Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Thanks Bruce.

In broad outline, this can be treated like other entities taking on external financial obligations in order to outspend their current financial income ... a business making a capital investment, or a household taking out a second mortgage to go to Disney World.

(1) If what is bought as a result of the external finance results in later income that exceeds the required interest payments, the debt is self-funding. This is, of course, the ideal that a commercial corporation ought to be aiming for.

(2) If there is no financial benefit from the acquisition, then this is discounting away future income in order to engage in current consumption.

(2a) This can be done without a loss in future standard of living if the funding comes from future income growth ... to simplify from above, if Mom just got a raise in her salary, and the vacation in Disney World will be easily paid for out of the first two years of the raise.

(2b) Otherwise, this is trading away a higher standard of living now for a lower standard of living in the future. Taking out of second mortgage to take a trip to Disney World because capital price inflation in the housing market makes the second mortgage possible, while both Mom and Dad are working in dead end jobs with a high risk of being laid off if a recession should raise its ugly head.

This is about what I understood.  The bank can repossess Mom's house.  However, it seems that things can get more complex in an international economy:  

We run a large balance of trade deficit with China.  My understanding is that this deficit is not anywhere close to nearly counterbalanced by financial service transactions.  Instead, China effectively loans us the money to pay for their imports by buying US Treasury Bonds.  If they try to dump those bonds they will trash their value.  Meanwhile, inflation proceeds and the value of the dollar, in which the bonds are denominated, declines relative to other currencies.  But many US investors have put money into production facilities in China, I believe.

  1. So is our current combination of public and private financial actions regarding China just a brilliant way to extract cheap goods from China for a lot less than the Chinese thought they were getting?

  2. Doesn't that simultaneously erode the value of US citizens' investments in China?  Are the importers and investors the same and is this o.k. with them?  

  3. What could China do if they think they are getting screwed.

  4. What could US citizens could do if they weren't such a bunch of dumb fucks that they think trading their jobs for cheap, often shoddy, sometimes poisonous Chinese goods is a good deal.  

  5. Is there anyone besides the importers, such as WalMart, that benefit from this arrangement?

  6. Can our present economic theories make any sense out of this arrangement?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 1st, 2008 at 02:30:42 PM EST
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