The US is Bankrupt

[WinstonWolfe]

The Credit card increase in the early noughties reveals how significant US credit expansion was, and the 25% decrease since GFC underscores the severity of weakness in US consumption.

Car and House loans are still declining.

An interesting thing about student loans is that they are full recourse unlike non recourse property loans. The rise in these loans since GFC is due to more high school students choosing further education to a shortage of jobs.

 

[Piston Broke]

Yes, Schiff was wrong on some of his investment advice.....not gold though....but that doesn't make him wrong on the bigger picture fundamentals.

And I'll go on the record right here and now saying if there is a QE2, the US is seriously stuffed. THere's no way the private sector will pick up the risk when QE2 ends. US bankruptcy will be brought forward.

My problem with Schiff is that he is not an independent voice.
He earns commissions on transactions, and speaks accordingly and however sensationally as it suits him.

That's exactly what many people were saying mid 07, then....
But what would really happen if the US defaulted, or just said "we're restructuring our debt payments and your all gonna be paid less and later as it's in our national interest".
Think about it WW, what would really happen?
How are you (or anyone else) going to go and demand payment from the US gov?
The simple answer is, there's no chance anyone could demand anything at this time.

---
That "debt clock" is a load of crap.
And with all due respect, modern history in this country is an endagered species. It's not taught in school.
Most G20 govts have large debts to the US, financial & political.
The US has a huge influence in the govts of most OECD nations.
Has nobody taught that we have US military bases in Australia to which the Australian govt has no access?
Ever ask yourself why? Maybe you should.
And it's the same all over the EU and many other countries.
How many US ICBM sites are there outside the US?
And how & why did they get there?

As someone pointed out here before, the US most common way of solving international problems (some of which never really existed) is bombs.

So watta you say people, since the US is broke why dont you go and take back our land at Pinegap from that bankrupt nation headed for extinction... you'll quickly see who the bankrupt nation really is.

I'd love a dashboard of all significant macro to micro factors for US, Aus etc.

Try this one
http://www.forexfactory.com/calendar.php?

 

[Bill.L]

Hi all,

Can you please explain how the US can possibly default??

But what would really happen if the US defaulted,

How are you (or anyone else) going to go and demand payment from the US gov?

especially when the following applies.....from me earlier in this thread....

I think what most are forgetting here is that the US owes all the money in $US, they have the ability to print those.

Most countries (all?) when they default it is because they owe money in another currency that they have no control over.

bye

 

[WinstonWolfe]

But what would really happen if the US defaulted, or just said "we're restructuring our debt payments and your all gonna be paid less and later as it's in our national interest".

It isn't about external debt restructuring. It is about domestic employment and maintaining law and order. If their response to Hurricane Katrina is anything to go by, they aren't going to manage the chaos of 15%+ unemployment.

As someone pointed out here before, the US most common way of solving international problems (some of which never really existed) is bombs.

Easy on PB....save the Evil Empire rant for the Kurds and Zimbabweans.

Try this one
http://www.forexfactory.com/calendar.php?

As far as calendars go, Bloombergs is best for US.
And ForexTrading can be divvied by nation.
I mean a dashboard of long time series core data series gdp/per capita, current account, trade balance, retail sales, monthly no. of housing loans, total $ housing loans, monthly job adverts, etc.

 

[WinstonWolfe]

Steve Keen has written a very insightful piece into the US economy and its debt.

What Bernanke doesn’t understand about deflation

"Its key point can be grasped just by considering the GDP and the change in debt for the two years 2008 and 2010: in 2007-2008, GDP was $14.3 trillion while the change in private sector debt was $4 trillion, so aggregate private sector demand was $18.3 trillion. In calendar year 2009-10, GDP was $14.5 trillion, but the change in debt was minus $1.9 trillion, so that aggregate private sector demand was $12.6 trillion. The turnaround in two years in the change of debt has literally sucked almost $6 trillion out of the US economy.

That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.

Ignoring this growth in debt—championing it even in the belief that the financial sector was being clever when in fact it was running a disguised Ponzi Scheme—was the greatest failing of the Federal Reserve and its many counterparts around the world."


I've always considered broad money and credit money must be taken into consideration when understanding inflationary forces, and Keen's definition of Aggregate Demand does this. IMO, this is a brilliant piece of insight into how serious the USA's financial issues are.


I've taken a strong interest in the Jackson Hole events, and one of the star performers was a young economics professor Eric Leeper who discussed the limitations of monetary policy and the greater relevance of fiscal....especially in the current environment. He also believes the unfunded liabilities are a serious problem. On that basis, the USA cannot afford Obamacare, nor Obama.

 

[Aaron Sice]

i feel sorry for the amerikan taxworker about now.

 

[ermen]

It is impossible for the US government to go bankrupt
Austerity now is killing the economy

 

[WinstonWolfe]

It is impossible for the US government to go bankrupt
Austerity now is killing the economy

Whether a nation can go broke or not is largely a play on words. Russia and Argentina are recent examples of countries going broke.

Austerity is an effect, not a cause. The cause is credit contracting abruptly from an unsustainable uptrend, and that's hitting consumption and asset prices, and jobs.

When you have an economy reliant on irrational levels of credit, there's no option but to stop it. It would have been less painful to do so over time and before credit blew out like it did, however democracies don't like making hard decisions when everyone seems to be making mulah, which is the mood a credit bubble creates.

Australia needs to be examining its credit environment a lot closer too.

 

[Sunfish]

It is impossible for the US government to go bankrupt

Why?

The President of the Bank of China is rumoured to have defected because they have lost 450 bill on US Treasuries. Being "Too big to fail" can only help while there is someone else willing and able to prevent that failure.

The US is in a bad way. Try as they might they can't generate the inflation they need to "inflate away" their debts and China wont tolerate that anyway. Their property market is sliding into deflation and the whole economy is at risk.

 

[WinstonWolfe]

The President of the Bank of China is rumoured to have defected because they have lost 450 bill on US Treasuries.

I heard that in the middle of last night and have been looking for reliable confirmation sources. That is massive news and something the Chinese govt will obviously repackage for their citizens.

As a side note, I think it's funny the Chinese bureaucracy are now trying to do fixed price contracts with Aussie miners, after renegging on previous contract prices, the Stern Hu debacle, and all the other underhanded BS they get up to.

 

[Sunfish]

Heard any more about the Chinese guy from BofC Winnie?

This is all I've read from Stratfor, a usually reliable group

China: Rumors of the Central Bank Chief’s Defection
August 30, 2010 | 1406 GMT
Rumors have circulated in China that People’s Bank of China (PBC)Gov. Zhou Xiaochuan may have left the country. The rumors appear to havestarted following reports on Aug. 28 which cited Ming Pao, a HongKong-based news agency, saying that because of an approximately $430billion loss on U.S. Treasury bonds, the Chinese government may punishsome individuals within the PBC, including Zhou. Although Ming Pao onAug. 30 published a report on its website indicating that the priorreport was fabricated by a mainland news site that had attributed thefalse information to Ming Pao, rumors of Zhou’s defection have spreadaround China intensively, and Zhou’s name has been blocked from Internetsearch engines in China.
STRATFOR has received no confirmation of the rumor, and reports bystate-run Chinese media appeared to send strong indications that Zhouis in no trouble at the moment. However, the release of this rumor andits dispersion throughout the public is significant, particularly as theCommunist Party of China (CPC) is preparing for a leadership transitionin 2012.

 

[WinstonWolfe]

Haven't looked SF. Stratfor usually get their stuff right. They say it is telling though that the govt hasn't come in and backed the guy. Power plays indeed. Should put a bit more sovereign risk into the Chinese equation.

 

[ermen]

Whether a nation can go broke or not is largely a play on words. Russia and Argentina are recent examples of countries going broke.

Russian and Argentinian debt were denominated in foreign currency (i.e. USD) which is why they went broke. A country with monopoly power over its currency like the US who issues debt in its own currency cannot go broke (now the EU is a difference story).

The President of the Bank of China is rumoured to have defected because they have lost 450 bill on US Treasuries. Being "Too big to fail" can only help while there is someone else willing and able to prevent that failure.

I highly doubt that rumour - if anything, treasury yields are going down and bond prices going up and up.

Contrary to popular myth, the US government does not issue treasuries to fund its budget deficits. In fact treasury sales are an operation to control the amount of reserves and hence target interest rates in the economy. In a gold-standard world the US government was like a household where it HAD to balance its books but under a fiat currency system it does not. The problem is though most textbooks are written with gold-standard thinking in mind...

Interesting and relatively article expounding this point - I am still trying to learn more about this theory (Modern Monetary Theory) and cannot say I am 100% fully up to speed. But it has very interesting conclusions indeed and I think it fits the empirical evidence better.

http://pragcap.com/jeff-gundlach-says-the-usa-will-default

 

[Sunfish]

I highly doubt that rumour - if anything, treasury yields are going down and bond prices going up and up.

What if we took a simpler view that they are just holding US$?

The US$ they hold in their treasury will only buy 20% of the gold, 40% of the oil and a similar amount of iron/coal that they would have done six years ago. They know this and that is why they are swopping US$ for "stuff" (resources and the producing companies, sometimes the countries). It's good business for them: They get the stuff and the clients get the depreciating US$.

The US defaulted in 1973 when Nixon renegued on the "gold backed" dollar. They were overspending then and still are today. If something can't go on forever, it wont.

 

[WinstonWolfe]

Russian and Argentinian debt were denominated in foreign currency (i.e. USD) which is why they went broke. A country with monopoly power over its currency like the US who issues debt in its own currency cannot go broke (now the EU is a difference story).

Not so. Buyers of US debt demand reward commensurate with risk, whether sovereign default or currency devaluation risk.

There's also a threshold to an economy's interest burden which once transgressed adversely impacts economic growth. The threshold is sensitive to stability of the tax revenues from which bond interest is paid. The risk of a deflationary spiral is tax revenues decline and bond buyers demand higher interest.

 

[Bill.L]

Hi all,

WW,

If something can't go on forever, it wont.

When it comes to printing money, the US can keep doing this. It can go forever, there is no limit to the amount of $US they can print. If they owed the rest of the world in some other currency then yes, big risk, but they don't.

The worry is of course collapsing currency and bond prices, yet neither of those is occurring. The US can support the price for its bonds by buying them back with $US, for as long as it takes to get some inflation happening.

bye

 

[WinstonWolfe]

When it comes to printing money, the US can keep doing this. It can go forever, there is no limit to the amount of $US they can print. If they owed the rest of the world in some other currency then yes, big risk, but they don't.

The worry is of course collapsing currency and bond prices, yet neither of those is occurring. The US can support the price for its bonds by buying them back with $US, for as long as it takes to get some inflation happening.

bye

I don't agree. You cannot print forever if you have to pay interest from tax revenue. And the US would not last long if it had to print to pay interest on printed loans.

The limits of monetary policy to stimulate and cause inflation are slowly being realized and epitomized in the following :

"The central bank's implementation of QE at a time of zero interest rates
was similar to a shopkeeper who, unable to sell more than 100 apples a
day at $100 each, tries stocking the shelves with 1,000 apples, and when
that has no effect, adds another 1,000. As long as the price remains the
same, there is no reason consumer behavior should change--sales will
remain stuck at about 100 even if the shopkeeper puts 3,000 apples on
display. This is essentially the story of QE, which not only failed to bring
about economic recovery, but also failed to stop asset prices from falling
well into 2003."


That the USD or bonds have not collapsed yet is not evidence they are immune to doing so. As China becomes less reliant on US trade, they have less incentive to provide vendor finance to US consumers, and according to many, China is no longer buying US bonds

 

[Sunfish]

When it comes to printing money, the US can keep doing this. It can go forever, there is no limit to the amount of $US they can print.

There is a limit to the number of GOOD dollars they can print. If that's all it took Zimbabwe would own the world. But I foresee the deflation WW mentions. During deflation you cannot actually lend out the money you print and that is how money is normally created.

You seem to believe the "Too big to fail" theory. That will only work until China and Japan no longer have any self interest in supporting them.

 

[HiEquity]

I'm with Bill. The US are doing an excellent job here - they have full control of the situation as it's all denominated in their own currency.

Worried about deflation? QE will fix that - if it doesn't work the first or second time it will by the tenth or twentieth. Deflation in USD cannot happen when the Fed have complete control to just print more money.

What's more the way QE has been implemented has been just beautiful. Print money to buy US treasuries when other buyers have evaporated, thereby bidding up their price and dropping their yields like a stone. Also able to keep interest rates on the floor so that, despite increasing debt, the cost of servicing that debt doesn't actually increase. Bewdy!

Worried about an inflationary spiral as a final result of all this money printing? Well just reverse the process - forgive the debt Treasury owes the Fed (which would just remove what is now an asset on the Fed's balance sheet back to where we were before) and let interest rates rise so that the higher rate of debt servicing is offset by the reduction in debt brought on by forgiving the debt to the Fed.

No need for China or anyone else to keep buying US treasuries - the Fed can take over that role now there are no greater fools left and bond yields can stay on the floor as a result.

Bernanke et al aren't stupid - while they know they stuffed up keeping IRs too low for too long and the govt stuffed up by borrowing too much, they also know they have all the tools necessary to hand to fix the situation. They are already doing "whatever it takes" and they hold all the cards - they set IRs, they control the amount of money in the economy and they can supply or forgive debt to the govt. This situation is unprecedented - comparisons to Zimbabwe / South America etc are irrelevant as they never had all these factors under their control.

IMHO, at the end of the day, the house will not lose...

 

[WinstonWolfe]

We'll just have to wait and see won't we. The scenario is unprecedented.
Never has there been a bigger stimulus with a smaller and shorter stimulatory effect.

The gotcha in the Fed's plans is the same as in Japan. Ultimately, it is about households and private lenders being enticed to hold the deflationary risk.

And that's got to happen in spades before the Fed get their hallelujah inflation.

I agree with Bill Gross the most likely way to increase household debt is for the govt to lend directly, cutting bottle neck risk averse private lenders out of the equation....who incidentally prefer to play derivative arbitrage games with the mulah instead. The US cash rate is 0.25%. A standard mortgage is 4.4%. Presumably the govt has to lend at a lot less than 4.4% to entice low risk consumers to take on debt....which makes you wonder who is going to buy a steady stream of bonds to back mortgages at that rate.

But when household debt serviceability is already maxed and/or borrowers have been burnt, and employers don't want to risk expanding employment, and imports outweigh exports, and Obama wants to raise taxes, and excessive household debt is what got the country into the problem in the first place, prepare for a lost decade.

Finally, what you guys are not considering is whether the electorate is going to permit Treasury to print. It's likely they'll remember the cr@p it caused last time, and insist fiat currency is controlled and the capacity to fund unfunded liabilities is accounted for.