NationStates Jolt Archive

http://www.economist.com/displaystory.cfm?story_id=4418328
I read a series of articles in this week's Economist, of which the above is one of them, that got me thinking of something I was aware of, but did not seek to understand. That is the disastorous state of the world's finances. It is contradictory to what's happened in the past, probably because the world economy is far more open today than ever before. These articles did a good job trying to make sense of it.
As anyone knows, savings and investments are always equal, for all investments use someone's savings, and those savings come from investments. But a shift has happened in the past few years. Some countries have been saving far more, particularly those in Asia and oil exporters. There are several reasons to explain this, but the memory of the Asian financial crisis of 1997 is one, encouraging people to save the piles of money pouring into those nations. China already has 50% of its GDP in savings, by far the highest for any nation.
Witih this backup of savings, one must wonder where the investments go. That is the end of the equation most highlighted by the media, and that is the US, and to a lesser extent, other Anglophone nations. The investments rolling into the US offer an unprecedented oppritunity to build, expand production, and start new businesses. Instead, it is going to consumption. Worse yet, the goods consumed are made mostly in Asia, further fueling the savings.
This is bad for both sides. If the US should have some form of a recession, investments would dry up, and interest rates would soar. But the rest of the world, dependent on US consumers for business, would fall into a recession of its own, as its factories have to shut down, and families empty their savings for basic needs.
I personally feel that any correction to this madness would be healthy. High interest rates and a weak dollar would encourage lots of savings in the US again, and it may help the government rethink its financial position. At the same time, it may ultimatly help the economies of Europe and Asia by becoming more mature, and having more domestic consumption. Reforms from both inside and outside the US need to happen, and they will once this house of cards collapses.
Thoughts?

So my fears are confirmed: I'm the only one on here interested in any financial stuff.

Bit complex for NS's "Bush suxxors"/"No, demz suxxors and are traitors" level of discourse.

For all those out there who can't wait to see america fall, this should be a wake up call. When we do fall we are going to take the whole world with us, and that scares the hell out of me.

Bit complex for NS's "Bush suxxors"/"No, demz suxxors and are traitors" level of discourse.
Well, I guess this is the wrong place for this stuff, then.

The Global financial system is in all sorts of trouble...resource prices are another example (not just oil).

When we chose to free up the markets, we chose to expose ourselves to violent shocks like the one you're anticipating.
I for my part would hope that Asian and Middle Eastern countries would keep investing globally, not only in the US.
What exactly do you mean though when you say that "investment goes straight into consumption"? Cuz they're not saving any of it?

These days global savings will equal global investment. Some countries may have huge imbalances, but on the whole, we'll be right.
I just hope the US can keep the recession away for a while yet, because the longer that takes, the more consumers from Asia (and hopefully the EU again) can take their place.

*grins*

But Bush -does- suxxors. (is that even correct leep grammar? (Yea, I know it's "leet". I just think "leep" is more fun to say))

Anyhow. Yeah... Current world economy is a scary place. Of all the social and political sciences I am versed in on at least a lay level, macroeconomy is probably not my strongest, so it's no surprise to me that I haven't come up with a nobel prize winning solution yet...

I wouldn't worry too terribly about it, though... If the current management of the US goes too far awry, I doubt the new owners (Mr. Chen and Mr. Takamura, et al) will let us remain unemployed too long. ;-)

Well, I guess this is the wrong place for this stuff, then.
Indeed. I find this stuff fascinating personally, but I don't have the depth of experience in the topic to actively debate it, so I just read the economist and learn XD.

When we chose to free up the markets, we chose to expose ourselves to violent shocks like the one you're anticipating.
I don't mind, really. They are always in between really big booms. The world economy, for example, grew at a staggering 5% last year.
What exactly do you mean though when you say that "investment goes straight into consumption"? Cuz they're not saving any of it?
Hardly. When money is saved in a bank, it is used by a bank, and there is no telling where one's capital goes. It's more of institutionalists and professionals that do the investing with capital derived from the market. As for investing in consumption, that is mostly true. Foreigners do not invest in stocks or capital goods as much as houses and government bonds, which produce nothing in the long run.
I just hope the US can keep the recession away for a while yet, because the longer that takes, the more consumers from Asia (and hopefully the EU again) can take their place.
Don't count on it. All those areas you mentioned need economic reform of some sort. Japan is most likely to rev up its consumer economy again, but other than that, I see no reason why it'd happen. Their only hope is a recession, which cuts exporters off from easy American consumers, and forces them to look at markets close to home. We may even see a ressurgence in manufacturing right here in the USA, too.

Indeed. I find this stuff fascinating personally, but I don't have the depth of experience in the topic to actively debate it, so I just read the economist and learn XD.
I just know the basics myself.

Hardly. When money is saved in a bank, it is used by a bank, and there is no telling where one's capital goes.
It is loaned out and people use it to invest (in domestic or in business investment).

It's more of institutionalists and professionals that do the investing with capital derived from the market.
:confused:

As for investing in consumption, that is mostly true. Foreigners do not invest in stocks or capital goods as much as houses and government bonds, which produce nothing in the long run.
Well, I'm only versed in macroeconomics, not in finance - so all I can tell you is that neither stocks nor government bonds count as investment. They're saving.
Domestic Construction is part of investment, and foreign direct investment is still around.
Point is that if foreigners put money into the bank in the US, it's up to Americans to borrow it and do useful stuff with it. Considering the current, relatively strong position of the US economy, I think they are doing just that.
An increase in interest rates may make it more attractive for foreigners to move their money into the US, but it makes it more unattractive for US-ians to invest. Also there is no link between interest rates and saving.
I wouldn't know what you would hope to achieve by making the US Dollar cheaper, other than the usual "we have to compete with China" whining - you can't. No Western nation can possibly offer those kinds of wages. Manufacturing is dying out in our countries. We'd be better off concentrating on getting a strong comparative advantage in R&D and advanced services.

So my fears are confirmed: I'm the only one on here interested in any financial stuff.

By no means are you the only one. I'm a believer that things always correct themselves. We will have a correction here at some point. Best way in my opinion is to make sure your debt is under control. Get some equity built up for that decrease in your home price if it happens. Save some cash or better yet get some investment grade gold. Not that bs way were its in someone else hands to watch. Keep it in your control. Thats the best way in my opinion.

I wouldn't worry too terribly about it, though... If the current management of the US goes too far awry, I doubt the new owners (Mr. Chen and Mr. Takamura, et al) will let us remain unemployed too long. ;-)
That's another problem. The Asian central banks, while making tons of cash, sell their stockpiles of it. Instead, they stockpile dollars, often in the form of Treasury bonds. This is a double whammy for the US right now, and will bite the Asians later. For one, it keeps their currency cheap and their export sector strong, even at the risk of consumption. For another, it is easy credit for the government, meaning that it can spend, spend, and spend some more with easy money. But the Asians need to realize that the longer they arbitrarily prop their own export sectors, the harder the impact they'll take when a recession does hit.

By no means are you the only one. I'm a believer that things always correct themselves. We will have a correction here at some point. Best way in my opinion is to make sure your debt is under control. Get some equity built up for that decrease in your home price if it happens. Save some cash or better yet get some investment grade gold. Not that bs way were its in someone else hands to watch. Keep it in your control. Thats the best way in my opinion.
My financial life is fine. I'll leave it at that.

It is loaned out and people use it to invest (in domestic or in business investment).
It's loaned by a bank where its assets are derived from bank accounts.

Point is that if foreigners put money into the bank in the US, it's up to Americans to borrow it and do useful stuff with it. Considering the current, relatively strong position of the US economy, I think they are doing just that.
We are, but in consumption only. No production is invested in, and our service sector is used by few outside the US.
An increase in interest rates may make it more attractive for foreigners to move their money into the US, but it makes it more unattractive for US-ians to invest. Also there is no link between interest rates and saving.
I wouldn't know what you would hope to achieve by making the US Dollar cheaper, other than the usual "we have to compete with China" whining - you can't. No Western nation can possibly offer those kinds of wages. Manufacturing is dying out in our countries. We'd be better off concentrating on getting a strong comparative advantage in R&D and advanced services.
I agree with the last part. Anyhow, a cheaper dollar will make foreign goods more expensive. Domestic production may or may not kick back in, but eiither way, we will see a more conservative and more thrifty American consumer. It'd be especially nice if a weaker dollar did, in fact, attract more foreign savings.

It's loaned by a bank where its assets are derived from bank accounts.
At some point in the cycle an investor will get some money into their grubby hands, correct?

We are, but in consumption only. No production is invested in, and our service sector is used by few outside the US.
Bah, you need to check on that. :)
http://www.oecd.org/country/0,3021,en_33873108_33873886_1_1_1_1_1,00.html

I agree with the last part.
Not with the first?

Anyhow, a cheaper dollar will make foreign goods more expensive. Domestic production may or may not kick back in, but eiither way, we will see a more conservative and more thrifty American consumer. It'd be especially nice if a weaker dollar did, in fact, attract more foreign savings.
But there's a minimum of what the Dollar can do before people seriously decide to switch to the Euro for their transactions. If the dollar starts looking shaky (which it may or may not already do - see budget deficit), and the Chinese suddenly decide to move their assets into Euros, all hell will break loose.

At some point in the cycle an investor will get some money into their grubby hands, correct?
Yes. The capital markets are incredibally complex. I don't even try to understand them.

Bah, you need to check on that. :)
http://www.oecd.org/country/0,3021,en_33873108_33873886_1_1_1_1_1,00.html

My project for tommarow.

But there's a minimum of what the Dollar can do before people seriously decide to switch to the Euro for their transactions. If the dollar starts looking shaky (which it may or may not already do - see budget deficit), and the Chinese suddenly decide to move their assets into Euros, all hell will break loose.
It is a great unknown about the dollar, though I can say this: through the years, the dollar has been very resilient. It survived its biggest challenge, being the collapse of the Brenton Woods agreement, and it has remained a dominate currency ever since. Besides, if I were a foreign investor, I would not give up on the US dollar. The euro is, as I see it, a good idea in theory, but a nightmare in practice, emcompassing different political structures, economies, and others, that lead to a very volatile currency. I believe the euro will one day rival the dollar, but that day is not today.

My financial life is fine. I'll leave it at that.


Just giving a general opinion. Not directed at anyone. Good for you if you got your stuff straight.

It is a great unknown about the dollar, though I can say this: through the years, the dollar has been very resilient. It survived its biggest challenge, being the collapse of the Brenton Woods agreement, and it has remained a dominate currency ever since.
Yes, but there was no serious challenger. The DM, the Pound or the Franc all only represented fairly small economies compared to the US. International transactions were done in USD.

Besides, if I were a foreign investor, I would not give up on the US dollar. The euro is, as I see it, a good idea in theory, but a nightmare in practice, emcompassing different political structures, economies, and others, that lead to a very volatile currency. I believe the euro will one day rival the dollar, but that day is not today.
The Euro isn't volatile though:
Gold in different currencies - article (http://www.zealllc.com/2003/goldfx.htm)
Check both Euro - Australian Dollar and USD - AUD over 5 years (http://www.discount-currency-exchange.com/currency-resources/currency-graph.cfm)
It's a real alternative already.

Yes, but there was no serious challenger. The DM, the Pound or the Franc all only represented fairly small economies compared to the US. International transactions were done in USD.
That didn't matter to dollar critics of the time. Several were predicting that the dollar would give way to a series of local currencies so that, in affect, no single currency would be truely dominant.

The Euro isn't volatile though:
Gold in different currencies - article (http://www.zealllc.com/2003/goldfx.htm)
Check both Euro - Australian Dollar and USD - AUD over 5 years (http://www.discount-currency-exchange.com/currency-resources/currency-graph.cfm)
It's a real alternative already.
Oh really? It's gone from $0.80 when it was first released to a high of $1.36 last December, and now down to about $1.20. Whether it is strong or weak doesn't really matter to people as much as whether the currency is stable. Besides, gold prices only measure the inflation of the currency, or expected inflation, which does not always translate into currency preformance abroad. The eurozone has experienced little inflation, and I doubt it will experience more anythime soon.
The real challenge to dollar supremacy will come when European nations further intergrate their economies, including giving some powers over to Brussels. But seeing that there is open hostility to the euro by some, including Silvio Berlusconi and many Italians, that may not happen soon.
But, I degress. I don't really want this to become a dollar vs. euro debate, which nearly all financial threads turn out to be.

bump

Oh really? It's gone from $0.80 when it was first released to a high of $1.36 last December, and now down to about $1.20.
That's why I told you to check with a neutral currency. One vs the Other could show anything - it was the US Dollar which did the free fall a while back.

But, I degress. I don't really want this to become a dollar vs. euro debate, which nearly all financial threads turn out to be.
Agreed, I won't say anything more. :)

That's why I told you to check with a neutral currency. One vs the Other could show anything - it was the US Dollar which did the free fall a while back.
Last comment I'll make is this: the yen zone is in the same financial condition as the eurozone, so of course it'd be closer to the euro. That's why it's better to weigh any currency fluctuation against a basket of currencies.