Pelosi in China

Nancy Pelosi is visiting China over the weekend to discuss bilateral relationship between US and China. I believe the biggest topic that will be discussed off the official channel is the touchy issue of US treasury debt purchase. China for past several month has signaled that they were concerned with declining dollar value. Of course this is a very legitimate concern considering that they hold over a trillion dollars worth of dollar in their current asset.

Now with over $100 billion of US treasury coming on auction to finance our massive defecit, you have to wonder who will be buying them. Remember that interest rate skyrocketed on the US treasuries over the past few weeks. In order for the auction to end smoothly, you need foreign government's purchase of our debt (ie China). It's just speculation, but there could be a move by China to under-purchase treasury notes next week to signal to US their displeasure of falling dollar values (which is mostly due to the Feds running the printing press to keep banks afloat).

On a side note, it was disgusting to see Pelosi eagerly grabbing Chinese officials hands. It looked like we were begging for money to finance our debt. Have we lost all of our pride to go running to the dictators.

Numbers need to be added up!

The sad reality has dawn upon us for at least a decade that we are running out of resources (money) to support the expenses that we incurred; Medicaid, Social Security, bank bailouts, military expenditures, and the list goes on. So why have we not done anything? Because we are playing ignorant. Well that really is not right either, because we can see it vividly. The best answer is that we are procrastinating in a perpetual optimism that somehow this big debt burden that we incurred for decades will be solved through a miracle. The miracle that experts are always pointing to is growth. Growth of economy indeed would be a cure all solution to our problem, as growth will compound the tax income. However the problem is that our nation has been growing very very slowly. After the dotcom bubble collapse, our economy grew at an annual rate of 3% or more, but the "growth" was fueled by borrowed money from foreign nations who was running a extraordinary trade surplus against us (ie China, Saudi Arabia, etc).

Now, debt can finance investment or consumption at present, but the future income will be reduced to pay off the debt at a later date. That's why it usually is better to use debt as investment to increase future income. However, majority of the debt we incurred after dotcom bust was used for consumption. The "growth" that we had was basically consuming our future income now by using debt. This poses a thorny problem for policy makers, because the expected growth, was but a mirage from the debt financed consumption and the end result would be lower growth in the future.

As the problem stands, our nation canoot to finance our liabilities if we stay the course. We now must make the choice of either to cut back on spending, increase taxes or combination of both.

GM loses money yet again.

GM just reported a loss of $9.6 Billion while burning through $6.2 Billion of cash. Now that is a spectacular captial destruction on par with the banking industry. So what is the GM's solution to their problem? Well, we all know they want more "loans" from the government, so that's not a surprise, but what if they were seriously thinking that they consider them to be grants? Let's look at the scenario closely. The Treasury department has announced that they are converting their preferred shares into common shares, which is a grant of capital for theoretically they do not need to be repaid or inccur dividend ( in another word interest on the principal). With this precedence, there is a good chance that the auto industry is looking for a similar deal.

This is a total capital destruction. The banks at least have some chance of buying back the shares when their portfolio recovers as economy stablilizes and the portfolio becomes liquid again. However, I don't see any viability for GM and Chrysler who has been eeking out profit at their heyday from SUV sales and rampant auto loans. Now that the consumer preference for vehicles shifted towards smaller vehicles (where US auto industry has a small share in and it is less profitable than SUVs), but also the new financial regulations after this financial meltdown will considerably limit the amount of capital available for auto loans. This is a double loss limiting auto industry's ability to earn money from interest and contraining it's ability to move inventories by low interest loans. To add to that, their debt level is beyond repair. With 170B in liabilities, interest alone will eat away most of the profit if they even manage to make some money. Then how is the US government to regain any of it's "investment"?

First Post!

The blog really isn't for anyone in particular. If anything it is here to organize my thoughts!