Monday, March 9, 2009

I Don't Understand...

Why would we allow countries, such as China, to buy our debt? I. Just. Don't. Understand.

Is this anything like the companies that buy housing loans?

What happens if we can't pay China back?

I don't get it.

12 comments:

One Salient Oversight said...

Governments all over the world allow their debt to be bought and sold on the market. The fact that the US does is not strange.

Click here to see how different countries have different rates. (The far right hand column shows 10 year bond rates).

Government debt is considered an important part of the world financial system. The reason is that, unlike companies, governments "cannot" go bankrupt and so therefore lending money to the government is seen as a very safe form of investment.

Government bonds act also as a way of determining all sorts of loans, as well as corporate bonds. Corporate bonds tend to be a few percentage points above government bonds, depending upon their level of risk.

The amount of government bonds in the marketplace also depends upon how much money the government borrows. In the current situation, public debt is equivalent to around 47% of GDP.

Whenever the government issues bonds, it offers an alternative investment to anything the marketplace can offer. Therefore there is a certain amount of "crowding out" which occurs, especially if debt levels get very high.

The US, however, has an advantage over many nations in that its debt is denominated in US currency. Many developing countries (eg Pakistan) borrow not in their own denomination but in US$.

This means that the US can control its debt (unlike Pakistan). If worse comes to worse, the US could simply print the money and hyperinflate itself out of debt. This is not considered "good practice".

China, like all nations, can sell its US debt. This is, I think, a likely scenario. If China believes that its investment in the US is not worth it, it will sell off its US debt. Others will end up buying it, not least many American investors. Unfortunately, if China does sell its US debt, the value of the US dollar will drop considerably.

In short:

1) Everyone does it. It's an important part of the world of finance.

2) No. Government debt is considered the safest form of investment, unlike property, shares, precious metals and corporate bonds.

3) China will sell its stake in US debt, causing the US Dollar to devalue.

Two Dogs said...

OSO makes really good points, but forgets the obvious one. The dollar is worth nothing as it is. The US dollar is a piece of paper 2-5/8" x 6" with some ink on it. If it was REALLY worth a dollar, a ream of paper would cost nearly 1500.00. (I cut the cost in half to allow for the ink. At today's price, the dollar is actually worth 0.00145 cents because a ream of paper is a little over eight dollars.)

As far as the buying debt thingy is concerned, other countries desire our bonds because those countries SUCK in comparison to the US. What I mean is that our country is the richest, smartest, and most productive country on the planet and all other countries want to be like us in wealth. They just want to do it without capitalism.

And now, we do too!

The US government overselling the debt is EXACTLY like all the folks that sold and signed "interest only" loans and the like. And the Obama administration and the Democrat Congress have sold more "interest only" loans (times two!) than all of the other mortgage companies (Washington thru W Bush) in the past COMBINED. Obama has increased the borrowing limit to all the illegal aliens (the world) to TWICE what was allowed in the past. To further hammer home the comparison, Obama raised the borrowing limit of a home owner to 70% of their five year income.

There is no "what if," we cannot pay anyone back, the United States is BROKE. Bill Clinton removed the debt calculations for Social Security from the actual deficit, that is how the supposed "surplus" he left materialized from thin air. He removed the actual cost of SS from the figures that really shows how much the US is in the hole. (I am too terrified to even try to accumulate that information. I would assume it is in the neighborhood of 50 TRILLION.)

George W. Bush continued that same accounting GINORMOUS FRAUD.

In short, the whole world economy is teetering on the abyss because Dickster McTrousersnake cheated on the economy, and W let the lie stand. When I say "world economy," I mean world economy. The US carries the entire financial well-being of the planet on its back.

The reason that you don't get it is because it is as stupid as spending government money of Embryonic Stem Cell research. Well, unless you WANT super tumors.

Roland Hulme said...

Warren Buffett pointed out that selling all this debt overseas will turn America into a 'sharecropper society,' in which we all work for foreign paymasters.

Coffee Bean said...

I feel like all this money stuff is nothing but a giant game. Take away the smoke and mirrors and what do we have?

Two Dogs said...

Roland, this NOT a dig at your comment, just about everyone's darling, Warren Buffet.

His company, Berkshire Hathaway used to make clothes. For over one hundred years, they made clothes. I have no idea why Buffet started buying the stock, back in the early 1960s, but now the only clothing they make is Fruit of the Loom, the rest of their major business is low-end insurance and specialty insurance.

They own Dairy Queen and some diamond mines, too.

In other words, they are going to lose a bunch of money if the government doesn't bailout risky Democrat-forced bank lending. And they are going to lose a bunch of money if the government doesn't give a bunch of folks money to pay for their Katrina losses.

Buffet is the epitome of corrupt "BUSINESSMAN." Wonder why he backed Jughead?

BLBeamer said...

Two Dogs,

You don't know what you're talking about.

Buffet bought Berkshire Hathaway as a failing clothing manufacturer. You ought to read his annual letters and find out if he is really as dumb as you claim. Better yet, just read his foreword to Benjamin Graham's The Intelligent Investor. No moron could possibly write so well on such a complicated topic. If you can't figure out why he bought BH after his record of 44 years, then I'm not the only dumb guy on this site.

One thing you'd find out is he owns lots more than just "low end insurance and Dairy Queens". Not that there's anything wrong with that, but BH has several broad areas of holdings: Utilities (which for some strange reason includes a large real estate brokerage business); Insurance; Manufacturing, Service, and Retailing Operations; and Financial Products. In addition, BH owns 18% of American Express, 9% of Kraft Foods, 8.5% of Coca-Cola as well as percentages of other well-known companies.

The thing he does best is buy well run private companies with superior products and lets the owners run the companies without having to worry about financing anymore.

Coffee Bean, if you would like a clear description of derivatives as well as other rather esoteric financial matters, read his 2008 annual letter here.

He is hardly corrupt. Self-serving? Certainly. Does he steal money? No. Does he give his shareholders a decent return? Hell, yes! He is an exemplar of transparent management. Why do you think his annual letters are so admired? He reveals much, warts and all. One could get a first class finance and accounting education just by reading his four decades of annual letters.

Obama could do a lot worse than take Buffet's advice, and unfortunately he is.

But go ahead and disparage him because of his fairly moderate Democratic politics. Just remember we all have our blind spots. Buffet's happens to be, in my opinion, his view that "overpopulation" is actually a real phenomenon.

Two Dogs said...

BLBeamer, as I said, BH's main interest is low-end insurance and SPECIALTY insurance. In case you didn't pay attention, BH has lost 38% of its value in the last year. The Dow has lost 46%.

And yes, Buffet stands to rake or at least break even, if Barry gives him what he wants.

I'll let the barb at me slide.

Again, Buffet is the EPITOME of what they are blaming the failing economy on. He DEFINES CORPORATE AMERICA.

Again, it is a Barry contradiction or more assuredly, a lie.

And, I never called him dumb, I called him everyone's darling. Did you prove my point?

BLBeamer said...

Two Dogs, I inferred irony when you referred to Buffet as "everybody's darling" and, since he is considered super-smart, I interpreted that as you calling him dumb. I am sorry if I misinterpreted your comment.

However, your data are wrong. According to the audited annual statement, BH had positive earnings, but their book value per share declined about 10% due to the decline in so many of their underlying holdings. As far as their main interest being in specialty insurance and low end insurance, here's a list of BH's subsidiaries. Insurance does have the largest portion of BH's assets, but Buffet has clearly stated numerous times that he is in the insurance business for the free cash it generates, which he uses to invest in other businesses.

I'm not sure which of my comments you considered a barb, but whatever it was I'm sure you can handle it. Or at least you ought to be able to, given how you dish 'em out.

The rest of your comments I won't respond to because I'm not sure I understand your point.

I think we agree that Obama's first month has been a fiasco, however.

Two Dogs said...

BRK B: 08-0228 4461.89
BRK B: 09-0312 2740.00

Sorry, BLBeamer, not to belabor the point, but you do the math.

BRK A: 08-0228 140k
BRK A: 09-0312 83.7k

i might have been a little off in my price quotes, but on the low side. Their cap is gone, gone, gone.

BLBeamer said...

I did do the math. You implied that BRK is on shaky financial ground due to Buffet's corruption. You have not demonstrated that. I think I've provided data that suggests otherwise.

BRK A and B sells at a premium to its book value. That's not unusual but the "Warren premium" last year was ridiculous and indicative of the bubble we experienced.

The underlying assets are still quite sound as a whole, not to say there aren't problems, but in his annual letter he discusses many of those problems with relatively rare candor. Particularly rare these days.

Two Dogs said...

BLBeamer, I did not IMPLY anything. I stated plainly that BH stands to lose a lot of money without government bailouts. (Never mind the OBVIOUS contradictions in that ideology) And you know that Buffet is the media's darling since he came out to back Barry. They can't use Soros because of the blatant currency manipulation that he employs.

Buffet is very cunning, but he is the epitome of what the Obama administration openly mocks. Just as is Soros.

I have no clue why you are trying to do this, because there is no problem at all with my statements above. Certainly a company that plummets in cap like BH is not at ALL on shaky ground.

(Just so you know, everyone is on shaky ground because of this feckless administration and the corrupt Congress, even the chicken farmer down the street, and everyone loves chicken. Not everyone loves GEICO.)

BLBeamer said...

What is "this" you think I'm trying to do? I'm interested in discussion from a factual basis.

You said, His company, Berkshire Hathaway used to make clothes. For over one hundred years, they made clothes. I have no idea why Buffet started buying the stock, back in the early 1960s, but now the only clothing they make is Fruit of the Loom, the rest of their major business is low-end insurance and specialty insurance.

They own Dairy Queen and some diamond mines, too.

In other words, they are going to lose a bunch of money if the government doesn't bailout risky Democrat-forced bank lending. And they are going to lose a bunch of money if the government doesn't give a bunch of folks money to pay for their Katrina losses.


Your first two paragraphs demonstrated an unfamiliarity of BH's business. The third raised an interesting point, but Buffet does discuss this in his letter. Have you read the letter, and looked at BH's financial statements?

Buffet has been a media darling for years, from long before Obama was even thinking about organizing communities. Buffet's folksy, "aw shucks" manner is only partly the reason.