Got a bit of a hypothetical question for you guys to ponder:

Imagine there is a country-- we'll call it Ameriba-- with highly productive citizens, but who consistently purchase at rates that exceed their income. They also have a ravenous appetite for cheap imported goods from a country we'll call Chima. Furthermore, the Ameriban gov't-- like its citizens-- also runs up huge budget deficits, which it funds through the issuance of gov't bonds.

Chima's govt is anything but transparent, and so nobody is totally certain what they're up to. Moreover, the Chimese populace aren't anywhere nearly as wealthy or free as the Ameriban people, so they tend to work for significantly lower wages than Ameribans.

Now here's where it gets interesting:

First of all, Chima has pretty much pegged its currency to that of the Ameriban currency. Likewise, a vast majority of Chima's exports are to Ameriba.

In order for Ameriba to continue to fund its government's deficit spending (which, by the way, reaches new highs every year) and its citizens' ravenous appetite for cheap Chimese imports (also consistently sets records year after year), these debts must be purchased by outside entities, often by other governments, and a large number of which are purchased by none other than the Chimese gov't.

Now, in order to purchase said debt obligations, the Chimese gov't would *theoretically* need to have an economy productive and robust enough to create enough gov't tax revenues for the purchase of the Ameriban gov't debts. Ditto the purchase of Ameriban citizens' debts, such as their mortgages and such, which are often consolidated into groupings of similar risk-levels and re-sold as bonds-- interesting stuff!

However, I mentioned earlier how the Chimese gov't isn't exactly transparent right? And their economy would have to be *theoretically* productive enough to be able to purchase all those Ameriban debts, and thus continue to finance the Ameriban consumer engine that ravenously consumes Chimese goods?

Hypothetically, what would happen if in fact the Chimese gov't didn't have enough Chimese tax revenues to puchase all that Ameriban debt... so, instead they just printed more Chimese money?! Under normal circumstances, when a gov't prints more money, their currency gets devalued and they tend to experience inflation. But the Chima situation isn't normal on two points:
1) They have pegged their currency to the value of the Ameriban currency.
2) Their gov't is not transparent, so nobody really knows how much money they have printed.

Moreover, the Ameriban and Chimese gov'ts (as well as those of other countries that are net exporters to the Ameribans) have vested interests in keeping this arrangement going. And, what essentially happens, is that Ameriban debts just disappear into the bottomless pit of Chimese gov't indebtedness... and-- really-- the Chimese gov't gains greater and greater political leverage on the Ameriban gov't, as well as its businesses, home owners, etc. (Since, the Chimese gov't can always threaten to stop purchasing Ameriban debts...)

So, given this hypothetical situation, how does it all end? (And, I don't think it'll be like the Argentinian currency collapse of a few years ago, because there are some crucial factors that are different.)

More importantly, Must it end? Must there be a catalyst that destroys this hypothetical arrangement? Or can the Chimese black hole of Ameriban debts exist forever?

 

I think that the country of Ameriba will slowly stop buying from Chima as the rest of the world will force a revaluation of the Chima currency. There is a lot of pressure from a group called the Euro-peon Onion to do so. In addition the cheap production is moving from Chima as it had moved from Mexhico and Ty-one-on. It is moving to Inja which will become a cheap production site and a growing cheap technology center.

So to answer the question I feel that the black hole will eventually stop supporting the Ameriba debt which will cause a great deal of discomfort for the citizens of Ameriba.

 

How will it end? Probably not pleasantly. I'll be glad to watch the spectacle from the sidelines and watch the gold coins in my safe-deposit box go through the roof.

Be careful and protect your financial selves.

 

but neither of you have answered the crucial question:

If it MUST end, what will be the catalyst?? Mind you, this arrangement has been going on for over a decade.

 

The catalyst would probably be some type of currency crisis, either in Ameriba or in Chima. There are over $100 trillion in interest rate sensitive derivatives bouncing around the globe. Even His Royal Highness, Alan Greenspan, has said that he has no clue what would happen if interest rates spiked, and the derivative house of cards came crashing down. With fiat currencies in use by shady and lying governments everywhere around the globe, the catalyst for crisis is anybody's guess.


Tritium, nice story, by the way.

 

The catalyist for the crisis will be when the Grand Exhaulted Poobah of Ameriba plays hard ball on trade with Chima and they sell the debt faster than a blue light special at K-Mars. It all falls down

 

It will end with the Apocalypse. There's always one out there lurking. Combine it with the asian flu and you have a double-whammy.

Now, I have to run out and make more money in this wonderfully capitalistic economy.

 

you guys forget what the debt Ameriba is selling pays for - as the most productive nation on earth, selling stock in your country is not a zero-sum game. As soon as Chima is forced to stop artificially inflating their currency, they will cease to be a major market force, and be ever more dependent on foreign trade and investment. Those bonds they purchased over the years will help, but until they find a way to return some sort of equity to their country, the same forces that have churned Chimese society in the past will resurface - poor peasants fed up with their lot in life, and nothing to lose, will once again force a change in Beiking, and it is back to square one (maybe square two or three, with any luck) for the Chima economy. Hopefully, change will be more productive this time around, but that is something for them to work out.

 

on a different note, here's a random news blurb, likely of little or no relevance... http://www.msnbc.msn.com/id/10736596/





p.s.-- check the date of the article, and the date I started this thread... pure serendipity!

 

I kept reading that as "Chima" in my head.