US trade deficit dilemma

Trade deficit is a tango that US goverment dances for a long time. It takes two to tango.

If Federal government doesn't change the reckless fiscal policy, there won't been such a huge deficit to be funded by foreign capital. Say US don't want to tango with China now. It doesn't mean that US will stop tango. Who's gonna finance the overspending in the private and public sector: medicaid&medicare,War on terror, congress spending,and bubbling property development etc? If US don't want China, It must be Japan, Korea, Malaysia or whoever can pick up the dance shoes and dance with it.

Closing the door to a debtor doesn't mean you don't own debt anymore: if you don't make more and spend less, you'll still ask someone else to lend you money and you'll end up with more debt. sometime Federal goverment spends money just like a drunken sailor. I heard a story from Chris Edwards about redundant and unefficient grant program spending: Technology development venture capital fund ,created in the 1996 telecom reform bill,funds technology start-up companies in recent years by spending 22 million dollars, of which 11 million dollars are used to pay adminstration salary. 50% of the money is paid for the officials to carry out the paperwork.What a grant wasteful bureaucracy! and the official grant website grants.org is under construction by Northrop Grumman under a $22 billion federal contract.22 Billion with a b just for a website is remarkable.In fiscal year 2004 the federal government paid out $418 billion in grants. With today's gigantic budget deficit,government really should reform the current unefficient and resouce-consuming grant system. But that's not good for election. States and voters need grants to get some federal money love.

Sometime when you do the right thing,you don't think about the seats in the parliment. but That's just what I think.

Obviously Bush adminstration doesn't think so. That's why bush signed in law four major tax cuts in his first presidency even when the fiscal deficit was reaching the historic level. So who's gonna pick up the tax bill for him. Next president. But Bush's won two presidency already.Mission accomplished. Let tomorrow worry about tomorrow. It's all about election, isn't it? Sometime it's so hard to do the right thing even when you know what's the right thing: at least a tax reform is much needed.

The options to US trade deficit

It looks like the world is trying painfully and reluctantly to move away from Dollar Hegemony.

America's huge trade deficit puts a downward pressure on the value of dollar. But the dollar doesn't collapse because of the huge demand for US assets pushing the dollar upward. This huge demand for US assets is the major reason that America can expand its economy far beyond its own strength. But the problem is that for such a long period, American economy is fuelled by such a huge amount of foreign capital that it finally becomes too big for its own. America loses the chance to go through some normal economic circles the other countries all do: Trade deficit, depreciation of the currency, rise of interest rate, slowing down consuming and investment, increasing public and private saving, trade surplus and so on so forth. It's like the whole world altogether feeds the body of American economy regardlessly and finally the body becomes a monster too heavy for its own two legs: America needs to walk on the legs of other countries' financing and otherwise it will break its own bones and fall flat on the ground.

There're only two options to this situation:

First: gear up protectionist trade wars, force trade deficit to shrink, rise up interest rate to bust the economic bubble, default lots of treasuries, allow economy to slip into recession to slim down itself and kill off the over demanding on the America’s asset market. Politicians won't buy into this though, because this strategy won't buy them seats in the parliament cause it won't improve American’s already luxury living quality fuelled by these cheap foreign capitals.

Plan B: accept the reality of globalization and the fact that outsourcing and trade deficit are just the consequence for being the only superpower on this planet: America has the majority of the major global corporations which are purely after higher profit, lower cost and therefore outsourcing. This is not about patriotism and leaving the job at home. America has the largest economy on the world,so monstrously large that America has to consume the bulk of world resources, energies, and capital to survive. America needs trade deficit and the capital inflow coming with it. Trade deficit spells disaster to any other countries but not USA because of the safe haven effect. You can not turn the globalization around. Outsource to cut cost and make more money, import goods to spend less and buy more. It's that simple. Any protectionist policy is just to help you pretend to be blind to the globalization. Being blind still can't wipe out the reality: outsourcing and trade deficit is just the consequence for being the only superpower country on this planet: America has the majority of the major global corporations which are purely after higher profit, lower cost and therefore outsourcing. This is not about patriotism and leaving the job at home. America has the largest economy in the world, so monstrously big that America must consume the bulk of the world resources, energies, and capital to survive. America needs trade deficit and the capital inflow coming with it. Otherwise America can force itself into a recession to slim down the size of such an enormous economy to become a slim kid to eat less and grow less. But then again, America won't be such a free and great country as it is today. It's time to accept the reality and happily live with it. The success of America today owns a lot to the efforts from all around the world. So when you think of America, don't be too patriot because today's America is not simply America's America, it's the whole world's America. When you think that way, you'll make the most out of the current situation.

Consistently make America a safe, free, efficient, and profitable asset market. That's the free way to sustain America's success. Consistently focus on the technology innovation to keep hands on the upper-end of global productivity. That's the key to keep the control of the global economic. America innovates, the world will follow.

Lenovo caught up in US security panic

A US advisory commission has raised a red flag over a deal for 16,000 computers for the State Department manufactured by China's Lenovo Group. The hangup is security - specifically, the fear that the Chinese could equip the machines with chips that could spy on State Department dealings. It seems that the same national-security worries that fueled the hubbub surrounding the Dubai ports deal in the US - that allowing an Arab-owned firm to operate six key ports could facilitate terrorist access to them - are bubbling up again. The incident is also reminiscent of energy-security fears surrounding the attempted purchase of Unocal Oil by the China National Offshore Oil Corp (CNOOC) last year, which ultimately killed that deal. The US government is planning to spend roughly US$13 million on what the State Department says are unclassified systems, mostly ThinkCentre M51 desktops with LCD (liquid crystal display) monitors. The US-China Economic and Security Review Commission, which reports to the US Congress from a national-security perspective on China-US trade dealings, is behind the current questions. After all, reason its members, if a foreign government were so inclined, there is a real opportunity to gather intelligence in embassies worldwide by inserting extra hardware and software in the computers. But technology and PC (personal computer) industry experts generally have a quite different view. For starters, Lenovo finalized its purchase of IBM's PC business last year, thereby becoming the third-largest PC maker in the world. The systems in question are part of the Thinkpad line. "If you have a Thinkpad that you bought when it was an IBM Thinkpad, turn it upside down and you'll see that it says 'made in China'," noted Brian Gammage, a vice president and analyst at UK-based Gartner Research. The PC is truly a global device, he added, and the majority are manufactured in China no matter whose name is on the label. Many, if not most, Dell, Apple, Acer, Sharp, Toshiba and Hewlett-Packard computers also are assembled in China. Gammage also pointed to the standardized, commoditized nature of PC technology, which makes it more difficult to insert any "Trojan horse" circuits on to a motherboard for spying purposes. "IBM sold the PC business as a loss; it has such a thin margin of only 2%," he said. "The days of tinkering with the chipsets are 10-20 years gone. Today, the configuration is the same worldwide - maybe there's a different keypad or power supply, and maybe there's [a] lower- or higher-cost chipset being used, but standard components are the only way to go and still stay in business." Actually, with the hardware being standardized, the only security weaknesses could be in software, he continued, "and any organization [purchasing foreign-made PCs] would have the right security processes and tools in place for how it interacts with the outside world. It stands to reason that any government arm, especially, would be taking the necessary steps to make sure that nothing confidential and private is leaving its network." The US State Department's actual contract, in fact, is not directly with Lenovo but with a distributor, CDW Government, a subsidiary of CDW Corp, based in Vernon Hills, Illinois. According to CDW, the computers will help the department modernize its technology systems. Furthermore, the actual systems in question, surprisingly, are assembled not in China but in Raleigh, North Carolina, and Monterrey, Mexico, with chipsets produced in Taiwan. As Gartner's Gammage stated, the PC is indeed a global device. But the scrutiny of the deal may nevertheless gain momentum, encouraged by the result of the Dubai complaints: the company agreed to relinquish the port operations in question. According to an interview with the British Broadcasting Corp, Lenovo believes that "an open investigation or probe may negatively affect the way the company deals with future government contracts or bids". Lenovo isn't owned by the Chinese government, at least not fully. It's a publicly traded company derived from Legend Holdings, which was started with Chinese government backing in 1984. The government-controlled Chinese Academy of Sciences holds 65% of Legend and 27% of Lenovo. IBM has a 19% stake in Lenovo as well. While China would love to have a multinational PC maker with global brand recognition like Dell or Apple, the security flap has raised the company's profile in a way that it didn't want. Lenovo says its business in the United States completely complies with the requirements for suppliers set by the US government department responsible for government procurement. "We would rather not have to go through these issues every time we win a government contract," Jeff Carlisle, Lenovo's vice president of government relations, has said. That may be unavoidable given the current mood in the US. But trade watchers expect ultimate success. "Once everyone is assured that there's no security risk, this deal will go through," predicted Myles Matthews, president and chief executive officer of the Global Trade and Technology Center in New York. Politics were definitely behind the ports brouhaha - "It's an election year," he pointed out. Although the US has indisputably become dependent on low-cost Chinese consumer goods, and exports to China have been growing at double-digit rates in recent years, that still doesn't mean smooth sailing for Lenovo. The US advisory commission is expected to deliberate for the next few weeks and deliver its opinion to Congress, some of whose members are already grumbling. Donald Manzullo, a Republican from Illinois, sent a letter to Secretary of State Condoleezza Rice to complain about Lenovo's unfair advantage in the PC market, claiming that it's partially subsidized by the Chinese government. But Lenovo's CEO is William Amelio, an American, and most of its top managers are not Chinese. In fact, vice president of government relations Carlisle reiterated that China is a "completely passive" stakeholder in the company. How is the issue playing in cyberspace? Posts on Slashdot on the topic have run the gamut from seeing this as just the latest incident in the United States' outsourcing many crucial business and government operations to nations "that are at best neutral and more likely future enemies", to "you'll never be 100% sure the hardware isn't Trojaned", to "this is simple xenophobia, nothing more".

America's Record Trade Deficit: A Symbol of Strength

The U.S. Commerce Department announced today that America's trade deficit in 2005 was the biggest in the history of the world. The difference between what Americans imported and exported last year should reach about $725.8 billion -- more than $550 billion larger than the previous record deficit set in 1999 and double the 1998 deficit.

Many headlines and quotes from trade skeptics will sound a familiar refrain: "Worst Year Ever for American Trade." "Trade Deficit Costs Jobs." "Trade Gap Undermines Dollar, Threatens Expansion." Should Americans worry about the trade deficit? Or is it a sign of our nation's strong economy? A $2-million federal commission on the trade deficit issued a final report in November that answered yes to both questions.

Economic theory and experience show that trade deficits are driven by levels of national saving and investment in the U.S. economy, not by allegedly unfair trade barriers abroad or by declining industrial competitiveness at home. America's record trade deficit is a symbol of economic strength, reflecting a strong net inflow of foreign investment drawn to America's dynamic economy.

Growing trade deficits signal improving economic conditions, while shrinking deficits often occur in times of economic trouble. During the last 25 years, the U.S. economy has on average grown about a percentage point faster, 3.5 percent vs. 2.6 percent, in years when the trade deficit expanded compared with years when it shrank. The unemployment rate on average fell 0.4 percentage points during years of rising deficits and rose 0.4 points when the deficit shrank. Manufacturing output rose much faster during years of rising trade deficits than during years of shrinking deficits.

America's largest trade deficits in recent decades occurred during economic expansions, its smallest deficits during recessions. It's no coincidence that as the economy shows signs of slowing down, the monthly trade deficit numbers have also begun to shrink with the economy's growth rate. (Those critics who demand that something be done to "fix" the trade deficit should be concerned that they might get what they ask for.)

Critics of trade liberalization often point to the trade deficit as proof that trade destroys jobs. If exports create jobs, they argue, then surely imports mean less domestic production and fewer jobs. In fact, imports and domestic production rise and fall together. Since 1987, manufacturing output in the United States has risen the fastest during years when the volume of imported goods has also risen the fastest. The two years of slowest import growth, 1990 and 1991, were the only two years in which manufacturing output actually fell. The same economic expansion that spurs manufacturing growth also attracts more imports and enlarges the trade deficit.

Another unfounded worry about the trade deficit is that it will saddle future generations with an unsustainable "foreign debt." It is true that foreign investors own about $1.5 trillion more in U.S.-based assets than Americans own in foreign assets abroad. But about half of foreign-owned assets in the United States are not debt but equity--direct investment in factories and real estate and portfolio investment in corporate stock. And the $1.5 trillion in net foreign investment in the United States is only about 16 percent of Gross Domestic Product, and 4 percent of the net wealth of all U.S. households and non-profit organizations. Net payments to finance our foreign "debt" were less than $20 billion in 1999, about one-fifth of one percent of GDP.

Yet another worry is that chronic trade deficits will spook foreign investors and undermine the foreign-exchange value of the U.S. dollar -- sending stock and bond markets and the real economy into a tailspin. The problem with that scenario is that it ignores the fact that trade deficits are linked to a strong, not a weak, dollar. The trade deficit increases the supply of dollars in the global economy, as foreign producers accept more dollars in payment for imports. But in times of economic expansion, the demand for those dollars by foreign investors seeking to buy U.S. assets is even greater. As long as foreign demand for U.S. assets remains strong, the dollar will remain high, and so will the trade deficit.

The best policy is to ignore the trade deficit, however large it may now seem, and concentrate on maintaining a strong and open domestic economy that welcomes foreign investment. As long as investors world-wide see the United States as a safe and profitable haven for their savings, the trade deficit will persist, and Americans will be better off because of it.

The End of Dollar Hegemony

A hundred years ago it was called “dollar diplomacy.” After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.
It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.
First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.
Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin-- always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.
This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.
That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations-- those with powerful armies and gold-- strived only for empire and easy fortunes to support welfare at home, those nations failed.
Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: “He who prints the money makes the rules”-- at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.
Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people-- just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.
The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.
When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules-- rules no longer written by those who ran the now defunct printing press.
“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.
This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.
This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.
Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress-- while benefiting the special interests that influence government.
Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.
The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.
The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question-- until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.
It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.
Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.
Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.
This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.
During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”
Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.
Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money-- i.e. the dollar system-- to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.
In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.
Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.
Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.
Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.
In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.
It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.
The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.
The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.
Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.
Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.
Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.
In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.
It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.
It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.
Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.
Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.
It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.
But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.
For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.
It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.
The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources-- we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.
Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.
Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.
Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.
But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.
The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.
But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.
Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.
And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.
Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.
The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.

America's Trade War with China is more political than economical

US ran a record trade deficit of more than $200bn with China last year.

This has given the protectionist on the capital hill a perfect motivation to wage a trade war against China. But what the politicians don’t get is the economics foundation of this trade deficit has serve America's interest on a long term.

America is a very special country when it comes to trade deficit. The reason of trade deficit is domestic saving-investment deficit. Due to the huge federal budget deficit and the collapse of household saving, America has not been able to finance its own investment needs on its own saving. So foreign saving comes to aid. It’s not exaggerating to say America’s prosperousness is fueled by not only American its own but the whole world’s determined efforts. For example, by the end of February China has gained $853.7 billion of foreign reserve partially thankful for the huge trade surplus with USA but according to analysts three-quarters of China’s reserves are in US treasuries, stocks, equities, and estates etc which are all long term investment in US. Only US can get away with this: consume the other countries' product and still keep all the money from within and beyond. South asia couldn’t do that, that’s why they ran into 1997’s financial crisis.

Why foreign capitals are so into US?

Because US dollar is the safe haven so that US can give them these green papers in exchange for the access to their resourse, engergy and financial saving.

Because US is a black hole to capital, no other country in the world has the same ability as America to absorb so much capital and trade surplus and that’s why other country’s surplus is just like America’s surplus of which a cruicial part will be invested in America’s long term project.

Because according to Risk-return trade-off, America provides the most steady and secure return for the investment thankful for the fact that US has a long term steady political and social environment which serves as a safe harbour for the capital from other less steady areas, and America has a far better economics performance in a long run compared to any other developed countries.

That’s why America can get away with trade deficit like that. No nother countries can copy this without bankruptcy.

So we all see the important issue here is not trade deficit but how America can consistently run such an efficient and profitable asset market which can consistently attract and absorb foreign capital. One day if America is not such an ultimate destination for foreign capital, that will be an end of America’s long term prosperousness and economic dorminance.

Politicians know this well. Trade war with China serves more as an election strategy than anything else and also offers a good opportunity to force China to open up its tightened-up financial market but not constrain the trade with China.

Tags: china, america, economics, trade, Politics

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interest rate calculations

interest rate calculations.   The methods used to calculate interest due can be conveniently divided into three areas: (i) discount methods, as per banker's acceptances, bills of exchange, commercial paper, and treasury bills; (ii) yield-based money market calculations, such as bank deposits, certificates of deposit, some kinds of commercial paper, and short-dated bonds with one or more coupons to maturity; and (iii) bond market calculations.

The money markets use both methods (i) and (ii) to calculate interest due. Discount methods were favoured given the complications of adding small amounts of interest to a short-term instrument. Selling the instrument below par, using a simple formula was both easier and facilitated repayment at maturity. The discount represented the buyer's interest on his investment. Method (iii) is favoured by the bond markets, although some hybrid instruments such as floating rate notes use method (ii).

The difference in approach arises from the tenor or maturity of the instruments. It was not quite so important to calculate interest to an exact fraction when the bond has a maturity of ten years, or more. The major complication arises in the exact method used to establish the number of elapsed days of interest in any period, both for determining the amount of coupon, or interest due, and also for secondary market transactions when accrued interest has to be included in the settlement or transaction price. There are a number of ways of accruing interest used by both money markets and the bond markets, but they can be grouped into three methods: an actual day count method, an actual day count method divided by a notional number of days in a calendar year (known as the basis), and a fixed day count divided by the basis.
1. Money markets: The principal day count methods are: actual/360 and actual/365 (fixed). The basis for calculating interest is therefore a year of either 360 days, or 365 days. The effect of a 360-day year is to increase the amount of interest paid by a factor of 1.013889 over that quoted. The following summarizes the situation in different countries. Basically, the UK and the old Commonwealth or Empire countries use the 365-day basis, the rest of the world, with the exception of Belgium, the 360-day basis (see Table).

Country	Interest basis calculation
Australia	Actual/365
Austria	Actual/360
Belgium	Actual/365
Canada	Actual/365
Denmark	Actual/360
France	Actual/360
Germany	Actual/360
Ireland	Actual/365
Italy	Actual/360
Japan	Actual/360
The Netherlands	Actual/360
New Zealand	Actual/365
Norway	Actual/360, under 1 month; 30/360 over 1 month; also Actual/365 on some money market instruments
Saudi Arabia	Actual/360
Sweden	30/360
Switzerland	Actual/360; federal bills: 30/360
United Kingdom	Actual/365
United States	Actual/360

In the international markets, the domestic market interest calculation methods have been followed, with again the exception of Belgium, where Actual/360 is sometimes used, although Actual/365 is also quoted (cf. London interbank offered rate).

The Actual/360 calculation also known as bank interest basis, certificate of deposit basis, Euro basis, or money market basis. Whatever the maturity, the convention is to quote the interest rate as if for a year and the amount payable is calculated on the actual number of days elapsed in the calculation period multiplied by the interest rate and divided by the number of days in the computation year, which is known as the basis:

   

For example, to calculate the interest on a three month (90 actual days) deposit of 5.75% of US$1,000,000 for the period starting on 28 January and ending on 28 April (for calculation purposes, interest is charged from the day following the settlement date up to and including the day on which the payment is due). In the above example this would be:

   

For the Actual/365 calculation, the interest is also quoted as an annual rate, regardless of the tenor of the transaction, and is calculated on the actual number of days in the period times the rate of interest over a basis of 365. Thus a £ 5 million sterling certificate of deposit at 6.75% issued on 24 February and maturing on 24 August would pay the following coupon interest:

   

If it had been a leap year the interest would have been slightly different, since one day would have been added to the calculation:

   

Note that the interest rate for Actual/Actual (see below) is often used, with some confusion, for Actual/365.
2. Bond markets: The principal methods of working out interest are: (i) Fixed Coupon; (ii) Bond basis (also called eurobond basis); and (iii) Actual/365 or Actual/Actual.

Fixed Coupon. This method of calculating interest divides the coupon rate by the frequency of payments, even though this may lead to differences in the number of elapsed days over which the interest is actually received due to weekends, holidays, or leap years. The interest rate is quoted as an annual rate and is calculated on the years in the period instrument over 100(%).

   

For example a bond with a fixed coupon of 10% paid quarterly in March, June, September, and December with principal of DM10,000,000, with an interest period running from, say, 31 March to 30 June would pay a coupon of:

   

Fixed Coupons are used for eurobonds (note that the vast majority of eurobonds pay annually).

Bond basis (sometimes notated as 30/360 or 30E/360). This is the method of day count used in the secondary market to calculate the accrued interest on certain types of fixed rate bonds, most notably those traded in the eurobond market. The accrued interest is calculated on a computational year of 360 days with each calendar month treated as one-twelfth of 360 days, that is 30 days. For interest purposes each period from a date in one month to the same date in the next or subsequent months is also considered to be 30 days, or multiples thereof. Accrued interest is calculated from, and including the date of, the last coupon date or, in the case of a new issue, from the day interest starts to accrue (the dated date), up to, but excluding, the value date of the transaction. This is different from the conventions used in the money markets, where the first day is ignored, but the last day is included. Examples of the method showing the difference in day count between actual days, Actual/365, and Actual/Actual are given in the Table.

Interest rate calculations: bond basis

Interest accrues from coupon date	Value date	Number of days accrued interest
		Bond basis (eurobond; 30E/360)	Actual/365, normal	Actual/Actual, leap year
Within the year:
1 Jan.	28 Feb.	57	58	58
1 Jan.	29 Feb.	58	—	59
1 Jan.	1 Mar.	60	59	60
1 Jan.	3 Mar.	62	61	62
1 Jan.	30 Mar.	89	88	89
1 Jan.	31 Mar.	89	89	90
15 Jan.	28 Feb.	43	44	44
15 Jan.	29 Feb.	44	—	45
15 Jan.	1 Mar.	46	45	46
15 Jan.	3 Mar.	48	47	48
1 Feb.	28 Feb.	27	27	27
1 Feb.	29 Feb.	28	—	28
1 Feb.	1 Mar.	30	28	29
1 Feb.	3 Mar.	32	30	31
15 Feb.	28 Feb.	13	13	13
15 Feb.	28 Feb.	14	—	14
15 Feb.	1 Mar.	16	14	15
15 Feb.	3 Mar.	18	16	17
28 Feb.	29 Feb.	1	—	1
28 Feb.	1 Mar.	3	1	2
28 Feb.	3 Mar.	5	3	4
28 Feb.	5 Mar.	7	5	6
28 Feb.	30 Mar.	32	30	31
28 Feb.	31 Mar.	32	31	32
The following year:
30 Nov.	28 Feb.	88	90	90
30 Nov.	29 Feb.	89	—	91
30 Nov.	1 Mar.	91	91	92
30 Nov.	3 Mar.	93	93	94
30 Nov.	30 Mar.	120	120	121
30 Nov.	31 Mar.	120	121	122
31 Dec.	28 Feb.	58	59	59
31 Dec.	29 Feb.	59	—	60
31 Dec.	1 Mar.	61	60	61
31 Dec.	3 Mar.	63	62	63
31 Dec.	30 Mar.	90	89	90
31 Dec.	31 Mar.	90	90	91
28 Feb.	27 Feb.	359	364	365
28 Feb.	28 Feb.	nil	nil	nil

Note that there are two different forms of the bond basis (30/360 or sometimes 360/360, and 30E/360) which are due to differences in the way the number of days from the last coupon payment to the settlement date are calculated. For 30/360, the 30-day month method involves taking the two dates for accrued interest purposes by assuming 30 days in each month using a formula, where the first date is (MM₁ - DD₁ - YY₁) and the later date (MM₂ - DD₂ - YY₂). If DD₁ is a 31-day month, change to 30; if DD₂ is 31, change to 30 if DD₁ is 30; otherwise leave as 31 (this gives a maximum of 30 days in a month). The number of elapsed days is calculated by:

   {(YY₂ - YY₁)} × 360) + {(MM₂ - MM₁) × 30)} + (DD₂ - DD₁)

For 30Esol;360, the calculation is the same as the above, but involves changing DD₁ to 30, if the calendar month has 31 days, and changing DD₂ to 30 days, if 31 days.

For example, a holding of US$500,000 of a eurobond with an annual coupon of 8%, sold for delivery on 3 March , with a coupon payment date of 15 February , would have accrued eighteen days interest:

   

Note that 30/360 is used in the US domestic market for some US government agency, municipal, and corporate bonds; 30E/360 for the vast majority of eurobonds (but excluding floating rate notes, where the accrued interest is calculated on a money market basis), German government and agency bonds, and European currency cross-currency swaps and interest rate swaps which include a fixed rate payment.

Actual/365 or Actual/Actual. This method calculates accruing interest by multiplying the principal times the interest rate times the number of days, all divided by 365. With a leap year, it is adjusted so that it is the number of actual days in the period divided by 366. Note that the calculation method takes the day from 31 December to 1 January as part of the earlier year.

Take as an example an 8% coupon US$50,000 Treasury Bond. The period 30 November to 31 March in a leap year would be 122 days. For interest assessment purposes, because US Treasury issues are calculated on an Actual/Actual basis, the calculation has to be split between the normal and the leap year:

   

The Actual/Actual accrual method is used for US treasury notes and US treasury bonds and some interest rate swaps denominated in US dollars where interest is paid semi-annually.

Coupon or interest frequency: The great majority of fixed rate bonds pay interest (coupons) either once or twice a year (known as annual or semiannual basis). Note also that for simplicity of trading, the vast majority of securities issued in a particular market will tend to follow the market's accepted convention for interest frequency. Occasionally, specialized securities may use different methods; for example, collateralized mortgage obligations and floating rate notes, which may pay interest quarterly or even monthly.
3. Yield calculations. (For money market calculations which use simple interest, see bank basis; discount; money market basis.)

Simple, flat, or income yield:

   

Using the US Treasury example given above and if the quoted full price were 98¹/₄, we would have:

   

4. Redemption yield (also known as yield-to-maturity; yield-to-call; yield-to-put, and so forth). This is the rate of interest at which the total of the discounted values of the future payments of interest and capital are equal to the current price. This is equivalent to:

   

where C is the coupon; P the principal amount at redemption, call, or put; i the interest rate as an annual rate; f the coupon frequency; t_sc the number of days, expressed as a fraction, from the settlement date to the next coupon date; and n_cm the number of periods from the next coupon date to redemption, maturity, call, or put.

The clean price is arrived at by deducting the accrued interest.

exponential function

exponential function   The function f such that f(x) = e^x, or exp x, for all x in R. The two notations arise from different approaches described below, but are used interchangeably. Among the important properties that the exponential function has are the following:
(i) exp(x + y) = (exp x)(exp y), exp (-x) = 1/exp x and (exp x)^r = exp rx. (These hold by the usual rules for indices once the equivalence of exp x and e^x has been established.)
(ii) The exponential function is the inverse function of the logarithmic function: y = exp x if and only if x = ln y.
(iii)
(iv) exp x is the sum of the series
(v) As

Three approaches can be used:
1. Suppose that the value of e has already been obtained independently. Then it is possible to define e^x, the exponential function to base e, by using approach 1 to the exponential function to base a. Then exp x can be taken to mean just e^x. The problem with this approach is its reliance on a prior definition of e and the difficulty of subsequently proving some of the other properties of exp.

2. Define ln as in approach 2 to the logarithmic function, and take exp as its inverse function. It is then possible to define the value of e as exp 1, establish the equivalence of exp x and e^x, and prove the other properties. This is widely held to be the most satisfactory approach mathematically, but it has to be admitted that it is artificial and does not match up with any of the ways in which exp is usually first encountered.
3. Some other property of exp may be used as a definition. It may be defined as the unique function that satisfies the differential equation dy/dx = y (that is, as a function that is equal to its own derivative), with y = 1 when x=0. Alternatively, property (iv) or (v) above could be taken as the definition of exp x. In each case, it has to be shown that the other properties follow .

logarithm

logarithm The power to which a number, called the base, has to be raised to give another number. Any number y can be written in the form y = xⁿ. n is then the logarithm to the base x of y, i.e. n = log_xy. If the base is 10, the logarithms are called common logarithms. Natural logarithms (or Napierian logarithms) (named after John Napier; 1550–1617) are to the base e = 2.718 28…, written log_ey or lny. Logarithms were formerly used to facilitate calculations, before the advent of electronic calculators.

A logarithm contains two parts, an integer and a decimal. The integer is called the characteristic, and the decimal is called the mantissa. For example, the logarithm to the base 10 of 210 is 2.3222, where 2 is the characteristic and 0.3222 is the mantissa.