Current account deficit of the US in 2005

[TCO]

It really does not bother me if consumers decide to get leveraged. I think that the wealth of the nation is decided by how much we produce rather than if we momentarily spend more or less than what we made. I really don't expect a disaster from the leverage. Eventually, they won't be able to do it any more. Interest rates will rise as risk rises. Yeah...there is some value destruction from bankruptcy process, but a lot less than is involved with corporate failtures. Mostly it's just an issue of lenders taking their haircut.

Why do you think that the dollar will correct to an undervaluation level. Why not correct to the right level? You don't merely have the hubris to think that you are smarter than the market, you are so much smarter that you can predict it's future "needing to nbe corrected" states?

[TCO]

Yeah, I did inject it. I think it's a useful concept. If you sense a big correction coming, than you must be saying that the current value is out of whack.

In this concept, I mean in terms of exchange to other currencies (the original poster comment about the "dollar rising").

[TCO]

This is maybe a slight variant from our logic train, but I think relevant.

How leveraged are we? To understand this, you need to know what the debt/equity ratio is (or if you are like me, the debt/total entity ratio).

So...let's say you are a certain type of company (certain beta, certain industry). And the desirable D/e ratio is 2/1. BTW, this is very hard to prove empiraclly, but you can see how the factors of taxation and bankrypcty cost drive the curve to be a parabola vice a line. Now, let's say that some change (let's say discovery of oil if you are an oil company) changes your stock price to double it. Now you are instantaneously off of the desired D/e ratio. If the stock price rise remains, then you really should increase leverage. you can justify it.

Or you can think about what I told Roland a long time ago. The US stock market was overpriced because the markets believed the dotcom silliness that the New Economy had really arrived. They were wrong. But if they had been right (if the dotcoms had really been what we thought they were) then the market would have been right. just because the p/e ratio is high is irrelevant if there is a correct anticipation of future growth. similarly, if I invented a room temperature HTSC or a seawater to oil transmuter, the stock market would be JUSTIFIED in zooming up.

He was alsways getting riled up about how the Fed ought to constrain the stock market (or had gnomes pumping it off in some conspiracy of buying). But the market was the market. It made it's own decisions and mistakes.

[TCO]

http://economics.about.com/gi/dynamic/offsite.htm?site=http://www.digitalnpq.org/archive/2006%5Fwinter/friedman.html

NPQ | The US Treasury debt is held mainly by China, Japan and South Korea. Is the huge foreign balance of payments deficit a problem for the US and world economy?

Friedman | I don’t think so. It may well be a statistical mirage. If you look at the balance sheet, the US is heavily in debt. If you look at the income account—the amount of interest the US pays abroad—it is almost exactly equal to the amount of interest that it receives from abroad. American assets held abroad are earning a higher rate of return than foreign assets held here.

That is understandable because what is most attractive about the US to people and countries with wealth is that it can provide security, insurance really, against political instability. Nobody is afraid that the money they place in the US is at risk of expropriation or of in some other way being taken away. For this safety, the wealth holders of the world are willing to accept a lower rate of return. US assets abroad, in contrast, are riskier and thus yield a higher rate of return.

This explains why there is a rough balance in real terms. It is not clear there really is a debt. It looks like the imbalance concerns are misleading. It doesn’t worry me a bit that China and Japan hold so much US debt. In a way, it seems foolish for them to do it because they get lower returns than they might elsewhere. But that is their business.

[Kidlicious]

Originally posted by TCO
That is understandable because what is most attractive about the US to people and countries with wealth is that it can provide security, insurance really, against political instability.

I don't think it's attractive to invest in the US. If it were the dollar would be a lot stronger. Investment in this country is so high because of the trade deficit. It's supply, not demand.

[TCO]

I can't hear you!!

[DanS]

Interesting interview.

Charlie Rose had an interview with Friedman at the end of last year. Not the best interview, but interesting nonetheless.

http://video.google.com/videoplay?docid=-2963837673813979186&q=tvshow%3ACharlie_Rose+milton+friedman&time=45000

[Kidlicious]

I don't think anyone has been wrong more often than Milton Freidman. Maybe I would have to look at more winners of the Nobel Prize for Economics.

[TCO]

What?

[Kidlicious]

stfu

[TCO]

I can't hear you!