and the huffington post

hey everyone.

this is a post i wanted to put up as a reply to somebody on huffington post but my account isnt activated yet. sooo im putting it here.

Atticus
I think you make a good point about the NPV of the principle of the bonds the US is taking out to fund its ongoing operations, but I think it is very dangerous to dismiss the cost of debt outright. While the final repayment of the principle of long term bonds may be significantly reduced in comparison to present value in real terms, we are also paying interest on those bonds at all times. Without these interest payments, bonds would have a negative net present value and there would be no reason for people to invest in them. It is those interest payment that are taking out so much of our governments resources, about $406 billion in 2006 compared to NASA’s measly budget of $15 billion.
Additionally, I’m not sure this article gets to the root of the problem with the American economy. The number one thing Americans should be concerned about is the sinking value of the dollar. Currently china owns about 1.4 trillion in US reserves followed by Japan at ~ .9 trillion. Due to our twin deficits, we have begun to see the value of the dollar drop to rate never seen in our lifetimes, unless you were alive during the civil war, the last time the dollar was worth less than the Canadian dollar. What happens when our creditor nations get tired with seeing their investments in dollars shrinking in real terms? Sure the t-bills are perfectly secure because we can always print more money, but they won’t be able to buy anything at the current rate of deprecation. So china decides to reduce their holdings in US dollars, followed by Japan who wants to sell off theirs before the sudden influx further weakens the exchange rate. This could ultimately cause a sort of mass selloff that, as you said, tips over the golden apple cart.
So how do we avert this problem?... back to the fundamentals.
The twin deficits refer to the current account and fiscal deficit.
Current account = BOT + unilateral transfers + DOI
-not much can be done unless you court trade sanctions or artificially intervening in the market. Not that that isn’t what china is doing by pegging the Yuan but still… if we don’t get our Wal-Mart goods there then we will get them from Malaysia or the Philippines.
Fiscal deficit = net savings + trade deficit – investment.
-save more, spend less. I guess it’s that simple. The problem is that the fed usually encourages this type of behavior by increasing interest rates. Less capital liquidity -> less capital expenditure. However, this could also cause increased capital flight and future exchange rate misery because of reduced marginal interest rates between America and other possible places of investment. It could also cause the economy to grind to a further halt… more halted then it currently is….