Between the cliff and the ceiling
Seems we’ve only just negotiated the fiscal cliff (for the moment, anyway; the fight is certainly not over), and now we face the debt ceiling.
Defining some terms. The article discusses the use of the word “default,” and why it’s incorrect. And yet we see it over and over again, as here.
So, all you economically and financially astute folks, is “default” the right term, or not?
Love the headline!
The problem with terminology and govt is that normal rules don’t apply when a sovereign entity can simply print/create its own money.
The debt limit is essentially the credit limit on govt borrowing, just as the credit limit on our personal credit cards. Defaulting, OTOH, means not making the current payment on the outstanding bill.
Numerous studies show that debt interest does not consume a huge percentage of federal spending, thus there is plenty of money that could be diverted from other expenditures to pay interest on the national debt. Thus if the govt forgoes an interest payment it essentially has chosen not to honor its obligation to pay interest.
By not raising the debt limit, technically the govt must cease borrowing money (issuing govt bonds), just as when we reach out credit card limit we can’t use it to charge further goods and services. But when one deals with a soverign entity that creates its own currency the rules go out the window. The debt limit is a useless tool anyway because anytime the govt reaches its credit limit, govt simply raises its own credit limit anyway nullifying the reason a debt limit was imposed in the first place.
It’s not a default in a credit/financial sense, but I think to anyone who was owed a check that didn’t come, it probably is a default to them.
By forever increasing the debt, we’re in the midst of a slowmoving “soft” default whereby we eventually inflate away some of the debt we accumulated. That are tax increases. No one in government seems to put it in those stark terms because they know the people who elected them are children who would rather hear a more pleasant tune.
The public does not understand that default in this case would be not paying creditors holding T-bonds that reach maturity. There are more than enough incoming tax receipts to pay those creditors. Go back to a 2.5 trillion annual budget and all problems are solved. But since DC wants to annually spend 1 trillion more than it takes in it has to scare the world with the term default and pile on more debt.
DC in collusion with the FED wants to monetize the debt and inflate their way to ‘solvency’. It has never worked in the long run in all of history, but hey these guys are from the Ivy League. We are as holmes notes in a “slow moving soft default” up and until the USD is no longer the world’s sole reserve currency. When, not if, that happens soft will suddenly become extremely hard. That will be the real fiscal cliff.
When one spends money, one is, in effect bartering; trading pieices of paper for some tangible good or service. When allied to a precious metal the currency has value because it represents the opportunity to acquire a metal universally accepted in trade (in reality its no easier to eat gold than it is to eat paper currency). It’s the universal acceptance of gold and silver that make them valuable for trade.
When one decouples the currency from the metal, as the U.S. has done, the currency becomes ephemeral not tangible. The currency is now only as valuable as the country’s promise to accept it and only as valuable as the country’s economic prospects and econimic and political stability.
The U.S. now has a currency that relies exclusively on our economic and political standing in the world; i.e., it relies on our exceptionalism and the integrity of our leaders not on its ability ot be converted into auniversally accepted medium of trade. It also relies on financiers (esp Treasury secretaries and Federal Reserve chairmen) to recognize this emphemeral nature of our currency rather than treating it as a tangible good.
One might argue that Bernanke has done just that with Qualitative Easing (printing money). But I don’t think such is the case. Not only does a larger money supply devalue the currency, but the weak economy in which Bernanke is printing exacerbates that devaluation. Some of that has translated into the Obama bull-market; the weaker the dollar the higher the price, whether the asset is a loaf of bread or a share of stock.
Perhaps 99% of the public doesn’t understand the difference between a solvency crisis and a liquidity crisis. We are facing a solvency crisis, our debt is far more than our total net worth and income combined.
This is the case for every western nation and only China buying our debt to keep their exports high (an economic necessity) is allowing the charade to continue. The Fed is printing money out of thin air and attempting to monetize our debt with steadily decreasing in value dollars to keep what is literally a Ponzi scheme going. While Obama and the democrats continue to raise the spending levels to keep the entitlement state growing.
The sovereign bankruptcy of the west is now mathematically unavoidable, the consequences of which are only avoidable until the Ponzi scheme collapses. Runaway inflation will be the harbinger of the coming collapse.
The Fed printing money out of thin air will continue as long as inflation remains under control and the bankers and politicians will continue to delay the inevitable collapse.
While the Ponzi scheme continues, expanding the money supply (by printing money out of thin air) borrows from the future, steadily destroying the nations wealth and the inheritance of future generations.
It is by far the greatest theft in history. Obama knows it and his actions are entirely intentional. While the majority of his supporters blindly follow, naive, gullible lemmings to the last.
A good reason for having the debt ceiling is it causes the government to talk about borrowing and spending every now and then. Obama’s frequent references to paying our bills is deliberately misleading. He wants no ceiling so he can spend more in the future or at least continue to spend borrowed money.
it relies on … the integrity of our leaders
We’re doomed.
OB,
Yes my thought, too. I originally included that sentence verbatim, but excised it before submission for clarity’s sake.
However, a glimmer of hope; a Milton Friedman quote that I came upon just in the last two weeks. I paraphrase:
Democracy isn’t about electing the right people to do the right thing, it’s about making it politically expedient for the wrong people to do the right thing.
There may be hope yet.
T, I think we’re now reduced to hoping that the wrong people, with the wrong ideas, who were elected to do the wrong thing, end up doing it badly, and in so doing do the right thing, or at least doing harm to a lesser extent than we had any right to expect.
OB,
No argument from me on that account. In fact they have been doing pretty badly soperhaps there is a smidgen of hope if we can just survive the next four years.
T – so this is a good case to in fact buy gold? Mixed information abounds on the financial advice channels. Some insist that stocks are still a better hedge on inflation.
Is gold a better tangible commodity than stock?
Another stupid question — how does the government’s inflation data appear so low, if they are printing money by the boat load, and there is next to no econonic growth? The price of oil and other commodities havn’t necessarily gone up linearly with the expansion of currency, or has it? I guess those prices are affected by demand too, but it’s not been well explained how we have higher escaped inflation.
southpaw,
I don’t think we have avoided inflation. Anyone who buys groceries can attest to the fact that prices are rising and/or pacakaging is reducing its content. It’s financial inflation (i.e., bond rates) that are being kept artificially low by the Fed.
As to gold, my own, purely personal opinion, is that it’s still overpriced. For those who buy gold because they expect Armageddon, they miss the point; I would likely not barter gold for food in return for food from my limited supply. If someone is really worried about social collapse they would be storing bottled water, MREs, canned goods and shotgun shells. The latter for when people in your neighborhood run out of food because they didn’t prepare and demand that you redistribute your food. This, of course, is an absolutely extreme last ditch scenario.
We bought some junk silver 2 years ago @$20/oz – it is now $30/oz. Wish we’d bought more. There are other precious metals that will probably show even greater gains shortly.
Tools are always a good investment, as are books.
No, it is not default. Default refers to the failure to honor the redemption of bonds and the payment of interest. We have enough revenue to do that, Social Security, and Medicare. That will take all of our revenue, though. So, if there is a default, that is on Obama. If SS and Medicare do not get paid. That is on Obama.
I have no idea why this would be a question!
amazing…
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay his or her debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.
When they cant meet their obligations any more, its a default. And just to put a real “tingler” up your spine bigger than any from a 1950s horror movie, it starts a huge avalanche.
if i default, no avalanche
but if they default, or renege on contracts, unilaterally change terms, etc… it wont take but one event, to a few before there is a rush to the door before it happens to other people.
take a look at whats happened at Kodak.
Kodak was a giant… its now sitting on 60 million.
it trades where? and what just happened to its pensioners?
Kodak retirees lose health, welfare benefits
http://www.usatoday.com/story/money/business/2012/11/05/kodak-retirees-lose-benefits/1684135/
basically its defaulting because there isnt anything it can do…
when an author says the US wont or cant default, they usually are basing it in some erroneous concept, and sometimes they even add to it. that is, they create judgments based on logic if the erroneous concept was correct. they seldom go back to the original wrong point, so you have to pick up on it from the error in logic. ie. find the system in which that does not appear to be an error but a sound or semi sound logical conclusion or seeming inference.
now why would someone, given history, say a country cant default.
well. i have heard it more than once described (and in other ways too) “how could they take possession and auction off everything?)
they try to apply things that don’t work for nation states, but they think is critical to the definition. no. nation states cant take possession by writ of debt.
this is a major reason why we have war among others
given we have a fiat currency, and that we are starting to slip in our keeping LEX REX, it doesn’t bode well.
Rex lex is returning… and so, the confidence in currency backed by natural resources, peoples potential and free markets – goes completely away when that is not the system any more.
the value of X in the state of Y
is vastly more than the value of X in the state of Z
There is no known state better than Y (Y may be the best there can be) There ARE known states lesser than Z (anarchistic, matriarchies, feudal tribal states, etc).
the administration or the left does not actually understand the substance of what gives the US value and leads to confidence in investing nations. in some cases they do and they do the opposite.
(to do the best was to be the same as the prior status quo which was a merit based constitutional republic with a focus on freedom).
so they are right, the bill collector cant collect…
so they usually go to war and other outright nasties that either happen after it starts, or are done as lead up to the event.
the chinese and other countries are not going to take kindly to a house frau paying off the national debt out of cookie jar money inflated so high its numeric value could settle the debt which is in dollars.
the chinese are doing what they have to do…
but if someone dont get that spigot closed, at some point people are going to turn away from dollars. and then the US government will have no way to pay the debts, and will default in the economic sense of not pay or meet their financial obligations.
but way before that, riots and things over not enough welfare money will give good reason for buying all those shells and being scared that the people in the street have guns. though what will other countries do?
sit and watch?
take advantage of it away from the US mainland?
take advantage and do something in the US mainland?
all of the above?
they will go to the well until the well runs dry or someone stops them
either way, the end result will be the same.
because that is when the world will cut them off before they go to far… and if they try to do something more, the world will dump their investments. stop shipments…
there wont be many options to keep things going other than pretty much the one option they are seeking. which would kind of be a clue given no other clues were enough
if the us had to somehow replace its manufacturing base given all shipments from the china sea have stopped due to a war that started over the senduku islands…
they probably would not do it by asking for resume’s
they would need a citizen army in which they could just tell people where to go, and it would be bigger and larger than the military.
wait? did i ever hear that before?
There was approximately $1.16 trillion in circulation as of January 10, 2013, of which $1.12 trillion was in Federal Reserve notes.
http://www.federalreserve.gov/faqs/currency_12773.htm
so there isn’t even dollars backing dollar debt…
but don’t worry… war or a change of leadership can wipe the slate clean as far as having to pay, but not so much in getting credit again for a few hundred years…
total debt is:
16,432,680,097,613
and it seems reasonable we could pay it off…
but that doesnt include all the stuff the fed is racking up, and other debt pools!!!!!!!!
so what gives?
what gives is that they are maintaining their credit with the world
while forcing an economic reset of the internal economy
ie. they probably wont default to the world
but at some point they are going to default on the citizenry
right now, its a game of hot potato of sorts..
Europe and the USA (and others) are stuck in a catch-22. GDP will take a drastic decline if deficit spending stops and GDP will ultimately take a drastic decline if deficit spending continues. This is not going to end well.
DC is 16.5 trillion in debt and racking up a few million more by the time you finish reading artfldgr’s post. 😉
And, estimates for the unfunded liabilities range from 50 to 80 trillion. Most of the states are deeply in debt and the same goes for local governments. This is not going to end well.
“… at some point they are going to default on the citizenry” Yep.
Meanwhile, Treasury will not submit a budget to Congress by Feb. 4, AS THE LAW REQUIRES.
T & Old Surfer:
I second the recommendation for junk silver. I likewise bought some a few years ago and would like to get more.
Historically, before paper money, ordinary people used copper and silver coins for day-to-day purchases. For the most part, only rich people had gold. You wouldn’t use gold to buy a bushel of potatoes.
southpaw asks, “Another stupid question – how does the government’s inflation data appear so low, if they are printing money by the boat load, and there is next to no econonic growth?”
Inflation is too much money chasing too few goods. There is plenty of money available, but there is also no shortage of goods. The only thing that is anywhere near short supply is some ag items. The corn/ethanol link is causing some shortage of corn and rising meat prices. However, prices are not rising rapidly…….yet. The other side of the equation is that there is still a lot of debt extinguishing going on. Banks are writing down bad mortgages, credit card debt, bad real estate holdings, bad car loans, etc. If it was all done suddenly, it would cause more deflation. (The disappearance of value in properties and commodities.) Many don’t realize it, but deflation is much worse than inflation because it is harder to stop. It is harder to stop because once it gets established no one wants to take any chances. Investment and risk taking dry up and economic activity retracts. All the money pumped into the system has kept the game going until people regain confidence. (Obama could have helped but has chosen to crush confidence.) Only a few banks and investors are taking risks right now. When confidence returns the velocity of money (Rapid recirculation of dollars) picks up and the demand for goods picks up. If the suppliers of goods are caught short or refuse to increase production then shortages develop. That’s when inflation begins to take off. That is when the Fed has to raise interest rates and reduce printing of money to cool demand and keep inflation under control. At least that’s the way it’s supposed to work.
The out of control spending is not helping confidence and is reaching a level where even a country such a the USA, which has every economic tool there is (Abundant farms, a modern infrastructure, timber, oil/gas reserves, fisheries, creative entrepeneurs, a reasonably honest banking system, well established private property laws backed by courts, etc, etc.), may have difficulty working it off. When other countries lose confidence in our ability to pay back loans, we become much poorer as we can no longer trade with them on a favorable basis.
As far as default goes, IMO that is the correct word. Here’s the definition of default:
A failure to fulfill a financial obligation. Or a failure to fulfill a legal obligation.
Since the spending is cooked into laws passed by Congress, failure to meet those financial and legal obligations is a default. It is true that the spending laws can be changed. It is also true that there is enough money coming in to cover “entitlement” spending and debt service. However, if the government does not comply with the laws that have been passed to cover it’s discretionary spending, that would be considered a technical default and the financial chaos would be as bad or worse than the 2008 meltdown.
Obama is playing chicken with the Republicans. They both know the debt ceiling has to be raised. The Republicans want to tie the increase to some real spending cuts. Obama wants to get the ceiling raised with few or no cuts and more tax increases. He’s once again saying it’s his way or the highway. My guess is that this will be a re-run of the fiscal cliff negotiations. It will go down to the last minute and some bad bargain will be struck. Obama will offer some spending cuts (which he has no intention of actually implementing) and the Republicans will raise the ceiling less than Obama wants. Rinse and repeat in a year or so. It’s a test of wills. Neither side can really get its way with the present configuration of Congress. We will continue to see government by crisis and brinksmanship.
Not exactly the hope and change Obama promised. In Obamaland the only hope for a change is to elect a more conservative Congress in 2014.
I see it everywhere: the general public still thinks that Red China is buying US Treasuries.
That is now false.
Recognizing that America is hyper-inflating its currency, Beijing has stopped buying US Treasuries — going back more than a year.
That’s why the Fed has had to step up its purchases — massively.
Yes, yes, Red China is still buying at the auctions — but with Roll Over Paper — only.
It is now their state policy to convert any trade surpluses into real assets — instead of US Treasuries.
————
And, I still see that the ‘informed’ public is still conflating inflation with hyper-inflation. They are as alike as a blue whale and a T-Rex.
Inflation-classic is the result of commercial lending — and the animal spirits of capitalism. Liquidity/ bank balances/ spendable money expands when a banker makes a fresh loan — which becomes significant when that loan is for a longer term and is of real size.
Short term loans do not have the same impact: they are wrapped up so quickly that money is created and destroyed in rapid succession.
It was the hyper-ramp of CRA Policy that created massive amounts of New Money — Inflation-Classic — which rippled through the balance sheets of the world — on its way to Red China.
Because of real estate arbitrage: booming ghetto prices caused ALL real estate prices to ramp up, too. It’s this connection that is denied by Liberals. They want to pretend that you can cause ghetto real estate to triple in value — while the house across the street stays steady in the market. As if!
When the real estate mania stopped, the money drug dried up; the addict went into withdrawal. It was a self-reinforcing death spiral — twice as virulent on the way down as it was going up.
Tax revenues collapsed — while the political spending impulse exploded.
This combo is most typical in wartime. No matter. The government stepped in with the fiat money-printing press. In modern times this takes the form of fiat-debt issuance. So, as commercial/ real estate loans receded, contracting the money supply, the Fedsury stepped up and handed out fake wealth — by grifting it to the national politicians.
In a fiat environment there is one Mathematical Identity:
(Fiat) Government Spending = Taxation
There is no such thing as borrowing from the future — for governments. Such institutions never, ever, leave the Present.
They can’t change the Past. That much is obvious.
They can’t rule the Future. Some other set of politicians will be doing that. Rome’s dicta didn’t last any longer than she did.
All that a sovereign can do is re-order within the Present.
In modern times, this is done via Spending and Regulation – Bureaucratically. Statues (law) are so Yesterday.
Hyper-inflation got its name for historical reasons. Whereas investors and speculators will draw back from the cliff; politicians ALWAYS take the currency for the ‘full monty.’
Once the spending narcosis is entered — The Powers That Be keep on keeping on until they hit the wall with a trainwrecked currency. In those final daze – the debasement of the fiat becomes so pronounced that it reaches escape velocity: complete rejection as a store of value – with its decay-time-constant reduced to hours if not minutes.
This paradoxical situation causes the modern economy to devolve into barter — and to utterly destroy real estate based wealth. Real estate can’t trade with any leverage — at all. So, apartment buildings will trade for the same price as a nice used car.
(That’s not an exaggeration — despite what you think; it’s actual history.)
Further, REAL tax collection collapse, too. The value of the currency evaporates faster than even the fastest bureaucracy can revise the tax tables. Further, the Dark Economy simply explodes. The super high tax collections vs GDP you’ll see here and there always occur against a backdrop of a massive Dark Economy. Human beings refuse to pay 55% taxes. Period. Stop.
———–
The Smart Money has already absorbed the above ^^^ and hence Wall Street is favoring commodities.
Hyper-inflation is ruinous for Apple. APPL has $150,000,000,000 earning nil interest. In real terms, APPL is being taxed, wealth taxed, upon that stash. No wonder its price is bending down. Further, all too soon a trade war will break back upon Apple-China as Red China steals its intangible, too.
They can ask Google how that worked out.
———
For investors: get the heck out of US Treasury linked assets — like bonds, notes, and bills.
Stay away from the insurance industry. It is ALWAYS destroyed by hyper-inflation.
Stay away from any commercial operation that HAS to lend to trade efficiently: wholesalers, master distributors.
Buy commodity producers that invest first — and re-coop by selling life-essential goods over time.
Such as domestic oil producers…
Such as your local electric utilities… ( Weimar utilities waltzed through hyper-inflation. Their debts evaporated while power bills were adjusted to current values. Most utilities are levered at least 2:1 and more. )
Strangely: Buffett and Gates have ramped up their investments in the power company that serves Washington DC and surrounds, — What a coincidence!
The DELL, MSFT, APPL get absolutely killed by hyper-inflation. Their cash stash evaporates in real value — it moves to the government. Their products become un-affordable to such a degree that sales die off.
Industries that are hugely on the Federal teat get zapped during the end game:
Big Medicine — top of the list — every sub-sector, entire.
Programs forced into massive termination/ re-structuring.
Big Academe — second place — student loan engine shuts down. Loan program forced into termination. Fraud overwhelms all during end-stage hyper-inflation. It’s CRA Policy on steroids.
These twin pillars of insolvency will collapse with LOTR abruptness.
MSM — third place — it’s on the federal teat, too. During straightened times, its ad revenue will utterly implode. Like shamans of old there will be no market for their philosophies — which consist of market-bleeding nostrums.
Green — fourth place — it’s on the federal teat by dint of K Street and myth. Its fount will dry up when the fiat goes: Green is entirely uneconomic. That’s why it’s so politically correct, for sure.
Food processors with national scope will waltz through hyper-inflation. No-one can stop eating.
Fast food players — especially pizza chains will be crushed. Just too many players.
Real estate tax collections will crater — in real terms. A tsunami of Chapter Nines is in the offing. Schools will retrench back towards hiring only teachers. Academic publishing will see Chapter Eleven. Last year’s books will, suddenly, do just as well.
blert is right about the PRC and others no longer trusting the value of DC’s long term T-bonds. The FED is buying the majority of bonds up for auction because no one wants them. The FED is buying mortgage backed securities because no one wants them.
http://tinyurl.com/d55tbff
“Obama is playing chicken with the Republicans.”
I want the House republicans to give BHO everything he asks for when it comes to deficit spending. Simply vote present and tell the public why everything BHO touches will come back to haunt them. Most of all, I want the republicans to concentrate on Benghazi and F&F, and thwart any EOs infringing on the Bill of Rights. 4 dead in Benghazi and I want answers.
J.J., are all defaults created equal? Is the impact of defaulting on bonds the same as furloughing workers at EPA, Interior, or DoD? Surely that spending can’t have the same force of law as the bonds, which have their own Amendment to the Constitution to guarantee them.
And no one is going to miss a Social Security check: the Social Security Administration is a massive holder of US Government bonds, and it could sell bonds without increasing the amount of debt outstanding. Medicare would face cutbacks–that will happen anyway.
On balance, this constant use of “default” is a Lakovian framing device to control the narrative and frighten the poorly informed. (Not that I think that this was J.J.’s intent. He was driving for precision in the definition.)
blert, thanks for your excellent and insightful commentary. A lot to think about there.
blert has got it right as to what happens in hyper-inflation. There are two things in question:
!. Can it be avoided? IMO, it is still possible, but I may be wrong. Some may know, but they are guessing. Anyway, hope springs eternal.
2. The timing or, when does it happen? Those who get the timing and investments right will sail through ala blert’s comment. Those who don’t understand what’s happening or get the timing wrong will just be poorer. Maybe much poorer.
I grew up during the Depression. That was basically a period of deflation. People got by with bartering, conserving assets anyway they could, and hard work. The standard of living my family had would be classified as in poverty today. Our house was tiny, we had kerosene space heater, one bath for a family of five, there were no plumb walls or level floors in the house, we cooked on a wood stove, food was plain and enough to sustain us but never in abundance, we never ate out, I got my first new suit of clothes when I was in junior high school, we had a jalopy for a car, etc. We didn’t know we were poor because there were so many other people living the same way. Most adults were pretty discouraged because things had been so bad for so long. WWII changed everything. It put people back to work building our airplanes, ships, tanks, military bases, and much, much more. It was done because there was no other option except giving up. When we won, confidence returned. Everyone was worried that, with no war effort to support, things would go back in the tank. Instead, people had the confidence to start businesses, invest, build, and the rest is history. Confidence does wonders for an economy.
Zimbabwe is a recent example of hyper-inflation. How did it happen? The Mugabe government slowly ruined the country’s agricultural productivity by driving the European farmers off their farms. The Shona tribesmen who took over the farms did not know how to farm. At one time Zimbabwe exported ag goods to other countries, now they can’t feed themselves. In order to buy such things as gasoline, food, and other finished goods, they had to pay more and more to importers. They printed plenty of money, but there was a shortage of everything – classic inflationary conditions. As long as Mugabe (who in many ways is the African Obama) is in power they won’t change. He is a strict Marxist ideologue. It took him eight years to drive the Europeans off their farms. Fortunately, our economy is far more robust and productive than Zimbabwe. Obama will have to do much more than Mugabe to ruin our economy, but he’s definitely working on it.
Oblio asks, “J.J., are all defaults created equal? Is the impact of defaulting on bonds the same as furloughing workers at EPA, Interior, or DoD? Surely that spending can’t have the same force of law as the bonds, which have their own Amendment to the Constitution to guarantee them.”
Standard and Poors will not care about the difference. There would be an immediate downgrade of our credit rating. That could lead to demands for higher interest rates. It would tank the stock market. It would cause confidence to sink even lower than it is now.
IMO, there is no way to not raise the ceiling and maintain the economy at it’s present depressed level. What the Republicans want is to extract some real spending cuts (the cuts offered by Obama are smoke and mirrors) in return for raising the ceiling. As long as Obama thinks he has the people in his hip pocket he feels he can do as he wishes. My suggestion is that, especially those who have democrat Senators or Representatives (as I do), you should write or call them and demand that they do something about the spending. And be sure to mention that you don’t support Obama’s spending plans. The more people that call or write and sound off on the spending and the deficit, the better. They do pay attention.
J.J., I think we will need to disagree about S&P’s reaction: in this case, they are charged above all with worrying about the government’s ability to repay the nominal principal and interest of the bonds.
The stock market is interesting, and perplexing. There is some evidence that quantitative easing has been keeping the market afloat; it is addicted to easing. On the other hand, the talk today is of a Great Rotation in which people are deserting bonds to go back to the stock market; we can’t live without yield. So pick your poison.
The current yield environment poses a dilemma in government finance. No yield (the current situation) breaks the backs of local government who can’t fund their pension obligations. Increasing the yield on treasuries will break the Federal government, or whatever is left after Obamacare finishes with it.
Oblio,
I agree with everything you said in the last comment.
The Fed interest rate policy is cutting both ways and the longer it goes on, the worse it is for pensions. Few are remarking on this, but it may be more important than anyone knows.
We can afford to pay the interest so no raise in the debt ceiling should not equal a default.
Default, dear Brutus, is not in our stars,
But in ourselves…
In some ways i was not clear in my post.
the US CAN NOT PRINT MONEY as it feels like. period
however there has been a subtle change in things.
i will try to explain this, but this is not where my bailiwick exists
if people understood this a bit more, then they would get whats going on in a more sane way and it would be much easier to tell who is being the bad guy and so on.
by the way, the whole trillion dollar coin thing shows that they know the rules and are following them, while the public does not. yet, the public will not allow THAT version of gaming the spirit by applying the letter of the law.
in order for the fed to print money, it has to create backing for it.
we do not have fiat currency the way people express it. we have rules as to what or how currency can be made and how its used and so on.
and guess what? The debt ceiling is the cap on this when the budget no longer works!!!!!!!
once you ‘get’ how this works, you will get why they created asset bubbles and what tiny change they made in some way made it happen.
can he fed say… print me up a billion new crisps? not at all
it first has to create a reserve asset. now, given how the fed was created these assets used to be limited to NON FISCAL things.
[i am not an economist kind of guy so terms will not be right, but essence will be close]
the treasury will not print money for the fed unless there is a reserve of some sort to back it. just not gold… if it tries, it wont matter, as only the fed can issue currency and the notes serial numbers are tied to the reserves that back them
they want you to think that the bind is republican when it was (i think) andrew jacksons thinking… but i can be totally wrong on this one as far as jackson goes
so what is the gig with the trillion dollar coin?
well, the treasury has another vehicle for printing monetary things.
ie. commemorative coins. and they do not have to be backed by the fed reserves… and the treasury can issue them.
so the idea is to get around the limit on printing your own money!!!!
they create a platinum commemorative coin…
the treasury can issue that
then they could give it to the fed, who would then have a trillion dollar asset to put in reserve, and so could then tell the treasury to print a trillion now that its backed. and then the fed can issue it.
cute. eh?
but even the idea shows how stupid the american people are if they can watch that be suggested and not get it.
anyway… the neat trick that happened that changed all this over obama is his failure to create a budget… and so the fed started amasing reserves that are FISCAL… not structural…
it USED to be that the fed could only buy treasuries..
which then would allow it to have a reserve to cause a print
this kept its power away from fiscal things..
however, with the cloward and piven welfare manufactured strategies, they started buying up hard assets, like property. (and by overpaying, they drive up the artificial worth of the asset)… and in this way, created an asset reserve so as to print money.
ie. they bankrupted the homeowners to get the asset into the state hands so they could then make a reserve of it, which allowed them to then convert these assets of the peoples who owned them, into a reserve.. once they had the reserve, they could print all that cash
i think that they intended for the people to take the money that they just printed after getin the asset reserve, to then buy back the commodities of assets. in this way, then clearing the books of the too many dollars. but we are dumb but not that dumb, and so people did not buy the assets with the money the fed injected after making a reserve of them, as the money never got to them as the banks who get the issued currency held on to it. after all, its at zero interest. so they could hold it forever and not pay a dime. right?
This is fiscal policy. When the Fed lends directly or buys assets other than Treasuries, the total debt + money increases. The traditional restriction that the Fed should only buy Treasuries separates it from fiscal policy. As some of James’ clever ideas point out, you just have to be a bit clever to channel this newly-created money to social security recipients.
now here is where the deeper understanding comes from
people wrongly imply that if the debt ceiling does not go up, then the USA will default. but that is wrong, not to mention, default to whom?
if a 100 dollar bond comes due, the treasury can sell a new 100$ bond to pay for it. with over 2.5 trillion in tax revenue coming in on top of all the RESERVES…
so the US defaulting would be a choice, this is why i said WHOM
all this is structural debt and its backed… so china is not going to be cheated… what is outstanding is ONLY 16 trillion..
so what about the unfunded liabilities? well, the reason they play games here is that they are saying that these are only fiscal promises to ourselves, not actual debts!!!!!!!!!
unlike treasuries and other BACKED debt, these are really only political promises that we as the people think we can hold the system to. but just as a internal budget choice can be changed by the budgeter, so can this.
so the left knows that a default on welfare, social security, tsa, etc… is not technically a default any more than a father cutting off the allowance of a daughter would be considered a default, and the bank wont be seeking redress.
SAME here…
oh.. the population may go into a civil war being denied what was promised them, but is that a default? i say yes in terms of the people. the young daughter may just rebel and so on…
so to the daughter or son whose allowance is cut off, dad defaulted on his promises… but since this promise technically has no legal obligation its a default in action, not legal parlance (so to the kind of people that look at it with a lawyer mentality, would say it has no reality to it legally)
and this is where everyone is getting all twisted up.
because Americans believe a promise is a contract!!!!
so they see these promises as legal obligations as they would be between themselves. but the politicians see such as conveniences that can be changed at will (if they could get everyone to cooperate).
but the lawmakers realize they can change a law they made in the morning by just changing it in the afternoon. short the limitations thrust upon them, they could do this 5 times a day every day and so on. (at the sacrifice of social stability, which they see as an opportunity to prove we cant get along).
so this is where the problem is….
if they intended to pay the internal bills, this would be a problem
but the idea of efficiency and control in a SOVEREIGN DEMOCRACY (see russia), is to promise you tomorrow what you never get for your complicity, cooperation and hard effort today!!!!!
ie promise them what they will never have and who will be stuck with the hot potatoe long after i am gone…
China Doesn’t Fear The Fiscal Cliff, Buys Massive Amount Of U.S. Debt
http://www.huffingtonpost.com/2012/12/17/china-us-treasury-debt_n_2316032.html
China and others are buying because they are backed. (though not by gold)
from yesterdays news
China’s sovereign wealth fund hopes to reduce its reliance on purchases of U.S. Treasurys and boost investments in other assets as the U.S. economic recovery makes U.S. government debt less attractive, the Shanghai Securities News reported Tuesday, citing the fund’s head.
they are charged above all with worrying about the government’s ability to repay the nominal principal and interest of the bonds.
Protracted low interest rates are hell on retirees and savers. Many Obama voters are not savers and are not affected. People who save and plan ahead for retirement find they can not earn any interest on their deposits. That forces them to chase dividends in the stock market where you can lose your investment.
its actually quite hard to lose all your money in stock unless you move it around.
if i take ten thousand, and put 1000 on each of 10 companies. to lose all my money would require them all to go bankrupt, and even then i may not lose it all
but if i sell and buy, and sell and buy, i can even invest in winners and end up broke.
put and call options are another thing
and for a change…
http://www.youtube.com/watch?NR=1&v=Y_o_5v92_zE&feature=endscreen
You are talking to a man who had stock in GM and Wachovia just when TSHTF. It’s not hard to lose money in individual stocks. Even indexes can bite you in big down turns.
“if i take ten thousand, and put 1000 on each of 10 companies. to lose all my money would require them all to go bankrupt, and even then i may not lose it all”
Learn the ups and downs and start trading in the commodity and currency markets. Stay nimble. I stay out of equities because its a rigged market. Commodities and currencies are far more straightforward and predictable. I stay in the tangible world. Cotton is cotton, wheat is wheat and the demand for cotton or wheat is far more possible to predict than the FED pumped equity market. I’m long ag commodities and strong on the AU, CA, and Singapore dollars. Stay nimble.