Thursday, October 26, 2006

Currency...another dimension to think about?

1) So the USA is the largest debtor nation in the world at the moment with the worst negative account balance. (-$829 billion in 2005, 10x worst than the next closest)

2) The US savings rate is now negative, so we are in no real position to take over out own debt.

3) The good news is that the USA is the worlds largest economy...and by far the largest consumer....the developing world (developing production capabilities) needs us.....

4) We have the largest public debt.

4) These people (China and India) who are developing happen to be great savers....and they don't mind funding our debt so long as we buy their goods. (and therefore transfer our wealth to them in the mean well as ramp up their production capabilities)

But the question is....will they continue to fund out excesses? Will they ever become worried that we will not "pay our bills"?

But what does "pay our bills" mean? Well, it first means will we pay out on our US Bonds they might be holding...but they also hold a lot of good old US Greenbacks as a currency reserve.

Why do they do that...well, the US Dollar is considered very stable. In fact, many of the worlds commodity markets are sold in dollars. The entire world energy market is sold in dollars....and every country has energy needs, so it is in everyone's interest to have a solid dollar. (there is a theory that this is why we went to way in Iraq....the started selling oil in Euros.....and perhaps a reason and France and Germany were not so eager to get involved....but I digress)

So what do we average people do about all we have people running for office discussing this? (I seem to remember people in the past...Tsongas and even Perot)

If we have savings, how should we invest? Should we diversify into investments based in other currencies? Which currencies would they be? (I suppose that changes as time goes on....I mean if the economic system were to fall right now, I think China and India would also be in big trouble...though they would end up with all the production capability and therefore the ability to dig their way out. (much the way the USA was after WWII....the only country with production capacity...and we benefited greatly!)

I am not sure I have fully convinced myself of the above problems.... Well, I guess I'm convinced those are problems....I'm just not sure there are no "solutions" I might not be missing.

Send me comments if you see a dimension of this situation that I am missing! (and give me your suggestions for solid currencies)


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