Dumb Question

[sdkid]

I know there’s no such thing as a dumb question– only “uninformed” question…so here’s my uninformed question. Relating to the ARM interest rate resets, everyone seems to agree that interest rates are going to increase over the next several years. Why is that, necessarily, so? Is it possible for interest levels to continue to stay at a relatively low level? Or at the very least grow at a very slow pace?
If you can answer this or point me to the appropriate references, I would be grateful.
Thanks,
SDkid

[powayseller]

Any question about bonds shows you’ve got brains, since most people don’t even think enough about them, to even ask a question. Most people don’t even know what they are. I believe this is not taught in high school.

Rich, I read these articles again, and I have 2 questions: Why do you say that tariffs are misguided? It seems that tariffs would discourage Chinese imports, causing us to buy American. A good situation for US business, right? Second, what do you think is the effect of Iran selling oil in euros, and the thwarted port deal, assuming Middle Eastern countries got the message we’ll take their $$s only if they are used to buy treasuries, but not to buy hard assets. Could either of these devalue the dollar?

[powayseller]

As far as tariffs as subsidies, I see that point, but the US has no problem with subsidies. Look at the huge handouts they give to farmers. I don’t even know of all the industries that are subsidized, but it is really unfair. What US corporation can compete against a Chinese company paying $3/day? The tariff would prevent deflating our wages to become on par with the Chinese wages. This is where we are headed, I think: US wages will come down, Chinese wages will come up, until they meet in the middle. Indians are already catching up in Engineering. My friend is constantly concerned that her software management job will be outsourced to India. It seems that import tariffs would encourage us to buy American-made. Perhaps we’d be better off if we all drove GM cars instead of Toyotas? We wouldn’t have the huge layoffs in Detroit.

[powayseller]

I see.. if we impose tariffs, China would export less, having a lowered need to buy dollars. The same result occurs if spending slows due to declining home values/higher interest rates and lowered home equity withdrawals. However, don’t the dollars they buy just cancel out the dollars we spend, so as we buy fewer Chinese goods over the next few years, China buys fewer T-bills. Whether we buy $60b/month or $30b/month from China, they would buy either $60bil/month or $30bil/month in T-bills. They are financing us either way.

I know why tariffs are bad, but my thinking was that American companies can not hope to compete against Chinese companies, regardles of the level of innovation. Every idea must be manufactured, and all labor which does not absolutely require face-to-face customer interaction is at risk of being exported. Even radiologists are at risk of losing jobs, as American hospitals electronically transmit their images to Indian radiologists.

Unless you are dealing directly with an end-user customer, your job can be outsourced to India. It doesn’t matter whether your product is good or bad. You can have a clever idea for a new asthma drug, but then the manufacture takes place in Japan. You can invent a fabric which doesn’t wrinkle, but the Chinese will manufacture it. You can design a car with lower gas mileage, but it will be made in Taiwan.

Regardless of American ingenuity, the lack of tariffs will cause all work to eventually be done overseas. Unless that work requires you to interact with the customer or know specific local regulations, such as engineering, law, medicine, your job can be outsourced.

Is anyone reading this certain that their job is safe against Chinese competition? Wouldn’t any of you feel better with tariffs, even if that means you must pay a little more for certain goods to cover the high cost of health care for American workers. With tariffs, we give up having a lower cost for our goods, but we gain the security of keeping American jobs in America. With the current system, we are going into debt financing China’s emergence into an industrialized nation. They are competing with us for resources (oil, commodities, goods), driving up the price of resources for everyone.

I thought about this many years ago, and felt that it was only fair, humanitarian, for us to lower our standards of living and wages until it meets the gradually raising standards of 3rd world countries. While a humanitarian and selfless goal, it is disaster for our economy in the long run. American wages must be reduced by an amount equivalent to the rise in Chinese wages, a zero sum game.

Why couldn’t we just close our borders, and just buy and sell things to each other?

[picpoule]

Would China, Japan and all our other debt holders encourage — no — accept — Iran selling oil in euros? I doubt it. I suspect these countries have an (in)vested interest in refusing to pay Iran for oil in euros and to continue to pay for their oil with petrodollars.

[barnaby33]

The last successfull attempt was Rome and it didn’t end well. I am a software engineer, my job is almost as at risk as any blue collar factory worker and yet. I believe like Rich that in many ways tariffs are a bad thing. They inhibit the most effective use of capital. There are reasons however why tariffs are not always bad. For one thing there are lots of issues which the market cannot address. For instance while it maybe much cheaper to produce food overseas, its a strategically bad idea.

The challenge in our present system is only to protect enough of those industries that would be required to sustain us through either a major war, or total economic collapse.

So while subsiziding detroit doesn’t seem like such a great idea, subsidizing food production does. Yes its inefficient, but that is not always bad. We just need to decide when it is and is not in our interest as a nation.

(Way off topic of housing but important as an economic fundamental)

Josh

[powayseller]

Rich, a smart guy like you can make the right moves to protect himself in a rapidly changing economy. But most people are average, or below average. They can’t adapt. Your entire software group cannot become design managers or team leaders.

Only a few can rise to the top to manage the masses. So my question then is: what should happen to the low-level coders and software testers if they are outsourced? Should they work retail, mow lawns? And whom will you manage if your employees are stationed in India? Will you have to learn Hindi? What if your customer is outsourced, and you have to make design decisions with your customer in Bangladesh?

I don’t see how this can end well for the US economy, when only the smart ones can keep their good jobs. If we did this in health care by providing access to healthcare to only the most healthy (diabetics and those born with genetic illnesses are denied insurance coverage because of pre-existing illness, doctors might say it’s not worth spending $200K on a preemie) it would be considered abhorrent. As a society, we feel every life is worth saving.

But then we don’t seem to care about saving anyone’s means of livelihood. Basically, what can 75% of people who are average or below average do to adapt?

My family is not affected by outsourcing, so this is not a personal issue. I’m just wondering how many American jobs will even exist in 20 years, and how our society will be affected if the majority of intellectual jobs are moved overseas, and we are left only with lower-wage service jobs in health care, retail, restaurant, travel, repair of stuff (car, clock, house), pet sitting, etc., basically anything where you work on/for a human or his stuff.

Did anyone read Fed Reserve Governor Kohn’s remarks today, where he said the Fed only manages the macroeconomic stability, not asset stability, and that people shouldn’t expect the Fed to protect their recent housing equity gains.

Sdkid – so much for a dumb question…

[sdkid]

I read through your articles on interest rates and bonds and, well…I really wish I had majored in Finance– because alot of it was over my head.
When I first found these boards I was interested in buying a house. But over the course of my reading, I’ve become pretty frightened over the US’ economic outlook– it’s dependence on declining oil supplies, retiring baby boomers, insane debt, and outsourcing means of production.
I no longer believe our quality of life can maintain itself. But I am still trying to get a grasp of what exactly our future will look like and what I can do now to prepare myself.
Is this what it was like living in the 70’s thinking the US was on the downslide?

[Author]

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