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April 12, 2013 at 1:03 pm in reply to: US Balance of Payments and Current Crisis Outcomes #17717
I understand what you said Professor Herbener, but my question is this. I apologize if I wasn’t clear above.
If foreigners decided tomorrow to say “You know what, we are not going to finance US current account deficits by recycling the dollars back into Treasuries but we are going to sell the dollars on the market from now on”, wouldn’t that immediately put upward massive pressure on interest rates in the US and immediately lead to the collapse I’m talking about?
What I mean is, aren’t we too reliant on foreign nations who sell us goods, which we then pay for with US dollars, which they then recycle into US treasuries? If they decided to no longer recycle our dollars into treasuries then wouldn’t we immediately have a currency crisis because with us running $50B a month trade deficits, that’s alot of dollars that foreign countries like China, Japan, South Korea and Saudi Arabia would be selling onto the foreign exchange market and would immediately cause the dollar to plunge on foreign exchange markets and cause the cost of living in the United States to rise dramatically?
Whereas if we were not running trade deficits then there would be no dollars to sell on the open market because foreign central banks wouldn’t have accumulated such a large amount of dollars because we would have paid for exports with exports.
And what I’m saying is under a gold standard, we would have never gotten into this position because the classical gold standard was responsible for keeping trade and current account deficits in check, vs the system we have today which seems completely unsustainable and it makes me think the adjustment process for us to repair our balance of payments (saving more, investing in capital and manufacturing alot more, deleveraging, etc) is going to be an extremely long and painful process.
I would checkout the Cobden Centre, Detlev Schlichter is a part of that institute and he is as good of an Austrian as there is, legit as good as Tom Woods or Peter Schiff.
Sons, the gold bubbles most often pop during periods of real interest rates of +2%.
However, never again will we have real interest rates. Every 1% move in interest rates adds $160B to interest expense on the national debt, which, thanks to Clinton and Rubin, now has an average maturity of under 3 years.
In a few years time, when inflation is clearly at 12-15%, it would require someone raising interest rates ahead of the inflation in order to tame the beast, but that would require interest rates of let’s say 17%.
Assume the US has a debt of $20T by then, it would mean an annual interest expense of $3T+ if we roll over the entire debt stock over the course of 3 years at the new rates.
And with our extremely overleveraged, consumer debt driven economy, you’re right to think we would be in a real mess with rising interest rates. Credit card rates would spike up, meaning people would be doing everything they could to pay down balances instead of racking them up. This would lead to poor retail sales, leading to layoffs and decreases in state and local tax revenue, less federal revenue, rising unemployment, so on and so forth.
In other words, hold on to your gold and silver and prepare for a monetary meltdown. There can be no end to quantitative easing, stimulus or the like. The U.S. balance sheet is beyond repair and Bernanke will monetize and monetize until he can monetize no more.