Have We Hit The Top?

[ValueArb]

5 hours ago, John Hjorth said:

 

 

Please don't worry too much about this, because it really does not matter that much, because when the music may stop at a future point in time, it will also be like peeing in your pants, so there will be no fire.

 

[Posted by a CoBF member who is a citizen in a nation with order in the pencil case, running at a surplus.]

 

I wouldn't compare over $1.5 trillion in annual interest payments like peeing in your pants to put out a fire. Gonna be a huge drag on the US economy for decades to come.

[John Hjorth]

2 minutes ago, ValueArb said:

 

I wouldn't compare over $1.5 trillion in annual interest payments like peeing in your pants to put out a fire. Gonna be a huge drag on the US economy for decades to come.

 

Here is no need to compilicate thighs here with regard to lending. Also, I don't think the lending needs more coverage here on CoBF.

[Spooky]

1 hour ago, ValueArb said:

 

I wouldn't compare over $1.5 trillion in annual interest payments like peeing in your pants to put out a fire. Gonna be a huge drag on the US economy for decades to come.

 

But this interest expense is interest income in people's pockets.

[Spekulatius]

If we get a Liz Truss moment in the US as it pertains to the deficit and capital markets, I think we will be shitting, not peeing in our pants.

[blakehampton]

So with this deficit thing, we are essentially selling our wealth in return for consumption right? Is that how that works?

 

I’ve also heard talk of a possible fiscal crisis where people could possibly start dumping treasury bonds. I’m interested if anyone has any insight on this.

[TwoCitiesCapital]

6 hours ago, Spooky said:

 

But this interest expense is interest income in people's pockets.

 

To an extent. But there are a ton of foreign treasury holders too. And its not an insignificant portion that would be transferred from U.S. to Japan, China, Saudi Arabia, etc. on their reserves to be recycled into global trade. So more income at home, but also more income leaving, and if we're having 20-30% inflation every 5 years then fewer of them may be wiling to roll those treasuries, reinvest that interest, or to price goods in U.S. to build those reserves. 

 

3 hours ago, blakehampton said:

So with this deficit thing, we are essentially selling our wealth in return for consumption right? Is that how that works?

 

I’ve also heard talk of a possible fiscal crisis where people could possibly start dumping treasury bonds. I’m interested if anyone has any insight on this.

 

Its more complicated than that because 1) we're the reserve currency and 2) the largest owners of the debt are U.S. institutions/citizens. So we're borrowing from ourselves to consume.

 

How do you that? Print more currency to pay off the debt while continuing the consumption.

 

That's hyperinflationary, right? Perhaps. But the world is constantly needing USD to pay for global trade and finds itself constantly short USD for USD denominated debt globally. So it isn't...until it is. 

Edited April 12 by TwoCitiesCapital

[changegonnacome]

3 minutes ago, blakehampton said:

So with this deficit thing, we are essentially selling our wealth in return for consumption right? Is that how that works?

 

You are taking future consumption and shifting it to the present day.......the price of time shifting this consumption is interest. The question of wealth is a question of whether your GDP growth is outstripping your present day deficit fueled consumption over time.

 

In the past the US could shift such consumption to the present day as it could credibly claim that it was a nation on the march and that 3% deficits in a economy growing 6% meant the future consumption prospects for the next generation was still mostly brighter than the consumption levels you presently enjoyed (even with the borrowing). 

 

The current version of US borrowing is just the opposite - as I don't think anybody credibly believes the US economy can grow at levels that exceed the current annual deficit of ~7%.......2-3% seems the consensus......so when the spread goes so positively negative like it is today (potential % annual GDP growth minus actual % deficit) you are with great certainty stealing future consumption from your kids.....your time shifting their potential consumption into your present. 

 

[Gamecock-YT]

14 hours ago, John Hjorth said:

 

 

Please don't worry too much about this, because it really does not matter that much, because when the music may stop at a future point in time, it will also be like peeing in your pants, so there will be no fire.

 

[Posted by a CoBF member who is a citizen in a nation with order in the pencil case, running at a surplus.]

 

the problem is we are spending as if the music stopped. If the music ever does stop, even more spending will be required to support the economy. Traditionally when the economy is in good shape, government spending should decrease. The calculus has changed since the GFC/Trump's tax cuts/Covid. Now there's no interest by either political party to put the cat back in the bag because doing so would hurt their election chances. 

 

 

 

Conversely, this is how a government should be behaving:

 

Edited April 12 by Gamecock-YT

[cubsfan]

15 hours ago, TwoCitiesCapital said:

 

To an extent. But there are a ton of foreign treasury holders too. And its not an insignificant portion that would be transferred from U.S. to Japan, China, Saudi Arabia, etc. on their reserves to be recycled into global trade. So more income at home, but also more income leaving, and if we're having 20-30% inflation every 5 years then fewer of them may be wiling to roll those treasuries, reinvest that interest, or to price goods in U.S. to build those reserves. 

 

 

Its more complicated than that because 1) we're the reserve currency and 2) the largest owners of the debt are U.S. institutions/citizens. So we're borrowing from ourselves to consume.

 

How do you that? Print more currency to pay off the debt while continuing the consumption.

 

That's hyperinflationary, right? Perhaps. But the world is constantly needing USD to pay for global trade and finds itself constantly short USD for USD denominated debt globally. So it isn't...until it is. 

Great explanation of monetary impact. Thanks.

[Jaygo]

13 hours ago, changegonnacome said:

The current version of US borrowing is just the opposite - as I don't think anybody credibly believes the US economy can grow at levels that exceed the current annual deficit of ~7%.......2-3% seems the consensus......so when the spread goes so positively negative like it is today (potential % annual GDP growth minus actual % deficit) you are with great certainty stealing future consumption from your kids.....your time shifting their potential consumption into your present. 

 

What if you borrowed to build a highway or bridge to increase productivity. As long as the money is not burned on military shit who cares If the deficit goes up as long as the standard of living also goes up. We have all seen that 100 dollars of dept today is essentially worthless in 50 years so why not just keep kicking the can down the road. Sure if I save 100 dollars that will also be worthless but I dont save, I buy assets that tend to hold their value.

 

I think if you were a sinking island nation with few prospects than dept would be an issue but the North American landmass is going to be habitable for longer time frame frame than any of us should care so id say lets keep spending and building and getting better.

 

Should Baltimore reconsider thier bridge because of interest rates? I'm not replying to argue, Im just trying to wrap my head around things like this.

[TwoCitiesCapital]

7 minutes ago, Jaygo said:

 

What if you borrowed to build a highway or bridge to increase productivity. As long as the money is not burned on military shit who cares If the deficit goes up as long as the standard of living also goes up. We have all seen that 100 dollars of dept today is essentially worthless in 50 years so why not just keep kicking the can down the road. Sure if I save 100 dollars that will also be worthless but I dont save, I buy assets that tend to hold their value.

 

I think if you were a sinking island nation with few prospects than dept would be an issue but the North American landmass is going to be habitable for longer time frame frame than any of us should care so id say lets keep spending and building and getting better.

 

Should Baltimore reconsider thier bridge because of interest rates? I'm not replying to argue, Im just trying to wrap my head around things like this.

 

Would just point out that if everyone thought along the lines of "$100 of debt today is essentially worthless in 50-years" then you will have no one to issue the debt to...

Edited April 12 by TwoCitiesCapital

[ValueArb]

19 hours ago, Spooky said:

 

But this interest expense is interest income in people's pockets.

 

And in Japanese pockets, in Chinese pockets, in UK pockets, in Luxembourg pockets, in Canadian pockets, etc. About a quarter of the US debt is held by foreign investors, including a lot in foreign governmental hands.

 

So we don't owe the debt just to ourselves, and even looking at it that way its still unbalanced. The 1% own most of the debt, while we all will have to pay higher taxes to service its costs. About a quarter of the debt is intragovernmental. Some of it IOUs for benefits "owed" to social security recipients that were never adequately funded during their working years. And some of it is for the massive quantitative easing the Fed ran from 2008 till 2022, essentially IOUs for inflating the money supply. 

 

So what happens in a few decades when our children realize how much of their taxes are going to service the debt and retirement benefits that had been underfunded? Do they just accept paying half of federal revenues in interest on the federal debt, to foreigners, to the 1%, to maintain retirement benefits at unsupportable levels? Or does the next RFK/Trump/Sanders sweep into office on a promise to force those evil debt holders to accept less?

 

This path has been trod many times in South America and it never ends well.

[Jaygo]

Who in their right mind doesn't see that 100 today is not 100 in 50 years. The 100 year Austrian bond was the height of lunacy as if Austria will be a Sovern nation in 100 years anyway? People who lend, banks ect are playing a different game with different ideas. Buffett buys treasuries to earn a bit while waiting for something real to come by like a railroad. He doesn't do it to make 1-5%

 

Lending money long term is tough to understand unless the rates far exceed the level of inflation.

 

In the 70's a big mac was less than 50 cents, today its 10x that or more. Our paper/ digit money looses value every day and has for a long time. 

 

Gold was 154 in 1974 today its 2400. Gold is money, paper or digits is just for transactions. Does it matter what the transaction number is? 10-100-1000 its just a digit. Will my house cost 18 million Canadian in 50 years, maybe maybe not who cares as long as its roughly the same value as today. I bet it will, gas will be 12 bucks a L, gold 25k OZ. all just a number.

 

What we should care about is life expectancy, number of people starving, happiness, wars, have the leaf's won the cup ect

[Jaygo]

12 minutes ago, ValueArb said:

So what happens in a few decades when our children realize how much of their taxes are going to service the debt and retirement benefits that had been underfunded? Do they just accept paying half of federal revenues in interest on the federal debt, to foreigners, to the 1%, to maintain retirement benefits at unsupportable levels? Or does the next RFK/Trump/Sanders sweep into office on a promise to force those evil debt holders to accept less?

Dont you think they will just inflate the dept away? so that although our children's depts are astronomical numbers it will be just as manageable as today (plus or minus a bit)

 

Imagine people from Toronto of the 1950's hearing I bought a rural house for millions, they would flip out considering they paid just $ 10,000 for theirs. But in fact im just a guy living with bigger numbers like my kids will likely be

 

[ValueArb]

46 minutes ago, Jaygo said:

 

What if you borrowed to build a highway or bridge to increase productivity. As long as the money is not burned on military shit who cares If the deficit goes up as long as the standard of living also goes up. We have all seen that 100 dollars of dept today is essentially worthless in 50 years so why not just keep kicking the can down the road. Sure if I save 100 dollars that will also be worthless but I dont save, I buy assets that tend to hold their value.

 

What if a new bridge has an economic value of $5B in terms of the benefits it will bring to reducing travel times, would you pay $20B for it? How much of that $20B would you consider an "investment" in productivity? Google the Davis-Bacon act for just one example of why governmental construction projects are economic sinkholes, not investments.

 

If Baltimore needs a new bridge, why don't they pay for it if it has net economic benefits? Why doesn't Maryland? If neither can afford it, why not make it a privately funded toll bridge? The reason is why should they when we have a massive federal infrastructure spending so that every politician from the Senate down to the local mayors and city council members can get hooks into the projects to direct money to their favorite contractors/lobbyists, and none cares if it means paying double or quadruple market rates because that's the entire point of the process. Their contractors make huge profits, their contractors make big re-election contributions, and the wheel keeps spinning.

 

Sure any military spending beyond whats necessary to maintain our freedoms is wasted, but a huge amount of the rest is wasted as well. Before Ike's huge mistake in taking over national road construction the federal government got by spending only 16-17% of GDP, with 50-70% going to the military. Today federal spending is now bouncing between 22% and 28% of GDP, with less than 15% going to the military.

 

https://fred.stlouisfed.org/series/FYONGDA188S

 

https://en.wikipedia.org/wiki/Expenditures_in_the_United_States_federal_budget#/media/File:US_Federal_Government_Outlays.png

 

46 minutes ago, Jaygo said:

 

I think if you were a sinking island nation with few prospects than dept would be an issue but the North American landmass is going to be habitable for longer time frame frame than any of us should care so id say lets keep spending and building and getting better.

 

Should Baltimore reconsider thier bridge because of interest rates? I'm not replying to argue, Im just trying to wrap my head around things like this.

 

Baltimore should make a reasonable economic decision without any handouts from the federal government. Most likely they should sell the bridge to a private business and let them rebuild it as a toll bridge. That eliminates billions in government spending that would be entirely new debt with heavy interest levels, and instead creates tax revenues that can be spent on government services far more core to the citizens needs, like policing, social programs, etc. Turning costs into income improves economics rapidly.

[changegonnacome]

20 minutes ago, Jaygo said:

What if you borrowed to build a highway or bridge to increase productivity.

 

Not all bridges automatically increase productivity and certainly not by the same amount over time.......the first bridge, airport or interstate highway linking say two economic regions leads to outstanding productivity increases and so has an excellent IRR for the economy and by extension the fiscal authority....the interstate highway system etc......the second bridge or fourth lane on the existing highway is subject to quite severe diminishing returns....it isnt a fiscal deficit creating no brainer like it was when there was just fields there.

 

So the problem in the US running 7% budget deficits....and assuming somehow those deficits being created are headed to productivity enhancing 'growth' infrastructure (they aren't to be clear but lets pretend they are)..........in a developed nation with established capital base, high productivity per capita and lots of output....its hard, almost impossible to grow output at that same 7% clip such that the governments tax base (income) is expanding along with its debt pile servicing costs (debts).

 

 

[ValueArb]

5 minutes ago, Jaygo said:

Dont you think they will just inflate the dept away? so that although our children's depts are astronomical numbers it will be just as manageable as today (plus or minus a bit)

 

Imagine people from Toronto of the 1950's hearing I bought a rural house for millions, they would flip out considering they paid just $ 10,000 for theirs. But in fact im just a guy living with bigger numbers like my kids will likely be

 

 

Inflating away debt might be the more likely solution, but its not any better than defaulting on it. It will drive borrowing costs through the roof for everyone, and make it far harder to borrow in the future even if inflation declines as inflationary expectations will remain high for generations (fool me once, etc).

 

It will bleed many people who don't have inflation indexed businesses. Any business that requires forward contracts will take massive losses and have a difficult time using them in the future. Any workers that don't have rapid inflation adjustments will end up with lower standards of living.

 

Most specifically, investors will see their real capital gains tax rates sky-rocket as their reported gains will be far higher than their inflation adjusted gains. For example, assume inflation is 14% annualized for 5 years, halving buying power. Lets say you bought $100k in stocks at the start of that period, and sold them at end of it for $300k, which appears to be a 25% annualized return. But you owe 25% in federal capital gains plus state income taxes, or $50k, leaving you with $250k. But the buying power of $250k is now only $125k, so your real after tax economic profits is $25k, or less than 5% annualized. 

 

So will you be anxious to invest in stocks again? Maybe, you might not have a choice as what will offer a better return? Or maybe you'll invest overseas in a country with low inflation. Certainly foreign investors are going to think twice about investing in the US, so over time inflation will bleed us of capital which drives productivity gains. Go back and read up about the 1970s and how awful investing and the economy was when we dealt with high rates of inflation.

[Jaygo]

Totally agree with both of you. A new road through the jungle will have a bigger impact than a 4th or 5th lane on a highway and may never actually recoupe the cost. A privatized bridge may be a good solution to reduce corruption in procurement and ongoing maintenance.  

 

My argument is if its about money and we are literally burning it in foreign wars maybe a few bucks towards a bridge or tunnel or new school doesn't seem too bad to increase the dept on. Especially when the government is controlling the level of debasement of that dept.

 

My second argument is about the long term viability of North America to other places in the world. Money spent in Saudi Arabia considering it is a scorched desert with a dwindling central resource may not be the same as money spent in the American heartland or a place like northern canada with its unknown trillions of economic value yet to be extracted. 

 

I feel that a version of life in canada and the united states could last centuries so laying the foundation now does not necessarily drown our kids in dept as much as pave the way to a better future for them. 

 

Look at Europe, look at the cobble stone roads that were set 1200 years ago. Are we drowning in the depts of those roads or of the churches and cathedrals that bring millions of guests a year.

 

I think a shit bridge with crooked contractors paid for by sleazy politicians should not be the base case for our dept financed infrastructure projects. Especially since the money is likely just changing hands of North Americans anyway. 

 

 

 

 

 

 

[Jaygo]

18 minutes ago, ValueArb said:

 

Inflating away debt might be the more likely solution, but its not any better than defaulting on it. It will drive borrowing costs through the roof for everyone, and make it far harder to borrow in the future even if inflation declines as inflationary expectations will remain high for generations (fool me once, etc).

 

It will bleed many people who don't have inflation indexed businesses. Any business that requires forward contracts will take massive losses and have a difficult time using them in the future. Any workers that don't have rapid inflation adjustments will end up with lower standards of living.

 

Most specifically, investors will see their real capital gains tax rates sky-rocket as their reported gains will be far higher than their inflation adjusted gains. For example, assume inflation is 14% annualized for 5 years, halving buying power. Lets say you bought $100k in stocks at the start of that period, and sold them at end of it for $300k, which appears to be a 25% annualized return. But you owe 25% in federal capital gains plus state income taxes, or $50k, leaving you with $250k. But the buying power of $250k is now only $125k, so your real after tax economic profits is $25k, or less than 5% annualized. 

 

So will you be anxious to invest in stocks again? Maybe, you might not have a choice as what will offer a better return? Or maybe you'll invest overseas in a country with low inflation. Certainly foreign investors are going to think twice about investing in the US, so over time inflation will bleed us of capital which drives productivity gains. Go back and read up about the 1970s and how awful investing and the economy was when we dealt with high rates of inflation.

 Yeah but this is nothing new. Currency debasement is not some new idea. Its the way the monetary system works. If my money was going to be worth more tomorrow i wouldn't spend it today and our economy would stop functioning.

 

Inflation of the 70s was a supply shock as well as a major war. We may repeat that but there is no guarantee imo.

 

And to think that people may not invest in America again after some Financial mess is crazy. How many wars has germany started and lost and destroyed itself only to be the strongest economy in europe again in the last 100 years. People go where the getting is good and the getting is good in North America and likely will be for a while. Inflation is part of that. Japan has been dead money for 30 years at a time of no inflation so your argument is not accurate.

[Spooky]

3 hours ago, ValueArb said:

 

And in Japanese pockets, in Chinese pockets, in UK pockets, in Luxembourg pockets, in Canadian pockets, etc. About a quarter of the US debt is held by foreign investors, including a lot in foreign governmental hands.

 

So we don't owe the debt just to ourselves, and even looking at it that way its still unbalanced. The 1% own most of the debt, while we all will have to pay higher taxes to service its costs. About a quarter of the debt is intragovernmental. Some of it IOUs for benefits "owed" to social security recipients that were never adequately funded during their working years. And some of it is for the massive quantitative easing the Fed ran from 2008 till 2022, essentially IOUs for inflating the money supply. 

 

So what happens in a few decades when our children realize how much of their taxes are going to service the debt and retirement benefits that had been underfunded? Do they just accept paying half of federal revenues in interest on the federal debt, to foreigners, to the 1%, to maintain retirement benefits at unsupportable levels? Or does the next RFK/Trump/Sanders sweep into office on a promise to force those evil debt holders to accept less?

 

This path has been trod many times in South America and it never ends well.

 

Sure but your original post was that the interest payments will be a drag on economic activity in the future. Counter-intuitively there is an argument to be made that raising interest rates is actually stimulative. Still 75% of this income going to American citizens and institutions will be spent or re-invested. It may be a drag if the interest payments force the government to spend less thus reducing GDP. The key question is whether the borrowing is to make productive investments which will increase productivity / GDP in the future. 

 

Also, if the US were to switch from running deficits to a surplus that would be deflationary / potentially lead to another crisis like 2008 which has been talked about by Wabuffo and others on this board.

[Spekulatius]

As the world reserve currency, the US has to run both fiscal and trade deficits - there simply is no other way to be a reserve currency, because the $ hasn’t end in foreign hands eventually and that via trade deficits.

 

Its the size of the trade fiscal and trade deficits that is an issue ,not the fact that they exist.

 

On infrastructure - keep in mind that while states and federal government are not the most efficient in building them (most of the time), they can finance them at a way lower cost of capital than private entities. So that compensates for inefficiencies. Also, tolls are a tax on trade and mobility which are beneficial to economic growth, so that’s also to consider.

 

[TwoCitiesCapital]

10 hours ago, Jaygo said:

 Yeah but this is nothing new. Currency debasement is not some new idea. Its the way the monetary system works. If my money was going to be worth more tomorrow i wouldn't spend it today and our economy would stop functioning.

 

Inflation of the 70s was a supply shock as well as a major war. We may repeat that but there is no guarantee imo.

 

And to think that people may not invest in America again after some Financial mess is crazy. How many wars has germany started and lost and destroyed itself only to be the strongest economy in europe again in the last 100 years. People go where the getting is good and the getting is good in North America and likely will be for a while. Inflation is part of that. Japan has been dead money for 30 years at a time of no inflation so your argument is not accurate.

 

This simply isn't true. Just like I don't put every dollar into bonds/CDs/etc because 'they'll be worth more tomorrow" and still actually spend money each and every day. 

 

At some point you feel sufficiently comfortable with your level of savings, and have desires to be met that you'll spend for. I think you can argue people will be more discerning with their spending - but it's not like people stop wanting things.

 

Inflation distorts this picture and encourages people to spend more and more money, take more and more risk to earn returns, and hoard assets all because  we can't simply hold cash and have it retain the value we put into earning it...

 

And then when wages/etc aren't benchmarked to that inflation - it means a % of the population is falling behind daily. If you create a system that does that, it's not surprising poverty and homeless have become rampant issues in major cities that have experienced high inflation over the last ~3-4 years. 

[RedLion]

21 hours ago, TwoCitiesCapital said:

Would just point out that if everyone thought along the lines of "$100 of debt today is essentially worthless in 50-years" then you will have no one to issue the debt to...

You would have all the same parties that don’t need the debt to provide a good absolute return. 
 

insurance companies and banks which are earning spread income. Sovereign wealth funds, social security, pension funds, etc. 

 

Up until last year, I hadn’t heard  or seen regular folks talking about buying t bills or bonds or even bond funds for that matter since I was a kid. 

[Jaygo]

17 hours ago, TwoCitiesCapital said:

 

This simply isn't true. Just like I don't put every dollar into bonds/CDs/etc because 'they'll be worth more tomorrow" and still actually spend money each and every day. 

 

At some point you feel sufficiently comfortable with your level of savings, and have desires to be met that you'll spend for. I think you can argue people will be more discerning with their spending - but it's not like people stop wanting things.

 

Inflation distorts this picture and encourages people to spend more and more money, take more and more risk to earn returns, and hoard assets all because  we can't simply hold cash and have it retain the value we put into earning it...

 

And then when wages/etc aren't benchmarked to that inflation - it means a % of the population is falling behind daily. If you create a system that does that, it's not surprising poverty and homeless have become rampant issues in major cities that have experienced high inflation over the last ~3-4 years. 

Going to have to disagree here. In the pre inflation eras as in pre Industrial Revolution poverty and homelessness was less noticeable because pretty much everyone was destitute. Look at the era of Charles dickens or New York of the 1800s. Most were poor with a few very rich. 

 

Today many people are falling behind but many are doing great as well and even the ones who are falling behind are still having better lifestyles than before. 
 

I know some poorish people and they still have cell phones and a roof over their heads. It’s not ideal but they  are also not digging through the trash for food. The one who are forced to do that are most likely suffering from a trauma that has nothing to do with 5% inflation. 
 

A 100 dollar bill is not a store of value. It is a transaction vehicle. If you want wealth you have to take risks and put that money to good use by moving it around the economy. If the 100 bill was 105 next year you would see a slowing of the economy and more importantly a slowing of progress because less risks would be taken.  

[Gregmal]

5 minutes ago, Jaygo said:

 

A 100 dollar bill is not a store of value. It is a transaction vehicle. If you want wealth you have to take risks and put that money to good use by moving it around the economy.

This is probably one of the first things they SHOULD be teaching in business school. Or any school for that matter. I know a lot of young people, say under 40 years of age and many in the 20-30 camp. 90% are terrified of taking risks(forget the fact that they habitually fail to properly even assess what risks are in the first place), and probably 3/4 of those that invest only do it through company sponsored programs. Probably more than half treat their money like they are 80…savings accounts, CDs, money market accounts…Then everyone complains about inflation and not being ahead….