The US is Bankrupt

[Bill.L]

Hi all,

Sunfish,

There is a limit to the number of GOOD dollars they can print. If that's all it took Zimbabwe would own the world.

As HE stated, the US is not Zimbabwe. Zimbabwe has to buy foreign goods and services with $US, they had to exchange their increasingly worthless currency just to obtain what they needed. The US does not have to exchange their currency, it is the reserve currency, and they will defend that status. What happened to Saddam when he wanted to get Euro for his oil instead of $US??

Virtually all commodities are priced in $US, you need $US to obtain them and that is what you get when you sell them (or the exchange rate equivalent).

WW,

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.

I don't doubt that there could be another lost decade, but that is different to default. Also pulling the pin on expansionary spending now would be similar to what happened in the '30's, that plummeted the world into depression.

Finally, what you guys are not considering is whether the electorate is going to permit Treasury to print.

All you need is some politician to come along with the media on side and claim some type of 'new deal' to get America out of the doldrums, or just leave Helicopter Ben in charge. Dropping trillions on Wall St has not worked yet. Perhaps next time they drop trillions on Main St instead. Just wait until after the mid-term elections to do it.

Of course I'll hedge my bets by saying that if we are near/at peak oil, then that will trump all attempts at reflation/growth. It really could be the elephant in the room.

bye

 

[Sunfish]

I can't argue Bill. All I can suggest is not to back this opinion of yours with real money. History (going back further than my lifetime) says you will lose.

 

[hobo-jo]

I'm certainly no expert on the way this all works, but HiEquity I have some issues with what you are suggesting.

Deflation in USD cannot happen when the Fed have complete control to just print more money.

I think the issue that the US faces is not so much deflation, but deleveraging. US citizens have bid up the price of assets with credit, now they are paying down that credit. I don't think it's as simple as the Fed just printing more money. It's a credit based monetary system, so it's not like they just throw a few extra rolls of notes through the printer...

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.

Honestly, I do not see how that would work. Let's say that the Fed ends up buying $2t worth of treasuries. One day they decide to wipe the treasuries from the Fed's asset sheet, they've essentially monetized the debt. The US has an existing monetary base of around $2t already, so would effectively double the money supply overnight...that is if I am reading the situation correctly, but by removing the need to pay that $2t back I'm pretty sure that's how it would work. And you think these actions would reduce inflation?

 

[HiEquity]

I think the issue that the US faces is not so much deflation, but deleveraging. US citizens have bid up the price of assets with credit, now they are paying down that credit. I don't think it's as simple as the Fed just printing more money. It's a credit based monetary system, so it's not like they just throw a few extra rolls of notes through the printer...

People in this thread were talking about deflation. I'm not sure what the problem is with deleveraging, other than lower asset prices. Deflation is a serious economic risk (that can be controlled by printing more money) while asset price drops (or increases) are just a wealth transfer - which is why asset prices aren't included in our measures of inflation.

Honestly, I do not see how that would work. Let's say that the Fed ends up buying $2t worth of treasuries. One day they decide to wipe the treasuries from the Fed's asset sheet, they've essentially monetized the debt. The US has an existing monetary base of around $2t already, so would effectively double the money supply overnight...that is if I am reading the situation correctly, but by removing the need to pay that $2t back I'm pretty sure that's how it would work. And you think these actions would reduce inflation?

Much of the commentary lately was that the Fed should just free issue the cash to the Govt rather than buy Treasuries with it in QE2. Printing money and giving it away stops the threat of deflation but gives you fewer levers to pull when you need to raise IRs in the event that inflation emerges as a result of your money printing.

Buying treasuries with it instead gives the Fed the ability to raise IRs in future while forgiving the US govt debt, thereby neutralising the impact on US govt debt servicing costs. Just free issuing the money to the govt now would only encourage bad habits and they would rack up the debt again in short order. The Fed knows this and wants more control over the situation. A good move IMO.

Printing money and buying treasuries with it has the same inflationary (or deflation preventing, depending on how you look at it!) impact as printing it and dropping it from a helicopter over Detroit. The act of printing the money causes the inflation - not what is done with it. Only the timing impact varies and by this method the Fed is hoping for some buffering through the govt processes. It would arguably happen a lot quicker if just helicoptered which is not the desired effect in this case, even though it worked for KRudd in our "emergency" (the helicopter rather than the money printing).

 

[WinstonWolfe]

Part of the headwind for the US is the Obama administration's futzing over fiscal policy, especially medicare. This is holding back employment.

Richard Fisher, President of the Dallas Federal Reserve Bank elaborates below.


"Fisher said that just last week, he sat in on a financial planning and budgeting discussion with middle managers of one of America's leading consumer goods producers.

He said that when he asked the unidentified company's chief financial officer how his firm determines the "all-in cost of an employee," the CFO replied, "We can't. We can't because we don't know what will happen on the tax front or with social overhead."

"So their current plan is to withhold payroll expansion in the United States while investing their growing cash reserves in driving productivity enhancement from their current crop of over 200,000 employees, of which about 70,000 are located in the United States," Fisher related. "Meanwhile, they are searching to expand their operations in other countries that "offer better incentives, stability and a more entrepreneurial environment."

"Ouch!" Fisher added.
..............................................

Fisher said firms are telling him that "not knowing the impact of health care ... not knowing (what's going to happen to) tax rates ... are inhibiting their commitment to long-term business."

 

[MarkandTina]

Seems like an appropriate place to link this article

http://www.businessspectator.com.au...-market-pd20100903-8WSTX?OpenDocument&src=kgb

I would be very interested in the counter arguments to this article as from my perspective (as someone outside the finance industry) it makes sense.

 

[WinstonWolfe]

Seems like an appropriate place to link this article

http://www.businessspectator.com.au...-market-pd20100903-8WSTX?OpenDocument&src=kgb

I would be very interested in the counter arguments to this article as from my perspective (as someone outside the finance industry) it makes sense.

I agree to some extent with Pellegrini, but am not informed enough to be with him 100%.

The view that the declining share of capital going to workers (households or consumers) has been replaced by growing household credit extension, is elaborated by the Marxist David Harvey. A quaint animated explanation was posted here by Charttv.

Although I agree that this has happened, I don't agree on the cause.
Marx and Harvey do not appreciate that advanced economies and developing economies do not require the same mix of unskilled and highly skilled labour.

Developing economies generally utilize unskilled labor within manual and unskilled jobs in manufacturing.

Developed nations tend to export unskilled labor jobs along with manufacturing overseas, and automate other production like farming... thereby rendering unskilled and low skilled labor underutilized and a welfare burden. Pellegrini acknowledges this.

But Harvey argues both economies should distribute the same % of gdp to all households. This is just classic Marxism, specifically the labor theory of value (LTV), which fails to account for:
- the automation of the means of production thus rendering much unskilled human labor redundant.
- the greater contribution to production of intellectual over manual endeavor in advanced economies.
- the greater contribution of capital to production in advanced economies via research and development, and the higher required return for risk (consider the capital required to develop pharmaceuticals and alternative energy tech)

Harvey's view would significantly weaken the incentive for people to get an education and develop skills most in demand.

Further, a healthy and bouyant economy with strong gdp growth based on increased foreign investment, will naturally see a fall in the % of gdp going to domestic labor. Why? because a higher % of the production is due to foreign investment which rightfully demands a return on its investment. This can happen without a fall in the dollar distribution to labor and an ensuing decline in std of living.


Nevertheless, Pellegrini is right that households/labor have continued to increase borrowing...........In my view they have misallocated credit towards import consumption and bidding up assets, rather than for expanding production.

So the problem is not so much % of gdp that goes to labor, but govt allowing money and credit supply to grow faster than gdp, and then that credit being used for non productive purposes (non GDP purposes). Richard Werner is an economist with the best understanding of this phenomenon.

From Wiki
"A major contemporary proponent is Richard Werner. Credit theory asserts the central role of banks as creators and allocators of money supply, and distinguishes between 'productive credit creation' (allowing non-inflationary economic growth even at full employment, in the presence of technological progress) and 'unproductive credit creation' (resulting in inflation of either the consumer- or asset-price variety)"


Like Pellegrini, I believe this is a very serious problem, and will eventually result in asset price deflation, which may or may not be violent. Hence why I am spending so much time trying to understand broad money and credit supply. Eventually, house prices and global consumption will be effected.

My investment strategy is shifting more to preserving the value of capital, via trading (not holding) assets that are being inflated in value by excessive money and credit supply. I don't want to get caught with too high a % of capital stuck in deflating assets.

 

[MarkandTina]

Thanks for the reply Winston but I think the main thing you have shown me is how little I know (or understand) about this topic.

It really is grabbing my interest though and I'll endeavour to get a better understanding.

I think I'll work through a few more of the khan academy movies, such as: http://www.khanacademy.org/video/the-housing-price-conundrum

 

[WinstonWolfe]

Prieur du Plessis does some good analysis. Below he looks at the global manufacturing trend, which is downwards. The US has kicked up a little recently, and economists are split on whether a recession can be avoided without QE2. Despite this week's better US data, I'm still bearish for them.

 

[Sunfish]

According to The Washington Post

it might:


IMF ponders the improbable: Will U.S. default?
By Howard Schneider

Will the U.S. government ever default?

It's not a pleasant thought for anyone holding some of the roughly $9 trillion in U.S. government bonds and notes currently in public hands - or for anyone hoping the global economy can stay on an even keel.

But the economists at the International Monetary Fund are paid to ponder the improbable, and in papers published on Wednesday fund staff examined where the U.S. and other developed countries fit on a continuum between easy living and disaster.

We're farther along than you might think.

 

[RightValue]

If they default they end up being a financial pariah in the international markets.

Do you think anyone would want to loan any money in the future to the U.S if they defaulted? Black mark.

The USA CANNOT DEFAULT on is loans.

It is pure and simple, any soverign nation that issues debt in it's own currency cannot go bankrupt.

A bond is promise to repay.

A $1000 US bond carries with it the promise for the US govt to repy the bearer $1000 on maturity.

There is no promise for the $1000 to be worth anything more than the paper it is written on.

A country can simply -and in the extreme will - just print the money to meet it's debt obligations .. known as monetising the debt.

A country can only go bankrupt when it issues Euro debt (not debt in the Euro currency, Euro debt means a debt denominted in a different currency to your own currency).

An example is Greece, it issued debt in Euro dollars, but it does not control the printing of the Euro currency .. the Euro is a common currency not actually Greece's currency.

Greece can go bankrupt, because it cannot print currency to meet it's obligation.

Argentina issued debt in USD.. it went bankrupt, it could not buy enough $USD at the exchnage rate to repay it's debt .. it defaulted.

Now look at Zimbabwe. I have $180 Trillion Zimbabwe dollars on my wall. If the Zim government issued $1 billion in debt in 1990 in Zim dollars due to be repaid in 2010, what is the chance they won't be able to pay that .. Hell the smallest note I have is $10 Trillion.

So the USA will never go bankrupt.

Currently the US government is issuing debt.. guess who is buying most of it??

The US Federal Reserve .. they are just creating credit to buy the debt, this is akin to printing money.

I will repeat it .. any government that issues debt in it's own currency cannot go bankrupt ... wether or not the currency has any real value - especially in relation to other currencies and real assets - is another matter.

cheers

RightValue

 

[Sunfish]

I will repeat it ..

You don't have to. Nothing you said had not been said and understood before ..... A number of times.

If however you are Emeritus Professor at ANU your personal standing may lend you authority to lecture us.

When will the US's obligations become overwhelming, how will they handle it and how will it effect us?

 

[meconium]

woe to all you conspiracy theorists

Some of the doomsayers on this thread were entirely wrong with their depressing prognostications barely 18 months ago, during the GFC. One only needs to scroll back to see how incorrect they were.

To those who recklessly proffer their negative opinions - get a life; the world is not going to end! There have been worse crises before. The current US debt is barely 12% of its annual spending. Just as many of us spend 12% of our salaries on beer and ciggies, I daresay the US can afford to splurge a similar percentage of its income to pay it's debts.

Agreed, the US may well be a declining economic/military power. But it's not the end of the world. With the war in Iraq all but over, US defence spending is set to decline as a percentage of expenditure. This will give the US government plenty of cash for pump priming and pork barreling.

With all the negativity that some of you spout, I wonder why you bother hanging around a property investment forum like Somersoft? Wouldn't it be easier to sell what you own and head for the hills to await the coming of the almighty?

 

[meconium]

If however you are Emeritus Professor at ANU your personal standing may lend you authority to lecture us.

Actually, my 1st undergraduate degree was at the ANU, at the faculty of Economics no less. The distinguished academics who taught us were an amiable and dedicated bunch of people. But they weren't especially successful as far as making money went -most considered themselves lucky to own their own homes. I stopped taking academics so seriously after Myron Scholes (an American Nobel Prize Winner) blew up, taking the markets down with him.

When will the US's obligations become overwhelming, how will they handle it and how will it effect us?

Sunfish, you have made many valuable posts elsewhere on this forum. Don't get dragged down to the level of the doomsaying conspiracy theorists who seem to dominate this thread. The US government spends barely 12% of its income on debt servicing. Would you default if you had to spend 12% of your income servicing your own debts? I doubt it. The world is not going to end just yet.

 

[WinstonWolfe]

The current US debt is barely 12% of its annual spending.

what debt are you referring to, and what spending?

 

[Sunfish]

Sunfish, you have made many valuable posts elsewhere on this forum. Don't get dragged down to the level of the doomsaying conspiracy theorists who seem to dominate this thread.

You haven't met a "gloomer" till you've met me on a bad day. LOL

But it isn't economics that really concerns me. We now have a new "best friend" and I think Oz can decouple from the US with only modest pain. The mining boom will allow us to remain stable even when the Boomers really start heading for the beaches.

So it is peak oil, carbon pollution taxes, Greenies who want to switch off the lights and the "Mad Max" attitude which is taking over our culture where once there was some respect for strangers and honour for those who have gone before and made possible the good-life we enjoy.

But this thread is about the US "going broke". Maybe not broke but non-Americans will not get full value for the US paper they hold. I'm not concerned whether they renegue via forfeiture or devaluation of the currency. It's not easy to see how either of these options can occur because all other nations are into "competitive devaluation" too, so there may be a third: Revalue gold. I'm not sure how that works but I've heard it can be done and effectively devalue the US$.

If that were to happen the Pacific Peso and the Loony will skyrocket and the last pockets of Australian non-mining enterprise will sink into the mud. I don't know Sydney but I assume there is an industrial belt (in the west?) and that area will suffer.

 

[Intrinsic_Value]

People generally just dont 'get it'.
Its not just about economic conditions, its about the pricing of investment assets with regards to those economic conditions.

The long term run of the two are not independent.

Just 3 years ago, everything looked hunkey dorey on the economic screan, no iceburgs here, everything looks ok. Hence the investment asset classes where reflecting this view, then baam alongs comes the GFC, and guess what happens to the investment assets??????
they start reflecting risk.
Now what happens when an investment asset starts to reflect risk????
the required return to hold the asset increases.
What happens when the required returns increase??????
the PE ratio decreases, the required yld increases.

WE HAVE BEEN HERE BEFORE.

I suggest the perma d&g'ers get out to the libarary and start going through newspaper articles dated early 90's from a global perspective.

But for me i'm as happy as a pig in ****, i am getting well compensated for the risks i am taking as is reflected by the yields (and we are not talking about US govt debt ylds here).

Life is not as good as early 2009 but its still good none the less.

 

[Graemsay]

Home equity (or the lack thereof) is the Giant Elephant in the Room.

http://www.senseoncents.com/2010/09/the-giant-elephant-in-the-room/

 

[ermen]

The USA CANNOT DEFAULT on is loans.

It is pure and simple, any soverign nation that issues debt in it's own currency cannot go bankrupt.

RightValue

RightValue, I totally agree with you. As I mentioned in a previous post in this thread, it is impossible for the US to go bankrupt being a sovereign issuer with monopoly currency issue rights.

There are certain things that people here don't understand - the US government no longer lives in a gold standard world.

1/ Treasury bond issuance does NOT finance the US deficit. An important but overlooked point is that the Federal government can run a deficit without issuing treasuries. It is not as if Congress wakes up today and says oh not I did not issue enough treasuries, hence I do not have enough money in the coffers!

2/ Treasury bonds are used as a monetary operation tool to keep the Fed Funds rate at the "target level" set by Bernanke. It is not a fiscal tool.

 

[WinstonWolfe]

2/ Treasury bonds are used as a monetary operation tool to keep the Fed Funds rate at the "target level" set by Bernanke. It is not a fiscal tool.

Ermen,
What does a govt do when the fed funds target rate cannot be lowered further?
Do central banks purchase Treasury bonds either directly or indirectly via open market operations as part of quantitative easing?
What is the impact of central bank demand for Treasury bonds on the price of bonds, their yields, and interest rates?
How does public debt grow as a % of GDP?

You might benefit from reading Eric Leeper's views presented at Jackson Hole themed “Fiscal alchemy can undermine monetary science"