The Great American Ponzi Scheme
Every month I send a cheque to a bank in my hometown of Dryden, ON. It is in US funds. They convert it into Canadian funds, deposit it into my account there, and then automatically withdraw most of it to make a payment on my Canadian student loans. This is a ritual that has been occurring for the past 5 years.
When this ritual began in July of 2004, I was able to get $1.32 Canadian for every $1.00 US that I deposited. Last year the curriencies traded at parity briefly. Currently I can get about $1.05 for every US dollar I send north. By the time this ritual ends in a few years, I would not be shocked to be getting even less. What is going on?
I think it is something I call "The Great American Ponzi Scheme." This is rather like the internet bubble at the turn of the millenium or the real estate and banking crisis of the last few years, except it is on a much larger scale. I am not an economist. I am a surgeon, and surgeons like to keep things simple, so forgive me if I do not grasp the complexities of the global economy.
The way that I understand how things work is this. We are a consumer society. As a whole, Americans consume more than they produce and definitely consume a disporportionate share of global resources on a per capita basis. Currently, the Asians (mainly Chinese) ship us manufactured goods. The Saudis and emirate states ship us oil. In return, we send those countries US dollars. Because these countries do not buy products from us of equal value, there is a trade imbalance, meaning that they have all these pieces of paper we've sent them that they have to do something with. They therefore send the money back to us by buying US government treasuries, US corporate debt, and shares in US companies. This capitalization injects money back into our economy. This is spent by us to buy more Asian manufactured goods and more oil from our Arab buddies.
This all works well as long as people like our Arab buddies feel like they are making money on the investments they have made. However, when treasuries pay interest rates that even a man with most of his digits amputated could count on his remaining fingers, there is not much reward for buying them. This reward vanishes and even turns into a punishment when the US currency depreciates as it has against most other currencies. Many foreign investors who bought treasuries with one year maturations would have been better served to keep their money in their native currency, stuff it in a sock under the mattress, and pull it out in a year.
Unless the government is able to quickly reduce the annual national deficit well below the trillion dollar mark, the Great American Ponzi Scheme will be revealed for the economic deception that it is. Given that a democracy with 2 and 4 year election cycles promotes short term fixes rather than long term more effective solutions, I think the possibility of that happening is remote.
When this ritual began in July of 2004, I was able to get $1.32 Canadian for every $1.00 US that I deposited. Last year the curriencies traded at parity briefly. Currently I can get about $1.05 for every US dollar I send north. By the time this ritual ends in a few years, I would not be shocked to be getting even less. What is going on?
I think it is something I call "The Great American Ponzi Scheme." This is rather like the internet bubble at the turn of the millenium or the real estate and banking crisis of the last few years, except it is on a much larger scale. I am not an economist. I am a surgeon, and surgeons like to keep things simple, so forgive me if I do not grasp the complexities of the global economy.
The way that I understand how things work is this. We are a consumer society. As a whole, Americans consume more than they produce and definitely consume a disporportionate share of global resources on a per capita basis. Currently, the Asians (mainly Chinese) ship us manufactured goods. The Saudis and emirate states ship us oil. In return, we send those countries US dollars. Because these countries do not buy products from us of equal value, there is a trade imbalance, meaning that they have all these pieces of paper we've sent them that they have to do something with. They therefore send the money back to us by buying US government treasuries, US corporate debt, and shares in US companies. This capitalization injects money back into our economy. This is spent by us to buy more Asian manufactured goods and more oil from our Arab buddies.
This all works well as long as people like our Arab buddies feel like they are making money on the investments they have made. However, when treasuries pay interest rates that even a man with most of his digits amputated could count on his remaining fingers, there is not much reward for buying them. This reward vanishes and even turns into a punishment when the US currency depreciates as it has against most other currencies. Many foreign investors who bought treasuries with one year maturations would have been better served to keep their money in their native currency, stuff it in a sock under the mattress, and pull it out in a year.
Unless the government is able to quickly reduce the annual national deficit well below the trillion dollar mark, the Great American Ponzi Scheme will be revealed for the economic deception that it is. Given that a democracy with 2 and 4 year election cycles promotes short term fixes rather than long term more effective solutions, I think the possibility of that happening is remote.
posted by The Mad Hatter at 6:51 PM
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