DEER in the Headlights

Prologue:
Just like the VIX lulling those into complacency safe feelings, like the PPT team (see Goldman buying that hedge fund?) supporting Dow 10K(no QUESTION about it)Fed Reserve made up of...heh! private BANKS!!! we're all suckered baby...the rich getting richer, ALL the powers over our lives and economy rests with the FED reserve.IMHO Doom and gloomers aside....ALL of the reasoning that is sound falls to those grouches.....and we keep getting deeper and deeper into the hole..ALL those dolars fleeing this country since we produce nothing has built China into the world power, the consumers demand for krapola...and now all things good.

BEST OF BILL BUCKLERSeptember 27, 2004
The US has done it again, it has managed to slide itself even deeper into an external state of indebtedness. The US current account deficit has widened to a record $US 166.2 Billion in the second quarter from $US 147.2 Billion in the first quarter of 2004.That's the US current account. The US deficit on goods and services also increased to a record $US 150.3 Billion from $US 138.6 Billion in the first quarter. These are truly enormous numbers. That's The Effect - Here's The Cause:These real financial numbers which express the outflow of US Dollars have on their "flip side" the equally enormous internal US expansion of credit. On the latest official data, US federal government debt is rising at an annual rate of 10 percent, US household debt is rising at 11 percent, and US business debt at 4.1 percent. All this borrowing inside the USA would be economically "fine" - IF - the internal economy of the US was also expanding in its productive output to a matching extent.Living On The Kindness of Strangers:But it is not, so part of this massive internal borrowing is spilling over into external purchases, into an external deficit with the rest of the world.Since all deficits (spending which exceeds earnings) have to be financed, the US has to be financed by the rest of the world. To the extent of its own external deficit on current account, the US is living on global credit.Global Warning Bells:Foreign capital inflows to the US slowed to $US 265.2 Billion from $US 445.3 Billion in the first quarter.Foreign purchases of US equities fell to $US 2 Billion from $US 4.2 Billion in the first quarter of 2004. Foreign purchases of US Treasuries dropped to $US 35.6 Billion from $US 65.4 Billion. Purchases of US corporate bonds increased to $US 51.5 Billionfrom $US 51.2 Billion. Purchases of US agency bonds rose to $US 35.1 Billion from $US 6.7 Billion. Foreign official assets, assets held by foreign central banks, increased $US 73.9 Billion compared with an increase to $US 127.9 Billion in the firstquarter. The KEY numbers are the ones on top of this page and the ones which lead this paragraph.If the foreign inflow of capital goes BELOW the US current account deficit - the USA crashes.Understanding The Scale Of The US Problem:Total US debt (government, corporate, and individual/consumer) is estimated at $US 37 TRILLION. That's more than triple the US gross domestic product (GDP). It has doubled over the past five years. Let's take a closer look at this. Over five years, Americans (public and private) piled up a debt of $US 18 TRILLION. That is an average debt increase, every year over those fiveyears, of $US 3.6 TRILLION. Most of this gigantic increase in debt went to acquire a better living standard using borrowed money. The current US GDP, according to the latest available figures, is about $US 11.6 TRILLION annually. It was less than that five years ago, when Americans began the spree which would double their debts in the next five years. Be that as it may, onaverage over those five years, Americans have borrowed almost ONE-THIRD (31 percent) of the US GDP into existence every year since 1999.On The Inside - On The Outside:The majority of that monstrous debt is held inside the USA by banks, mortgage lenders, credit card issuers, etc., etc.. But today, a stupendous amount of that debt is held by foreigners - and they have all received that debt through the twin outflowsof the US trade and current account deficits which always arrives in foreign places as US Dollars making purchases, but which most of the locals cannot really use inside their ownnation. So, they sell all these US Dollars back to their own local commercial banks.Money Loops Can Make Debt Mountains:If these local foreign banks have no readily available use for these US Dollars, they either lend the sum received right back to the US financial system in order to earn a rate of interest themselves, or they sell on their currency floors for their own local currency. Such additional selling of US Dollars by such banks would normally cause to the US Dollar to fall in value against the local currency. But if the local government and itstame central bank does not want to see their national currency climb in value against the US Dollar, hampering exports and enticing imports, then the local central bank is sent into the fray to buy these additional US Dollars to stop the national currency from climbing in value against the US Dollar. Now, the foreign central bank stands with these just arrived US Dollars. What does it do? It does the obvious. It lends these new additional US Dollars right back to the US. It can buy US Treasuries, which helps fund the US budget deficit and holds internal US interest rates down. Now, these US Dollars are right back inside the US Treasury, which spends them inside the US economy. The foreign central bank can also buy any of the numerous US "Agency" debt or bank paper. They promptly lend these fresh US Dollars back to eager American borrowers. The money is right back inside the US financial system again, leaving only a trail of debt paper and debts owing all over the world.The Problem Inside The USA:If anything goes on long enough, it ends up looking normal. In brief, that is the problem in America. A decades-long sequence of rolling credit expansions, each one bigger than the one before, has made present circumstances look normal to most Americans. But a DOUBLING of debt in just five years, with these newly arrived debts equal to 36 percent of the average US GDP over those same five years, is anything but normal. In terms of sane economics, it amounts to borrowing one-third of the American nation's gross domestic product over the past five years into existence. In terms of all valid economic theory (led by the Austrian School and the Classical Economists), this is a totally unviable set of circumstances and will come to a grim and bitter end. In terms of comparative economic history, the current US situation resembles nothing a much as the "recycling of Dollars" to the Latin American nations in the 1970s when the "petro-Dollars" gained by OPEC were recycled there as new loans.The difference is that today, it is America's own currency, theUS Dollar, being recycled back to the US.Ó 2004 –
The Privateer