Wednesday, September 17, 2008

Funding trade deficit via home equity
I believe that we are funding the trade deficit with home equity, not cash, not credit, and now - assets like companies.

This article elaborates on the trade deficit/cliff

Question:  What is the amount of money in the trade deficit?
What is the amount of money lost in value of our assetts?

Here is a paragraph from the article that illustrates the connection:

This astounding amount is 40% of GDP and shows no signs of slowing. To put this $4 trillion in perspective, the comparable base of what the whole country is worth is only $48.5 trillion. This total value of the nation is the sum of all real estate, all equities and such personal possessions as cars and furniture. So we are approaching having given away 10% of our net worth as collateral for importing the oil, cars and computers we use for our life style.

If we sent all our money overseas, would we see companies buying assets with borrowed money?  Aka: Leveraged stock investment
Would we see that money all the sudden evaporate if the rest of the money was based on value our market had defined, but our 
economy could not support?

I found these charts.

All these pictures show that the deficit is big and growing.

The Trade Deficit links to the US housing bubble and government deficit
The most basic view of the economy is diagramed below. Households earn the wages they spend on the goods and services from the businesses:

The following chart adds that consumers spend a portion purchasing foreign goods. The foreigners then recycle the dollars they collect from this trade into the US government debt by buying Treasuries and into Agency debt of Government Sponsored Enterprises like Fannie Mae, which then provide money for housing.

Foreigners have funded our housing boom and provided enough credit that the growing Federal deficits have not driven interest rates up. Much is simplified out of the above explanation, but the value is that we can see the biggest and most important money flows.

The US credit market matches the amount borrowed and lent. The accumulated foreign contribution of $4 trillion of lending (investment) has provided the credit for the borrowing by the US government whose debt held by the public is now similar in size to the accumulated foreign loans to the US. The chart below shows the size of Federal government debt and the foreign accumulated current account debt to point out that foreigners are funding credit at comparable levels:

A comparison of Mortgage Debt and Current Account shows similar growth rates:

Subprime mortgages are a symptom of the same unweildy spending of money, I believe was influenced by the capacity to hand money off by computers and cards, rather than cash passing from hand to hand.  We couldn't see or feel how bad our transactions are.

$2333 a year going out.  Per person, this includes kids.  

Government needs to nationalize oil drilling where we made all the leasing available, but have not used it.

The core is actually an attitude towards money, resources, and assets that is all confused.  

So, let me repeat - trade deficit is a number one problem.

Trade deficit and other money issues are an expression of a core attitude problem about money.  

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