New Posts
  • Hi there guest! Welcome to PoliticalJack.com. Register for free to join our community?

surreal moment for America

Days

Commentator
Then there is no debt cap. This, of course, is an absurd concept because we know that there is. Why would there be a debt cap if it was incapable of limiting the issuance of (additional) new debt?
We also have to run a "balanced budget" ... as if that ever happened.
 

Arkady

President
Then there is no debt cap. This, of course, is an absurd concept because we know that there is. Why would there be a debt cap if it was incapable of limiting the issuance of (additional) new debt?
I have no idea why there's a debt cap. It seems like one of those ideas that dumb politicians thought would make them seem fiscally tough to voters, without thinking through how it would actually work. It makes a lot more sense to have them vote on taxes and spending and then that dictates what the debt will be.
 

Days

Commentator
The budget was in surplus as recently as the late Clinton years.
yeah, we paid down a whopping $150 Billion in the debt, don't hold your breath waiting for that to happen again. We have $13 Trillion in outstanding Treasuries that can't be rolled over like the $5Trillion owed to federal trust funds get rolled over. That $13 Trillion ranges in term from 3 month T-Bills to 40 year Bonds. For a govt that only realizes around $2.5 Trillion in revenue every year, and tends to spend around $3 Trillion, it's not a pretty picture.
 

Arkady

President
yeah, we paid down a whopping $150 Billion in the debt, don't hold your breath waiting for that to happen again. We have $13 Trillion in outstanding Treasuries that can't be rolled over like the $5Trillion owed to federal trust funds get rolled over. That $13 Trillion ranges in term from 3 month T-Bills to 40 year Bonds. For a govt that only realizes around $2.5 Trillion in revenue every year, and tends to spend around $3 Trillion, it's not a pretty picture.
Well, I think we've got a pretty good idea of what works and what doesn't -- it's just a question of what we do with that knowledge. We know what took us from record deficits to record surpluses in just a few short years, under Clinton. We know that we cut military spending, held non-military spending growth to slightly lower levels, and hiked taxes, especially on the rich.

We also know that from 1946 to 1981, debt fell as a share of GDP nearly every year. We know that we worked out way out of a situation where we owed 118.9% of our GDP to a situation where debt was pretty much an afterthought: just 31.7% of GDP. And we know exactly what went wrong after that. We know how Reagan's upper-class tax cuts set us up for year after year of exploding debt, through the mid-1990s. And we know how Clinton's tax hikes gave us a brief reprieve from that, before Bush's tax cuts again drove debt ever upwards.

The information is all there and clear. If we're worried about debt, we know what to do. We just choose not to.
 

Lukey

Senator
I have no idea why there's a debt cap. It seems like one of those ideas that dumb politicians thought would make them seem fiscally tough to voters, without thinking through how it would actually work. It makes a lot more sense to have them vote on taxes and spending and then that dictates what the debt will be.
Tax revenue is a variable. Spending is not. Would you think it prudent that a family could decide their income and spending, and that would dictate their credit limit?
 

Days

Commentator
Well, I think we've got a pretty good idea of what works and what doesn't -- it's just a question of what we do with that knowledge. We know what took us from record deficits to record surpluses in just a few short years, under Clinton. We know that we cut military spending, held non-military spending growth to slightly lower levels, and hiked taxes, especially on the rich.

We also know that from 1946 to 1981, debt fell as a share of GDP nearly every year. We know that we worked out way out of a situation where we owed 118.9% of our GDP to a situation where debt was pretty much an afterthought: just 31.7% of GDP. And we know exactly what went wrong after that. We know how Reagan's upper-class tax cuts set us up for year after year of exploding debt, through the mid-1990s. And we know how Clinton's tax hikes gave us a brief reprieve from that, before Bush's tax cuts again drove debt ever upwards.

The information is all there and clear. If we're worried about debt, we know what to do. We just choose not to.
The Savings and Loan scandal of Bush Sr first term scared America. We didn't understand what was happening. That's how Clinton was voted in (I cast my first presidential vote for him for that exact reason) and that's what gave him the political capital to get Congress to cut spending.

But the surplus was a result of the collapse of the yuan forcing Asians to buy US dollars and assets to hold onto value. That huge surge in our economy brought in record revenue to the Treasury, and try as they did to spend it all, they still had so much surplus one year they decided to pay down the debt. After they stabilized the yuan (by pegging it to the US dollar) Asians took their money back out of America and went to work with it back in Asia. You won't see a repeat of that happening again in your lifetime.
 
Last edited:

Arkady

President
Tax revenue is a variable. Spending is not. Would you think it prudent that a family could decide their income and spending, and that would dictate their credit limit?
I would think it reasonable that a person's debt be allowed to rise or fall on a regular basis. Obviously, if it keeps rising, you need to sit down and do a budget and hold yourself to it -- either find a way to reduce spending or a way to increase income. But what you shouldn't do is start defaulting on your obligations -- for example, refusing to pay people who have done work for you, the way the government does during shutdowns.
 

Lukey

Senator
I would think it reasonable that a person's debt be allowed to rise or fall on a regular basis. Obviously, if it keeps rising, you need to sit down and do a budget and hold yourself to it -- either find a way to reduce spending or a way to increase income. But what you shouldn't do is start defaulting on your obligations -- for example, refusing to pay people who have done work for you, the way the government does during shutdowns.
So you think people making and spending the money should determine their own credit limits. That should work really really well...
 

Days

Commentator
So you think people making and spending the money should determine their own credit limits. That should work really really well...
In a sense, they do... since their credit limits are determined by their behavior.
 

Arkady

President
So you think people making and spending the money should determine their own credit limits. That should work really really well...
What we're talking about here is a self-imposed limit. As far as the market is concerned, the federal government is welcome to borrow much more: people are happy to buy treasuries at a fraction of the interest rates they demanded in the 80s, 90s, etc. The lenders aren't imposing a credit limit. We're imposing it on ourselves.
 

Days

Commentator
What we're talking about here is a self-imposed limit. As far as the market is concerned, the federal government is welcome to borrow much more: people are happy to buy treasuries at a fraction of the interest rates they demanded in the 80s, 90s, etc. The lenders aren't imposing a credit limit. We're imposing it on ourselves.
that and so much more...
any actual Bills that survive to become law will seek to control exactly what is and what isn't to be funded enroute to raising the debt limit. So it is not going to be carte blanche for the Treasury, Congress will raise the debt limit in conjunction with a spending program.
 

Arkady

President
In a sense, they do... since their credit limits are determined by their behavior.
Yes. Bad behavior convinces lenders the borrowers are a bad credit risk, and they demand higher and higher interest rates for loans, until finally you get up to the crazy interest rates of payday loans. By comparison, right now lenders are willing to lend to America at incredibly low interest rates -- something like half a point above expected inflation. Essentially, the market has ruled that our behavior makes our debt some of the lowest-risk on the planet. That won't stop the usual suspects from freaking out about it, but the numbers are what they are.
 

Days

Commentator
Yes. Bad behavior convinces lenders the borrowers are a bad credit risk, and they demand higher and higher interest rates for loans, until finally you get up to the crazy interest rates of payday loans. By comparison, right now lenders are willing to lend to America at incredibly low interest rates -- something like half a point above expected inflation. Essentially, the market has ruled that our behavior makes our debt some of the lowest-risk on the planet. That won't stop the usual suspects from freaking out about it, but the numbers are what they are.
interest rates reflect zero growth, and that's what T-Bills pay in interest. But banks still buy them because they need asset reserve. But if the nation were to actually default - and that includes the idea that they intentionally are not going to redeem the debt - then, yeah, you can forget finding creditors for your Banana Republic after that. That's why the USSR was dissolved.

America has 12 mints and could print up million dollar bills at the sweep of a presidential pen (executive order) - there's no reason in the republic for America to default. For that matter, there is no reason for America to be collecting an illegal income tax either. We have 12 mints that have not printed the nation's own Notes since JFK began to do so in 1963. We have 12 mints that have not issued the nation's own money since FDR shut down the gold dollar in 1932. We have 12 mints that have remained open and operational solely for the benefit of the Federal Reserve. Talk about your sleeping giant.
 

Arkady

President
interest rates reflect zero growth, and that's what T-Bills pay in interest. But banks still buy them because they need asset reserve. But if the nation were to actually default - and that includes the idea that they intentionally are not going to redeem the debt - then, yeah, you can forget finding creditors for your Banana Republic after that. That's why the USSR was dissolved.

America has 12 mints and could print up million dollar bills at the sweep of a presidential pen (executive order) - there's no reason in the republic for America to default. For that matter, there is no reason for America to be collecting an illegal income tax either. We have 12 mints that have not printed the nation's own Notes since JFK began to do so in 1963. We have 12 mints that have not issued the nation's own money since FDR shut down the gold dollar in 1932. We have 12 mints that have remained open and operational solely for the benefit of the Federal Reserve. Talk about your sleeping giant.
The market buys those assets at essentially zero real interest rates. It doesn't have to. It could hold out for a better deal if it thought those assets were risky (a scenario the fiscal conservatives insisted was imminent back in 2009). It could keep reserves in other forms -- notes from other countries' treasuries, or bonds from other governments or corporations, or currencies, or gold, or what have you. They choose to buy US treasuries even at ultra low rates because they ascribe near-zero risk to those assets. And I don't just mean default risk. We're also talking about risk of currency devaluation -- the market is factoring in the risk of a fall in the dollar, and even then they accept ultra low interest rates.
 

Days

Commentator
The market buys those assets at essentially zero real interest rates. It doesn't have to. It could hold out for a better deal if it thought those assets were risky (a scenario the fiscal conservatives insisted was imminent back in 2009). It could keep reserves in other forms -- notes from other countries' treasuries, or bonds from other governments or corporations, or currencies, or gold, or what have you. They choose to buy US treasuries even at ultra low rates because they ascribe near-zero risk to those assets. And I don't just mean default risk. We're also talking about risk of currency devaluation -- the market is factoring in the risk of a fall in the dollar, and even then they accept ultra low interest rates.
Your factors are all correct, but the reason the market buys Treasuries is not to retain value. Remember, they pay for the Treasuries with dollars, so it isn't about being anchored in the dollar, neither is it a fear of dollar devaluation, because eventually they get redeemed in dollars, so this is purely not the reason the banks buy Treasuries at zero interest. They buy them because the Federal Reserve requires them to hold Treasuries in asset/reserve for their lending. So it is the foundation for their banking. If you believe you can grow your business in the coming quarter, you buy Treasuries, so you can lend. On top of that, the international oil market requires traders to hold asset/reserve in dollars (read: Treasuries) in order to buy oil. So you have central banks the world over, buying Treasuries, holding them at the NYFed, redeeming those Treasuries when they mature, and then replacing them according to business.

The last time there was no appetite for new bonds was 1957; Eisenhower administration. You can read the bids ratio in the auction reports; generally it is 3:1, which means three times as much money was bid as was sold. (the higher they bid for the bonds, the lower the interest rate of the bond). Credit isn't a factor in the daily market, if it becomes a factor, then something is severely wrong.
 

Lukey

Senator
What we're talking about here is a self-imposed limit. As far as the market is concerned, the federal government is welcome to borrow much more: people are happy to buy treasuries at a fraction of the interest rates they demanded in the 80s, 90s, etc. The lenders aren't imposing a credit limit. We're imposing it on ourselves.
If by "people" you mean central bankers then yes, that is correct. The "bond vigilantes" at the bond market trading desks used to provide the borrowing discipline. Remember Carville's infamous quote?

"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Until the CBs figured out how to use interest rate policy and ultimately QE to neuter them. Now there simply is no borrowing discipline. And you are correct, it is now a self-imposed credit limit because the bond market has been subsumed by CB balance sheets. That makes the debt limit all that more important to those of us who understand both economics AND finance.
 
Last edited:

Arkady

President
They buy them because the Federal Reserve requires them to hold Treasuries in asset/reserve for their lending.
First, lots of Treasuries are held by those other than US lenders. They're held by foreign governments, private citizens, non-lending corporations, etc. As of February 2015, $2.1 trillion in Treasuries were held by US commercial banks:

http://www.bloomberg.com/news/articles/2015-02-23/bofa-leads-charge-into-bonds-as-banks-build-2-trillion-hoard

That's compared to $18.4 trillion in debt. So you're talking about 11.4% of the picture. The other 88.5% of purchasers are opting for Treasuries, even at ultra-low rates, over a whole planet's worth of assets they could choose from. Why? Obviously, it's because they think those Treasuries are unusually safe, relative to their other options, and so they're willing to accept very low return.

Even when it comes to the lenders, nobody is forcing them to make loans. If the only way to make a loan were to put money at risk in the form of Treasury reserves with a high default or devaluation risk, lenders would either stop lending, or would at least demand high interest rates on those loans, to cover their perceived risk. But that's not what's happening, obviously. Right now I can go out and get a 30-year fixed-rate mortgage at 3.592% APR! That's insanely low. Not only does that indicate the lenders think I'm a low risk, it also means that they perceive those US Treasury reserves as a low risk, too.

On top of that, the international oil market requires traders to hold asset/reserve in dollars (read: Treasuries) in order to buy oil.
What makes you think that? Traders choose dollar reserves because they're seen as stable and safe, but they can choose other options. Russia was recently thinking of switching to Swiss Francs... not because of any perceived monetary risk of the dollar, but because they're more vulnerable to US sanctions when they're holding a lot of dollars. There have also been others who shifted to Euros, including Iraq ahead of our invasion. The Iranian oil bourse works in currencies other than the dollar, as well. You can trade in Euros, Yen, Yuan, Rupees or a basket of currencies, but not the dollar.
 

Lukey

Senator
First, lots of Treasuries are held by those other than US lenders. They're held by foreign governments, private citizens, non-lending corporations, etc. As of February 2015, $2.1 trillion in Treasuries were held by US commercial banks:

http://www.bloomberg.com/news/articles/2015-02-23/bofa-leads-charge-into-bonds-as-banks-build-2-trillion-hoard

That's compared to $18.4 trillion in debt. So you're talking about 11.4% of the picture. The other 88.5% of purchasers are opting for Treasuries, even at ultra-low rates, over a whole planet's worth of assets they could choose from. Why? Obviously, it's because they think those Treasuries are unusually safe, relative to their other options, and so they're willing to accept very low return.

Even when it comes to the lenders, nobody is forcing them to make loans. If the only way to make a loan were to put money at risk in the form of Treasury reserves with a high default or devaluation risk, lenders would either stop lending, or would at least demand high interest rates on those loans, to cover their perceived risk. But that's not what's happening, obviously. Right now I can go out and get a 30-year fixed-rate mortgage at 3.592% APR! That's insanely low. Not only does that indicate the lenders think I'm a low risk, it also means that they perceive those US Treasury reserves as a low risk, too.



What makes you think that? Traders choose dollar reserves because they're seen as stable and safe, but they can choose other options. Russia was recently thinking of switching to Swiss Francs... not because of any perceived monetary risk of the dollar, but because they're more vulnerable to US sanctions when they're holding a lot of dollars. There have also been others who shifted to Euros, including Iraq ahead of our invasion. The Iranian oil bourse works in currencies other than the dollar, as well. You can trade in Euros, Yen, Yuan, Rupees or a basket of currencies, but not the dollar.
Not really. The people (besides CBs) who are buying treasuries in large amounts are speculators using the artificially low rates to make a (leveraged) bet that rates will (ultimately) go lower, and then they will reap big capital gains. You really don't understand this stuff very well...
 

Arkady

President
Not really. The people (besides CBs) who are buying treasuries in large amounts are speculators using the artificially low rates to make a (leveraged) bet that rates will (ultimately) go lower, and then they will reap big capital gains. You really don't understand this stuff very well...
I understand it quite well. I've done some of this stuff for a living, negotiating ISDAs and working on large M&A transactions where tiny differences in interest rates can make millions of dollars of difference. The world looks different out here in the real world than it does in the airless echo chamber of Zero Hedge. That's why Zero Hedge and those who rely on it keep being so very, very wrong in their predictions, year after year.
 
Top