A Glimpse of the Apocalypse

Today’s New York Times has a front page story that features the concerns of the Chinese premier over the US’s ability to pay the trillion US dollars it owes Beijing. They seek assurances that the money won’t go up in smoke. As a friend of mine much smarter than me once said, “They’ll get their dollars back. Can’t promise what those dollars will be worth.” The point is (obviously to economists) that the best way for a nation (from its’ point of view) to pay off deft is to inflate the currency.

Unfortunately, this is rarely the lenders’ view. Should the Chinese stop loaning us money, the price of our bonds would have to fall so someone would want them. Uncle Sam’s crazy bond blowout! Prices so low, it’s insane!

Brief note here. As the price of a bond falls, the interest rate goes up. The dollar denomination is what you get at the maturity of the bond, either months or years from now. Here’s how it works:

I loan you $90 for your offer to pay me $100 in a year. I earn $10 for my trouble, so I get (10/90=0.11) 11% interest.

Later, I loan you $80 for your offer to pay me $100 in a year. I earn $20 for my trouble, so I get (20/90=0.22) 22% interest.

Much later I loan you $70 for your offer to pay me $100 in a year. I earn $30 for my trouble, so I get (30/90=0.33) 33% interest.

Get it? The cheaper the loan (basically a 1 year $100 bond) the higher the interest. And while the full $100 has to be paid on all three loans, until the end of the year (the maturity), the first guy is screwed if he needs his money sooner, since no one will give him the $90 he loaned, just the $70 the last guy got.

Throw in the higher inflation inevitable with falling bond prices, voila! You see why the Chinese have their knickers in a knot. They can sell (or just stop buying) and the value of their holding will fall in dollar terms immediately, or they can hold on and have the value of the dollar decline, getting back at maturity the right number of dollars, but much less value in what they can buy with these new smaller dollars.

Got it? Good.

Basically, we all know that the US Treasury isn’t like Scrooge McDuck’s basement, with piles of cash and gold lying around. To fight the Iraqi war, bail out the banks and stimulate the economy, we’ll need to borrow the money from guess who?

As noted previously, most Americans never saw this thing coming. Imagine being Chinese! They didn’t have a market economy the last time a nasty spell came around in the early 80’s. Yours truly was moving furniture for $3 an hour with an Economics degree from Trinity College. My friend who cleaned the Slurpee machine at 7/11 wasn’t a Pakistani immigrant. He was a native Californian with a Doctorate in Physical Chemistry.

I’ll be 50 this month, so I remember the hard times and have been cautious about risk, markets and debt. Any American under 50 never saw it first hand. Any Chinese of any age has never been through this. It will become very political, very contentious and very dangerous when 100 million newly middle class Chinese get sent back to the rural villages.

May you live in interesting times.

From the Humble Farmer in Maine

Recently, the Humble Farmer, a 30 year veteran of Maine Public Radio was fired for making political commentary. I enjoyed and am posting one here and am assuming I have permission from the site.

How do you feel about war? I probably shouldn't take sides, being privileged as I am to sit --- with your permission --- behind this microphone, but I am going to come right out and admit that I don't care for war. No, it's not the war itself that bothers me. It's the needless killing and starvation and destruction and expense part of war that bothers me.

You might argue with me and say that war is the only way we can control the world's population. You might tell me that birth control is not a good thing but there is nothing wrong with millions of young men dying gloriously on the field of battle defending their country. You might tell me that we've got to have wars because if the population continues to increase at the present rate, in 500 years there won't be standing room on this planet. And I've got to admit that you've got me --- I can't say a word about that.

Let's admit it. You and I know that there are people who do like war. Many of them are the simple flag waving folks who will stand right up in public to show their support for a wimpy looking, weasely faced war monger from way down south who didn't even get most of the popular vote. There. I've said it and I'm glad. But this is public radio so you shouldn't be surprised to learn where I stand. And besides the support from flag wavers, you know that when there's a war every big company stands to make money. So you'll find the unions standing right beside management when you're talking big time war.

It's pretty hard to stop a war when the man --- who calls himself the leader --- wants a war. You'll notice that he starts out by sword rattling --- lets all the other world leaders know that he's got to make a move very soon to protect the safety and well-being of his people --- no matter how far away it is. And if he says the same thing over and over and over there will be a few people out there who say to themselves, "Baaaa. You know, I think he's right. There are some bad guys out there who are killing our people. We've got more planes and tanks and guns and technology than anyone else, so why should we have to put up with it. Our leader says we'll hit them so hard and so fast it will be over before they knew what hit them. And before we are done, we will have restored order and sucked all the natural resources out of an unstable region."

All this while, even though the war-mongering, rat faced wimp knows what he's going to do no matter what, he's making a big public show of talking with the top guys in Russia and France and England --- trying to either get their support or keep them off his back while he blows half the world to kingdom come.

Agh. I've said enough about him. Every time I see him blabbing on TV I wonder how anyone could possibly have been stupid enough to vote for such an idiot. I comfort myself by knowing that most of the people who went to the polls didn't.

I'll bet you don't know that wimpy little weasel face wrote a book in which he very clearly outlines his plans. And it might surprise you to hear me say that if you haven't read it, you should. Got your pencil? The name of it is Mein Kampf.

So that's the Humble Farmer. Who did you think he was talking about?