Debt Ceiling

[Parsad]

Brian Moynihan on preparing for any potential debt ceiling issues. 

 

Unlikely to happen, but always be prepared...I love this guy!  As good a bank CEO as Jamie Dimon, but gets far less love from the industry!  Cheers!

 

https://www.cnn.com/2023/02/06/investing/bank-of-america-ceo-brian-moynihan-debt-default/index.html

[ValueArb]

At over 4% average interest rate, $31T in federal debt is going to cost over $1.2T a year in interest in a few years when it rolls over. And that assumes a balanced budget, at the last decade's average of $1T in annual deficits by decades end we'll be near $40T in debt. If inflation spikes rates again, interest costs could be well over $2T annually.

 

So is a default inevitable by 2030?

[wabuffo]

$31T in federal debt is going to cost...

 

It's not $31T -- you have to subtract $6.8t of intragovt holdings & $5.3t held at the Fed.   That's left-pocket-right-pocket-the-govt-owing-itself stuff.   The net amount held by the private sector (along with the foreign sector) is "only" $19.3t.

 

And a sovereign issuer that issues debt in its own currency can never default on its own debt.

 

Bill

Edited February 7, 2023 by wabuffo

[Gregmal]

Who cares? If the US defaults, everyone will likely try to create a circus and “look at me I called it” show. But really, it would just be a casual reminder to the studious market participant that anything can happen. If the US can default, so can anyone, ratings be damned. So again, does it even matters. And if you already approach your investments with some sort of level of caution or diligence…this wouldn’t be news in the first place. Although I would laugh at the treasury buyers. 4% will always be a waste of time. Regardless of who sends it.

[no_free_lunch]

Wabuffalo, they can't default but can they not get into an inflationary spiral?  They print to cover the deficit, which leads to higher inflation and rates, which leads to higher deficits.. 

[Stuart D]

32 minutes ago, wabuffo said:

 

 

And a sovereign issuer that issues debt in its own currency can never default on its own debt.

Yeah, that makes sense. But does this assume the debt ceiling is raised?

[wabuffo]

But does this assume the debt ceiling is raised?

 

It will get raised but not before they go right to the wire, I'm afraid.  It's such a silly exercise.

 

Bill

[Parsad]

19 hours ago, no_free_lunch said:

Wabuffalo, they can't default but can they not get into an inflationary spiral?  They print to cover the deficit, which leads to higher inflation and rates, which leads to higher deficits.. 

 

Chances are you will see higher tax revenues in this expanding and growing economy.  We've seen governments do this over and over.  They eventually slowdown the deficit or balance the budget for a few years so that GDP catches up, and debt/GDP becomes manageable again. 

 

Now that the pandemic is over, the economy is bustling, power is somewhat even in the political landscape, there will have to be compromises...and some fiscal conservatism will be part of the negotiating ploys to get bills passed, including raising the debt ceiling to avoid default.  But it may be last minute until people get their wish lists fulfilled!  Cheers!

[Spekulatius]

The US can pay 4% interest rates with 5% inflation forever, they are still 1 % negative. Real interest rates have been below zero for a long time and they are still below zero.

[Castanza]

22 minutes ago, Spekulatius said:

The US can pay 4% interest rates with 5% inflation forever, they are still 1 % negative. Real interest rates have been below zero for a long time and they are still below zero.

Forever? Economies don’t exist in vacuums. 
 

The Piper always gets paid in the end….

[crs223]

3 hours ago, Spekulatius said:

The US can pay 4% interest rates with 5% inflation forever, they are still 1 % negative. Real interest rates have been below zero for a long time and they are still below zero.

 

Calm despite community panic.  I love it!

 

Also, great point.  Wake us when real rates are positive!

[Cigarbutt]

23 hours ago, Parsad said:

 

Chances are you will see higher tax revenues in this expanding and growing economy.  We've seen governments do this over and over.  They eventually slowdown the deficit or balance the budget for a few years so that GDP catches up, and debt/GDP becomes manageable again. 

Can you please provide evidence to back this up?

[Parsad]

9 hours ago, Cigarbutt said:

Can you please provide evidence to back this up?

 

Canada did it from the mid-90's to 2008:

 

 

Debt decreased very modestly or remained the same, while the budget was balanced and GDP increased.  U.S. needs to do this...Canada too!  Cheers!