THE MACRO MONEY-GO-ROUND

Okay, I copped some flak for suggesting a US recovery was imminent. But here’s why it is and here’s why Australia’s debt is also recoverable and why the only fly in the ointment is China

All countries borrow from each other and the US debt of $17 trillion is mostly owed to itself. 

Even 30% of Australia’s debt is held internally by domestic institutions and we even hold an “asset” of about $35 billion in US 

Treasury bonds, albeit at a lower yield (interest rate) than ours.

But because government domestic debt is in AUD (with a relatively higher yield) it in turn is traded competitively internationally under a AAA rating that that is, in the main, required by the big investment institutions, especially so if the bond rate is high.

Joe Hockey needs to explain the situation in hackneyed clichés otherwise our eyes glaze over. 

But it’s not quite as bad as Joe suggests. 

If a final accounting of the card game was settled tomorrow only China, maybe Germany and the Russian mafia, would go home with a pocket full of money, but that simply ain’t going to happen because there would be no money left for anyone else to play with and the losers would be unable to buy the winners’ goods.

China doesn’t play fair because it keeps its yuan devalued allowing its biggest customer, the US consumer, to keep buying more of its goods. 

This disadvantages every manufacturer in every country that China exports to, and that’s the way they want it.

China also prints voluminous amounts of its yuan which it uses to buy US treasury bonds to ensure the US can keep buying even more Chinese goods. 

It is highly inflationary for the US to print its money, but not as domestically damaging for China, because its burgeoning middle class can more easily soak up higher domestic prices.

In simple terms we are all globally interdependent on each other in a game of macro poker where China is doing all the dealing.

If China gets bored and goes home with all the money (dumps its US bonds) the US dollar is devalued and all the players holding those US Treasury bonds lose their purchasing power, the AUD rises against the USD and our minerals exports are now dearer ... China has just shot itself, and everyone else, in the foot.

Just as the financial powerhouses of the Eurozone won’t allow their prodigal members to fail, neither will China allow the US.

In comparison our troubles are small because our debt to GDP ratio is a fraction of that of the other players and our other trading partners can be used to offset our current trade deficit merry-go-round, which is due to lower minerals and gas prices, which make up 53% of our exports.

In the meantime our $0.5 billion trade deficit is helping to push our AUD lower, and that’s pretty good!

What is happening to Western economies is exactly what China planned as it powers up to become the World’s leading economy on the back of its 1.4 billion avaricious consumers. 

Phew, hope all that makes sense ‘cos I’m not sure I understand it now.

The Pickering Post