Is the Fanny and Freddie Action Socialism?

Right now America scares the s**t out of me. This is a fairly recent reaction, and it relates to the comment made by Paulson:

Liesman: There’s some speculation that overseas buyers said we are not going to continue to buy into the markets and/or we are not holding the screws we already hold. Are we that close to a meltdown in the market?

Paulson: There was not anything quite like that. But overseas buyers had reduced the level of buying, some stopped buying, and there have been some modest selling, no doubt about that. This was, when you say what has, what is the event or what was the particular call? This was just obvious. There was grave concern that throughout this country and outside of this country, it was largely related to the fact that these companies are just too big. They are just really big.

As a foreigner holding USD’s ever since the Euro was introduced holding USD’s was a loosing proposition. You had to wade through a falling dollar, falling bond yields and a falling market.

Recently the USD rallied making me think, should I dump my dollars, and all of my holdings? I can even imagine other people who were thinking the same thing. Normally Americans could say, "hey who cares what you think Christian, you are just some damm foreigner." Well, yes, but nearly 50% of America’s debt is held by "damm" foreigners like me, and that makes us very important to you Americans.

Paulson did the right thing by saying that the American debt will be guaranteed by the American government. Yes could be construed as a bailout or socialism, but necessary nonetheless.

Imagine the people of America as children who broke some furniture in another house. The owners of the other house would expect the parents to pay for the furniture, and in this case the furniture are the mortgage bonds and the parents are the American government.

Of course you can argue that hey, this is capitalism, no assurances. Yes, you can argue that, which brings me to my second point and the clincher in this. America is broke! Yes America is broke and they need to pay the piper to foreigners who buy American debt.

Read the following article from 2002.

The result has been a growing annual deficit in what’s called the "current account" — the net amount we owe to foreigners for goods, services, interest and dividends over what they owe us. By the end of last year, our accumulated current account deficits — our total foreign debt — amounted to 23 percent of our gross domestic product. Economists at Goldman Sachs predict that if we continue on our current trajectory, our foreign debt will amount to 40 percent of GDP by 2006. Like any enterprise whose debt payments are mounting faster than its income, we cannot go on like this.

The interesting bit is the following paragraph.

Unfortunately, the dollar still has so far to go that leaving the international rebalancing to take care of itself has become dangerous. Our current account deficit now runs about $400 billion a year, and the Goldman Sachs number crunchers estimate that just to cut that in half, the dollar would have to fall an "astonishing" 43 percent against the currencies of countries we trade with.

Go back to 2002 and look at how much the USD dropped against the Euro. Coincidence? I think not.

What we have here is that America is broke! You argue yes, yes you already know that. Yes everybody knows that, but the patience of foreigners are being tested. Especially when you see how well other economies are doing.

What I feel broke the camel’s back is the problem of the Georgian-Russia-America saber-rattling. When Russia attacked Georgia they overreacted. However, to demand that Georgia’s borders remain intact and call Russia the horrible horrible aggressor is simply wrong. What is happening in Georgia is the reversal of what happened in Yugoslavia. My brother who happens to live in Russia tells me that people in Georgia actually like Russia (propaganda aside, seriously there are people who like Russia).

The problem of Georgia and what many foreigners are wondering about is why America is yet again rattling attacks when they could not afford yet another attack. Here is something to question. Notice how nothing has occurred with respect to Iran? Iran knows nothing will happen because if a conflict were to happen the aggressors could not afford it.

The new world order is about money, who has it, and who does not. Of course many will argue that if there is a run on the American debt then those who did the running would be just as hurt.

Well, here is where I disagree. Yes those holding and cashing in American debt would be hurt, but they are already hurt. So you loose a bit more, who cares! If you are already down by 50%, do you care that you get out at 75%? Not really!

On the other hand imagine a run on American debt on the American itself? Imagine a 3 to 1 USD to EUR conversion, and if oil were 200 USD. Imagine what that would do to the American consumer? They would collapse.

Many will say, "but if that happens the world would collapse since we are all coupled" The more I see it, the more I am starting to think what will happen is that the world would be coupled and then decouple very dramatically. As a Chinese said to me, "you know the American drop in demand is hurting, but hey instead of 10% we will be growing 7% and then 3%." And my brother in Russia, and sister in Ecuador all say, "hey things are growing quite nicely."

What Paulson did was the right thing for America, and while some might say it was socialism it was the right thing to do. As Paulson said many times, he tried to do the best with the hand that he was dealt. And I agree with that.

We foreigners still like America, because American’s and America is a great place with nice people. BUT patience is running out, and consider this run up in the price of commodities as a warning shot across the bow of USS America.

As Tom Friedman on Meet the Press said,

"It would be, Tom, as if on the eve of the IT revolution, the revolution of PCs and the Internet, someone was up there standing and demanding, "IBM Selectric typewriters, IBM Selectric typewriters." That’s what drill, drill, drill, is the equivalent of today."

Good point no?

America needs to change in very dramatic ways (it can we foreigners believe it can) and in the fall America can vote for change. I have my own ideas on who would truly change America, but that is mine and American’s need decide on their own.