US Bankruptcy: PF'ers Weigh In on the Risk

[Galileo]

So what are the US PF'ers thoughts on this.
Do you fear for the US's economical future, or do you think it's bs?

 

[EnumaElish]

So what are the US PF'ers thoughts on this.
Do you fear for the US's economical future, or do you think it's bs?

1. The metaphorical "house" backing up the debt is not only future production and income, it is what people in the future will believe how much income can be produced in THEIR future. And so on.

2. Government not only has the power to tax; it also has the power to print money as a last resort. It is difficult for a sovereign government to become bankrupt because of debt denominated in national currency, like the soc. sec. is. Although that is not an impossible scenario, I don't think we are at that point now.

 

[mgb_phys]

it also has the power to print money as a last resort.

Or not so last resort!

A country is only bankrupt when no-one else will accept it's currency, when t runs out of things to sell to other countries for their currency and it doesn't have or can't make the things it needs domestically.

However badly managed the US economy might be, it is unlikely to run out of the natural resources or manufacturing ability to be self sufficent - even if no-one else will accept dollars printed on newspapers.

 

[falc39]

Ah, glenn beck interviewed david walker. I posted a similar link in the obama thread about our runaway spending. didn't get many replies. Anyway, I already moved a lot of my assets to safer investments. but it's still pretty sad though what is happening now.

 

[DeadWolfe]

The US isn't going bunkrupt. They are bunkrupt. They have an enormous debt which groes constantly, and there is no forseeable way to pay it.

And the way things seem to be goin in America, nobody will pay attention until the us is a 3rd world country.

 

[Ivan Seeking]

For the record I think Beck is an idiot, but it's hard to argue with the GAO.

We won't go bankrupt but we could see hyperinflation like Russia did. Either way our standard of living is doomed.

Now let's hear more of that Republican talk about how debt and trade deficits are good! Note that Ron Paul is the only candidate who got a positive mention here. At least he recognizes the problem.

If we're not creating wealth through trade, the problem can only get worse.

 

[Anttech]

The American Standard of living was never going to be sustainable for ever. The US isn't going bankrupt, if it did we are (Globally) in a pile of pooh pooh. Many countries have had huge debts compared to GDP before, look at Europe after ww2, and didnt actually go bankrupt. But the next generation of Americans will probably look back at last century with a hint of jealousy IMHO

 

[W3pcq]

I think Beck is an idiot too.

The fact is that China is selling us the rope to hang ourselves with. We are slowly being set up for economic disaster. Wallmart isn't helping. Buying cheap crap from other countries only helps the corporations selling them and many of them base headquarters offshore to exploit tax loopholes. This drains our economy and takes away jobs. What happens when between buying cheap foreign crap and replacing peoples' jobs with computers and machines becomes an advanced science.

 

[mgb_phys]

Look at it from China's point of view - they slave (literally ;-) to produce $20 dvd players and Barbie dolls and America pays them in worthless pieces of green paper.

 

[DrClapeyron]

Look at it from the US's point of view, we sacrificed our finest in order to prevent the world from being controlled by a group of mad monkies. $20 dvd players?

 

[W3pcq]

It isn't the workers who are responsible. It is the middleman who probably isn't even chinese. Your right though, it isn't the sellers in china trying to hang us. Still the Chinese government loves every bit of it as our economy is drained and theirs gained.

 

[t-money]

All nations have a trade defecit, for the same reason why individuals have a trade deficit with their grocery store. If the Chineese government wants to buy the Dollar let them, it only helps the US in the long run.
And just because you can print money doesn't mean you can't go bankrupt. Look at the Inflation in Zimbwabe (bread basket of Africa).

 

[t-money]

Look at it from China's point of view - they slave (literally ;-) to produce $20 dvd players and Barbie dolls and America pays them in worthless pieces of green paper.

Slave?
These people chose to work, companys can't force people to work. And besides how do you know they don't have any better options, because I am pretty sure if they did they would take it, that's what I would do.

 

[ShawnD]

Jesus, panic much? Let me tell you exactly what will happen. Rather than actually paying for stuff they said they would pay for, the government will simply scrap social security and medicare, piss off millions of people, get away with it, business as usual. The current debt of 8 or 9 trillion is sustainable, but the projected 58 trillion is not. Once it gets to maybe 15 trillion, funding will completely stop and we'll have another scandal. Baby boomers may have voting power, but they're still only 1/4 of the country. It's still possible to rally against them and screw them over big time.

 

[W3pcq]

My main point is that the more foreign imports and less exports, the less money we are worth as a nation because people who make stuff here will sell less, less tax money, less employment, less currency recirculation etc. It is always better for an economy to buy local whether it be on the county scale or the state or the National scale.
In contrast corporations gain profits buying non local and they siphon off our economic means of stability.

 

[ShawnD]

My main point is that the more foreign imports and less exports, the less money we are worth as a nation because people who make stuff here will sell less, less tax money, less employment, less currency recirculation etc. It is always better for an economy to buy local whether it be on the county scale or the state or the National scale.
In contrast corporations gain profits buying non local and they siphon off our economic means of stability.

Trade deficit is a bit different since it is not government funded. The money Americans have right now didn't just magically appear from nothing, you're not paying Chinese slaves with worthless paper, and having a trade deficit doesn't automatically mean you owe somebody money. You and I have 10 apples, I give you 6 applies, you give me 4 applies. I now have 8 applies instead of 10 (10 - 6 + 4 = 8) and you now have 12 applies (10 + 6 - 4 = 12). Do I owe you any apples? No. Do you owe me applies? No. Do I have fewer apples than I had before? Yes.

The trade deficit simply means that money, in general, is leaving the country. The mistake is thinking that you get nothing in return. The reality is that the country, as citizens (not government), is giving its money to china in return for products. This is no different than going to best buy and giving an American money in return for products. The only thing that changes is who you are giving money to. Eventually the US, on average, will run out of money to trade with China and will need to get that money from exporting goods to someplace, like France or wherever. It's not a big deal really. I don't think of myself as some kind of failure if I spend my money on stuff I actually want (give dollars to China in exchange for Chinese goods). Remember that American citizens are not going into debt with China in order to buy Chinese goods. Your credit cards are owned by American companies, your mortgage is with an American company, your car debt is with an American company. You are borrowing US dollars from other Americans to buy stuff, so in the end you owe money to your fellow Americans. It would be a different story all together if you were borrowing money from a Chinese bank to buy Chines goods. I remember Warren Buffet wrote an article specifically warning against doing that (he didn't call them USA and China, but it was kind of assumed).

 

[W3pcq]

Well I know that personally I can benefit from buying cheaper in China, but the economy is hurt because my money is not circulated back into our economy right?

 

[ShawnD]

Not quite. I get my money from a pharmaceutical company but I spend it at Best Buy. You can give money to China if they made what you want, but make sure you get some money from somewhere else. Overall spending (imports) in the US is higher than earnings (exports), but that's still not really a problem until you start talking about debt. If I earn $30,000 per year and I have $100,000 in the bank, is it ok if my total spending for the year is $40,000? Sure that's ok... for a maximum of 10 years. Once the reserves run out, I can no longer import more than I export, and I'll have to either get another job (export more) or stop buying so much (reduce imports), or maybe both at the same time.

It should be noted that the economy would also shift to reflect where the money is. China has no money, so their entire economy is in production. USA has lots of money, so the majority of the economy is in services. China probably has more factories while USA has more hair stylists, artists, actors, etc.

 

[mgb_phys]

Well I know that personally I can benefit from buying cheaper in China, but the economy is hurt because my money is not circulated back into our economy right?

Not necessarily. You buy something in a US store that is made in China, most of the price tag goes to paying US store workers, rent, utilities, advertising - the amount sent to the manufacturer is quite small. You could regard it as the company merely subcontracting the unimportant part of the process to the cheapest bidder.
Insisting on buying locally produced can actually have a negative effect on the economy, manufacturers don't have to improve the product, don't have to make efficency gains, don't have to invest in R+D (look at US cars in the 60s or British cars in the 70s ).

What is bad for the economy is to spend dollars to buy something from abroad and then burn it without gaining any productivity. Your F350 (cue patriotic music track about "Our Country") harms the US economy a lot more than buying a Japanese 50mpg hatchback.

Having said that a lot of the deficit isn't real. All countries have huge trade deficits, which is of course impossible. The reason is that imports are carefully tracked, because you pay tax on them, while exports are estimated by tonnage - so a ton of microchips is averaged with a ton of wheat, invisible exports like finance and consulting services are almost always ignored.

 

[EnumaElish]

All nations have a trade defecit

Some have surpluses, which pay for others' deficits.

When U.S. consumers buy Chinese goods worth of $20, the Chinese might buy $10 worth of U.S. technology, while invest the remaining $10 in U.S. bonds or stocks. In fact, they might invest more than that. How can that happen?

U.S. having a trade deficit (technically, a current deficit which includes other types of cashflows on top of flows from trade) always implies U.S. having a capital surplus. Think of it this way: if the Chinese insisted to be paid in Yuan (rather than dollars) for their exports to the U.S., where would we find so much Yuan? Remember, we are trying to finance a trade deficit, so the answer isn't "by selling them tube socks (for Yuan)" because then, we don't have a trade deficit. Instead we could tell them, "if there is one country with a sound, secure future, and an unlimited long-term growth opportunity with a relatively low uncertainty, it is the U.S.A.! Our economy can provide many a safe investment opportunity for your hard-earned Yuans! Have you considered buying U.S. stocks lately? You'd be impressed by our historical return rate of 7%! That means you can double your money in less than 10 years! Looking for an even more secure investment with a low default probability? You can do no better than investing in U.S. government bonds!" So the Chinese invest in U.S. paper, and the U.S. ends up having a capital surplus (= the Yuans to pay for the trade deficit). This is not a literal scenario, but it demonstrates why a current account deficit implies a capital surplus.

The other way around, it is even more eye-popping. Suppose the Chinese suddenly start feeling shaky about their economy and the rest of the world, except the U.S.A., which, they believe, will keep humming along for the rest of the foreseeable future. This boosts up their demand for U.S. "paper instruments" (investment opportunities) and creates a tsunami of Yuan (and Yen and Riyal ...) into the U.S. financial markets. Now, our problem is how and where to spend so much foreign money! We try the corner convenience store, but (incredibly!) they will not accept anything but dollars! (Peh, so much for globalization!) Our only option seems to be buying Chinese (and Japanese and Saudi) exports, which means now we have to run a trade deficit! So, a capital surplus implies we have to run a trade deficit, and there is no way around it.

 

[Amp1]

Originally Posted by W3pcq
Well I know that personally I can benefit from buying cheaper in China, but the economy is hurt because my money is not circulated back into our economy right?

My thought is that our economy is top-heavy which causes much of the instability though other factors are at work.

By top-heavy I mean that the upper-management staff in a lot of firms is paid enormously disproportionately high compensation. I understand that a CEO, CIO, COO, etc, have great responsibilities and should receive fair compensation for their effort.

I draw the line though when their compensation is as obscene is it has become. In all fairness, I think the compensation should be no more than a few thousand times the lowest paid worker. The problem is that recently (the last fifty years or so) it has been a few hundred thousand or million times the lowest paid worker.

That is a major reason the circulation of money doesn't go back into the economy to multiply and stimulate growth. (IMHO) Why? The huge blocks of value the top 5% (in the US) control is placed into investment instruments which are basically static. I understand that these instruments are dynamic in that they grow in value or generate wealth, but they are also static in the sense that if some percentage of the value was distributed to non-management staff you can see that economic multipliers and consumer purchases would work to create economic growth. The value would be spread over a larger base which I’m sure would stabilize rather than hinder growth unlike the top-heavy structure that we have today.

 

[Anttech]

My thought is that our economy is top-heavy which causes much of the instability though other factors are at work.

By top-heavy I mean that the upper-management staff in a lot of firms is paid enormously disproportionately high compensation. I understand that a CEO, CIO, COO, etc, have great responsibilities and should receive fair compensation for their effort.

I draw the line though when their compensation is as obscene is it has become. In all fairness, I think the compensation should be no more than a few thousand times the lowest paid worker. The problem is that recently (the last fifty years or so) it has been a few hundred thousand or million times the lowest paid worker.

That is a major reason the circulation of money doesn't go back into the economy to multiply and stimulate growth. (IMHO) Why? The huge blocks of value the top 5% (in the US) control is placed into investment instruments which are basically static. I understand that these instruments are dynamic in that they grow in value or generate wealth, but they are also static in the sense that if some percentage of the value was distributed to non-management staff you can see that economic multipliers and consumer purchases would work to create economic growth. The value would be spread over a larger base which I’m sure would stabilize rather than hinder growth unlike the top-heavy structure that we have today.

I don't really agree with that. If a publicly traded company is making massive profits, why shouldn't the said profits go to the people who are creating it? Better for (the economy) that the money is back in the workforce rather than tied up in the company?

 

[kach22i]

Good Video.

 

[WheelsRCool]

I draw the line though when their compensation is as obscene is it has become. In all fairness, I think the compensation should be no more than a few thousand times the lowest paid worker. The problem is that recently (the last fifty years or so) it has been a few hundred thousand or million times the lowest paid worker.

A company can pay their employees whatever they want. What they choose to is none of the government's business. If they decide to pay their CEO $80 million a year, that's their choice.

I don't really agree with that. If a publicly traded company is making massive profits, why shouldn't the said profits go to the people who are creating it? Better for (the economy) that the money is back in the workforce rather than tied up in the company?

That is standard-issue Communist thought. A corporation's only loyalty is to its shareholders. It pays the workers. It's a simple concept. I pay you, you work for me.

The profits themselves belong to the corporation, which is to use those profits to make more profits and increase the value of the stock for the shareholders.

Now of course there are certain moral limits, for example if the corporation finds it can increase the value of the company's stock by harming workers or dumping toxic waste into the local river, well obviously those things can't be allowed.

But otherwise, the profits belong to the corporation, owned by the shareholders. The employees are not entitled to any of those profits unless they own stock in the company.

Furthermore, the economy grows as the corporations becoem more profitable. They expand their operations, which opens up new jobs, which creates new tax payers for the government, and new consumers for the economy.

The economy then grows.

Taxing corporations kills incentive for the corporation to grow at all, because the money gets taken. Furthermore, they then relocate to countries with more friendly-tax climates.

The United States has one of the highest corporate tax rates in the world (about 40%), so it is no wonder so many of our corporations locate their headquarters in countries like Ireland that lower their corporate tax rate to 12% (which sent Ireland from being a backwards borderline Third-World nation into a country with a standard of living almost equal to the United States).

 

[Anttech]

That is standard-issue Communist thought. A corporation's only loyalty is to its shareholders. It pays the workers. It's a simple concept. I pay you, you work for me.

Right, so it is.. :rofl: Communists are always ensuring through there political policies that, for example, City workers are being paid massive bonus for creating huge amounts of wealth in the finance sector, because commies know that if you dont, then these highly skilled people will leave the company.

The standard of thought on this Forum is very low these days.

The extremely simple "I pay you, you work for me" smacks there much of communism indoctrination.

 

[russ_watters]

Insisting on buying locally produced can actually have a negative effect on the economy, manufacturers don't have to improve the product, don't have to make efficency gains, don't have to invest in R+D (look at US cars in the 60s or British cars in the 70s ).

It's as big a problem for US cars today as it was 30 years ago.

Toyota and other manufacturers know that a good segment of the US clings to the "made in america" mantra -- so they make a large fraction of the cars they sell here here.

 

[russ_watters]

I draw the line though when their compensation is as obscene is it has become. In all fairness, I think the compensation should be no more than a few thousand times the lowest paid worker. The problem is that recently (the last fifty years or so) it has been a few hundred thousand or million times the lowest paid worker.

The only way to get numbers like that is to mis-analyze a Microstoft-type situation. Just assuming Bill Gates is worth $20 Billion and the lowest paid worker earns $20,000 a year gets a ratio of a million to one. But that overlooks some obvious and important things:

-That's Bill Gate's net worth, not his income. His net worth has built over two decades.
-(AFAIK), Bill Gates has never earned more than a million dollars a year. So if his company did poorly, he wouldn't be a billionaire. But even if his company did poorly, that $20k worker would still make $20k. No risk, no reward.
-Related to the timeframe issue above, everyone who worked at Microsoft when it's headquarters was in a motel (20 or so people) is today a billionaire. So their equality was pretty good.

The worst "offenders" in income inequality today are the financial companies that give multimillion dollar bonuses. But a $20 million bonus vs a $20k employee is still only a ratio of 1000 to 1.

 

[WheelsRCool]

Right, so it is.. :rofl: Communists are always ensuring through there political policies that, for example, City workers are being paid massive bonus for creating huge amounts of wealth in the finance sector, because commies know that if you dont, then these highly skilled people will leave the company.

The standard of thought on this Forum is very low these days.

The extremely simple "I pay you, you work for me" smacks there much of communism indoctrination.

The idea that workers are entitled to any of the profits of the company is Communist/Marxist-Socialist. That's one of the primary arguments used by socialists, that the workers work hard yet see none of the business's profits, so they are for some reason entitled to a share of them.

 

[EnumaElish]

What about those corporations that pay workers partially with share options?

Are those corporations Communist/Marxist? Or are they Marxist-Socialist?

Or is it all part of a vast capitalist conspiracy?

On a more serious note, I'd venture to guess that people's stock ownership percentage is at an all-time high in the U.S. (directly or indirectly, e.g. through investment funds).

 

[fourier jr]

I don't know that the US is literally going bankrupt, but Bush has definitely screwed over the country. Apparently the debt is double what it was before he took office, and that will probably be used as a justification for more privatization. I doubt that the recent tax cut plan will do anything, since it will only give people more money to buy Chinese products, if they choose to buy anything at all. A better plan would have been to initiate a bunch of major infrastructure & public works projects, like what China, Canada & many other countries are doing these days. Like what's listed here:
http://www.upi.com/NewsTrack/Top_News/2008/01/16/us_infrastructure_crumbling/7237/
http://www.stateline.org/live/details/story?contentId=250042
That's what the original New Deal was all about wasn't it?

 

[WheelsRCool]

What about those corporations that pay workers partially with share options?

Are those corporations Communist/Marxist? Or are they Marxist-Socialist?

No, because those corporations are not saying that the workers are entitled to the profits, they are using it as an incentive. If the employees have partial ownership of the company through stock options, then they are inclined to work harder.

Or is it all part of a vast capitalist conspiracy?

One of the great ironies of capitalism is that although it emphasizes individualism, it is the only system that actually truly allows public ownership of the businesses, that actually allows the workers to own the business.

Capitalism basically achieves, by emphasizing individualism, what communism (Marxist socialism really) tries and fails to do.

On a more serious note, I'd venture to guess that people's stock ownership percentage is at an all-time high in the U.S. (directly or indirectly, e.g. through investment funds).

Most likely.

There is nothing wrong with public/worker ownership of corporations through stock ownership, the problem is when government tries to dictate this sort of thing.

Remember, the free market is ultimately about contracts.

Workers are ultimately in a contract with the company. For their work, they get paid. Certain companies offer more attractive contracts than others. The more skilled the worker and more in-demand their profession, the better the pay and other perks the workers can get, because companies compete with each other for workers. Some contracts say you will be given stock options, some don't, some are where if you move up far enough in the company, you'll get them, it all depends on the company and the particular job. But all of the contracts are voluntary.

Now if the workers are slaves, being forced to work for the company, well that's different. But when it's voluntary contracts between individuals and businesses, the only job of government, overall, is to just enforce those contracts.

Companies naturally resort to things like stock offerings as a way to raise money, that's why if your company needs some serious cash for growth, you try to go IPO.

Stock options are also a great motivator for startups, because then everyone has a stake in getting the company off the ground, and profitable, to the point that it then goes IPO or is acquired by another company and the owners become wealthy, but all the employees make a nice chunk of money as well, perhaps enough to go off and start their own company and the process repeats.

For example, when Google went IPO, Larry Page and Sergei Brin both became billionaires, and many employees became millionaires.

Many who became Google employees four years ago who bought stock for cheap now are worth around $3 to $4 million (because of the Google stock going up), and are cashing out their stocks and leaving to go off and start their own companies.

So the natural tendency in a capitalist society is that a great many of the corporations will end up being publicly-owned.

 

[EnumaElish]

So the natural tendency in a capitalist society is that a great many of the corporations will end up being publicly-owned.

That's somewhat ironic, but it also shows the adaptability of capitalism.

I hear your point about incentives, and for all I know it may work for startups, but from a financial diversification point of view, buying your company's stock is putting all your eggs in one basket.

You work for them, and you (partially) own them (or have the right to, through options).

If they go bankrupt, you (a) are out of work, and (b) have just experienced a drastic capital loss. This is an extreme example, but it demonstrates what I mean by "having all eggs in one basket."

 

[mheslep]

...The worst "offenders" in income inequality today are the financial companies that give multimillion dollar bonuses. But a $20 million bonus vs a $20k employee is still only a ratio of 1000 to 1.

Nah, trial lawyers beat them out easily for the top spot. Lawyers who filed the class action against Blockbuster Video: $9.25 million. The wronged customers: $20. Lawyers took $2.8 Billion of the $11.3B Florida tobacco settlement.

 

[WheelsRCool]

That's somewhat ironic, but it also shows the adaptability of capitalism.

I hear your point about incentives, and for all I know it may work for startups, but from a financial diversification point of view, buying your company's stock is putting all your eggs in one basket.

Well when you get the stock options, they're very cheap at that point, and the idea is if the company is successful and has a good IPO or gets acquired, you then can cash out your stocks and then diversify to preserve your wealth. It isn't as if you must make a huge cash investment into the company to get the stock options.

What you say about the "eggs in one basket" is actually a key mistake many made during the tech boom of the 1990s. There was one guy, I forget who, whose net worth was $10 BILLION. When the Dot Com bubble burst, all his net worth was in tech stocks, so it plummeted to $100 million (which still ain't bad, but a heck of a lot less than $10 billion!).

Now Mark Cuban for example, when he got $1 billion for selling Broadcast.com, he, being a businessman, and knowledgeable of the tech industry, saw that the tech industry was in a bubble that likely would burst soon. Being smart, he diversified his stock immediately, so he kept his wealth when the bubble burst.

You work for them, and you (partially) own them (or have the right to, through options).

Well I still wouldn't say you have the right to, if the company decides to give you options, that's nice, however, otherwise, the contract is you work for the company and they will pay you for your work in return. Remember, un-coerced contracts between individuals and businesses.

If they go bankrupt, you (a) are out of work, and (b) have just experienced a drastic capital loss. This is an extreme example, but it demonstrates what I mean by "having all eggs in one basket."

Maybe, maybe not, it depends. If you go to work for a startup and are given stock options, then if the company fails, you are only out of a job, not really any capital loss, because you didn't invest anything except time, energy, etc...

Now the venture capitalists, they would be out a loss.

But if the company succeeds, you can become a multimillionaire, then have the cash to start investing and also to start your own company even (and regarding many tech companies, it depends, certain ones require virtually $0 to startup, they'd need venture funding later).

In Silicon Valley, I've been told by someone who works there that it's actually a very common occurence for people to start a company, then sell it a few years alter for a few million, though venture capitalists don't like this as they are always looking for the next Google. The Valley is a crazy place :)

 

[WheelsRCool]

I don't know that the US is literally going bankrupt, but Bush has definitely screwed over the country. Apparently the debt is double what it was before he took office, and that will probably be used as a justification for more privatization. I doubt that the recent tax cut plan will do anything, since it will only give people more money to buy Chinese products, if they choose to buy anything at all. A better plan would have been to initiate a bunch of major infrastructure & public works projects, like what China, Canada & many other countries are doing these days. Like what's listed here:
http://www.upi.com/NewsTrack/Top_News/2008/01/16/us_infrastructure_crumbling/7237/
http://www.stateline.org/live/details/story?contentId=250042
That's what the original New Deal was all about wasn't it?

Bush did increase the debt, however didn't the economy also grow by about $3 trillion during his time in office...? (I might be wrong on that). Maybe that offset it.