That paints an astonishingly bleak picture. I'm not an economist, but that seems almost unreal.
We have a lot of levers (some unpleasant) that we can tweak that aren't mentioned. Getting into a cold war with China and shaping trade seems like something America is uniquely positioned to do.
It may even be possible to cancel US treasury debt to China if the entire world gets on board with that plan (suing the CCP over covid-19 coverups and unanimously agreeing to prevent credit rating downgrades). I've seen this idea floated around the internet, and it doesn't sound implausible.
> It may even be possible to cancel US treasury debt to China
Then the credibility of the United States would be forever harmed. If the U.S. can do this to China as retaliation, what guarantees that it won't do something similar to another country when the United States doesn't like that country? Plenty of countries aren't allies with the U.S., and they'd be dumping their treasuries like there's no tomorrow. The downward price pressure then wreaks havoc on investors in the U.S. and U.S. allies: treasuries are supposed to be the safest asset classes; when they crash, plenty of things will crash.
Credit ratings don't even matter; without a credit downgrade everyone would know these ratings aren't objective any more. Not to mention that would potentially trigger total chaos in the U.S. sovereign CDS market, and potentially bankrupt financial institutions that sold these CDSs.
I can't even imagine the scale of damage this would do.
It wouldn't get cancelled, it would get frozen for the duration of hostilities. Being able to transfer US treasuries is only really possible with the consent of various pieces of US banking machinery, and that consent is revokable.
For what it's worth, this is the fate of whatever treasury debt the sanctioned Iranian regime owns. Really hasn't been all that much of a problem in terms of causing dollar flight.
You're getting over-excited. The US has a vested economic interest in China that despite rhetoric, it cannot extract itself from immediately, maybe not even in ten years. It doesn't have that entanglement in Iran. Trying to crash China's economy is in shooting-own-foot territory, and trying to do it by reneging on Treasury securities that are a part of complex financial transactions (they might be lent out, have you thought of that?) must be the dumbest way of all.
My comment will probably just be removed or buried, but I am going to put some "crazy" beliefs out there.
1) The financial system is hopelessly oversimplified and hopelessly unfair.
2) It does need to be completely redone. We should understand that money is a fundamental _technology_ and actually come up with a totally new set of high technologies that replace its current incarnations with things that are much more sophisticated.
3) Failing that, it is quite possible that countries other than the US may see so much death and destruction due to the failing financial system (excessive debt etc.) that they become desperate for a way to unhook from the dollar. A certain amount of hunger and chaos could motivate a global war.
3) Up until just recently, it seemed pretty clear that it was not feasible to defeat the United States in war.
4) The Covid-19 pandemic _may_ have unfortunately proven that there is now a type of warfare that the United States cannot win - bio-warfare. I am not suggesting that Covid-19 was actually a bioweapon, but due to the very feasibility that a _similar_ virus could have originated in a lab in China, the effect of this disaster could nevertheless be seen to be the bio-warfare equivalent of Hiroshima. Again, does not appear to actually be the case, but research in similar microorganisms was documented to occur in Wuhan. So you can't say it isn't potentially plausible in the future. And so this is an effective demonstration of the power of such a weapon, and the way that tight controls on citizens and information makes it a feasible type of weapon for China.
I am not writing this to try to create a rumor or something. But people have to realize that if money doesn't work for a certain number of entire countries they will fight for survival. And the US and it's outdated dollar system could actually be what they have to fight against.
I'm sure this is pointless because we have wildly divergent worldviews.
But one example would be massive wage disparity between adjacent countries, where people doing the same job in one country earn only a small amount compared to the other. And although cost of living may be lower in the other, important costs are not and objectively it's unfair.
The financial system is rigged in the favor of bigger players; especially stock market. Big players with a lot of capital can easily add “insurance” to their investments via hedging strategies that a small investor would not be able to utilize due to the high capital requirements currently in place. They are other regulations that make it tough for small players to get into the game such as the mark to market feature which abolishes/ makes one exempt from the “wash sale rule”; the requirements to get this is an uphill battle for a small investor.
On the surface wash sale rule seems to make sense but in reality it limits the amount of trades you can do especially in times of high volatility. And as Nassim Taleb mentions in his book “Antifragile” things that are harmed during times of high volatility are extremely “fragile”.
The technology is already there to make proper investing available to the masses; unfortunately regulations heavily hinders the feasibility for a small company to roll something like this out.
What do you mean by “high capital requirements in place” for hedging a portfolio? Do you know what options are? They can be used for hedging, and the bid/ask is the same for an institution or an individual.
You or I could’ve followed the 50 cent VIX call trader and made several thousand percent, all for 50 bucks a contract.
Hedges cost a percentage of a portfolio, it doesn’t matter whether it’s 100,000 or 1,000,000,000 dollars, if the overall composition is the same, the hedge will cost the same percentage of the portfolio.
You and I can trade mark-to-market assets too, CME micro futures have pretty cheap margin requirements.
It sounds like you have a lot of theoretical knowledge, but don’t actually have a practical knowledge of trading/investing. All of the stuff you complain about not existing actually exists.
Sure, you and I aren’t going to be able to put on a hedge like Ackman did, but only because the notional value of the derivatives used is so high. Use the tools available to the average investor, there are plenty.
Wow thanks for the response really appreciate it. I’m actually dabbling in trading atm, very familiar with bid ask spread and would def consider myself a practitioner, and not an economist/only thinking of things from a theoretical point of view.
I have a trading bot that trades crypto at the moment.
Anywho, what I was trying to convey in my initial post is that regulations make it tough for the little guy; especially on the stock market side.
My knowledge on options is definitely lacking, plan on learning more about that eventually, but when I referenced “insurance” I was def alluding to options / inversely correlated positions.
Any who what I mean by large capital requirements is to safely trade equities and crypto you typically want to trade based on a position sizing algorithm. Which reduces your position size based on the risk you’re exposed to.
In crypto the capital requirements are very low in the sense that you can buy a fraction of a share for as little as a few cents or even less in some places.
In stocks fractional shares are now becoming more and more accessible to people. But the problem there is you can’t actively trade a single stock unless you register as a active trader with the IRS. Also in most places fractional shares are $1. I would like to see this be even lower to truly allow anyone to run sophisticated strategies without needing a lot of capital.
$50 might not be a lot to me or you but it’s def a lot to others. Just wish system was designed in a way where you could trade sophisticated strategies with as little as $5 or heck 50 cents.
Hell, even some rich Western nations' currencies are fragile by this measure. I thought I was being smart by anticipating the coronavirus crash and selling half my global funds as an hedge. Timed it almost perfectly, a week and a half before the crash.
But it ended up being a complete wash! The funds were settled in Norwegian Crowns, which fell 30% relative to other currencies along with the stock market. And during the recent recovery, it has recoved in lockstep with the US stock markets, so the returns of my fund holdings measured in Crowns have been pegged at -5% to -10% throughout the whole crisis.
Turns out in retrospect that some big NOK-denominated bond funds investing international bonds were margin called on their currency insurance. They were therefore forced to sell a crapload of NOK bonds into the drop, in sum causing a 20-30% crash in two days.
Yeah it’s def tough to perfectly anticipate what the market will do next. What I’ve learned on my end is just simply be prepared for the following outcomes:
Have you heard this joke? "If you owe the bank a million dollars, you are in trouble. If you owe the bank a billion dollars, the bank is in trouble." Follow up joke - if you owe a billion dollars to a bank, and no one likes you or the bank, no one will care about either of you going down.
As a neutral outsider, I see that there are actually three scenarios which can play out:
1 US comes out ahead after this
2 China comes out ahead after this
3 Both countries engage in a lot of tit-for-tat, impoverishing both sides, and making the world significantly more multi-polar.
As a neutral, I would prefer 3.
What I am saying is that no neutral country has an incentive right now to come on board to help either of these economic superpowers because both have been abusing and exploiting their powers for a long time now, and neither have been particularly trustworthy in their dealings with their friends and allies.
Getting into a kind of cold war with China will lead to an actual war. But, here's the kicker. Our economy has been decimated over the last 30 years as we've exported our production to 3rd world countries (like China). We now have the strongest currency and it's going to get harder to export as a result. Meanwhile, all the factory and production skills we had 30 years ago are gone now. Those people are retired or dead. We now have 2 generations (Gen Z and Millenials) who fundamentally lack production skills. We are in a bad spot. It will take years to retool our economy.
> Getting into a kind of cold war with China will lead to an actual war.
China does not want that, and we don't want to go to war with them either. MAD makes this an extremely unattractive option.
> It will take years to retool our economy.
No it won't. We're already manufacturing more high-skill goods domestically than at any point in our history, and now we have an opportunity to expand upon it.
We can replace China with manufacturing in Vietnam, India, Mexico, Ethiopia, etc. and own the factories. China is already starting to shift expensive manufacturing out with One Belt One Road, but we can do the same with even more immediacy and effectiveness.
India, Viet Nam, and Taiwan are itching to further distance themselves from China.
There's no reason we can't be at the top of the manufacturing game worldwide in fifteen years. Especially if we use trade as a means to get partners on board. The G7 would do it.
This is sadly quite ridiculous. The US can't move production out of China through sheer will power, and China is incredibly dominant in production in many industries -- the know-how simply doesn't exist in the US.
It doesn't need any of that. Automation will take care of most of manufacturing. The issue is, and always has been, redistribution of economic gains. China is a convenient red herring.
A huge part of our military spending is to ensure that we have the requisite domestic production to fight a war, without spending years retooling the economy. Additionally domestic manufacturing output is at an all time high for a huge number of products, even while overall employment numbers are down.
We have a lot of levers (some unpleasant) that we can tweak that aren't mentioned. Getting into a cold war with China and shaping trade seems like something America is uniquely positioned to do.
It may even be possible to cancel US treasury debt to China if the entire world gets on board with that plan (suing the CCP over covid-19 coverups and unanimously agreeing to prevent credit rating downgrades). I've seen this idea floated around the internet, and it doesn't sound implausible.