Home › Forums › Financial Markets/Economics › Stunning flight from the dollar.
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bsrsharma.
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October 17, 2007 at 11:50 AM #89624October 17, 2007 at 11:50 AM #89633
Arraya
Participant“Appreciation is what we are counting on and we are pushing the debt service further into the future.”
So basically the RE market is/was a microcosm of the larger economy. Banking of infinite growth to pay for todays bills.
October 17, 2007 at 12:00 PM #896274plexowner
Participant“banking on infinite growth to pay for today’s bills”
can you say, “Ponzi Scheme?”
October 17, 2007 at 12:00 PM #89634Participant“banking on infinite growth to pay for today’s bills”
can you say, “Ponzi Scheme?”
October 17, 2007 at 12:08 PM #89629lonestar2000
Participant“can you say, “Ponzi Scheme?””
It already has been said, by some Church of God or some such. 😛
October 17, 2007 at 12:08 PM #89636Participant“can you say, “Ponzi Scheme?””
It already has been said, by some Church of God or some such. 😛
October 17, 2007 at 12:22 PM #89637ucodegen
ParticipantRegarding raising interest rates to 18 or 20%, how could we do this? We have so much debt outstanding would this create a balance of payments risk (ie we don’t take in enough revenue to pay our debt service)?
Yes and no. Basically the treasuries yield a ‘fixed’ rate of return upon issue. This is done by discounting the face value by the rate of return and the time over which the return applies. If after issue, the yield on new issues goes up, the existing outstanding issues will still yield the same amount. What happens is that the face value of existing treasuries will now drop to compensate for the change in yields. An Q&D(quick and dirty) example. We purchase 2 10 year Tbills, one day apart. The first Tbill is at 5%. The rates jumped the next day and it was issued at 7%. The price for the first $10K Tbill will be about $6139. The second will be about $5083. After the rate jump, you will not be able to resell the first treasury for its initial purchase price. If you wanted to sell both treasuries on the third day, they would both go for about $5083 each, meaning that you would take a $1056 capital loss on the first treasury. (I am not going to get into yield curves at this point.)
What the increase does mean, is that further deficit spending will be more expensive, but it does not adversely affect existing payments. If Congress can get its act together and control spending (ha, ha.. yeah right), the shift in interest rates would allow the fed to buy back treasuries at a face value less than what they were issued at. Of course, deficit spending would have to cease to do this.. Or the fed could increase the Money Supply(M0) to fund the repurchase (which has other nasty repercussions).
October 17, 2007 at 12:22 PM #89645ParticipantRegarding raising interest rates to 18 or 20%, how could we do this? We have so much debt outstanding would this create a balance of payments risk (ie we don’t take in enough revenue to pay our debt service)?
Yes and no. Basically the treasuries yield a ‘fixed’ rate of return upon issue. This is done by discounting the face value by the rate of return and the time over which the return applies. If after issue, the yield on new issues goes up, the existing outstanding issues will still yield the same amount. What happens is that the face value of existing treasuries will now drop to compensate for the change in yields. An Q&D(quick and dirty) example. We purchase 2 10 year Tbills, one day apart. The first Tbill is at 5%. The rates jumped the next day and it was issued at 7%. The price for the first $10K Tbill will be about $6139. The second will be about $5083. After the rate jump, you will not be able to resell the first treasury for its initial purchase price. If you wanted to sell both treasuries on the third day, they would both go for about $5083 each, meaning that you would take a $1056 capital loss on the first treasury. (I am not going to get into yield curves at this point.)
What the increase does mean, is that further deficit spending will be more expensive, but it does not adversely affect existing payments. If Congress can get its act together and control spending (ha, ha.. yeah right), the shift in interest rates would allow the fed to buy back treasuries at a face value less than what they were issued at. Of course, deficit spending would have to cease to do this.. Or the fed could increase the Money Supply(M0) to fund the repurchase (which has other nasty repercussions).
October 17, 2007 at 4:02 PM #89705GoUSC
Participantucodegen,
That’s my point. Not about the debt we have outstanding, but debt retires everyday and we sell new debt everyday. Slowly but steadily this new debt will increase our daily debt service. That could eventually result in a balance of payments problem. Back in Volkers time they increased the interest rate but our debt wasn’t nearly the level today. I don’t know if that is even possible anymore.
October 17, 2007 at 4:02 PM #89696Participantucodegen,
That’s my point. Not about the debt we have outstanding, but debt retires everyday and we sell new debt everyday. Slowly but steadily this new debt will increase our daily debt service. That could eventually result in a balance of payments problem. Back in Volkers time they increased the interest rate but our debt wasn’t nearly the level today. I don’t know if that is even possible anymore.
October 17, 2007 at 4:36 PM #8970834f3f3f
ParticipantThe grumbles from Europe have been that a weak dollar makes their exports harder. The flip side is that not everyone is grumbling. Foreign firms have been buying up high tech companies. Nothing new or wrong in that, but foreign owners are not always as humanitarian in their treatment of those new businesses. Real estate is also being snapped up in New York at dollar discounted prices.
October 17, 2007 at 4:36 PM #89717ParticipantThe grumbles from Europe have been that a weak dollar makes their exports harder. The flip side is that not everyone is grumbling. Foreign firms have been buying up high tech companies. Nothing new or wrong in that, but foreign owners are not always as humanitarian in their treatment of those new businesses. Real estate is also being snapped up in New York at dollar discounted prices.
October 17, 2007 at 4:55 PM #89720The-Shoveler
ParticipantNor_LA-Temcu-SD-Guy
My Two cents,
The Fed will cut until the pain stops period …
inflation be damned I think will be the rallying call.
just my two cents, If you find a bargain, and you can afford it. go for it .. My feelings (no expert, just my gut) somewhere around 2003 prices would meet bargain status.
October 17, 2007 at 4:55 PM #89729ParticipantNor_LA-Temcu-SD-Guy
My Two cents,
The Fed will cut until the pain stops period …
inflation be damned I think will be the rallying call.
just my two cents, If you find a bargain, and you can afford it. go for it .. My feelings (no expert, just my gut) somewhere around 2003 prices would meet bargain status.
October 17, 2007 at 5:29 PM #89748gold_dredger_phd
ParticipantThe future has no lobbyist in Washington.
Therefore, the dollar is dead, your children and grandchildren will be sharecroppers to foreign bosses and by the time anyone realizes this, the politicians will have left office.
Look how Joe and Jane consumer treat their household finances. Live for today and screw tomorrow. Same thing in Washington. If people cared about the future, then they would not spend like this.
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