Read and Critique
1. For many years US consumers borrowed, borrowed, borrowed, borrowed.
2. The money was lent to them by US entities.
3. Where did the money go? Much of it went to buy stuff. The vast majority of this stuff was manufactured overseas, primarily in Asia.
4. The dollars that were loaned to US consumers by US entities therefore made their way to overseas entities. Essentially what you had was an export of dollars overseas.
5. These dollars needed a home, and so overseas entities bought many billions dollars worth of US government bonds and equities thereby financing America’s continued consumption.
6. Now the credit bubble has burst. There is very little money being loaned out and the economy is in the tank.
7. This means that there is far less stuff being bought. The consumer binge has ceased.
8. This means that dollars are no longer being exported in nearly the same volume as they were before.
9. This means that overseas entities will have far fewer dollars that need to find a home.
10. This brings us to the problem: The government debt is rising rapidly due to the bailouts, other efforts to try to "fix" the economy, declining revenue due to the slowing economy and so on. So, we have more need than ever to sell our government debt to foreign investors.
If this analysis makes sense, then the million dollar question is this: Where will the dollars come from that are needed to continue financing the US government? Aren’t foreigners (those who export to the US) getting poorer just when we need them most?
The "dollars" will come from the Federal Reserve. It stands ready to "buy" unsold Treasury bonds from regularly scheduled auctions.
[quote]If this analysis makes sense, then the million dollar question is
this: Where will the dollars come from that are needed to continue
financing the US government? Aren’t foreigners (those who export to
the US) getting poorer just when we need them most?[/quote]
*Short term: From anyone that has dollars to spend. Most likely investors fleeing all the falling markets. The question is thus: Is there enough dollars? And if assets continue to fall, will too many be sucked into the void?
*Long term: Unless things get better, they won’t come.
(And it isn’t a million dollar question, unfortunately. Its a two trillion dollar question.)