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.

Proportionality

Probably “statistics” would have been a more appropriate heading, but what the hell. I have a pet peeve about proportionality, and especially the federal government, the man on the street and the media’s inability to have a perspective on the scale of disasters and other historical events. The Bush Administration has taken this to crazy level, spending literal trillions to prevent another 3,000 dead Americans, whereas that much money could save hundreds of thousands, more likely millions of lives if applied to medical research. (Stem cell, anyone?)

On 9/11, I was in London for a board meeting, and I’ll never forget the hours spent staring at the TV in my hotel room. The most bizarre part was watching a CNN interview at a Wal-Mart in South Dakota. A woman who must have weighed 300 pounds was sucking on a cigarette and telling the reporter, “You couldn’t get me into one of those deathtraps” referring to commercial aircraft. I’m thinking diabetes, heart disease and cancer are much more appropriate concerns, but that’s the way most people have come to think. Just be afraid of the last thing you heard about on the news or talk radio or wherever oblivioids get their misinformation.

Economics is the study of scarcity. If there’s enough of something, there’s no market for it, like air for example. The free market does one thing pretty well, and that is to set a price for stuff. One key shortcoming is that there is no market for public safety or national defense. How much we spend is based on policy decisions by the current rulers and reflects their mindset and worldview. For the last eight years, we’ve tried to become the Death Star, Fortress America, and Fort Apache.

Costa Rica dismantled its’ military in 1948, and they’ve never had a problem with it. Average incomes are 1500% (yup, fifteen times) neighboring Nicaragua’s, and they have a better health care and education system than we do, not to mention longer life expectancy. I’m not saying we need to completely dismantle the military, but is it really necessary to spend more than the rest of the world combined?

Here’s another stumper. In the last decade, around 3,000 Americans have died in terrorist attacks. Every day, it’s estimated that around the world about 30,000 children starve to death. A decade is 3,562 days, so for our 3,000 killed, there were over ten million children starved to death. So over 36,000 kids starved for every American killed in a terror attack. Doesn’t that make it seem a little silly to focus so completely on this stupid Global War On Terror? Maybe a little more help with food aid? How the hell does a country in which most citizens claim to be Christians get its’ priorities so completely fucked up? The Big Guy famously said, “You still lack one thing. Sell everything you have and give to the poor, and you will have treasure in heaven,” and “Blessed are the peacemakers.” How the hell do you square that with Bush doctrine and actions?

Even if you take the logic at face value, it’s more than a little hard to buy the sense of proportionality. Suppose you lose a hundred thousand Americans in a nuclear terror attack on a large urban center EVERY YEAR. That would make terrorist attack the sixth leading annual cause of death, behind heart disease, cancer, stroke, respiratory illness and accidents, and barely ahead of diabetes.

I can’t find the data, but it sure as hell seems like we’re spending more in Iraq (which had nothing to do with 9/11), Afghanistan and in the Department of Homeland Security (doesn’t “Homeland” kind of smell like a swastika?) than we are working to prevent heart disease, cancer, stroke, respiratory illness and accidents? How does this make any sense if you have even the vaguest sense of proportionality?