This is what China Premier Wen Jiabao had to say about the growing US Government Debt, and I quote from the Wall Street Journal website article entitled "US Insists China Fears Over debt Unfounded" written by Batson, Browne and Phillips: -
"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets," Mr. Wen said in response to a question at his annual news conference. "Frankly speaking, I do have some worries."
"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets," Mr. Wen said in response to a question at his annual news conference. "Frankly speaking, I do have some worries."
Naturally, like any borrower, the US insisted on its creditworthiness. After all, the US Government is only owing US$14 trillion of debt, or US$46,700 per US citizen as at today.
I don't know about you, but US$46,700 is a lot of money for each US citizen to be owing, including the one day old baby who just got born yesterday. If we only take into account the working population, then the Debt per worker rises to US$82,400. This is on top of any housing mortgage debt, car loans, and credit card and personal loans that the US worker may have.
If we take into account that an average American worker earns US40,000 per year, and saves 3.5% of the earnings, which is the current savings rate, i.e. US$1,400 per year in Savings, then the number of years for the US Worker to save sufficiently to pay down the US$82,400 of existing Government Debt will be 59 years.
Since it is unlikely that a worker will earn US$40,000 in his first few years of work, we can assume quite conservatively, that the Government Debt will have to be repaid over two generations of workers if the current generation is now in his 20s.
I don't know about you, but I don't consider this financial obligation manageable, and I am sure any sane banker will agree with me, if he was assessing any individual's debt obligation. I mean, we have tied the unborn son of the US Worker in his 20s today, to a lifelong contribution of 3.5% of his Annual Income to repaying existing debt already spent, on top of the normal income and other taxes that the worker currently pays.
Since it is unlikely that a worker will earn US$40,000 in his first few years of work, we can assume quite conservatively, that the Government Debt will have to be repaid over two generations of workers if the current generation is now in his 20s.
I don't know about you, but I don't consider this financial obligation manageable, and I am sure any sane banker will agree with me, if he was assessing any individual's debt obligation. I mean, we have tied the unborn son of the US Worker in his 20s today, to a lifelong contribution of 3.5% of his Annual Income to repaying existing debt already spent, on top of the normal income and other taxes that the worker currently pays.
How would you like to saddle your unborn child with a lifetime debt repayment? I wouldn't. Yet, the US Government is insisting that it is creditworthy, and is even persisting in increasing its Government Spending and Budget Deficit, and thus, increasing its Government Debt even further.
Now, in an act of utter defiance on World Concerns, the Federal Reserve has announced that it is committed to buying more Treasury Bonds in an effort to flood the financial system with cash, in what economists call, "Quantitative Easing". I quote from the Wall Street Journal article entitled Fed in Bond-Buying Binge to Spur Growth as follows: -
"All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases."
Obviously the World is not convinced with the US Government's assurance by presidential spokesman Robert Gibbs -
"There's no safer investment in the world than in the United States"
Now, in an act of utter defiance on World Concerns, the Federal Reserve has announced that it is committed to buying more Treasury Bonds in an effort to flood the financial system with cash, in what economists call, "Quantitative Easing". I quote from the Wall Street Journal article entitled Fed in Bond-Buying Binge to Spur Growth as follows: -
"All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases."
Obviously the World is not convinced with the US Government's assurance by presidential spokesman Robert Gibbs -
"There's no safer investment in the world than in the United States"
and the Dollar tumbled badly after the Federal Reserve announcement. Read more about this market reaction in the Wall Street Journal article entitled "Dollar Tumbles on Aggressive Fed Move".
It would seem that the US Government has no consideration for non US parties in their effort to print money, and thus, the challenge is now in China Premier Wen Jiabao's court to respond.
In my opinion, he should actually start to sell US Treasuries on a consistent basis, until he has made a point to President Obama that the US Government cannot simply give pieces of paper not backed by additional Gold Reserves or any other valuable assets and expect the world to take it lying down.
Whether China's Premier will actually do this is interesting news to follow up on in the next few months. Where does it end? After another US$5 trillion of additional paper money? Or US$10 trillion? Why not make it a round number of US$100 trillion?
In my opinion, he should actually start to sell US Treasuries on a consistent basis, until he has made a point to President Obama that the US Government cannot simply give pieces of paper not backed by additional Gold Reserves or any other valuable assets and expect the world to take it lying down.
Whether China's Premier will actually do this is interesting news to follow up on in the next few months. Where does it end? After another US$5 trillion of additional paper money? Or US$10 trillion? Why not make it a round number of US$100 trillion?
Where will China, Japan and the European Union draw the line where it says enough is enough? When they do, the risks of Hyper Inflation escalates significantly, which is why Gold Price skyrocketed after the Federal Reserve announcement.
In this regard, my conclusion in the earlier blog article entitled "The Inevitability of A US Dollar Devaluation Crisis" seems to be in the correct direction, although as explained using the Sand Metaphor in that article, the exact timing of the Devaluation Crisis is unclear.
Best wishes,
Ooi
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3 comments:
Hmmm... I guess it is a right brain versus left brain argument.
You've given a cogent left brain argument which unfortunately if used by Obama to the US public would ensure that the AIG bailout is the last cent that gets passed by Congress.
Mr. Libbby when he took the job knows that his main job is as a punching bag. That is called government service. His job is not to plot any great direction for AIG, but to simply ensure that the financial system survives...
So Libby has to play the bad guy to Obama's good guy. At the end Obama has to always go to Congress who will reject any proposal if the mebmers feel the electorate will throw them out.
Obama is right brain. He understands how to play the mood to get waht he wants done.
To ask him to check the facts is naive. Of course he has checked the facts... his actions shows that he knows how to play to the voters, the people that are more important than the CEOs and self important traders etc. He plays with the voters emotions - that is why he won.
Management is generally left brain. Facts, statisctics i.e. all the hostroical stuff and lets say look where that has gotten us.. hahahahaha..
Having said that I disagree with you on these points (but of course or else where is the fun)
1. YOU SAY: the talented need to be paid the market rate. I SAY: Since there is a surplus of these so called "talented" who probably got us into trouble, they should be grateful just to have a job.
2. High integrity? You're joking right... there wouldn't be a difference to the economy now if they are around or not... We differ in that, you treasure these people, I don't. They won't be missed. They contributed nothing (contributed as much as casino high rollers) and will continue to contribute nothing. I dont see where they figure in making the market place efficient. In fact some would argue that the act of keeping them means that market is highly inefficient.
3. You say "Shouldn't we pay key people who continue to support the firm from collapsing some decent amount of money equivalent to market rate?" Eeer, the market rate would now be very very low to non-existent if these firms didnt' exist anymore. The firms wouldn't exist if there was no bail out money
And it is arguable if these people can prevent the firm from collapsing when they are the ones that put it in this situation. If they 're not the one that put it in this situation, then they wouldn't have a clue on how to unravel the mess, just like you and me.... and NO they obviously have NO TALENT in MITIGATING RISKS...QED .
4. Who wants to join a firm that has no bonus for a long long time.... My opinion - Don't join then lah. Try finding another job in Wall Street.... or better still gt a real job
5. Actually the government is not the spouse but rather the mediator... between the beggars (the corporations) and the citizens (the voters/tax payers)
6. Or has society degraded to such an extent we cannot differentiate an honest day's work that adds to a country's wealth compared to compensating people sufficiently to get reverse the mess that they created, when Jail-Time is more suitable? [grin]
Hello,
All I can say is this...
Don't bother bailing out. Let it all fail. It's not the end of the world. Let nature take its course.
We don't know the extent of the damage. It is all guess work. If it is worst, then we're wasting money. If it is not as bad, then we are all OK.
Why throw good money to bad. Its a never ending cycle. The pain is prolonged. Instead of 5 years, it may be 20 years.
It is time to reward the smart and the prudent instead of protecting the stupid, greedy and irresponsible.
I don't buy the argument that the impact is so great that we will all "die". Same was said in the early 1900's, same was said about South Korea when the chaebols which controlled more than 50 per cent of the Korean economy failed...
Chain effect? So what. It will always sort itself out. Someone more efficient in the chain will come along.
Opportunities abound. Even Warren Buffett said that he has never ever seen such a benign investor (not trader) environment in all his life.
Most important - there wouldn't be any need to worry about bonuses as it is irrelevant. If those guys were any good, well they would still get a job some where else. If not - well we knew all along they were over-rated [hahahaha]
America needs to cleanse. The world needs to get over it's addiction the fact that there is no more old America.
So simple...
Dear Victor,
Thanks for taking the trouble to comment.
Haha, the more I learn about how the current financial and economic crisis is unfolding, the more I admire the wisdom of the US Government during the Great Depression where they refused to bailout the financial institutions.
Despite my past blog article that bank bailouts might be a necessary evil, I would concede that with hindsight, bailouts seem like a bad idea.
Thus, your point is valid.
As for the comment on Liddy and Obama, yeah, you're probably right as well.
However, I noticed as at yesterday evening's CNBC that commentators are starting to side Liddy, although they still don't get it that there is US$1.6 trillion to unwind, and he needs people to do it.
You have made some comments on availability of talent in these tough economic times, but I think the situation is much more complex.
I believe, without any basis as I don't have any evidence to prove my case, that there is a need to maintain strict confidentiality as to what is in the books of the US$ 1.6 trillion or else, some unscrupulous Speculator might just do the necessary to add more pressure, knowing exactly the right amount, to break AIG at its expense.
Retaining people helps to maintain confidentiality, while rescinding contracts tend to have such negative effects.
It is one thing to say sue the bugger, but you must have proof. And what is whispered in a dark corner of a coffee shop is hard to prove.
Maybe, just maybe, this is the ultimate definition of talent - CONFIDENTIALITY with very, very sensitive information.
But don't get me wrong. I don't think any one of the employees is threatening, for then it would tantamount to criminal blackmail.
If you read Jeffrey Archer's novel, The Fourth Estate, that was what happened to a nasty boss that didn't want to pay his Personal Assistant, what was fair. Of course, that was a fictional story, but it is plausible it may happen.
I don't know. I am guessing, based on this Conspiracy Theory.
Best wishes,
Ooi
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