If you import a lot more than you export, for a long time, and foreigners getting your currency don't want to accumulate any more of it, especially if your bonds pay little interest and there is worry of inflation, then inevitably those chickens are going to come home to roost. They might consume more of your exports, but if not, then they are going to take increasing levels of ownership of what was formerly your property, assets, and productive capital, until you have nothing left to sell to maintain your lifestyle of living beyond your means.
"They put the bonds that the government issues onto their balance sheets" and "They are allocating a lot of this additional wealth to real estate".
I'd guess that the government bonds are a liability and the real estate is the asset that is bid up by the additional cash generated by this liability. Is that right?
Abstracting away a heck of a lot of intermediation here. How should we evaluate the strength of the logic?
"Real estate is not capital" - mostly false. This is the fallacy behind Georgian taxes. Market cap of real estate is higher for three reasons: 1. There is a lot of building - this is 100% capital. 2. Lots are worth more because you can do more with them, mostly because of 1. This is a garden variety agglomeration externality. If someone builds a high-rise next to my vacant lot, the value of my vacant lot is immensely increased. This is capital too. 3. People need someplace to park their assets. This is not capital.
Yes, a regional economy (the US) running huge and chronic trade deficits (due to subsidized imports), financed by selling assets or de facto borrowing, may run into problems....
Dudes, globalism is not working. The global guard service for multinationals (US military) is expensive also.
I was recently reviewing what happened when Japan's real estate bubble burst, in an effort to glean insights about how I might hedge against something similar happening in the US.
I suspect I should shift a bit of my portfolio to foreign countries that can be trusted to have friendly relations with the US, but aren't too tightly coupled (economically).
I think it's better to think of "wealth" as something that already exists. You can either buy assets to try and preserve that wealth or you can spend the wealth trying to create more wealth.
I think bonds are wealth (or more properly assets storing "wealth") and bondholders account for how the government might pay back the lender just like every other lending asset.
Let's think this out. If Arnold Corp issues a bond, and I buy it, I've made an implicit decision, just by buying the bond, that they will pay me back. Otherwise I wouldn't buy. It wouldn't be my concern if Arnold Corp payed me back by raising it's prices on the things I bought from it. To the extent it was, I'd factor that into my decision to loan them money in the first place.
Now, I think what you're saying is that I might expect the government to pay me back by raising my taxes. Or creating inflation. And you might well be right. But...
1) I would still build that into the price of the bond and
2) In that eventuality, I'm still better off having bought the bond than not, because they'd tax or inflate away the cash I'd hold instead.
The government bond is still a better way to for me to preserve my wealth than holding cash. That it might not be the best way is neither here nor there, except in that it explains the rush to real estate and stocks to say that they may be less susceptible to the tax or inflation expectations.
Over time, we have allowed a structural deficit to develop becasue taxes have not kept up with spending. This reduces national savings and investment and therefore wealth accumulation.
If you import a lot more than you export, for a long time, and foreigners getting your currency don't want to accumulate any more of it, especially if your bonds pay little interest and there is worry of inflation, then inevitably those chickens are going to come home to roost. They might consume more of your exports, but if not, then they are going to take increasing levels of ownership of what was formerly your property, assets, and productive capital, until you have nothing left to sell to maintain your lifestyle of living beyond your means.
New money creation has bid up the real estate prices, increasing the relative wealth of the lucky asset holders at the expense of everyone else.
And some people think (or at least claims to think?) that inflation helps the poor (lol).
Except it won’t be future taxation, it’ll be future inflation…and the political instability that comes along with it.
"They put the bonds that the government issues onto their balance sheets" and "They are allocating a lot of this additional wealth to real estate".
I'd guess that the government bonds are a liability and the real estate is the asset that is bid up by the additional cash generated by this liability. Is that right?
Abstracting away a heck of a lot of intermediation here. How should we evaluate the strength of the logic?
"Real estate is not capital" - mostly false. This is the fallacy behind Georgian taxes. Market cap of real estate is higher for three reasons: 1. There is a lot of building - this is 100% capital. 2. Lots are worth more because you can do more with them, mostly because of 1. This is a garden variety agglomeration externality. If someone builds a high-rise next to my vacant lot, the value of my vacant lot is immensely increased. This is capital too. 3. People need someplace to park their assets. This is not capital.
Yes, a regional economy (the US) running huge and chronic trade deficits (due to subsidized imports), financed by selling assets or de facto borrowing, may run into problems....
Dudes, globalism is not working. The global guard service for multinationals (US military) is expensive also.
I was recently reviewing what happened when Japan's real estate bubble burst, in an effort to glean insights about how I might hedge against something similar happening in the US.
I suspect I should shift a bit of my portfolio to foreign countries that can be trusted to have friendly relations with the US, but aren't too tightly coupled (economically).
I think it's better to think of "wealth" as something that already exists. You can either buy assets to try and preserve that wealth or you can spend the wealth trying to create more wealth.
I think bonds are wealth (or more properly assets storing "wealth") and bondholders account for how the government might pay back the lender just like every other lending asset.
Let's think this out. If Arnold Corp issues a bond, and I buy it, I've made an implicit decision, just by buying the bond, that they will pay me back. Otherwise I wouldn't buy. It wouldn't be my concern if Arnold Corp payed me back by raising it's prices on the things I bought from it. To the extent it was, I'd factor that into my decision to loan them money in the first place.
Now, I think what you're saying is that I might expect the government to pay me back by raising my taxes. Or creating inflation. And you might well be right. But...
1) I would still build that into the price of the bond and
2) In that eventuality, I'm still better off having bought the bond than not, because they'd tax or inflate away the cash I'd hold instead.
The government bond is still a better way to for me to preserve my wealth than holding cash. That it might not be the best way is neither here nor there, except in that it explains the rush to real estate and stocks to say that they may be less susceptible to the tax or inflation expectations.
Over time, we have allowed a structural deficit to develop becasue taxes have not kept up with spending. This reduces national savings and investment and therefore wealth accumulation.
Government bonds are not "wealth" but the expenditures they financed may be. Ideally all government expenditures would have NPV>= 0