end of the stick.  And the market will not care that you held the opposite opinion. 

 

Humility is indeed important. There are multiple ways to look at this, but in general trade always benefits both sides, that is true even if money always flows in one direction and goods in the other.  The trade deficit isn't necessary a "problem".

 

My trade deficit with my local grocery store is huge, they never buy anything from me, but I don't consider this a problem at all.

 

I think a better analogy would to think as if you're buying from your grocery store with money that you've borrowed from the grocery store.

 

If the grocery store believes that you could return the money with interest in the future, then it's not a problem at all. It becomes a problem when the grocery store stops believing in your ability to return the money..

 

But to further the analogy I also have the ability to inflate the debt away.

 

I think what you mean is that you have the ability to print your own money to return to the grocery store. In that case, you will always have the ability to return the money that the grocery store has lent you.

 

However, as you continue to borrow and print your money to return to the grocery store, will the grocery store continue to believe that the money that you've printed for them has value?

 

If not, will the grocery store continue to sell to you?

 

But who is "you", this analogy is getting a bit stretched too thin.  Remember the trade deficit isn't trade between the government of the U.S. with some other government, but the aggregate of all trade between non-government entities which just happen to be located in two different countries.  No one talks about a trade deficit between New York and California?  Why?  Because both sides benefit from the trade regardless of which direction the money/goods flow. Countries don't trade, people and companies do.  It doesn't really matter if the parties are located in different cities, different states, or different countries the economics are the same.

 

Also if the dollar collapses the purchaser still has the merchandise and the other side has worthless debt that will never be collected.  A new medium of exchange will be used for trade between private parties in the U.S. and parties in other countries in the future (maybe a private currency, maybe another government currency, maybe a crypto-currency like bitcoin) and things will be bumpy for a while but life will go on.  When you file bankruptcy it is your creditors who get screwed the most, likewise when a currency collapses it is the creditors who get screwed the most, not the debtors.

 

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Also if the dollar collapses the purchaser still has the merchandise and the other side has worthless debt that will never be collected.  A new medium of exchange will be used for trade between private parties in the U.S. and parties in other countries in the future (maybe a private currency, maybe another government currency, maybe a crypto-currency like bitcoin) and things will be bumpy for a while but life will go on.  When you file bankruptcy it is your creditors who get screwed the most, likewise when a currency collapses it is the creditors who get screwed the most, not the debtors.

 

I think the impact will be more on your future consumption rather than the deficits that has accumulated in the past. As an example, look at the impact of the plunging rouble on Russia consumers. The prices of imported products have risen significantly while incomes have not.

 

I mean, like its micro-participants but on a macro level, a country can't continue to consume beyond its own productive capacity without sacrificing some consumption in the future.

 

Sure, companies and people trade, but that doesn't change anything. As an example, A sells widgets to B and demands payment in fiat currency. If A doesn't believe that A can redeem fiat currency for anything, A may demand payment in gold from B. While B has an infinite supply of fiat currency, B will have a limited amount of gold. How will B continue to consume widgets as before?

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@ Tim,

 

1. Lower oil prices shrinks our trade deficit substantially.  We import around 2.5 billion barrels per year.  So that is a $100 to $150 billion decrease.

That implies that USA will maintain its production quota with WTI @ $47 ?!? Production will fall and imports will rise putting pressure on the trade deficit. Plz read EIA paper on projection.

 

2. Is a trade deficit inherently bad?  We exchange x dollars for a barrel of oil.  How is that not a wash?

Depends on what side of equation you are on. Importing more than exporting for decades, buying more than you produce for decades and borrow to do so - yes that is inherently bad for future americans imo. A constant outflow of USD will at some point find its home again.

 

3. You seem to blur a trade deficit with fiscal deficit.  Two totally different things.

The discussion is about the trade deficit.

 

4. So far Buffett has been shown to be wrong on the whole issue.

'So far' does not mean permanent.

 

I think it is a interesting topic since it touches “intergenerational inequities”. It will be very interesting to see how the US will handle the debt level when it becomes inbearable. For decades the US has been selling pieces of the country coupled with increasing the debt level. If thus the Fed start embracing highly inflationary policies (which I believe is the case) the holders of USD will most likely opt for US land instead of US Bonds and, a true colonization of USA by purchase would be initiated.

 

Rgds

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Also if the dollar collapses the purchaser still has the merchandise and the other side has worthless debt that will never be collected.  A new medium of exchange will be used for trade between private parties in the U.S. and parties in other countries in the future (maybe a private currency, maybe another government currency, maybe a crypto-currency like bitcoin) and things will be bumpy for a while but life will go on.  When you file bankruptcy it is your creditors who get screwed the most, likewise when a currency collapses it is the creditors who get screwed the most, not the debtors.

 

I think the impact will be more on your future consumption rather than the deficits that has accumulated in the past. As an example, look at the impact of the plunging rouble on Russia consumers. The prices of imported products have risen significantly while incomes have not.

 

I mean, like its micro-participants but on a macro level, a country can't continue to consume beyond its own productive capacity without sacrificing some consumption in the future.

 

Sure, companies and people trade, but that doesn't change anything. As an example, A sells widgets to B and demands payment in fiat currency. If A doesn't believe that A can redeem fiat currency for anything, A may demand payment in gold from B. While B has an infinite supply of fiat currency, B will have a limited amount of gold. How will B continue to consume widgets as before?

 

Got you.  Well, maybe B should be buying gold now while he can?

 

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Also if the dollar collapses the purchaser still has the merchandise and the other side has worthless debt that will never be collected.  A new medium of exchange will be used for trade between private parties in the U.S. and parties in other countries in the future (maybe a private currency, maybe another government currency, maybe a crypto-currency like bitcoin) and things will be bumpy for a while but life will go on.  When you file bankruptcy it is your creditors who get screwed the most, likewise when a currency collapses it is the creditors who get screwed the most, not the debtors.

 

I think the impact will be more on your future consumption rather than the deficits that has accumulated in the past. As an example, look at the impact of the plunging rouble on Russia consumers. The prices of imported products have risen significantly while incomes have not.

 

I mean, like its micro-participants but on a macro level, a country can't continue to consume beyond its own productive capacity without sacrificing some consumption in the future.

 

Sure, companies and people trade, but that doesn't change anything. As an example, A sells widgets to B and demands payment in fiat currency. If A doesn't believe that A can redeem fiat currency for anything, A may demand payment in gold from B. While B has an infinite supply of fiat currency, B will have a limited amount of gold. How will B continue to consume widgets as before?

 

Got you.  Well, maybe B should be buying gold now while he can?

 

 

True, B should be doing that and also as anders suggests, buying land, businesses and other productive assets of A with the fiat currency.

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