| ||FINISHED THIS BOOK, HERE'S WHAT IT SAID IN EVERYDAY LANGUAGE|
Do you know why interest rates have been so low for a generation? Because of the emergence of hundreds of millions of people who used to live behind the borders of communism - mostly China. Because China doesn't really have retirement benefits, people there are notorious savers. They put their money in the bank in China, then China buys treasury bonds, etc. from the United States. Because there is so much money coming in to be "rented out" (remember - when you borrow what you are really doing is renting money) - due to the laws of supply and demand, the cost of renting plentiful dollars is very low.
Low interest rates are also accepted when there is very little risk to the investment. For a long time, the U.S. Treasury instruments were a very safe place to invest your money. T-Bonds have a yield and a maturity date that is defined - and backed by the U.S. Government. Investing in a government that is strong and secure is a safe bet - UNLESS it becomes bathed in a deficit of red ink, and stuck in a war that has cost hundreds of billions of dollars that it cannot see how to get out of. In a case like this, foreign countries would want to invest in economies that are less risk.
This is why the U.S. Dollar is dropping historically in value against the world's currencies. International investors are realizing that the debt needs of the U.S. are getting scary, and are instead investing in Euros, Canadian dollars, etc. When people do not want to invest in the U.S. as much, the U.S. will have to raise the yield on their bonds, lowering prices and raising interest rates.
Inflation is coming back, and here is why - the reason inflation has been so low is because with hundreds of millions of people offering cheap labor from formerly communist countries, these rice paddy farmers who used to make $1 a day will gladly enter the suburbs to make more exporting cheap T-shirts to the U.S. The U.S. consumer demand lower prices (this is why Wal-Mart gets one out of every five dollars spent on groceries in the U.S.) and this is why inflation has been so low. But it's coming back, and here's why:
1) Wages for workers in the emerging countries will increase. This will increase inflation.
2) The U.S. Dollar will continue to drop. With an unescapable $2-3 trillion dollar bailout plan to help homeowners who have lost their homes in this current housing fiasco, the U.S. Deficit could quadruple. As the government prints money, the value of each dollar drops. This will greatly increase inflation.
Inflation is the long-forgotten enemy of economic prosperity. Although I was only 9 years old, I remember very clearly Nixon's wage and price freeze. There was a big sign over the grocery store. It was a stupid move, because as Greenspan says, markets correct themselves. Which brings me to the most encouraging part of the book:
Free markets should be left alone, and when deregulated, thrive. In the history of famines, there has never been one in a society that encourages free markets AND has a free press. Not one. This is what has made the U.S. an economic leader. But the main reason he said that the U.S. has been so successful - the singularly MOST important reason why the U.S. has been an economic powerhouse is.... (does anybody want to guess before I tell the answer tomorrow?)_ comment below.
| ||Posted 9/27/2007 11:28 AM - 1195 Views - 24 eProps - 19 comments|
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