It's done for self interest.
Another perspective here talks about the Currency Wars that are presently being played out as countries attempt to grow their economies at the expense of other countries.
Financial Times on currency Wars
RBA Leaves Rates on Hold!
- Thread starter Rixter
- Start date
It's done for self interest.
Another perspective here talks about the Currency Wars that are presently being played out as countries attempt to grow their economies at the expense of other countries.
Financial Times on currency Wars
Was compelling to watch and listen.
Even more so the 2nd time and it seems to go pretty quick the second time.
It's worth the time anyway, so much wisdom and inspiration.
So...."If" the whole global system is geared toward "creating" inflation.....
Then I think I should invest in property.....
And use debt to do it....
Is it really this simple??
Nath
No
the "whole global system" currently views Australian property as overvalued (resi anyway). Only on a national level we find reasons to justify the cost of real estate here (housing shortage, population growth etc)
If you believe global inflation is the way to go, it may be more worthwhile to buy commodities
So...."If" the whole global system is geared toward "creating" inflation.....
Then I think I should invest in property.....
And use debt to do it....
Is it really this simple??
Nath
there was a good article by Tim Treadgold I think it was in the AFR called somehting like ' the truth about debt funding for property'... something like that. He made a couple of really good points whilst making them in a sensible context... the main one being that property owners get a pretty good free ride due to the size of a banks lending book i.e. the interest rate you pay does not reflect the true risk return. So in summary leveraging property is a no brainer and everyone should do it within your ability to fund the cashflow. He didn't get into debt deflation which for me is the biggest return for property investing.
IMO everyone should be leveraged into real estate to the best of their ability i.e. the size of the loan and the cost of the funds
So...."If" the whole global system is geared toward "creating" inflation.....
Then I think I should invest in property.....
And use debt to do it....
Is it really this simple??
Nath
nope.
debt requires serviceability.
there's only so much you can tax a population before you hit a ceiling of serviceability.
that's when bond sales fail, and the return rates pitch over 7%.
when that happens, all your income goes to paying interest on your debt, not running your country.
oops.
This is what i cant wrap my head around...forgive my "un"economic knowledge.
If a reserve bank prints money and "lends" it to the government to spend on whatever it wants.
who is it that enforces the paying back of the debt?
Nath
Because Governments want to preserve their credit rating and reduce the 'sovereign risk' element that plagues bankrupt countries like Greece and Argentina.
How does a country go bankrupt if it prints money and lends to itself?
using the USA as an example.
if it cant pay back its debt to itself.....(assuming the federal reserve is "owned" by the USA) why does it care.
Or is the federal reserve not "owned" by the USA.
why do countries care about debt ratings if they can print money and lend to themselves......
this is the bit i cannot get my head around.
probably no short answer for this question is there?
Nath
a govt can't print money anymore - they used to be able to, but the creation of the rothschild/morgan federal reserve system implemented the world over has removed the right of money creatio away form the people and into the hands of a select few.
Treasuries and Federal Banking Reserves are two very different entities.
in the USA, the US treasury raises capital by selling bonds that the Federal Reserve buys, because no-one else will unless mandated, like their superannuation 401k funds etc.
in Australia, people (the wider "market") still see our bond yields as an attractive return on a relatively lower risk market (that market being GDP, Taxation, etc). therefore, when we issue bonds, the world buys them, not the RBA.
so countries can only issue bonds out the wazoo and hope that they're bought, the interest payment on these are our "debt obligations". in the USA, the Federal Reserve says "...your "economy" (read Dow Jones) is falling, you need to issue bonds so that we can buy them to prop your "economy" up...."
Treasuries and Federal Banking Reserves are two very different entities.
in the USA, the US treasury raises capital by selling bonds that the Federal Reserve buys, because no-one else will unless mandated, like their superannuation 401k funds etc.
in Australia, people (the wider "market") still see our bond yields as an attractive return on a relatively lower risk market (that market being GDP, Taxation, etc). therefore, when we issue bonds, the world buys them, not the RBA.
so countries can only issue bonds out the wazoo and hope that they're bought, the interest payment on these are our "debt obligations". in the USA, the Federal Reserve says "...your "economy" (read Dow Jones) is falling, you need to issue bonds so that we can buy them to prop your "economy" up...."
The fed isnt owned by the US government, its a privately owned entity.
The short answer is that the whole fractional reserve banking system thats not backed by anything is a world wide scam where international bankers make unimaginable amounts of money.
The governments care because individuals in the government are on the payroll, and politicians win if they maintain the system as it currently is.
If a country defaults on its debt obligations, who enforces the consequences of the default?
Arron sice mentioned credit ratings may be affected.....
But if a reserve bank/treasury (whatever ya wanna call it) can create money out of thin air for itself why does a credit rating matter?
I know I am asking basic and probably the wrong question
s
Or am I?
Nath
One(Two) reason would be hyperinflation and trade. If you start printing piles of money to pay back debt, you will devalue the currency (the extra money you've printed has no real value backing it), making it more expensive to import goods, and exports are worth less. If a country prints enough money or defaults, their currency can become worthless outside and inside of that country and no-one will want to trade with them.
You can see what happened recently in zimbabwe when they started printing money like crazy to pay debt.
Cheers
You can see what happened recently in zimbabwe when they started printing money like crazy to pay debt.
Cheers
....and yugoslavia, and weinmar germany.
If a country (sovereign debt) defaults, it's not like defaulting on your home loan where the bank moves in and ceases your property and sells it to someone else.
Basically, sovereign debt is unsecured, and all built on confidence.
The consequence is that no one will lend to you again for a very long time. Then, at only tiny amounts, at very high interest rates.
So if your country defaults and then has a great credible plan to economic prosperity (which usually involves borrowing to build the crap you're going to sell), no one will lend to you.
The worse the credit rating the higher ir you pay on your debt.
see lyndons post.
Nate, I suggest you look at Wikipedia Zimbabwe and Weinmar Germany, generally Wiki is well written and basic.
A recent example of a country defaulting on it's debt would be Argentina (not for the first time).
The ramifications?
http://www.soundsandcolours.com/articles/argentina/argentina-lessons-learnt-from-the-aftermath-of-default/
Argentina saw four years of economic recession which led to the economic crisis of 2001/02. Argentina’s then-President, Fernando de la Rua, presided over the depegging of the peso to the U.S. dollar, draconian spending cuts and social unrest. Unemployment soared to over 19% and inflation rocketed as economic collapse poured millions of citizens into unexpected poverty. Domingo Cavallo, the economy minister of the time, introduced a raft of austerity measures that sparked widespread rioting which swept through the country as the people took to the streets to protest against the apparent collapse of the economy. As many as 20,000 people started looting shops in the capital, Buenos Aires, with many banks and restaurants being destroyed.
Fearing the worst, much of the population began a run on banks, trying to empty savings accounts, retirement accounts and liquidating assets in an attempt to salvage capital. Fernando de la Rua responded by freezing withdrawals from bank accounts with a series of measures called the “corralito” resulting in more civil unrest.
The number of people under the poverty line more than doubled in 2002 compared with pre-default levels and violent protests that year unseated five presidents. In nominal terms, it took over seven years for the economy to recover to pre-default levels and even now GDP per capita is still below 1998 peaks. Investment in Argentina dried up over night and essentially the country lost access to international capital markets as investors fled in fear. They deemed the risk of investment too high.
After eight long years, Argentina is proof that investors usually do forgive a country for defaulting. It will provide a valuable lesson on the immediate results of default if Greece does go down this road. The obvious benefit is the saving on the debt, but judging by Argentine experience, it will be followed by swift and horrifying economic collapse, accompanied by political chaos.
http://en.wikipedia.org/wiki/Argentine_debt_restructuring
Thanks for the tip, will do
Dont forget Bank Holidays in Brunei and Argentina, where the closed the banks for a day, reopened and voila! no economy.
Just as a side note there is a fantastic book that goes into most of the discussed and how interest rates, inflation and the property market affects the developed world.
Excellent read for anyone with an interest:How The West Was Lost - Dambisa Moyo
Excellent read for anyone with an interest:How The West Was Lost - Dambisa Moyo
