The Economist: America may default on it's debt

Iaato

Your bad British paper is courtesy of adoption of bad US paper and fraudulent US models for financial gamesmanship. According to that first Figure in the LEAP article, you guys own 10% of US debt.
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"For my part, whatever anguish of spirit it may cost, I am willing to know the whole truth; to know the worst and provide for it." --Patrick Henry

Twilight · Expert Joined: Mar 02, 2007 Posts: 2971 Location: UK

On the bright side, at least it is only losing money against price inflation, unlike the rest of the market which is plain losing money. And if we do something really stupid, the higher yield will offer some compensation. Thankfully my choices are not rigged to include a portion of alphabet soup; gilts and cash it is until there are better options.
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"The American people are watching the numbers climb higher and higher at the pump and they're waiting to see what the Congress will do." - George W Bush

ReverseEngineer · Heavy Crude Joined: Jul 16, 2008 Posts: 302

MrBill · Expert Joined: Sep 15, 2005 Posts: 5220 Location: Eurasia

I fear I grasp the concepts far better than you do. Nothing that you wrote disproves anything I have written. Food, fuel and fertilizer prices are all inter-related, and therefore are all subject to both physical limitations on production as well as scarcity.

You are confusing finance with economics. They are not the same. Money has no intrinsic value. Like all assets it fluctuates in value relative to all other assets. If you produce too much money it falls in value compared to physical assets such as energy, commodities and precious metals that are limited in supply and therefore valued for their scarcity.

The Saudis have oil. They need to import food. There are logistics involved in that physical transfer of oil for food. So what? Is this basic observation somehow outside the realm of economic theory? Or breaks the basic rules of finance that you can exchange one asset for another via a transaction currency such as the US dollar or the euro?

If a resource is finite, and demand is positive, then the physical reality is that eventually the mid-point of extraction will be reached, such as peak oil, and there after production, and therefore consumption, of that resource can only decline. Potentially to zero. It is finished. That is not outside financial or economic theory. I get it. I have been at this website for three years.

The only alternative to a finite resource is another resource. It may also be finite. It may not be a perfect substitute. Alternative energies may have a lower EROEI than petroleum products. That means they are less efficient, and therefore will cost more in absolute terms to produce and to consume. Energy is both a final product for consumption, as either heat or transport, and it is a cost of production. An input. Again that is nothing new to me. It breaks no economic laws. From a financial point of view if I pay more for a less efficient alternative to petroleum I get a lower return on my investment. Period. You can measure that in monetary terms or as a drop in living standards.

A lower EROEI alternative to petroleum would therefore either make food and fertilizer more expensive in real terms or reduce total production of food and fertilizer or both. If fuel, food and fertilizer all cost more in real terms, and if supply is reduced, then there can only be less consumption. Potential demand, which is for all intents unlimited over time, is destroyed until actual demand meets available supply.

There is nothing in either economics of finance that says if we produce less fuel, food and fertilizer that it will not result in higher real prices, lower living standards, more poverty and even starvation or die-off. The flipside to demand is the ability to pay. The flipside of supply is the ability to produce. If you cannot produce it, you cannot consume it.

If you cannot produce the wealth to pay for food, fuel and fertilizer then you cannot buy it from those that can produce it. They will sell that food, fuel and fertilizer to someone that does have something else of value that they want. You can represent that as money - dollars, yen, euros, yuan or whatever - but it represents a call on a real asset that someone else finds of value.

There is no value judgement to say whether that is good or bad. It simply is. You cannot tax or transfer non-existent wealth. If it is not produced it does not exist. Wealth can be measured in money, but it is really a claim against physical assets. Labor if unused has no value. It is a wasting asset. Kind of like posting here. I cannot pay myself to work for myself. I can only sell my labor for food, fuel or some other asset like money. Or I can use my labor to produce those assets for myself. So you can express the value of food, fuel and fertilizer in monetary terms or you can express them in terms of the cost of labor or the amount of labor.

This is all textbook stuff. And guess what, it works in the real world as well. Economics is the study of scarcity. Man's wants are unlimited. His means are limited. Finance is the study of the value of assets. Sometimes the time value of money. Or risk versus reward. No asset has a fixed, unchanging value. All assets change in value relative to one another. Transport costs or even the means to transport using energy is a function of the value of one asset to another (food & fuel) over distance (fuel & time). So if the Saudis need food, they better make sure those that grow it for them have fuel, and the means to transport it to them. They cannot eat money in the bank. That has no intrinsic value in any case.
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.

cube · Fusion Joined: Mar 12, 2005 Posts: 3375

MrBill you give these people more time than they deserve.
You have a greater amount of patience then I do that's for sure.
Give me another 2 years on this website and I think I'll end up like an irritable scrooge who will have NO patience for answering anyone's questions!

Cloud9 · Intermediate Crude Joined: Jul 26, 2006 Posts: 955

So, if the U.S. government goes bust, how does it fund its entitlement programs?

wisconsin_cur

MrBill · Expert Joined: Sep 15, 2005 Posts: 5220 Location: Eurasia

patience · Expert Joined: Jan 04, 2008 Posts: 1412

Yeah. I just got signed up for Social Security today, 1st check due in Dec., 2008. I wonder if I'll get it, will the $ have any value if I do, and if so, how long that will continue?

My best guess is, they will write the checks, and they will get to be worth less and less until they are about worthless, say in the next 1 to 5 years. I hope it lasts long enough to get back the money I paid in to those thieves.

edit: Using the govt cpi numbers from 1965 to date, the official inflation has been about 7 to one since then, if I read it right. So, they'll have to pay me back (averaging from then to now at say, a 4 to one rate), about $150,000 for me to come out even, not counting the time value of the money. At $1,200/month, that is 125 months, or 10 1/2 years. If we included the time value, at a 6% interest rate for the past 43 years, There is no way I'll live long enough to get it back. 6% compounded doubles in how long? About 10 years? I dunno. If so, that would mean doubling 4 x or more. Give me compound interest over Social Security any time!!
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Local fix-it guy..

ReverseEngineer · Heavy Crude Joined: Jul 16, 2008 Posts: 302

Economic Theory..scarcity and wealth...suply and demand....money supply....

Amazing the amount of verbiage applied to a simple problem. Too many people, not enough stuff. I don't think ANYONE here, including Mr Bill denies the underlying problem of a lack of resource to support the current population. Mr Bill just obfuscates his analysis with a lot of traditional economic theory.

The real questions are not if a reduction occurs, it must, but HOW the reduction occurs. There are so many variables in this one its not even funny. I'll pitch out a few for you folks to play with.

All the economies are tied together. So, though wealth in "dollar" terms might flow toward the oil producers, they still gotta buy back food produced with the oil bought with dollars. Except of course since Ben Bernanke keeps printing new dollars, the dollars the Saudis earned today buy LESS food tomorrow from the oil they sold yesterday. Sure they are getting richer in dollars, but they are getting poorer in food.

Oil is Food, but you can't eat it until it gets transformed. It gets transformed through the industrialized agricultural process and then moved through the transportation process, all oil dependent of course. The Saudis aren't getting any richer, they are just holding more bad paper in the form of Dollars and leaking out more oil every day.

So the question is, HOW does it spin down, not DOES it spin down. Well, this one has at least as many variables as the first problem, probably more. As the oil gets more expensive, it forces the reduction in production of many things, well everything really but it comes in stages. The automotive industry abosrbs a lot of oil in the production of cars, but we got 20 years worth of cars that still operate. Every single plant in the US producing cars could STOP tomorrow, and we would still be driving. I personally drive a 20 year old car at the moment. If all the plants producing cars STOP producing tommorrow, there will be excess production of oil that used to be used to produce those cars. So effectively, you have at least a 20 year lag time because the energy used in the past to produce cars could now be turned toward just keeping the old ones running. Obviously it does not happen quite that way, but you should get the picture here. People just won't buy cars, they will use their old ones and the automotive companies will gradually go outta biz. This by itself takes at least 2 to 3 years to completely devolve itself. Bad as the balance sheet is at Ford, they won't go outta biz tomorrow. Its a very big engine with a lot of inertia. Takes a while to slow that one down to a complete STOP.

As the auto plants go out of production, so also will people be forced out of their suburban homes. They can't pay the mortgage on them. So those Energy Eater homes go offline as well. Again, this leaves surplus of current oil production. the quicker we as an energy society go down the tubes economically, the less oil gets consumed, and rapidly because since the economies are all tied together, the Chinese economy fries right along with ours. They hold a LOT of our bad paper.

All that excess oil saved on unproduced cars and vacated houses will not go to waste however. It will get burned up in Wars for the possession of the oil that remains, which ends up stimulating the economy. But it takes some TIME to play out. It does not happen in a year, it probably takes at least a decade here to get to the point you can't even run a mechanized war effectively.

I got my personal plan for survival if it crashes in an instant, but I don't really think that is how it goes. I think it spins down here over a decade or more. I'd be interested to hear other interpretations of possible spin down scenarios.

ReverseEngineer

Cloud9 · Intermediate Crude Joined: Jul 26, 2006 Posts: 955

So, you are telling me that all those people who are on welfare will be cut off?

the48thronin

cube · Fusion Joined: Mar 12, 2005 Posts: 3375