Billy T said:
If the MBR were adjusted so that 4 RMB buys what 8 does now, the purchasing power of the financially sophisticated (top 2 1/2% surely is) would double by that fact alone. China is a society, like the old USSR, where "some are more equal than others." I believe that more Million dollar (or greater) houses are now being built in China than in any other country, even though these same houses would cost several million if built in US because construction is so cheap in China.
It's really kind've funny and odd. You can go into some peasant rural areas, at least that I've seen on the outskirts of major towns, and see these multimilion dollar houses going up surrounded by shanty shacks and peasant huts with chicken roaming down the streets next smelly pig pens.
If 4 RMB buys what 8 does now, that would be an increase in domestic purchasing power parity, but the Fed wants China to decrease the value of the yuan: increase the exchange rate from US $1= RMB $8. (I think I've got that right). This is what I don't understand. Why would they want it to go up? Not only would Chinese products be so much more cheaper for us to buy - fueling their economy to the extremes, but then look how much more Chinese would be able to invest in America - not just being able to buy more sophisticated technology, gadgets, and hightech devices: they have that now. Everybody in the major cities has a cell phone and digital camera, and probably when I go back again this year I'll be seeing tons of ipods. But then they'd be able to start buying out our corporations.
As of December 2005 the United States Federal debt is $8.1 trillion. Of this, $6.5 trillion has built up during the past three decades, the last $2 trillion in the past eight years and the last $1 trillion in the past two years.
"Our foreign creditors - major trading partners like Japan, China, and Europe - are believed willing to sustain the status quo [with the United States] because their own industrial output and employment levels are worth more than risking the implosion of their most important consumer market, but that, of course, assumes levels of rationality not necessarily found in a moment of crisis. All you have to do is imagine the first hints of things economic spinning out of control and it's easy enough to see that that China or Japan, facing their own internal economic challenges, might give them primacy over sustaining the American consumer. If, for example, a banking crisis developed in China, Beijing might feel it had no choice but to begin selling off parts of its U.S. bond holdings and use the capital at home to stabilize its financial system or assuage political unrest among its unemployed masses.
Even if foreign capital just moves increasingly elsewhere and easy credit disappears for American consumers, U.S. interest rates could rise sharply. As a result, many Americans could experience a major decline in their living standards -- a gradual grinding-down process that could continue for years, as occurred in Japan after the collapse of its credit bubble in the early 1990s.
Even if China, Japan and other eastern Asian nations continue to accommodate American financial profligacy, a major economic adjustment in the United States could still be triggered simply by the sheer financial exhaustion of its overextended consumers. The United States can ill afford even lagging economic growth, given the magnitude of its burgeoning and expensive overseas military commitments, especially in Iraq."
Source: "Debt-financed growth could be our undoing at feet of rivals," by Marshall Auerback, San Francisco Chronicle, Feb. 20, 2005
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/02/20/INGG9BBCVK1.DT
United States National Debt is expected to be $10 trillion by 2008. See historic chart:
http://www.cedarcomm.com/~stevelm1/usdebt.htm
Scroll halfway down to chart: "U.S. Debt vs. GDP"
"Debt is divided into two main categories: debt held by the public and intragovernmental holdings. Intragovernmental debt includes money for government trust funds, such as pension plans and the debt for social security, which is about $1.7 trillion as of May 2005. Overall, intragovernmental holdings account for over $3.1 trillion of the total debt at this time. The remaining $4.6 trillion or so has been purchased by the public, including foreign entities. This largely comes from the issuance of US Treasury securities. Nearly half ($2.2 trillion) is composed of Treasury notes (aka T-notes), while T-bills and T-bonds (including savings bonds) cover most of the remaining public portion of the debt. Bonds sold for infrastructure projects are also part of the national debt. It is common for individual Americans and businesses to buy bonds and other securities, though much of the debt is now held overseas. At the end of 2004, foreign holdings of Treasury debt were $1,886 billion, which was 44 percent of the total debt held by the public. Foreign central banks owned 64 percent of the Federal debt held by foreign residents; private investors owned nearly all the rest.
The country holding by far the most debt is Japan which held $1.2 trillion at the end of March, 2005. In recent years the People's Republic of China has also become a major holder of Treasury debt, holding $223.5 billion at that time.
Paying the debt: The most common method used today to "reduce" the debt is by growing the nation's GDP. The hope is that the deficit spending that increases the debt will increase GDP by a greater amount, and thus—in relative terms, at least—the debt would decrease. This worked to great effect in the U.S. between the end of World War II and 1980, even though the debt showed a net increase in absolute value over the same period.
The debt could also be paid down by increasing revenue through increased taxes and other fees, such as import tariffs. Over 47% of the personal income tax (but not of total tax revenue) collected in 2003 was spent on paying interest on the debt. Additionally, if it were possible to avoid incurring new debt, current revenues could be used to pay off the bonds sold and the loans taken. By U.S. law, a budget surplus must be used to pay down what the government owes, though the nation continues to issue securities.
It is also possible to repay the debt by simply printing more money. However, this is destructive to an economy, as it results in inflation, reducing the actual worth of the national currency. If the country attempted to repay a huge amount of debt at once with this method, hyper-inflation would result, leading to a drastic reduction in the value of cash. The United States government can't actually use this method as the sole right to print money is given by the law to the Federal Reserve."
http://en.wikipedia.org/wiki/U.S._public_debt
This explanation is fully supported by the graphs in the links above. This also supports what I said that the international economy today, with the EU, Asia's Rising Tigers, and that massively huge Chinese economic machine, make today's international economy and the logistics used to maintain it - and to maintain our own economy - a lot different today than they were in the 80's and 90's.
