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abqguy 09-22-2011 04:54 PM

Massive default is best way to fix the economy
 
Interesting article but not very uplifting though.

Massive default is best way to fix the economy - Portfolio Insights by Brett Arends - MarketWatch

go_guy123 09-22-2011 05:22 PM

Quote:

Originally Posted by abqguy (Post 2891744)

Thats very hard to implement as the whole credit system is based on past credit history.
US atleast has non recourse home loans (closest to default).

Fed is already try to do that using QE3 and more to come...which is buying bonds by paying cash...where it comes from ? printing or its electronic form.

That way they can transfer the "pain" to holders of USD treasuries....mainly foreign central banks of China, Japan, HK, Korea, Taiwan etc

snathan 09-22-2011 05:42 PM

Quote:

Originally Posted by abqguy (Post 2891744)

They should default and dont pay anything for the Chinese...so they can fix the economy and contain the Chinese. :rolleyes:

rkg000 09-22-2011 05:43 PM

In the Grand Scheme of things was this mess to create new money
 
Quote:

Originally Posted by abqguy (Post 2891744)

In the article, an interesting point was that the borrowers were paying their debts instead of spending.

That got me thinking as to where the money originated and where is it going. For example a house worth $100 in 2003 is worth $1000 in 2006. So a bank would have to lend $1000 for someone to buy that house and then investors or government would have to lend that $1000 to bank to make the loan. If the price increase was on par with rise in inflation then the gains for the creditors are just the interest on money. But since the House price fell back to $200, the creditors or money creators are enjoying an extra $800 for which home owner is on hook. Who exactly is enjoying the extra $800 and the interest on it while the inflation adjusted increase was just $100 from 2003 - 2006.

thomachan72 09-23-2011 10:32 AM

Quote:

Originally Posted by rkg000 (Post 2891754)
In the article, an interesting point was that the borrowers were paying their debts instead of spending.

That got me thinking as to where the money originated and where is it going. For example a house worth $100 in 2003 is worth $1000 in 2006. So a bank would have to lend $1000 for someone to buy that house and then investors or government would have to lend that $1000 to bank to make the loan. If the price increase was on par with rise in inflation then the gains for the creditors are just the interest on money. But since the House price fell back to $200, the creditors or money creators are enjoying an extra $800 for which home owner is on hook. Who exactly is enjoying the extra $800 and the interest on it while the inflation adjusted increase was just $100 from 2003 - 2006.

Its very complicated. This extra $800 is channeled back into the system. That is why we have several more high paying jobs than what would have been available if the growth of price was just from 100 to 200. Now when it fell back from 1000 to 200, the jobs and other facilities that the "extra 800" supported is also falling apart.
Now here is the interesting role of "offshoring/outsourcing" plays. Instead of a reduced consumption due to increased cost of production what we say "thanks to NAFTA/other trade agreements" was that consumption was maintained by production offshoring. What now? Now we have a dangerous situation in countries like India/China due to the temporary boom; Every indian and chinese will soon own a car. Imagine that situation:(:confused: The US/Europe simply shifted the "consuming responsibility" to India/China which were traditionally very low consumers. Unfortunately there is no going back without a painful setback in these economies on the long run. :mad:

go_guy123 09-23-2011 11:43 AM

Quote:

Originally Posted by thomachan72 (Post 2891978)
Its very complicated. This extra $800 is channeled back into the system. That is why we have several more high paying jobs than what would have been available if the growth of price was just from 100 to 200. Now when it fell back from 1000 to 200, the jobs and other facilities that the "extra 800" supported is also falling apart.
Now here is the interesting role of "offshoring/outsourcing" plays. Instead of a reduced consumption due to increased cost of production what we say "thanks to NAFTA/other trade agreements" was that consumption was maintained by production offshoring. What now? Now we have a dangerous situation in countries like India/China due to the temporary boom; Every indian and chinese will soon own a car. Imagine that situation:(:confused: The US/Europe simply shifted the "consuming responsibility" to India/China which were traditionally very low consumers. Unfortunately there is no going back without a painful setback in these economies on the long run. :mad:

The offshoring/outsourcing/import is possible due to the currency peg..that Asia on the whole does to US dollar (some rigidly like China while others loosely like India )

So, how do they do the peg...by buying US treasuries (US Dollars) and real interest on US treasuries (adjusted for inflation) is actually negative.

Therefore , whether its Bush, Obama, Perry, Mitt Romney...who ever comes will issue more treasuries at close to zero interest (and real interst rate is -ve)

On the whole US consumers enjoyed the whole decade and are enjoying the low interest rates at the expense of the
savers in China, Japan and other asian countries.

Like Gondon Gekko said ...pal, its a zero sum game..there are winner and losers.

Eventually China and others will face the same fate of France who lost a bundle from Pound pegging in the 1920s.

Without currency intervention, as US imports more, the USD currency should fall making imports/outsourcing more expensive and making US manufacturing sector viable. With private sector providing jobs , there wouldnt have been need for so many government jobs (to reduce employment and win elections) and the resulting deficits and "stumulus" spending by debt.

Long run classical economics prevails but short run Keynesian wins.

thomachan72 09-23-2011 01:59 PM

Good explanation goguy123. Thanks


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