Submitted by FinancialJuice - Financial News Tailored by You [10]
Seriously folks, enough. We’ll start slow. Interventions are not as palatable as they once were
FACT: The size of the US consumer base is approximately 11 Trillion Dollars per annum. That is the equivalent to China’s and Japan’s GDP, combined minus a mere 2 Trillion. The size of the US Consumer is 1/3 of the Global Consumer Market. More than Japan, more than EU, more than China.
Let me say this before opinions start flying like the Luftwaffe over Poland: It Is our G-D given right to enjoy the products we purchase and use our reward based credit cards to buy them. Now that we have that out in the open. Let us move on.
So we know that we are a consumer based economy, right? Yes. $11 Trillion is about 70% of the overall economy. We love our products and we love to get new products. I don’t have the actual data, but the churn rate on new products must be in the range of 18 – 26 months. Think Iphone.
Scenario that is impossible to implement but interesting to consider: The US consumer stops buying anything outside of food, Water, and Gas. No new cars, no new technology, no new clothes. Never going to happen, right? Correct.
Our next point, if you had the opportunity to cater to an economy that is falling over itself in its attempt to get the latest and greatest, would you? No brainer category.
We told you we would start slow, so let’s step it up a bit.
The US economy is able to sustain itself from Aunt Janet and her predecessor uncle Ben. Don’t forget our long lost cousin Alan. The US, with one of the highest bond ratings in the known universe, is able to borrow $ at the lowest rates since the Great Depression. See chart.
We use the $ borrowed from the Treasury Auctions to supply the feeding frenzy provided by the Fed. Pretty straight forward, right? Kind of.
The treasury market is approximately $11.8 Trillion dollars. Foreign money holds approximately $6 Trillion on an annual basis. This is a mix of short term and long term securities. As of August 2014, China’s US Treasury holdings were at$ 1.269 Trillion. So no, China does not hold half of our Treasuries.
Treasuries are denominated in USD. In order for Foreign investors to buy T-Bills, T-Notes, T-Bonds, conversions into the USD would need to take place. Thereby, selling the foreign currency and purchasing the US dollar. Providing strength in the USD and, for the moment, weakness to the foreign currency. Selling the currency X, buying the USD. Multiply this by the steady stream of interest in the US Treasuries and you experience a rising tide in the US currency. US based consumers are able to purchase goods manufactured in international locations cheaper without sacrificing domestic purchasing power. Conversely, foreign based companies and consumers would experience more expensive goods when purchasing US products.
WIFC: What’s In It For China? This is where things get interesting. The common contention is that China is allowing the US to continue its spending spree until all-heck breaks loose. We feel a bit differently.
What if the Chinese would like to make sure that the Yuan fluctuation, which is seemingly regulated by the government, remains low for the benefit of the Chinese? The Chinese are merely looking for a pathway to keep the currency low to promote the goods produced in China as financially attractive as possible. With some esoteric currency plays and good ole fashioned financial engineering, it’s possible and already in play.
This turning out to be a more of a currency play than just a macroeconomic motif. China needs to stay relevant. This isn’t about the US and its consumers but about the Chinese desire to create a relevant economy and more relevant presence on the world economic stage.
If China does not purchase USD based securities the probability that the US $ will not continue its buoyancy will decrease. When USD buoyancy exists the picture, the purchasing power of the US consumer will decrease in relation to its foreign supplier. The Supplier and Manufacturer in China will immediately feel the impact in the decrease in demand for the product. In turn, more intervention will need to take place to keep the Yuan by the Chinese government.
We need to remember that the US need not be the focus of these discussion. The focus should be on the Chinese manufacturing and supply chain integrity. This bring to light the true implication of currency movements and asset purchases.
The reason the US is at the center of this discussion on a global scale is the fact that we refuse to stop spending. Perhaps this is more of a philosophical than a fiscal, monetary, or economic discussion.
For what it’s worth, I like my crack.
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