Wednesday, September 9, 2009

Returning to the Real World

Over the past two weeks, I have done the best I can to help re-stimulate the economy. I got married, I closed on a new house, I hired contractors, and I spent as much as I could. Well maybe I could have spent more.

This morning I returned to the real world. And, what did I see? Gold is right around $1,000 an ounce. The dollar sank to its lowest level in nearly a year. The Chinese, through their sovereign-wealth fund, are looking at investing big bucks in United States real estate, a better longer term investment than putting them in United States Treasury securities.

In this vein, the Wall Street Journal contains a “tongue-in-cheek” letter from the Ministry of Finance in Beijing to “Dear Esteemed Chairman and Savior of the World Economy” in its editorial “Dear Chairman Bernanke” congratulating Chairman Bernanke on his re-appointment at the Chairman of the Board of Governors of the Federal Reserve System (
And, what about the quantity of United States Treasury securities?

Martin Feldstein has presented a sobering opinion about the future of federal deficits resulting from the proposed health care proposals. (See his “ObamaCare’s Crippling Deficits” in the Wall Street Journal, Feldstein quotes the Congressional Budget Office report of March 2009 which estimates that federal deficits “will average 5.2% of GDP over the next decade and will be 5.5% of GDP in 2019.” He adds that “Without the president’s proposals, the budget office forecasts a 2019 deficit of only 2% of GDP.” However, Feldstein argues, “More realistic assumptions would imply a 2019 deficit of more than 8% of GDP and a government debt of more than 100% of GDP.”

And what news do I see about economic activity?

I guess my stimulus efforts are not having much of an effect. Consumers aren’t borrowing, banks aren’t lending, commercial real estate is showing higher and higher levels of vacancies and unemployment has reached 9.7% of Americans looking for a job. Of course, this does not include the discouraged workers that are not seeking a job which indicates that the people without jobs is above 15%. And, today, there was an article in the New York Times about all the fancy mortgage loans granted over the past four or five years that are going to be re-pricing in the next 12 to 36 months, re-pricing at substantially higher payments that individuals and families will not be able to cover given their current income levels.

Americans seem to be de-leveraging. However, the net worth of American households is declining. But, America, the nation, seems to be leveraging up. The dollar is declining and this makes American physical assets cheaper and cheaper to those in the world that possess wealth, that hold United States Treasury securities.

As the dramatic events of the financial crisis recede we return to the story that was developing in 2007 and early 2008. This story evolved out of the massive federal deficits created by the Bush 43 administration and the more than 40% decline in the value of the United States dollar. Earlier in this decade, before the financial collapse, the wealth of the world was being shifted to China, India, and the Middle East. These countries and their sovereign wealth funds were buying more and more physical assets in the United States as their wealth increased and the value of the dollar declined.

On returning to the real world, it seems as if this latent story is still alive and well and will continue into the future as more and more wealth is transferred out of the United States and into the rest of the world.

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