US Debt Limit concerns

[twacowfca]

Why cant U.S gov't continue to print money, while keeping the debt ceiling at current level, continue buying their bonds (keeping interest rates artificially low) +/- buying stock markets (as a stable market is very important for consumer confidence, valuation of various pension funds, etc).

 

The real value of dollar to decline.

 

The worst thing to hold is U.S. debt, cash.

 

 

 

Not a viable option.  Now the massive deficit is financed by a massive expansion of debt and a small expansion of money.  It would take a huge expansion of money to finance the deficit without the use of increased debt.  The rate of money expansition would immediately jump to double digits without massive cuts in spending.  The international banking system would dump dollars on the prospect of continued hyperinflation of the dollar.  US credit would be shot.   And then things would get worse.  

[Kraven]

I am probably wrong but I am very much on the side of Drunkenmiller on this issue.  People have fallen into the theatre that the politicians have purposefully created around this issue but fortunately investors haven't fallen for it (iRates haven't budged.)

 

The fact that the US is even having this conversation shows just how solvent we are.  If we miss an interest payment for a few days or weeks, no one would care.  That's like saying investors would stampede out of Coke if they said they were going to defer a single dividend payment one week.  At the end of the day, billions of servings are going to be guzzled and Coke is going to make money off of it.  Dividend timing here and there is largely irrelevant.

 

Same goes for US debt.  We are still the biggest economy with the brightest people with a very reasonable debt level.  And the US has plenty of run-way for taxing these people more and more.  Timing here and there is a non-issue.

 

P.S. - On a similar note: the state of California had a somewhat similar issue and issued IOUs.  And you know what ... those things were 100c on the dollar.  Banks even took them as deposits at face.  If people shrugged at California; they won't even blink at the US.

 

 

Hmmm.... I think you are minimizing this a bit.  People didn't shrug at California.  I had some tax due in California at the time and received an IOU.  I looked into the banks accepting them as deposits and one, it was very few banks and two, I am pretty sure that after a brief time even they stopped accepting them.  I am just going from memory on this so I could be wrong.  I do know that I had to sit on the IOU and didn't have any other options, or at least no options that were easily obtained out of state.  In fairness, when the time came to get paid, I sent in the IOU and had money literally about 5 days later so it all worked out. 

 

I know a lot of people in California.  The state is in miserable shape.  Teachers are being laid off in droves and even wealthy schools have drives in order that the kids have pens and pencils and paper.  Teachers not laid off have seen some work furloughs, etc.

 

Anytime there is a stoppage in payments, even if short term, I don't agree that is a non issue and don't agree that everyone knows the payments will start again.  At the very least it shows that there is something rotten somewhere.

 

 

 

 

 

 

 

 

[benhacker]

I am probably wrong but I am very much on the side of Drunkenmiller on this issue.

 

This isn't my area of focus generally, but I read the Drunkenmiller piece and was confused.

 

I wasn't confused because I disagreed with what he said, but I was confused by what he didn't talk about.

 

He basically said

short term default is a good tradeoff for long term deficit reduction for holders of treasuries

.

 

Well that's all well and good, and he admitted that he is long treasuries.  But when people talk about this, I think they are confused.  Even if the US defaults on it's debt, US debt is still the safety trade, and Drunkenmiller knows this... and articulates it well.

 

I agree 100%.

 

What I don't think was genuine, was what about every other asset?  Oh just "a few days with missed interest payments" --- how will commercial paper market behave?  Money market funds?  Stable Value funds?  What is the impact to letters of credit, to the stock market?  To the forex markets?

 

Does every financial model in the world need to change how they calculate the risk free rate for their derivative models?

 

Count me as agreeing with drunkenmiller that a US default will be *good* for the price of treasuries, but *bad* for virtually everything else.... at least in the short term and likely longer.

 

Ben

[biaggio]

" Oh just "a few days with missed interest payments" --- how will commercial paper market behave? "

 

How would our bank react to this if that was a mortgage payment?

 

Realistically money wise it is no big deal especially because interest rate is next to zero.

 

If I am the bank I would be thinking, ok if the re is no fix for why you re late, what will happen next? A missed payment? Eventually no payment?

 

I think we re looking at higher interest rates. But then again, can the system take higher interest rate? (all people who are having trouble paying they re mortgage + other debts with current interest rates, can they afford the increase)

 

In the real world (you and I), if you want to borrow more money (raise the debt ceiling)+ you can t pay what you already owe, you definetly have to pay higher interest cost + show a credible plan for reducing spending + debt.

 

Oh boy.

[biaggio]

Why cant U.S gov't continue to print money, while keeping the debt ceiling at current level, continue buying their bonds (keeping interest rates artificially low) +/- buying stock markets (as a stable market is very important for consumer confidence, valuation of various pension funds, etc).

 

The real value of dollar to decline.

 

The worst thing to hold is U.S. debt, cash.

 

 

 

Not a viable option.  Now the massive deficit is financed by a massive expansion of debt and a small expansion of money.  It would take a huge expansion of money to finance the deficit without the use of increased debt.  The rate of money expansition would immediately jump to double digits without massive cuts in spending.  The international banking system would dump dollars on the prospect of continued hyperinflation of the dollar.  US credit would be shot.   And then things would get worse.  

 

Is there not a way for the gov't to do this covertly? i.e fudge the numbers?

 

Sorry if this is naive or dumb 

[rjstc]

I would bet this is how Munger would describe all this. From the piece on the Berkshire board by Alice Schroeder talking about him. Besides, nobody else would say a lot of the entertaining things that have come out of Charlie Munger’s mouth, such as when, in 2000, he criticized bankers who foisted worthless Internet stocks on the public by saying, “If you mix raisins and turds, they’re still turds I'm sure he would expand that to this whole political bunch of crap.

[mountboney]

Whichever side you are on, this is an epic showdown between two very different views of the future.  The left sees an America that spends 25% of GDP with tax increases to match, sacrificing future growth for a "fairer" more European America.  The right sees a country that returns to 18-19% spending and the 3% growth rates of the past.

 

These views are deeply ingrained on both sides and I'm guessing at least a 50% chance it takes significant market disruptions before compromise on a short term patch which pushes the issue down the road.

[libor.plus1]

On a very simplistic level, I am confident the debt limit is going to increase on time. I just can't imagine a scenario where that wouldn't happen, even if the GOP has to take it on the lip. Imagine the headlines when voting starts: Democrats were willing to compromise, Republicans weren't. Vote Lib!

 

That said, I was all cash until today, where I went balls to the walls and put all my money into one stock.

[given2invest]

On a very simplistic level, I am confident the debt limit is going to increase on time. I just can't imagine a scenario where that wouldn't happen, even if the GOP has to take it on the lip. Imagine the headlines when voting starts: Democrats were willing to compromise, Republicans weren't. Vote Lib!

 

That said, I was all cash until today, where I went balls to the walls and put all my money into one stock.

 

TELL US WHICH ONE!

[libor.plus1]

On a very simplistic level, I am confident the debt limit is going to increase on time. I just can't imagine a scenario where that wouldn't happen, even if the GOP has to take it on the lip. Imagine the headlines when voting starts: Democrats were willing to compromise, Republicans weren't. Vote Lib!

 

That said, I was all cash until today, where I went balls to the walls and put all my money into one stock.

 

TELL US WHICH ONE!

 

Honestly it's not an 'I'm smarter than most investors, deep value' type investment. It's more of a trade. Apple.

[given2invest]

On a very simplistic level, I am confident the debt limit is going to increase on time. I just can't imagine a scenario where that wouldn't happen, even if the GOP has to take it on the lip. Imagine the headlines when voting starts: Democrats were willing to compromise, Republicans weren't. Vote Lib!

 

That said, I was all cash until today, where I went balls to the walls and put all my money into one stock.

 

TELL US WHICH ONE!

 

Honestly it's not an 'I'm smarter than most investors, deep value' type investment. It's more of a trade. Apple.

 

You put 100% of your net worth in it?

[rjstc]

There is oftentimes a discussion of the mess we have created and the mess we are leaving our kids and the debts.

 

From NY Times Thomas Friedman

 

 

 

I REALIZE that I should be in Washington watching the debt drama there, but I’ve opted instead to be in Greece to observe the off-Broadway version. There are a lot of things about this global debt tragedy that you can see better from here, in miniature, starting with the raw plot, which no one has described better than the Carnegie Endowment scholar David Rothkopf: “When the cold war ended, we thought we were going to have a clash of civilizations. It turns out we’re having a clash of generations.”

 

Indeed, if there is one sentiment that unites the crises in Europe and America it is a powerful sense of “baby boomers behaving badly” — a powerful sense that the generation that came of age in the last 50 years, my generation, will be remembered most for the incredible bounty and freedom it received from its parents and the incredible debt burden and constraints it left on its kids.

 

It is no wonder that young Greeks reacted so harshly when their deputy prime minister, Theodoros Pangalos, referring to all the European Union loans and subsidies that propelled the Greek credit binge after 1981, said, “We ate it together” — meaning the people and the politicians. That was true of the baby boomer generation of Greeks, now in their 50s and 60s, and the baby boomer politicians. But those just coming of age today will never get a bite. They will just get a bill. And they know it.

 

You can see that when you walk around Athens’s central Syntagma Square, where young people now gather every evening to debate the crisis and register their protests at the future being imposed on them. The facades of banks around the square have been defaced, and flapping in the wind are two large banners. One says “IMF Employee of the Year” and has a picture of Prime Minister George Papandreou, and the other says “Goldman Sachs Employee of the Year” and pictures George Papaconstantinou, the former finance minister. (And these are the good guys, trying to fix the problem.) Nearby is a picture of a baby, saying: “Father, whose side were you on when they were selling our country?” And the more blunt: “Yield to rage,” “Class war, not national war,” and, finally, “Life — not just survival” — a message that seemed filled with foreboding about what the next decade is going to be like for young Greeks.

 

I was struck by one big similarity between what I heard in Tahrir Square in Cairo in February and what one hears in Syntagma Square today. It’s the word “justice.” You hear it more than “freedom.” That is because there is a deep sense of theft in both countries, a sense that the way capitalism played out in Egypt and Greece in the last decade was in its most crony-esque, rigged and corrupt deformation, letting some people get fantastically rich simply because of their proximity to power. So there is a hunger not just for freedom, but for justice. Or, as Rothkopf puts it, “not just for accounting, but for accountability.”

 

“There are no jokes about this crisis,” the Greek novelist Christos Chomenidis told me. “Everyone is in a bad temper. It feels like nearly everyone is against everyone. If the economic situation gets worse and worse, I am afraid for what can happen.”

 

The other day striking Greek cabdrivers tried to muscle their way into the minister of infrastructure’s office — only to discover that it was already full of his own ministry’s striking employees. Take a number, please.

 

That brings up another similarity between Greece and America: that the necessary may be impossible, that baby boomer politicians in the age of Twitter may not be up to addressing problems this big. The hole is too deep and power too fragmented. The only way out is by collective action — where ruling and opposition parties unite, share the pain and take the necessary steps. But that is not happening here or in Washington. There are Eric Cantors everywhere — reckless baby boomer politicians for whom no crisis is too serious to set aside political ambition and ideology.

 

But there is an adult lurking. China has been buying Spanish, Portuguese and Greek bonds to help stabilize these Chinese export markets. “These are delicate times, and we take a positive role,” Yi Gang, deputy governor of the People’s Bank of China, told the British newspaper The Guardian in January.

 

This is a role America used to play, but can no longer afford. Anyone who thinks that this economic crisis, if prolonged, won’t also hasten a global power shift has never heard of the Golden Rule: He who has the gold, sets the rules. “We are so used to the Americans providing the solutions for Europe and leading,” said Vassilis T. Karatzas, a Greek money manager. “But what happens when we are both in the same boat?”

 

What happens is that both the American and European dreams hang in the balance. Either we both put our nations on more sustainable growth paths — which requires cutting, taxing and investing for the future — or we’re looking at a world in which democracies are going to turn on themselves and fight over shrinking pies, with China having a growing say over how big the slices will be.

 

[Packer16]

I think a large part of the problem is lack of trust.  The "rich" and other job creators don't mind paying taxes but don't trust the current crew in Washington will do anything but provide a short-term solution and go back and ask for more.  Part of the issue is that the folks running the show in Washington are career politicians who are rewarded for being not trustworthy.  You see it in the debt showdown.  How can the President hope to get a compromise by slamming his opposition?  What has worked in the past has been charming and compromising with it (i.e. Reagan, Clinton).  This is how deals are done in business.  The President is using his skills and charm to destroy rather than unite, acting more like Hugo Chavez than Bill Clinton or Ronald Regan.  I guess this what you get when you elect a career politician with no business experience (i.e. compromise).  He could get a great lift by being the adult but instead by acting as a partisan he has given away his advantage.  He could easily get a deal and but he has poisoned the well and has taken the opposition to his policies as a personal attack.  Even if sometime it is, the President needs to rise above it or he will lose the trust factor.

 

Friedman's contention that somehow China (in its current form) is going to replace the US is fear mongering.  Who in there right mind would accept advice from a China over the US for a few dollars.  More likely they will accept the money (as financial transaction) and ignore the rest.  I believe he also has "China envy" - where he thinks China is as stable as the West.  This may be in theory in the future but just look where is most of the money going once the Chinese make some - real estate and savings to pay for health care and other staples we in the West pay on a relative basis very little.  He also seems to bemoan the fact that so much debt was racked up but his approach does nothing to stop it.  As matter of fact, his investment statement (for unneeded items such as uneconomic high speed passenger rail (the Concorde of the 2000s) and green energy subsidies) shows he does not get it.  His other investment is education.  Why has no one offered an economic incentive to get what we would like to get, i.e. more engineers and scientists?  Maybe providing more federal loans and financial aid for engineers/scientists versus less needed majors would be a step in the right direction. 

 

Packer

 

[rjstc]

Packer; I sure agree with your first sentence. "I think a large part of the problem is lack of trust".

 

As a side note. I am going to the Oshkosh Airshow in a few weeks. Also may be going to Greenbay to see  the "Packer" stuff. First time and I hear it's really good.

[oddballstocks]

Just a small anecdotal story about this...

 

At breakfast today the news story comes on about the debt ceiling and my mother-in-law who is retired and drawing Social Security says "well I think the problem is they're giving tax breaks they shouldn't cut Social Security... they can't cut it."

 

My point is I think this is a generational battle as noted above, my parents and in-laws can't imagine their benefits being cut, they want taxes to go up to pay (of course they don't pay taxes anymore).  While people in my generation can't imagine paying a high tax rate to pay for current benefits with no guarantee of the same rich benefits when we age.

 

My own solution is to give each party pain, cut benefits and raise taxes.  It's better for everyone to suffer a little bit than one group to suffer a lot, as long as everyone is angry it's probably a fair solution.

[libor.plus1]

On a very simplistic level, I am confident the debt limit is going to increase on time. I just can't imagine a scenario where that wouldn't happen, even if the GOP has to take it on the lip. Imagine the headlines when voting starts: Democrats were willing to compromise, Republicans weren't. Vote Lib!

 

That said, I was all cash until today, where I went balls to the walls and put all my money into one stock.

 

TELL US WHICH ONE!

 

Honestly it's not an 'I'm smarter than most investors, deep value' type investment. It's more of a trade. Apple.

 

You put 100% of your net worth in it?

 

Lol, no, that would be crazy.

 

I took margin, so its closer to like 200%.

[zarley]

My own solution is to give each party pain, cut benefits and raise taxes.  It's better for everyone to suffer a little bit than one group to suffer a lot, as long as everyone is angry it's probably a fair solution.

 

This is largely the administration's position, and has been for just short of a year.  

 

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

 

The commission recommended a broadened tax brackets with fewer deductions, so it's a mixed bag on the tax front.

[rjstc]

Just a small anecdotal story about this...

 

At breakfast today the news story comes on about the debt ceiling and my mother-in-law who is retired and drawing Social Security says "well I think the problem is they're giving tax breaks they shouldn't cut Social Security... they can't cut it."

 

My point is I think this is a generational battle as noted above, my parents and in-laws can't imagine their benefits being cut, they want taxes to go up to pay (of course they don't pay taxes anymore).  While people in my generation can't imagine paying a high tax rate to pay for current benefits with no guarantee of the same rich benefits when we age.

 

Maybe this is between two spoiled generations. One "The greatest generation" children from post WW2 who were given too much by their parents who sacrificed so their kids would have more of what they had missed. Then the kids of the "Great Generation" who thought they were sacrificing for their kids but really only had the experience from having watched their parents. Now neither wants to be the one who gives in and loses their so called "RIGHTS" Leading to your last sentence.

 

"My own solution is to give each party pain, cut benefits and raise taxes.  It's better for everyone to suffer a little bit than one group to suffer a lot, as long as everyone is angry it's probably a fair solution."

 

This would be too logical.  BY THE WAY. YOU GO FIRST WITH THE PAIN THING.  When you add Federal, State, Sales and local taxes where I live I already pay in excess of 50% & I'm retired and I paid into SOC SEC and they "Owe" me. :D ;D 

[PlanMaestro]

My point is I think this is a generational battle as noted above, my parents and in-laws can't imagine their benefits being cut, they want taxes to go up to pay (of course they don't pay taxes anymore).  While people in my generation can't imagine paying a high tax rate to pay for current benefits with no guarantee of the same rich benefits when we age.

 

I beg to differ.

 

Probably more important than how a problem is analyzed is how it is framed. Your generation is not who the republicans are defending against higher taxes (actually reversing tax cuts). This is not about demographics, this is about an entrenched plutocracy and its ability to distort reality and lobby to get spoils (while not paying taxes for them and adding little to society in return).

 

A good reading of Twain's A Connecticut Yankee in King Arthur's Court shows that is not un-American to bash an aristocracy (hedgies, bankers, buyout firms, entrenched managers) especially when they deserve it. Long live Charlie.

[mountboney]

My own solution is to give each party pain, cut benefits and raise taxes.  It's better for everyone to suffer a little bit than one group to suffer a lot, as long as everyone is angry it's probably a fair solution.

 

This is largely the administration's position, and has been for just short of a year.  

 

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

 

The commission recommended a broadened tax brackets with fewer deductions, so it's a mixed bag on the tax front.

 

 

Do you really believe the administration position is anywhere near the deficit commission?

http://www.adrienneroyer.com/wp-content/uploads/2011/04/publicdebtryanvscommission.gif

 

 

[zarley]

My own solution is to give each party pain, cut benefits and raise taxes.  It's better for everyone to suffer a little bit than one group to suffer a lot, as long as everyone is angry it's probably a fair solution.

 

This is largely the administration's position, and has been for just short of a year.  

 

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

 

The commission recommended a broadened tax brackets with fewer deductions, so it's a mixed bag on the tax front.

 

 

Do you really believe the administration position is anywhere near the deficit commission?

http://www.adrienneroyer.com/wp-content/uploads/2011/04/publicdebtryanvscommission.gif

 

The basic premise is still in play.  It is the outline for "the grand bargain" that isn't quite dead yet.

 

http://www.washingtonpost.com/politics/grand-bargain-on-debt-ceiling/2011/07/16/gIQAgPJpII_story_1.html

 

But Sen. Richard J. Durbin (D-Ill.) said there is little doubt where the committee will start.

 

“We all keep coming back to the same basic parameters. The Bowles-Simpson plan really laid out how you reach $4 trillion. And there aren’t a lot of things they didn’t consider,” Durbin said. “There are only so many moving parts here.”

 

The commission recommended saving $3.8 trillion by raising the retirement age for Social Security, slashing spending across government and wiping out more than $100 billion a year in popular tax breaks, including the tax deduction for mortgage interest and the tax-free treatment of employer-provided health insurance. It recommended larger Pentagon cuts and revenue increases than the White House sought this month.

[SharperDingaan]

 

http://fpc.state.gov/documents/organization/105193.pdf

It would seem that this is a regular ocurrence that has taken place almost every year since 2001.

 

So why is this time different from all the other times ?,

& who benefits by trying to manufacture a 'market' hysteria ?

 

Puts quite a different spin on the issue.

 

SD

 

 

[given2invest]

 

http://fpc.state.gov/documents/organization/105193.pdf

It would seem that this is a regular ocurrence that has taken place almost every year since 2001.

 

So why is this time different from all the other times ?,

& who benefits by trying to manufacture a 'market' hysteria ?

 

Puts quite a different spin on the issue.

 

SD

 

 

 

It's different this time because congress (republicans) have never said before they won't raise the limit.  It's definitely different this time. 

[Myth465]

Alas with politics people see what they want to see, and its always the other guys fault. This is an easy one, and roughly half the country still blames the wrong party.....

 

Good interview on the subject - http://finance.yahoo.com/blogs/daily-ticker/dangerous-precedent-being-set-debt-ceiling-debate-galbraith-122432522.html;_ylt=Al1xPhVl6kDf._8vAJ2.YwQp2YdG;_ylu=X3oDMTBqZml0NnE4BHBvcwMxNgRzZWMDRFQgSW5kZXg-;_ylg=X3oDMTFpMm9iMzh1BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANibG9nBHB0A3NlY3Rpb25z;_ylv=3

 

 

[Packer16]

Your right the question is do we want gov't to spend 25%+ of GDP (like Europe) or do you want to spend 18 to 20% like we have historically spent.  The reason for the tax increases is to support the 25%+ spending.  This is the reason Repubs don't want to increase taxes is to support the 18-20 model not the 25+ model.  Once you determine the model you want, then you can ask who pays for it.  The President is combining the issues to push his 25% plan by at first taxing the rich.  As to Boles Simpson, this is not the President's plan.  If it was, how do you explain his budget proposal?  If I have learned one thing about Obama, it is watch his actions not his words.  He is very good smooth talker.

 

Packer