There is a lot of questions about the economic situation in the United States and a lot of elected officials are claiming that the economic situation is not sustainable. But I see that Japan has borrowed up to or more than 220 percent of their GDP. I was wondering if you thought the US is there any breaking point? Can they borrow 250% of their GDP?
A: The main deference between the debt of Japan and the United S. Number one is that Japan owes the money to its own People. The US owes approximately 50% to foreigners. But almost 50% of our dept is international debt.
Q: I saw one conuntries economic situation Iceland in 2008____, they had such a bad economic situion, that the value of their currency went half just almost over night. I was wondering if you could compare the US situation currently to any historical situation like Iceland, Weimar Germany, Zimbabwae or something what would you compare it to.
A: Its two different things. The similarities all of the countries you mention they owe money. Thier all in debt. The US is the wealthy countries in the world. At the same time it is the larges debtor nation in the world. Number two the US owes all of its debt in its own currency. Which means if your Thailand , Greece or Zimbawae and you owe money this is in currency that you can not create. So you must work hard or you go bankrupt. The US can do neither one to repay its debt. The US can monitize its debt. That is create the money and repay its debt. Its a unique situation that no one else on this planet has owes money in its own currency.
Q: We have indeed monitizing our debt in the past few years more agressively than we have ever done in the past in the History of the US.
A: Yes, yes we are doing that.
Q: That would be QE 1.
A: Yes, exactly.
Q: Are there anythings coming up that might be a danger? Is it possible that China would stop buying US treasuries. Even though it might be unlikely.
A: Everything is possible. In todays environment everything is possible. However, Chinese are facing the following dilema. Should we continue lending money to the US? Taking the risk that we might lose it through this inflationary monitiziation approach. That the US might chooses to do in the near future. Or if we stop and do not buy additional US debt we might put at risk all the debt we are holding right now in our hands plus economic stability of the planet therefore the econic sitaitution of China would deterioriate. So they are in a very, very tough sitatuion as well.
Q: Some of the past landmarks of the US in this economic turbulance was monitizing our debt. That was something that was pretty new in the past couple years. Are there any landmarks in the future that you might say people should look for similar to that in the next six months to a year should we expect to see anything like a sharp reduction in Chinese buying bonds, comoditties panic or something like that.
A: First of all to put the record straight the US used to be the largest net creditor in the World. In the last 25 years it has become the largest debtor nation. SO prior to 85 we did not face the same financial problems we are facing today. So that is the number one thing for us to consider. Number two we have used monitization in the past. In the 70's. Thats why we used to have high inflation. Double digit inflation. In the past thirty years in the 80's When Volker was the chairman of the fed then Greenspan they used very tight monetary policy. They did not monitieze our debt. That is why we had no inflation in the past 25 years in the US. Now things keep changing. We might have come to the point that we need eventually to monitize our debt. That is something the Chinese are afraid. Because monitization of our debt means that everthing they have invested in the United States will will be inflated. Thats a major issue of concern for that.
Q: The value of their holding really go down because we are paying in dollars that are less valuable.
A: Exactly. And when you inflate the US economy through the monetization. By the end of the day they will buy much, much less of their own currency.
Q: Ok if things get much worse, should we . . .
A: They will.
Q: Should we then anticipate possibly a commodities panic or precsious metals panice or something else like that.
A: All these panices, one follows the other one. Because if you lose faith in the monetary system then in a way you are inclined your forcing yourself to get more involved into commodities or metals. Its a substitute in a way. Thats why you see right now the price of gold is going up and other metals. So in a high inflation situation it can be the worst.
Q; So far, monetizing the debt has been a bane for China and a benefit for the US because we are the default currency. The US dollar is.
A: Although we have still not utilized the full monitization approach. Still we borrow money. We are still finding creditors, they are sending money to the US. Still we are not forced to monitize our debt. That would be the last resort. When everbody will stop sending their money to the US to buy the government bonds then we have no other alternative but to monitize our debt. Still we are not in that situation.
Q: So there is some cushion, maybe some wiggle room there.
A: Yes, yes.