What will happen if China wants its money back??

I'm sure many of you are well aware that the USA owes China some money. Many people seem to believe that a majority or very large portion of our national debt is owed to the Chinese. This is not true actually. As I discussed previously in the article, Myth: We Owe All Our Debt to China, the US government owes less than $600B to China. That is around 6% of the total US national debt which is owed to China. That is still a large amount of money. Its not good in general to be heavily in debt to a party and be so obligated to them.

So this raises the question: What will happen if China wants its money back?

The very short answer is : They won't so don't worry about it.

I'm serious. Maybe this seems flippant but it isn't really. So I'll explain..

First of all Chinese officials have publicly said they have no plans to drastically or abruptly reduce their investment in the US. The Chinese ambassador wrote in 2007 to US Senator Chuck Grassley to say “China does not have a plan to drastically adjust the structure of its foreign reserves.” Then assistant governor of the People’s Bank of China, was quoted as saying that “the U.S. dollar is the main currency in our reserves and that policy remains very firm” and said statements to the contrary were "opinions".

The US government loans people money in the form of bonds. These are contracts to loan money. You can't just simply call up the government and demand your money back. Contractually and legally there isn't a way for someone to just demand their money back from the US treasury. So basically China can't just take its money back. They could ask for it back or they could sell it. If they asked for it back theres nothing that would require us to return repay the debts outside the normal terms of the loans. They could sell their bonds to someone else on the open market if they wanted to. That wouldn't hurt the US though. The US government debt owed to China is just like any other loan you might have. Thinking the Chinese will abruptly demand their loan back is like thinking your bank will call tomorrow and demand you repay your mortgage.

But they generally wouldn't want to. Individuals, businesses and governments loan money to the US because they know it is the safest investment in the world. People don't buy treasury bonds because they are high interest, and in fact since the risk is so low the treasury can loan money at very low interest rates. Over time this could change. People may decide the US government is no longer stable or worthy of loaning money to. That isn't happening and isn't going to happen any time soon. Given the current economic situation it might seem as if the US government is on the verge of collapse, but this is far far from the truth. In fact during the current economic crisis people are more willing to buy treasury bonds because even now the US government is considered a safe harbor.

Contractually China has no way to demand their money back. Economically China would have no reason to do so. These reasons alone should be justification enough to not worry about China pulling the economic rug out from under our governments debt.

But what if China for whatever reason decided to challenge the contracts of the treasury bonds or otherwise demand their money back? That is possible but it would strongly irritate relations between the USA and China. Politically China would risk heavy economic repercussions from the USA if they chose to demand early repayment of our loans. The USA is a big customer of Chinese goods. In just the first 9 months of 2008 the US has imported over $250B in goods from China. If China chose to play economic 'hard ball' with the USA for some reason then it would be highly likely that the US government would respond by reducing or taxing imports from China. The USA wields a lot of political power around the world. China has no motivation to risk making USA a serious political enemy.

If China sold off its treasury securities abruptly they would lose a lot of money in the process. You can't just dump a large amount of anything on a market and get full price. If they sold our treasuries they'd take a loss in the sale.

A sharp or drastic reduction in Chinese investment in the US would have negative economic impact on the US. This would hurt our economy which would in turn hurt the Chinese economy.

China lacks any real motivation to prematurely demand loan repayment. It has been speculated that they could do so as a retaliatory measure or as leverage over a political point. However China has no realistic incentives to reduce investment in the US and significant downsides if they did so.

So as I said originally: it won't happen so don't worry about it.


Reference:
Report to congress: China’s Holdings of U.S. Securities: Implications for the U.S. Economy

Would you buy this mutual fund?

Lets consider the mutual fund named PGB. PGB has a lot of buzz and you'll see people on the net saying its a great investment. Lets look at PGB's price over the past year and before.

The price for PGB hit a high of $10.11 a share back in March of 2008 and then like most equities it has dropped significantly since then. PGB hit a low of $7.12 a share by late October. Since then the fund rebounded a bit and is now at $8.26. So its currently down 18% from its peak of the year.

Here's a graph of PGB prices for 2008:


You might notice that in each month there is a pretty wide difference between the high and low. So the price of PGB has pretty high volatility. In every one of the past 12 months the price of PGB has fluctuated at least 7.9% and as much as 26.8%.

If we look back further in PGB's history we see a see a big boom and bust cycle followed by a current boom. From 1975 to 1980 the price boomed and more rose over 300% going from about $1.50 to over $8.00. Then after 1980 PGB hit a bust and dropped down to around around $3 and then stayed between $3 and $5 from 1980 till 2004. Now since 2004 the price has gone up significantly and jumped up about 100% to hit its 2008 peak.

If you look at the long term trend from 1975 to today in 2008 the price of PGB has increased at an annual average rate of about 4-5%. Also the stock went through a 26 year period between 1980 and 2006 where there was 0% growth in the price.

A couple other details about PGB is that it pays no dividend or capital gains distributions. Also PGB has a load / fee to buy that varies a lot and is set by the selling agent. The purchase fee can vary anywhere up to 8% or more and is set by the seller.

So here are key points about PGB:

• Down 18% from its 2008 peak
• Average rate of increase of 4-5% since 1975
• Fluctuates in value from 7-26% within each month
• Saw 0% growth for 26 years
• Costs 0-8% in fees to purchase

By comparison lets look at the general S&P500 :

• Down 41% from its 2008 peak
• Average rate of increase of 8% from 1975 to today
• Fluctuation of 5-39% within each month for this year
• Saw 0% growth for 1998 to 2008
• Can be bought with 0% fees

S&P500 has had rose drop in the past year and some months have dropped a lot compared to PGB. However long term PGB has only grown 4-5% while the S&P has grown 8% annually.

Given how PGB has performed in the past and how it compares to the general S&P do you think it is a good investment?

I don't.

PGB isn't a real mutual fund. Its just an example with a fictitious name.

The numbers I used are the prices that gold has traded for. Now that you know that the numbers are all about the price of gold and the return on investment for gold, does this change your mind about whether or not you think its a good investment?

Merry Christmas

Merry Christmas everyone!

Free or less expensive alternatives to cable TV

Cable or satellite TV is pretty expensive. According to the FCC report there are 95 million homes in the USA with some sort of subscription television service. Thats over 80% of the households in the USA. The average cable or satellite bill runs around $50-60 a month. That adds up over a year with annual costs of $600-720 or more. One sure fire way to save money is to cut your cable service.

Cable TV can be a very cost effective form of entertainment. Americans watch 20-50 hours of television a week. Thankfully today there are a number of free substitutes for cable TV that will get you a lot of the same programming. In addition to the free sources you can also find some very reasonable low cost alternatives.


Use an Antenna
Cost : Free after antenna purchase

You can get all the broadcast networks off the air. The broadcast networks still make up a large amount of the programming that people watch. With HDTV you can get a high quality signal from an antenna if you aren't too far from the broadcast tower. If you don't have HDTV then you will soon need a converter box to use an old style non-digital TV. You can get a free $40 coupon from the government to offset the cost of the converter box.

The Hulu.com Website
Cost : Free if you have internet

Hulu is a site that collects or hosts video feeds from various sources. There is a ton of content on Hulu. They carry popular shows like The Simpsons, The Office, The Daily Show, House, Chuck and Prison Break just to name a few. In my experience using it, the feeds are pretty good quality and the site is reliable. Sometimes the links on Hulu will redirect you to the networks website but usually they seem to play right off the Hulu page.

The TV networks websites
Cost : Free if you have internet

The major broadcast networks all seem to have full episodes of shows on their sites now. Some are even in HD quality. Here are the links for the networks: ABC, CBS, NBC, Fox, PBS and CW
For each network you can find the video from the main page follow the 'video' or 'full episode' link at the top. Then choose the show you want to watch.

Like the broadcast networks, many of the cable networks host full episodes of their programs on their websites. Comedy Central, Sci-Fi, and FX network among others Some networks like Bloomberg provide a live stream of their programming. I've covered a few of the TV networks here but I'm sure there are many others that have programming available on their websites.

Direct from a sports organization
Cost: possibly free

Sports can be one of the hardest tings to get free access to. Some sports teams or organizations carry live feeds of their events on the web. Much of the 2008 summer Olympics were streamed on the net. Many college sports teams have live streams of their games on the web.

Local Library
Cost: generally free

Many libraries have DVDs and VHS tapes free to check out. Check your local library to see what videos they may have.

Netflix
Cost : varies, $5 per month and up.

Netflix can be a good cost effective alternative to paid cable TV. You can get most good programs on DVD now so you could use Netflix to watch TV shows after the season is over.

Redbox
Cost : $1 /day per DVD

Redbox rents DVDs for $1 a day. They have the latest popular movies. This is a very cost effective form of entertainment. However it doesn't seem Redbox caries many television programs so Redbox would mostly act as a substitute for movies you may watch on cable such as HBO.

These options might meet your needs just fine and act as a good alternative to subscription TV for many people. However not all of us have broadband internet and not all programming is available elsewhere. If you have cable television programming that you really want to see that doesn't have alternative sources then you could also consider cutting back on your cable bills in other ways. Going without premium movie networks like HBO or Showtime can save $10-17 a month. Subscribing for just the minimal cable TV package will keep your bills low.

One big gotcha for cutting the cable bill is the availability of live sports. My wife and I watch a lot of football and basketball. Cable TV is our only TV source for those programs. Some of the games are broadcast on a major network but its only around 10% of the total. Our other alternatives are listening on the radio or buying tickets at the arena. Radio is not nearly as enjoyable and buying tickets is way too expensive. So for the time being we are paying for cable service since its our best way to get the sports programs we want. If it weren't for sports we could probably drop cable altogether and substitute it with more the free internet TV and more Netflix.