Read a book with open mind

Neil, a fellow blogger, replied to my comments as follows. A good conversation or debate benefits and educates both of us. My comments are coded in the format of [ … ].

[I have not taken any class in economics, so ignore my ignorance.]

Tony, don't worry about not having taken any classes in economics:

1.       Lots of "real" economists say truly stupid things, and you haven't said anything regretful at all.

2.       Not having taken a course in economics might actually be an advantage. Most colleges and universities teach "liberal economics" where they "teach" you things like "the huge U.S. National Debt is 'safe’” because, um, we owe it to ourselves.

[The students should ask for their tuition refunds. That’s why most professors are still driving a Civic and most of their incomes are not from personal investing. J]

[The current loan to China will be paid in USD. If I were China, I will make sure future loans will be paid back in gold, oil, real estate..., not the depreciating USD.]

Your intuition is correct. But rather than asking to be paid in gold, China has asked for the next best thing, TIPS, which Uncle Sam could hardly deny them. Uncle Sam increased the sale of TIPS but not by much, TIPS still comprise about 10% of the Treasury bond market.

[When I loan you $1 and that dollar can buy a loaf of bread, you pay me back $1 and that dollar can buy me half a loaf of bread. That's how the US manipulates currency. ]

Yeah but when inflation hits, Uncle Sam won't get a huge benefit at all because 66% of our Treasuries come due in 5 years, 85% in 10 years. No investor in their right mind would buy a long Treasury when rates are seen as rock-bottom, and consequently, very few did. In other words the debt gets rolled over quickly and the new interest rate will be higher (due to inflation).

[Short-term bonds and long-term bonds should be separated for investors. Today the long-term bond holders will suffer most.]

[Are our dollars truly decoupled with gold? The true value of the USD should be measured against a bucket of commodities including gold, silver, copper, oil...]

Yes, Tony, I think dollars have been decoupled from gold since Nixon.

 
Though it might actually be a good idea to add commodities into the market basket that is used to measure inflation (maybe they are already included), I don't think the value of the dollar should be measured against commodities alone. Prices of commodities vary with changes in supply and demand. Supply of copper (for example) is affected by the vibrancy of the economy, and inflation, just like every other product.

[If S&P 500 is doubled, but the purchase power of the dollar is about half, then I believe we have a flat market except Uncle Sam asks you to pay the capital gain tax as your stocks have been doubled. Another currency manipulation! ]

Yes, but this problem is already well known. So why hasn't it been resolved? I guess no politicians really care about the wealthy folk who own 80% of the stocks.

[It has been partially fixed for me. Check out Chapter 87 on Tax Avoidance.]