Personal Finance Blog by Debit versus Credit

What Everyone Who Has US Dollars Needs to Know About China

November 19, 2008 | Filed in: Economy | No comment

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Today we’ll be featuring a guest post from Simit Patel, a contributing analyst at InformedTrades.com

As the recent economic turbulence has shown us, we live in a global economy. And thus, if you want to astutely manage your finances, you need to know about how global factors can affect your wealth.

And if you hold US dollars, there’s one factor that you should be particularly wary of: China.

The US government is currently running record levels of debt, and with government spending continuing to rise given the bailouts, entitlements, and foreign policies that have been promised, the debt will likely rise — especially when we remember that the tax base is diminishing due to rising unemployment. And right now, one of the biggest lenders to the United States is China. To put it in consumer terms, China is like the bank that gave the US a credit card to finance its expenditures.

Of course, how much longer China, as well as other buyers of US Treasury bonds, continue to buy US debt is increasingly becoming an issue — particularly as the global economy is contracting, thus making lenders more wary of lending. Accordingly, China and the rest of the world may not be buying US debt — just at the time when the US government is looking to increase its expenditures.

So the question: is the US on the verge of maxing out its credit card?

Well, one way the US government can attract more lenders is to raise its interest rates. Currently rates are moving in the opposite direction; the Federal Reserve, the organization that establishes the monetary policy of the US dollar, is moving interest rates to near zero in an attempt to encourage borrowing and spending as a means of stimulating the economy. However, if the US has trouble securing more debt, it may need to raise rates — i.e. the amount it is willing to pay for the privilege of borrowing — to attract the debt. This does, however, introduce greater problems down the road, as it will increase the overall debt burden on the
US government and its taxpayers.

Alternatively, if the US government is not able to secure more debt — if, to put it in consumer terms, it’s credit card is maxed out — it will need to print more money to pay off its debts. This will result in currency devaluation. Personally, this is the scenario I am more concerned about.

If more money is printed and the currency is devalued — meaning it will cost more to buy the same goods and services — how can you protect yourself? Well, just as we now need to monitor the global economy for signs of problems, we can look to the global economy for solutions as well. Foreign currencies and precious metals — particularly gold and silver — have historically served as ways to protect against currency devaluation. For individuals looking to preserve and grow their wealth, diversifying globally may be a path worth embarking upon.

Simit Patel is a currency trader and contributing analyst at InformedTrades.com, a site that offers free courses on trading the world’s financial markets.

Tags: Debt, Economy, Globalization, Guest Post, wealth

Revitalize Economy? Spend Says Obama

June 16, 2008 | Filed in: Miscellaneous | No comment

I was reading the financial news today at CNN Money when I ran across an article highlighting presidential candidate Barack Obama’s plan for revitalizing the shrinking U.S. economy.  He says that he wants to spend billions of dollars on education, infrastructure, health and energy systems.  Specifically (and this is to improve America’s competitiveness according to the article) he wants to spend “$10 billion on childhood education, $150 billion over 10 years developing alternative energy and $60 billion over 10 years to build 21st-century infrastructure.  Where will the money come from to fund these spending plans?  By ending the war in Iraq, reducing government waste, charging polluters for greenhouse gas emissions and ending the Bush tax cuts, but only for wealthy individuals.

Not A Bad Idea, But Will It Really Work?

Honestly I’m all for increasing spending where it’s important for the future of the country, and more importantly the future of the world.  Education is a great place to spend money on (efficiently of course) and I’m definitely all for developing alternative energy.  Overall the places which Mr. Obama has outlined as important to spending I agree with.  However I’m not so sure how realistic it is to assume that the money to fund these plans will actually come.  The war in Iraq is probably likely to end if Obama is elected (at least if he does what he is saying he will), but what does it really mean when someone says that they want to reduce government waste?  Or charge polluters for greenhouse gas emissions?  These are quite vague.  I drive my car to work which means I emit greenhouse gases.  Does that mean I’ll be taxed for these pollutions?  Any ideas out there?

Globalization Is Inevitable

Another interesting part of this article was Barack Obama’s response when asked about protectionist trade policies designed to protect American jobs.  He said, “it is impossible to turn back the tide of globalization.”  Good man.  I’m glad that someone in Washington is smart enough to at least realize the truth of this matter.  We’re going global, whether we like it or not.  If we prepare for it and stay competitive then we’ll survive in a global market.  If we don’t and instead whine and complain and fight for protectionist trade policies and increased tariffs, etc. we’ll crash and burn as a global economic superpower.  I’m actually a fan of his policies regarding this.  I’m glad that he’s realized that we need to change and adapt, if we want to stay competitive.  Now if we could only convince everyone else…

Tags: Barack Obama, Globalization