"Chimerica Breakdown"
Political rifts, tech battles, trade tariffs and currency wars...
by Bill Bonner
Paris, France - "Let’s turn to the money itself. There’s more to the story there, too. The ‘West’ may be failing politically…maybe even technologically…but when it comes to making money, nobody does it better, right? The stock market is booming. Unemployment is low. (Au contraire Monsieur Bonner: Reality-based ShadowStats said "May 2023 ShadowStats Alternate Unemployment increased to 24.7% from 24.6% on top of U.6 increasing to 6.7% from 6.6%" That rate has certainly gone higher since then. - CP) As for ‘inflate or die’…our hypothesis, that a system that thrives on more and more credit must continue ‘inflating’ or it will collapse…maybe we are wrong? Maybe inflation will come down with no need to pop the bubble?
First, the latest news, MarketsInsider: "Bonds go bonkers as the US government now pays more than Vietnam or Morocco to borrow." "The US is the world's biggest economy, with the biggest businesses, and is a magnet for global investors. Such unrivaled economic muscle would mean the American government can borrow money much more cheaply than other sovereign entities - especially, emerging-market nations with weaker credit ratings.
Today, the world’s strongest borrower – the US government – pays more for its loans than some of the world’s weakest borrowers. The US borrows money at 4.5% (the 10-year T-bond)…while Vietnam pays only 2.8%. This is just one of many contradictions and puzzles that bedevil the whole ‘western’ world. Nothing is quite what it pretends to be...or used to be."
Chimerica: But the ‘more to the story’ is that the US government has an almost unbroken chain of deficits going back to the Carter administration. The national debt now totals $33.5 trillion…and it’s still growing fast. America’s trade deficits, too, began in the 1970s…and haven’t let up since. It now owes the rest of the world $18 trillion in accumulated deficits (currently running at about $1 trillion/year.).
More to the story there, too. China invested way too much money (much of it borrowed) in order to develop output capacity for people who really couldn’t afford it. And as they put more and more peasants to work, fewer were left to be absorbed into their factories. It became harder and harder to keep wages (and prices) low. And then, too, when the US revealed that it was not above ‘sanctioning’ foreign nations and seizing their assets, the ‘world’s most successful joint venture,’ began to fall apart.
The New York Times is on the case: "Americans treated China like the mother of all outlet stores, purchasing staggering quantities of low-priced factory goods. Major brands exploited China as the ultimate means of cutting costs, manufacturing their products in a land where wages are low and unions are banned. As Chinese industry filled American homes with electronics and furniture, factory jobs lifted hundreds of millions of Chinese from poverty. China’s leaders used the proceeds of the export juggernaut to buy trillions of dollars of U.S. government bonds, keeping America’s borrowing costs low and allowing its spending bonanza to continue." Chimerica has yielded to a trade war, with both sides extending steep tariffs and curbs on critical exports - from advanced technology to minerals used to make electric vehicles.
Deficits, Debts…and Disaster: It was nice while it lasted. Now, the foreigners are no longer holding down prices for US consumers. So, the Fed had to stop buying bonds, and raise interest rates, in order to bring inflation down to its 2% target. The Chinese aren’t buying bonds either. Axios: :In China, the economy - and the currency - are weakening. It now may even be selling some of its Treasuries as it tries to support its slumping currency. Further, the worsening relationship between the U.S. and China - as well as America's sanctions on Russia after its invasion of Ukraine - might be giving Beijing a reason to reduce its exposure to the U.S. financial system."
The US still borrows huge amounts of money. The average interest rate on consumer credit card purchases is now over 21%. Bloomberg reports that some auto buyers are paying 29% on their car loans. Mortgage rates have come down, but are still twice what they were three years ago. Meanwhile, the largest borrower in the world – the US federal government – runs a deficit of $7 billion every day, Monday through Friday. And it has some $7.6 trillion in old loans that it must roll over in the next 12 months. Its two major lenders – China and the Fed – have both stopped buying. Shouldn’t the feds cut back…and stop borrowing so much money?
Improv Policy: But instead of even addressing the subject, Congress is doing a kind of ‘improv’ fiscal policy…making it up as it goes along. No budget. No balance. No long term plan. And no hope of getting excess spending under control. Business Insider has the latest: "Congress just found the dumbest way to avoid a shutdown." "Under a plan backed by House Speaker Mike Johnson, the federal government would be funded through the new year. After that, different agencies would face different deadlines for potential partial government shutdowns. For example, funding for the Pentagon and veterans would run out on January 19. Funds for the State, Justice, and Health and Human Services department would be extended until February 2."
"That's the craziest, stupidest thing I've ever heard of," [says] Democratic Sen. Patty Murray. “You'd have to go through the threat of shutdowns of part of [the] government over and over again," [senator Susan] Collins said. Under the circumstances, the wonder is not that US borrowing costs are so high…but that they are not higher. But it’s probably just a matter of time…before the real cost of borrowing goes up more. Stay tuned…"
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