Vox Rationalis

The U.S. Is Losing the Economic Cold War

"You are short TBT???"

Yeah, I wondered that too. It's gotta be a typo.

The U.S. Is Losing the Economic Cold War

Wow, this one is chock full of it. I can't even deal with it all.

"Currently the US has an estimated $11 trillion dollar deficit."

Debt, not deficit.

"The Fed has expanded its balance sheet to $8.5 trillion..."

Nonsense. Take a look at the Fed's balance sheet (www.federalreserve.gov.../), which has grown from $979B to $1.85T over the last year.

"...and the Congress is looking to spend another couple trillion on a stimulus package."

It's funny, but I haven't seen anybody taking about a $2 trillion stimulus. Surely you can cite something, right?

"...the US will at best emerge from the financial crisis with a $15 trillion deficit (sic) with a $7.0 trillion dollar Gross Domestic Product."

You really think this? Did you know that you have to go back to 1984 to get to the point where GDP, adjusted for inflation, was half of what it was at Q3 2007? (EROP table B2) Your assertion is patently absurd.

"...remember the GDP was goosed to $14-$15 trillion using 40 times leverage."

You're saying all of the growth of the past 25 years was illusory. You are massively overstating things.

"Cutting leverage by half would ordinarily at a minimum reduce GDP to one-half..."

No. First off, you seem to be saying that the average leverage of everything in the economy was 40x, which is absurd. But let's assume that the economy is levered and that contributes to growth. Cutting leverage in half doesn't cut GDP in half. Much closer to a logical answer is that it cuts the GROWTH RATE in half.

"...but the math of losses has an exponential impact. When you lose half (50%) a 100% gain is required to get back even!"

This is not exponential. It's an inverse relationship.

"Indeed, the US Government can be expected to crowd out businesses for loans to finance the deficit (as banks are now hoarding cash to shore up capital)."

Your parenthetical is unrelated to your sentence.

"Such an [interest rate] increase will make servicing the debt a big problem."

Not so much. Government payments on existing debt do not change with interest rates - government debt does not have a variable interest rate. Only new debt is subject to current interest rates.

"...the Economic war... comes when the competition... decides to move on trading amongst themselves. Think BRIC countries–they have the consumption base and resources.... if they work together and get their economies growing."

Um, you think that you've named some of the currently fastest-growing economies? But more importantly, you don't seem to understand the relationship between the current account deficit and foreign purchasing of US Debt.

"When that happens they will demand interest rates to finance US deficits greater than the growth rates they can earn at home, and may just place an additional risk premium on US borrowing for its lower credit."

Your first statement is dependent on the second being true. US debt is seen as the safest place for cash, and all other instruments trade at a premium to it.

"The US Government is focused on the tactical problem of fixing the banks and have failed to think strategically. Growth is the ONLY answer to the US's woes."

Nonsense on the first sentence. The banking system is integral to the free flow of money. Without the banking system, commerce grinds to a halt. Look what happened to the commercial paper market for an example.

"The US needs to boost productivity."

I believe productivity gains in the US have been quite good for years.

"Look at it this way: there are two solutions 1) Grow your way out or 2) inflate and default."

Why would "inflate" and "default" BOTH happen? If the currency is inflated, doesn't the reduce the real cost of the debt?

"Assuming default is out of the quesition–a big if–ignoring the demand side of the equation and continuing with trickle-down stimulative policies is akin to staying in a scratched rut."

I can't think of anything in the stimulus that can accurately be described as "trickle-down."

"The real price of failure is high and the US’s very future hangs in the balance of what we do now. If we do not take the right bipartisan actions to harness the power of US business, the US will ironically find itself being the ‘freedom loving nation of the world’ who desires uncertainty, chaos and war over growth, prosperity, and peace. Why? Because the former allows us to finance our deficits and the latter puts us in bankruptcy because we can’t finance our debt."

What a load of hooey.

"The implifications (sic) for investors is huge..."

"Against the backdrop uncertainty will dominate for the foreseeable future and the US will underperform most all other countries."

Complete, utter, alarmist nonsense. I'd love to bet with you on this.

And then, the grand finale:

"The only wild card to change the inevitable dismal US outcome..."

Personally, I love changing the inevitable.

"...is if US temperament permits greater foreign ownership of US assets giving creditors something other than devalued treasuries to own."

Apparently you have no idea how much equity is available for sale in the US to any buyer, regardless of any limitations imposed by the government. InBev bought Anheuser-Busch. In most cases, there are no significant impediments to foreign ownership of US assets.

"In that scenario, foreign investment will diminish the upward push on interest rates, bide time for the US to pay down its debt, and give our creditors vested interest not to forelcose (sic)."

Again, so little knowledge of the relationship between trade and capital flows. And I love the last line. Who is going to foreclose on what? You think the Chinese, the largest foreign owner of US debt at about 6% of the total, is going to kick us out of America?

This is perhaps the worst article I've read here.