Chinese buying America

[brianeyci]

Well, who is the biggest consumer of goods in the world? More likely than not, it works both ways. Even America experienced something when Asia when nuts in 1997 because fewer people in Asia consumed American goods.

Well my idea is it's a big difference being hit by Morgan Freeman than by Mike Tyson. You can't just say "it works both ways" without calculating the magnitude. "It works both ways" implies some kind of equality, and even a cursory glance tells me golden mean reeks of stink.

I lack the accurate financial knowledge... you know fuck that. I might just do some number crunching myself with raw numbers. If I had economic training I'd probably say something really retarded like public debt is good for America.

I have a sneaking suspicion that because of the US trade deficit, it would absolutely be crushed in the worst case scenario of the world going down the shitter, while if the US ate it, capital flight would create other financial capitals in the EU to the gain of everybody but Americans and America would suffer unimaginably.

[Lancer]

You're massively wrong. Capital flight also hurts the investors, as they face substantial losses that have to be written off even if they manage to bail out early.

I assume you know what happens next, as you saw it play out globally (albeit on a much more limited scale) during our subprime morgage debacle. Anyways, the EU would be hit particularly hard in the event the US economy tanked, as the majority of foreign investment in the United States comes from Europe.

[K. A. Pital]

Capital flight also hurts the investors, as they face substantial losses that have to be written off even if they manage to bail out early.

So what? Big fucking deal; keeping investment into a distress economy running is not good for them either - capital flight is a mechanism of dealing with that.

Anyways, the EU would be hit particularly hard in the event the US economy tanked, as the majority of foreign investment in the United States comes from Europe.

Which economies "tanked" because they had foreign investment into distressed economies and chose to withdraw that? Could you provide some examples of capital flight which really constituted a net loss for the investor at all? Do such examples even exist, eh?

[brianeyci]

You're massively wrong. Capital flight also hurts the investors, as they face substantial losses that have to be written off even if they manage to bail out early.

I assume you know what happens next, as you saw it play out globally (albeit on a much more limited scale) during our subprime morgage debacle. Anyways, the EU would be hit particularly hard in the event the US economy tanked, as the majority of foreign investment in the United States comes from Europe.

But those investments have an extremely low rate of return, especially US treasury bonds. If the tank didn't happen, they'd be getting their money back like a leaking tap, so I have a hard time believing if the tap was entirely shut of there'd be significant damage to the GDP of those countries. It is paper money, words on a page, accounts receivable with no reasonable guarantee of collection. It's not money in the pocket, nor is it a representation of real wealth. You cannot pay workers with fixed assets. At best you can get loans from banks.

Are you telling me that jobs in the EU will be lost if the American dollar tanks? I don't particularly care about the wealthy. In fact, I don't particularly care about home owners or the elderly who have invested their life savings; they have had their good life and they expect to make money without doing any work. Only the young, the new generation matters.

I know what would happen next; a well deserved readjustment. Better sooner than later. Better slow than fast too, to allow people time to adjust, but I'll take fast over nothing.

[Gerald Tarrant]

Are you telling me that jobs in the EU will be lost if the American dollar tanks? I don't particularly care about the wealthy. In fact, I don't particularly care about home owners or the elderly who have invested their life savings; they have had their good life and they expect to make money without doing any work. Only the young, the new generation matters.

From a trade perspective the bolded statement is absolutely correct. Many of America's trade partners do "export led growth" where domestic demand is insufficient to their production. In order to maintain full employment they try to maintain trade surpluses, so they can have sufficient demand to soak up their production. Without this the companies participating in the surplus face two unpalatable choices, cut prices and profits, or streamline by firing workers. The only way that can be avoided is if some new demand for products appears to the point where it can absorb a large volume of the former trade surplus.

[K. A. Pital]

Companies exporting to the US will have exports cut down. But parallel to that there'd be a large influx of capital from the US into other countries. Of course, it would take some time before demand builds up in those countries, but it inevitably will.

The world economy could live on and other countries could become more rich and well-off if the US tanked and had it's capital assets liquidated and moved out of country... ;D

Capital flight is beneficial for the country into which it flies

[Darth Wong]

You're massively wrong. Capital flight also hurts the investors, as they face substantial losses that have to be written off even if they manage to bail out early.

Far too economic policies are designed to help investors as it is. Almost no economic policies are ever designed to aid workers at the expense of investors, while the opposite happens all the time.

[Surlethe]

You're massively wrong. Capital flight also hurts the investors, as they face substantial losses that have to be written off even if they manage to bail out early.

Far too economic policies are designed to help investors as it is. Almost no economic policies are ever designed to aid workers at the expense of investors, while the opposite happens all the time.

Why? Well, helping the workers at the expense of investors is communism. Helping the inverstors at the expense of workers, on the other hand, is damned good capitalism.

[ray245]

Assuming the US enconomy really tank from this day onwards, how long will it take for the rest of the world's enconomy to recover?

Before or after US recovery?

[Darth Wong]

Assuming the US enconomy really tank from this day onwards, how long will it take for the rest of the world's enconomy to recover?

Before or after US recovery?

How do you know there will be a "recovery" back to current levels? Current levels are fake: a game of smoke, mirrors, and bad debt. Japan never really got back to its high-flying ways after its big market crash. It didn't collapse into a third-world nation or anything, but the recession became longer and longer until people simply had to realize that the high-flying bubble from before could not be resurrected. That's the problem with bubbles.

[Lancer]

You're massively wrong. Capital flight also hurts the investors, as they face substantial losses that have to be written off even if they manage to bail out early.

I assume you know what happens next, as you saw it play out globally (albeit on a much more limited scale) during our subprime morgage debacle. Anyways, the EU would be hit particularly hard in the event the US economy tanked, as the majority of foreign investment in the United States comes from Europe.

But those investments have an extremely low rate of return, especially US treasury bonds. If the tank didn't happen, they'd be getting their money back like a leaking tap, so I have a hard time believing if the tap was entirely shut of there'd be significant damage to the GDP of those countries. It is paper money, words on a page, accounts receivable with no reasonable guarantee of collection. It's not money in the pocket, nor is it a representation of real wealth. You cannot pay workers with fixed assets. At best you can get loans from banks.

Are you telling me that jobs in the EU will be lost if the American dollar tanks? I don't particularly care about the wealthy. In fact, I don't particularly care about home owners or the elderly who have invested their life savings; they have had their good life and they expect to make money without doing any work. Only the young, the new generation matters.

I know what would happen next; a well deserved readjustment. Better sooner than later. Better slow than fast too, to allow people time to adjust, but I'll take fast over nothing.

Ok, so you don't quite understand how much of the economy is smoke and mirrors. Let me explain:

When people talk money, you think of cash, right? Little wads of paper or discs of metal with pretty pictures on it? That's not so in the finanical world. Money is, for the most part, ink on the balance sheet.

For the purposes of this explanation, let's just assume that you just got paid so you take that money and deposit it into a savings account at your bank. Well, the bank has to pay interest on your deposit, so they go out and lend most of the money (keeping some of it in reserve in case you need to make a withdraw) to some person or company who's looking for some capital for some reason or another. Of course, that second person / company isn't going to spend the money right away, so they'll deposit that money in their bank (which may or may not be the same as yours), which goes out to put out most of that second deposit as a loan to a third person who deposits the money into a bank, in theory going so on and so forth infinitely many times. The net effect? The amount of "money" in the economy is far greater than the actual amount of currency available.

Now, imagine if one of those people somewhere in the chain had made a investment in some developing nation and lost some money when that country tanked, such that they could no longer pay back that loan. No big deal, the bank should have enough other assets to compensate for that loss. Now imagine if a lot of people had made investments in what they thought was a secure, well-developed market. Now the bank is facing a lot of people who can't pay back, so the bank starts to goes under. People hear this and start to make runs on their bank (regardless of whether or not it had made the bad loan), resulting in a large number of of people who wish to collectively withdraw an amount of hard currency that doesn't physically exist. Well, most developed nations have a central bank which can come to the rescue (though only up to a certain point), but a bailout takes time and is costly to the country as a whole. Furthermore, it still shakes consumer and investor confidence in your economy.

[Gerald Tarrant]

Companies exporting to the US will have exports cut down. But parallel to that there'd be a large influx of capital from the US into other countries. Of course, it would take some time before demand builds up in those countries, but it inevitably will.

The world economy could live on and other countries could become more rich and well-off if the US tanked and had it's capital assets liquidated and moved out of country... ;D

Capital flight is beneficial for the country into which it flies

Sort of. First, Ricardian trade theory says everyone is poorer when trade shrinks. Google the Smoot-Halley tarriff. Second, the financial sector in the US is in trouble. This doesn't necessarily mean every US sector is in trouble. IBM is as fundamentally sound as it was before the bubble. Some companies will take justifiable stock price hits for their debt exposure. Some companies will take unjustifiable stock price hits, the latter are more likely to recover. And people who flee from sound companies will lose their "unrealized losses" and the profit they could have made off normal growth. Some capital flight will be from unsound sectors to sound sectors. Third the US is in absolute terms the number one trading nation, just based on the scale of its economy. A corollary of this is that the US is the main trading partner of many nations. Decreasing the value of US trade (which will happen when the economy shrinks) decreases the demand or supply of things that America's trade partners buy or sell. To recover that needs to be replaced. The problem is there isn't an obvious existing source of demand to replace America's, one might appear spontaneously, but the smart betting is that it will take a while for people to change their behavior sufficiently to replace America's demand.

Assuming the US enconomy really tank from this day onwards, how long will it take for the rest of the world's enconomy to recover?

Before or after US recovery?

First we need to quantify how much the rest of the world will be hurt. The US had a trade deficit ~$600B in 2005 I believe (the conventional trade theory links trade and budget deficits, the capital to fill budget gaps needs to come from somewhere) the current budget gap isn't that deep, I don't have the current trade deficit numbers but as a result they ought to be lower. In absence of the current numbers we can just take the worst case, and note that whatever happens will be better than the worst case. The worst case for the ROTW would be that the trade deficit spontaneously dissapears, America's trade partners would find themselves without a market for many of their goods. How much each country would be hurt would depend on: what share of America's trade deficit they were responsible for, and how quickly someone could replace the lost demand. The worst case scenario looks like a massive one time Keynesian demand shock. The real situation doesn't look to be that bad, decreasing buying power of the dollar means that the US trade deficit will shrink as a result of less money for consumption. That mechanism suggests a more gradual change. In a gradual change the ROTW has time to adjust its practices to gradual decreases in US behavior, Chinese consumption might conceivably go up by $100B/year, but thinking they could replace the US's rate instantly isn't likely.

So where does this leave us? In a hypothetical "collapsed US economy" the ROTW loses a market that they have trouble replacing, it might take 2 or 3 years for demand to offset America's to appear. In a more realistic scenario the US exhibits decreasing demand for foreign products, the more dynamic countries shift assets around to compensate. Countries that have labor market and other rigidity may have a harder time adapting to this. If some other country picks up the demand "slack" then there won't be any real difficulties; if not, it may be a minor recession. The time to recover would be Lost_Demand/"Absolute_global_GDP_growth_rate".

[K. A. Pital]

First, Ricardian trade theory says everyone is poorer when trade shrinks.

I'm sure you know that this theory isn't corroborated by the opposite example, increased trade could mean pauperisation of one but the rise of another.

The problem is there isn't an obvious existing source of demand to replace America's, one might appear spontaneously, but the smart betting is that it will take a while for people to change their behavior sufficiently to replace America's demand.

The US will not tank in an instant - you know, it still houses some real production and important industries, as you said. It'll take time to bankrupt them.

In a more realistic scenario the US exhibits decreasing demand for foreign products, the more dynamic countries shift assets around to compensate. Countries that have labor market and other rigidity may have a harder time adapting to this. If some other country picks up the demand "slack" then there won't be any real difficulties; if not, it may be a minor recession.

Yeah. Well, if the US tanks, much of it's capitals would be transferred into other countries, which by itself will raise the abilities of their consumers to exert new demand, isn't that so? That won't happen overnight, but if you give it several years, you could do that.

Russia's capital flight was enormous and it totally wasted the country's economy, however, the rest of the world didn't flinch and continued to exploit the nation as a simple consumer good "dump" market.

A distress economy will see a dangerous pattern, where capitals and investment would be liquidated to maintain consumption of foreign goods (domestic production is disintegrating, thus the need for foreign manufacturing). If that happens to the US, it's as good as gone, but the other countries wouldn't really suffer heavily and might get serious boons in the longer term

[brianeyci]

From a trade perspective the bolded statement is absolutely correct. Many of America's trade partners do "export led growth" where domestic demand is insufficient to their production. In order to maintain full employment they try to maintain trade surpluses, so they can have sufficient demand to soak up their production. Without this the companies participating in the surplus face two unpalatable choices, cut prices and profits, or streamline by firing workers. The only way that can be avoided is if some new demand for products appears to the point where it can absorb a large volume of the former trade surplus.

Everybody in the world is looking for high quality goods (or cheap quality goods.) If Americans can no longer afford it, why can't the EU or any other country send their exports somewhere else? Like, China.

Ok, so you don't quite understand how much of the economy is smoke and mirrors. Let me explain:

When people talk money, you think of cash, right? Little wads of paper or discs of metal with pretty pictures on it? That's not so in the finanical world. Money is, for the most part, ink on the balance sheet.

I know it's all fake. I know that the money supply in circulation is far lower than the actual amount of money in circulation. That doesn't change my point that for the people I care about, the people who actually work for their money, investment doesn't matter a shit. Only liquid matters.

For the purposes of this explanation, let's just assume that you just got paid so you take that money and deposit it into a savings account at your bank. Well, the bank has to pay interest on your deposit, so they go out and lend most of the money (keeping some of it in reserve in case you need to make a withdraw) to some person or company who's looking for some capital for some reason or another. Of course, that second person / company isn't going to spend the money right away, so they'll deposit that money in their bank (which may or may not be the same as yours), which goes out to put out most of that second deposit as a loan to a third person who deposits the money into a bank, in theory going so on and so forth infinitely many times. The net effect? The amount of "money" in the economy is far greater than the actual amount of currency available.

I don't particularly care about the investor class. Unless the European banks or other banks have such huge sums of money invested in the US economy that if the US economy sinks, the bank goes under, I don't see your point. The bank cannot go under, not in a modern economy -- deposits are insured by governments.

Now, imagine if one of those people somewhere in the chain had made a investment in some developing nation and lost some money when that country tanked, such that they could no longer pay back that loan. No big deal, the bank should have enough other assets to compensate for that loss. Now imagine if a lot of people had made investments in what they thought was a secure, well-developed market. Now the bank is facing a lot of people who can't pay back, so the bank starts to goes under. People hear this and start to make runs on their bank (regardless of whether or not it had made the bad loan), resulting in a large number of of people who wish to collectively withdraw an amount of hard currency that doesn't physically exist. Well, most developed nations have a central bank which can come to the rescue (though only up to a certain point), but a bailout takes time and is costly to the country as a whole. Furthermore, it still shakes consumer and investor confidence in your economy.

The bank can simply institute withdrawal limits until it can rip all its money from the US. At a significant loss, but that shouldn't matter since after the readjustment all the rich and noble Americans will ditch their own currency and banks like a bad whore and dump into Europe. What is their equivalent of the Federal Reserve in their countries can give banks money for loans for short-term consumption. Do you seriously think you will see Latin American style riots in Europe if people can't access their money? The politicians will go on television and assure the public that their money is secure, that the banks only need time to pull out of America. The people are more refined, they will not panic, knowing in the long run their savings accounts are safe.

Part of the problem is economists treating long-term investments or investments in general as good as liquid. They forget the market burst in the 90's leading to the popularity of the Cash Flow Statement as opposed to the Balance Sheet. When historians look at the failure and fall of capitalism, they will laugh at the hilarity of the Balance Sheet. How the fuck does it make sense to invest money that you don't have? It only makes sense if your investments and accounts receivable have a reasonable guarantee of collection. This is precisely what happened in the subprime, banks packaging low-quality investments as secure. "Capital flight" had little to do with subprime and everything to do with my position, that liquid is king. Liquid is what matters, even if it is insured liquid sitting in a savings account in a bank. Just because the liquid is electronic, that doesn't change my point that liquid is what workers get paid with. Liquid is not investment, so I don't see what the point of your whole rebuttal is.