AND NOW FOR A REAL ISSUE
Ok, enough about my “liberal” rambling about the middle east, because I like to look more at the economy, and since I’m almost finished with my education at WestPoint, I’m going to be looking for some real estate soon, and of course, there’s a REAL issue that faces most of Americans.
I’ve told you all about the Nightmare that is the Budget Deficit in one of my previous posts, “Thoughts on the economy”, well, now I plan to talk to you about another nightmare deficit, the Trade deficit. (Insert scary music here)
The Issue at hand is Mortgage rates, and why this conundrum of rising interest rates, but low mortgage rates exists.
First off before I start rambling on, lets look at some background information.
The Federal Reserve sets period rates: literally, the “overnight” cost of money. This rate is the rate one bank pays another for have a loan of money overnight. The rationale of banks borrowing from one another is to maintain what are called minimum reserve requirements. If You’re a bank and you have, say, $ 350 million in loans outstanding, you’re required to keep a minimum percentage of those loans, in cash, at all times. So if one day Bank A lends out a little more than it can cover with reserves, it borrows from it’s buddy Bank B, which happens to have a little spare cash on it’s hands.
Long-term interest rates (which include mortgage rates) are an entirely different story. These rates are “set”by the bond market, just the way the stock market “sets” stock prices. Banks, brokerage firms, pension funds, foreign countries, mutual funds, insurance companies and individual investors bid for bonds when the Treasury sells them every three months. The more demand there is the higher the “bid” the less the Treasury has to pay in interest rates to sell them. The Federal government can, and does, try to tinker with long-term rates by buying and selling bonds that it holds. But as big as it is, the Federal government Can’t control the global market. These bonds are then bought and sold all day long, fine-tuning long-term rates between Treasury auctions. And because the market is so large and liquid, other long-term loan rates — like mortgages — tend to follow suit.
So, why the conundrum? Several economist have come up with a theory that goes a little something like this.
Say you buy a new pair of sneakers at Wal-Mart that were made outside the U.S. A few of your dollars end up at Wal-Mart headquarters where they’re booked as profit in the company’s next quarterly earnings report. A few more dollars wind up in the hands of the American company that imported your new sneakers. A few more go to the truckers and owners of cargo ships that brought them to you. But a significant chunk of your dollars end up in the country where the products were made.
Last year, around $650 billion ended up outside the U.S. The country with the most, China, took in over $162 billion in 04. Oil producers, lead by Saudi Arabia, received $164 billion from American purchases of gasoline, heating oil and other products made from crude oil.
So what would you do if you were one of those countries with a piece of that $650 billion? You can’t spend it on goods and services: your country has already bought all the stuff from the U.S. that it needs, wants or can afford. You could put it in a bank, but for many countries holding surplus trade dollars, especially those with shaky banking systems, that’s not necessarily a very good Idea
Eventually, those U.S. dollars come back home in return for I.O.U.’s from The Federal Government called U.S. Treasury securities, still one of the safest places in the world to stash cash. As long as our Congress continues to spend more than it rises in taxes, we’ll have plenty of that Treasury debt to sell. All that demand helps keep interest rates low.
One reason China is getting so much attention, aside from the huge chunk of the trade deficit it creates, is that it has kept its own exchange, the Yuan, artificially low by pegging it to the dollar. No one knows just how much it would rise if it was allowed to “Float” but the strength of the Chinese economy indicates that the Yuan should be valued considerably higher relative to the dollar.
President Bush has been pressuring the Chinese to let the Yuan Float. If the Yuan rises against the dollar, Chinese products don’t look so cheap anymore. But China has been refusing to accept the move, in part, because it already holds close to $225 billion in U.S. Treasuries, why would it give this up? If the dollar weakens relative to the Yuan, that investment in Treasuries shrinks in local value. By keeping Yuan fixed, Chinese officials are preserving the value of their investment.
Just like the Euro, The Yuan can, and will eventually be worth more than the American Dollar, and eventually, the dollar’s value fate will be the same as the Deutsch Mark of Post WWI Germany, I remember in one of my old textbooks seeing a Man from that era pushing a wheel Burrow full of paper cash to the store to buy a loaf of bread. And a stamp that cost 50,000,000 marks, it appears that is what is happening to our dollar
If the dollar slides gradually, all of this may all work out just fine. But a sharp drop in the dollar would almost certainly bring substantially higher long-term interest rates in the U.S. (including mortgage rates.) Nobody wants to buy U.S. Treasuries today if they know they’re going to be worth less tomorrow. So if foreigners stop buying the paper being used to fund our federal spending spree, long-term interest rates could rise very sharply, making a house very unaffordable.
K. Marx Says: June 1st, 2005 at 12:22 am
Jack; Well written. The shift in political ideologies in the past few decades is interesting. Currently, you see many so-called Liberals arguing for Conservative capitalist market ideals; yet, you see many so-called Conservatives arguing for Liberal capitalist market ideals.
Perhaps that explains why President Clinton got such a large percentage of the Conservative vote, and why President Bush lost some of the Conserative vote.
Suzanne Says: June 1st, 2005 at 7:25 am
It is my belief along with many others, that China is the real threat to the U.S…not a handful of Islamic extremists. The current Bush administration has ignored our economy, while busying themselves with creating and seeking out “terrorists,”…draining our remaining economy in the process. Meanwhile, China, the “sleeping giant,” has begun to awake, once again.
For all the patriotic rhetoric and show of military force we use….the REAL basis for wars, power and all else is economic. We can claim to be “defenders of human dignity” or whatever we wish…but the bottom line is always the same…money. If this were not true, we’d be fighting in many nations under siege…not just the ones with oil and strategic geographical locations.
Now, here you can read a little bit about what China can do and has done….at a time when we Westerners were literally still living in caves. China, because of an early emperor,, retreated into isolation….giving Western nations the opportunity to seize power. But, China is waking and coming out of that isolation…and what will stop them from reclaiming their earlier title as the power of the world? Not this administration, that is for sure.
It is very simple……one SMALL city in China currently produces 90% of the cigarette lighters used in the WORLD! Okay, so who cares? Well, when China is producing 90% of the clothing, automobiles, electronics and household products, a lot of people are going to care. And, when China’s economy leads them to buy 90% of the oil in the world…..a LOT of people are REALLY going to care….a LOT! And, they won’t be stopped by an army of part-time soldiers, backed by a “coalition of the willing,” consisting of a handful of fourth rate nations, each sending a token 50 or so troops to help, so they can get billions of dollars in aid from King George Bush.
More to come
Suzanne
Suzanne Says: June 1st, 2005 at 7:36 am
While we neglect our own economy, putting all efforts into chasing poorly defined “terrorists” and bankrupt ourselves with unwarranted wars, China slowly and steadily builds their economic power base…the day will come when they are the major world economic power….and we slide down the scale, wondering how it happened…..
http://www.reuters.com/newsArticle.jhtml;jsessionid=43TWQTPRQY5IECRBAEKSFEY?type=businessNews&storyID=8648549
YEAH it is the DRAMA QUEEN AGAIN
Suzanne Says: June 1st, 2005 at 7:42 am
The information in this comment came from Reuters:
China can sustain 8 pct growth -economist
China is not in danger of overheating and will be able to sustain growth of 8 percent a year for the next decade, a leading economist said on Tuesday.
Growth has averaged more than 9 percent a year since China started reforming its economy along market lines in the late 1970s and has averaged 8.4 percent in the past five years.
“It is hard to say the Chinese economy is overheated across the board,” Yu Yongding, who heads the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, told a seminar in Seoul.
China’s economy looked as though it might boil over a year ago because of excessive investment in sectors such as property, steel and cement.
The government responded by curbing bank lending, tightening land-use rules and raising interest rates to slow growth. Slowly but surely, the measures are working, most economists believe.
Weakening investment and industrial output will slow growth to 9.1 percent in the year through the second quarter, according to a report by the State Information Center (SIC), a top government think-tank.
First-quarter gross domestic product was 9.4 percent higher than a year earlier. In 2004, GDP expanded 9.5 percent.
The China Securities Journal on Tuesday quoted the SIC as forecasting growth in fixed-asset investment would be 20 percent in the year through the April-June quarter.
The report did not specify whether the think-tank was referring to overall fixed-asset investment, which was up 22.8 percent in the year through the first quarter, or to urban investment, which was up 25.3 percent.
“The momentum for industrial production to continue to expand is weakening, and will for certain fall from high levels,” the newspaper quoted the think-tank as saying in its latest report.
It gave no forecast for industrial production, which rose 16 percent in the 12 months through April and was 16.2 percent higher than year-earlier levels in the first four months of 2005.
YUAN WAIT TILL 2007?
Yu, also a member of the central bank policy committee, made no mention of the yuan, which has been pegged near 8.3 per dollar for a decade.
Financial markets have been speculating feverishly that a move to unshackle the currency is imminent, not least because of growing pressure from Washington to let it float higher.
But Fitch Ratings agency said on Tuesday it did not expect Beijing to tamper with the yuan until 2007 because the government’s priority was to maximise export-led growth.
“It’s our view that there’s really not going to be any exchange rate change in China even next year,” James McCormack, a senior director at Fitch, told Reuters in Seoul.
A slowdown in investment would be welcome to Chinese policy makers, who are targeting full-year growth of 16 percent in overall fixed-asset investment.
Growth in urban investment, which covers everything from motorways to steel mills, has slowed from giddy rates of more than
50 percent in early 2004.
The SIC’s forecast of a modest slowdown chimes with a Reuters poll of economists earlier this month that pointed to GDP growth this year of 8.8 percent.
(Reporting by Lu Jianxin in Shanghai and Yoo Choonsik and Oh Jung-hwa in
Suzanne Says: June 3rd, 2005 at 7:39 am
It is time that the American people got back to the wisdom of George Washington and Theodore Roosevelt. It is time that the American people got back to truth, got back to right and wrong, got back to the Constitution. It is time we started looking out for what is best for the United States, not what is best for a particular political party. In short, it’s time we started being Americans again!
Perhaps Thomas Jefferson summarized it best when he said, “In questions of power, then, let no more be said of confidence in man, but bind him down from mischief by the chains of the Constitution.” That is exactly what Michael Peroutka and the Constitution Party are all about.
Suzanne