Trump and America's Credit-Worthiness

[Arkady]

If it looks like Trump is going to win the presidency, you may want to think about investment strategies that count on Treasury interest rates rising.

Our current ridiculously low interest rates (just 0.18% on a 10-year inflation-indexed security) means the market assumes there's essentially no risk of even partial default, and the rate on non-inflation-protected Treasuries (just 1.77% for the 10-year) means the market assumes extremely low inflation rates, as well. America gets those low rates for the same reason someone with a great credit score gets better rates on loans than the average person: a low credit risk means a lender doesn't have to charge much for the risk of not getting repaid, and so it can just charge what it demands as a profit. But Trump is a threat to that.

First, of course, he has proposed a tax plan that would create nearly $10 trillion in additional debt over the next decade, making us a bigger credit risk. And that's before even considering the fiscal impact of his wildly expensive wall, or his promised stronger military, or the deficit hit from repealing Obamacare, etc.

Second, he's openly talking about partial default on our debt. Of course he doesn't frame it that way. He talks about renegotiating our debt. But that's just a polite way to bring up a tactic used by financially distressed businesses (like the ones Trump manages): threaten to go bankrupt and demand your creditors lower your rates, extend you payment deadlines, or forgive part of your debt, to keep you from going under and leaving them with the whole thing being an unrecoverable loss. At a national level, he'd basically be telling holders of Treasuries (including lots of Americans, by the way), that either they agree to get pennies on the dollar, or he'll just not pay them at all.

Even if he can bully them into doing that, the result would be much higher interest rates on future debt, because America's status as having the world's highest "credit rating" would be destroyed. People would be factoring in much more risk in future loans to us.

Even if this is just some nonsense he's floating for the campaign, and smarter people would convince him not to try that once in office, the mere discussion of it could result in us paying billions of dollars more in interest in the coming years, if those people and institutions buying Treasuries think there's a meaningful chance he might get elected and follow through. It's like walking into a bank, to ask for a loan, and you start talking about the fact that if you have trouble repaying, you can always just renegotiate better terms with them later, or go bankrupt if they don't agree. You start talking that way, and they're going to charge you an arm and a leg to lend to you at all.

Trump is just too stupid to be president. The last time I said that about a candidate was in 2000, about Bush. Everyone was insisting that although he clearly wasn't bright, he'd surround himself with smart people and it would all be OK. Turns out, I was right to be worried. His presidency was a nearly across-the-board socioeconomic and foreign policy disaster. Let's not make the same mistake again. Smart matters.

 

[Spamature]

If it looks like Trump is going to win the presidency, you may want to think about investment strategies that count on Treasury interest rates rising.

Our current ridiculously low interest rates (just 0.18% on a 10-year inflation-indexed security) means the market assumes there's essentially no risk of even partial default, and the rate on non-inflation-protected Treasuries (just 1.77% for the 10-year) means the market assumes extremely low inflation rates, as well. In essence, American gets those low rates for the same reason someone with a great credit score gets better rates on loans than the average person: a low credit risk means a bank doesn't have to charge much for the risk of not getting repaid, and so it can just charge what it demands as a profit. But Trump is a threat to that.

First, of course, he has proposed a tax plan that would create nearly $10 trillion in additional debt over the next decade, making us a bigger credit risk. And that's before even considering the fiscal impact of his wildly expensive war, or his promised stronger military, or the deficit hit from repealing Obamacare, etc.

Second, he's openly talking about partial default on our debt. Of course he doesn't frame it that way. He talks about renegotiating our debt. But that's just a polite way to bring up a tactic used by financially distressed businesses (like the ones Trump manages): threaten to go bankrupt and demand your creditors lower your rates, extend you payment deadlines, or forgive part of your debt, to keep you from going under and leaving them with the whole thing being an unrecoverable loss. At a national level, he'd basically be telling holders of Treasuries (including lots of Americans, by the way), that either they agree to get pennies on the dollar, or he'll just not pay them at all.

Even if he can bully them into doing that, the result would be much higher interest rates on future debt, because America's status as having the world's highest "credit rating" would be destroyed. People would be factoring in much more risk in future loans to us.

Even if this is just some nonsense he's floating for the campaign, and smarter people would convince him not to try that once in office, the mere discussion of it could result in us paying billions of dollars more in interest in the coming years, if those people and institutions buying Treasuries think there's a meaningful chance he might get elected and follow through. It's like walking into a bank, to discuss a loan, and you start talking about the fact that if you have trouble repaying, you can always just renegotiate better terms with them later, or go bankrupt if they don't agree. You start talking that way, and they're going to charge you an arm and a leg to lend to you at all.

Trump is just too stupid to be president. The last time I said that about a candidate was in 2000, about Bush. Everyone was insisting that although he clearly wasn't bright, he'd surround himself with smart people and it would all be OK. Turns out, I was right to be worried. His presidency was a nearly across-the-board socioeconomic and foreign policy disaster. Let's not make the same mistake again. Smart matters.

Smart people have their own agendas too ? If they are that much smarter and more prepared to carry out their own agendas than he is to carry out mishmash of conflicting agendas. He won't even see it coming until its way to late.

 

[Arkady]

Smart people have their own agendas too ? If they are that much smarter and more prepared to carry out their own agendas than he is to carry out mishmash of conflicting agendas. He won't even see it coming until its way to late.

That's also scary. It reminds me of that dim bulb Bush and his VP. Bush campaigned on criticisms of Clinton for "mission fatigue" and "nation building" and hammered Clinton for getting us involved abroad without clear exit strategies. He said that we'd be respected if we were a humble nation. Then he picked a smart person as his VP, who had him stuff his administration with warmongering neocons, and they spent eight years pushing their agenda of foreign policy arrogance, with perpetual aggressive war and nation building, and no thought of exit strategies. A dummy in the White House is an open invitation to the forces of evil.

 

[Deleted member 21794]

A dummy in the White House is an open invitation to the forces of evil.

Indeed.... one need only look at who came to the White House after Bush for proof of your statement.

 

[Arkady]

Indeed.... one need only look at who came to the White House after Bush for proof of your statement.

Whatever you think of Obama's policies, he's clearly not a dumb man. With no wealth or family connections he got himself an Ivy League education, then passed the bar exam, got elected to high office young, and soon won the presidency. He was also an academic all star, including heading up the Harvard Law review and working as a professor. I'm not convinced he's a genius or anything, but he's clearly bright.

 

[worldlymrb]

Our current ridiculously low interest rates (just 0.18% on a 10-year inflation-indexed security) means the market assumes there's essentially no risk of even partial default, and the rate on non-inflation-protected Treasuries (just 1.77% for the 10-year) means the market assumes extremely low inflation rates, as well. America gets those low rates for the same reason someone with a great credit score gets better rates on loans than the average person: a low credit risk means a lender doesn't have to charge much for the risk of not getting repaid, and so it can just charge what it demands as a profit. But Trump is a threat to that.

First, of course, he has proposed a tax plan that would create nearly $10 trillion in additional debt over the next decade, making us a bigger credit risk. And that's before even considering the fiscal impact of his wildly expensive wall, or his promised stronger military, or the deficit hit from repealing Obamacare, etc.

Second, he's openly talking about partial default on our debt. Of course he doesn't frame it that way. He talks about renegotiating our debt. But that's just a polite way to bring up a tactic used by financially distressed businesses (like the ones Trump manages): threaten to go bankrupt and demand your creditors lower your rates, extend you payment deadlines, or forgive part of your debt, to keep you from going under and leaving them with the whole thing being an unrecoverable loss. At a national level, he'd basically be telling holders of Treasuries (including lots of Americans, by the way), that either they agree to get pennies on the dollar, or he'll just not pay them at all.

Even if he can bully them into doing that, the result would be much higher interest rates on future debt, because America's status as having the world's highest "credit rating" would be destroyed. People would be factoring in much more risk in future loans to us.

Even if this is just some nonsense he's floating for the campaign, and smarter people would convince him not to try that once in office, the mere discussion of it could result in us paying billions of dollars more in interest in the coming years, if those people and institutions buying Treasuries think there's a meaningful chance he might get elected and follow through. It's like walking into a bank, to ask for a loan, and you start talking about the fact that if you have trouble repaying, you can always just renegotiate better terms with them later, or go bankrupt if they don't agree. You start talking that way, and they're going to charge you an arm and a leg to lend to you at all.

Trump is just too stupid to be president. The last time I said that about a candidate was in 2000, about Bush. Everyone was insisting that although he clearly wasn't bright, he'd surround himself with smart people and it would all be OK. Turns out, I was right to be worried. His presidency was a nearly across-the-board socioeconomic and foreign policy disaster. Let's not make the same mistake again. Smart matters.

Still bitterly clinging to the notion that the US "Market" is still not a rigged casino I see.

There is no risk of of US Credit Default as the Federal Reserve can continue to monetize the debt (buy USTs), like they have the last 8 years.

In fact, had the Federal Reserve not stepped in to buy USTs during the 2009 recession, interest rates would have soared and bankrupted the USGovt.

BTW: If you think today's interest rates are ridiculously low, just wait until Negative Interest Rates (NIRP) comes to town. Then, instead of collecting interest on your savings or CDs, you will have to PAY banksters to hold your money. While big debtors (speculators/Corp/USGovt) get paid to go further into debt.

Then the total Fundamental Transformation from normalcy will be complete.

 

[Arkady]

Still bitterly clinging to the notion that the US "Market" is still not a rigged casino I see.

There is no risk of of US Credit Default as the Federal Reserve can continue to monetize the debt (buy USTs), like they have the last 8 years.

There's a reason I listed both the inflation-protected and non-inflation protected securities. In very oversimplified terms, you can think of the Federal Reserve as printing money to buy Treasuries. That increases the US currency in circulation, which creates a risk of inflation under the right circumstances. If the market got worried about US debt and started to dump it, putting upward pressure on rates, and the Fed's only way to keep them low was to keep increasing its stock of debt, then the result would be inflation. Yet the spread between the inflation-adjusted and non-inflation-adjusted Treasuries is very low, indicating that the market anticipates very low inflation for decades to come. And, remember, the Fed has not been accumulating any appreciable amount of debt lately.

https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/hist07z1.xls

As you can see, between 2014 and 2015, the debt held in the federal reserve system was nearly flat in dollar terms, and actually fell from 29.2% of GDP to 28.1%. In fact, that 28.1% is the lowest it's been since 2007. Relative to the size of the economy, there's been a net DECREASE in leverage in the Federal Reserve system over the last seven years. Yet, despite that, interest rates remain near all-time record lows, because the appetite for US debt outside the US government is huge, even at those very low rates. Since 2008, the amount of US debt held by the public OTHER THAN THE FEDERAL RESERVE SYSTEM has soared from 29.7% of GDP to 59.8% of GDP.

Right-wingers like this notion that the Fed is rigging the system because it lets them put a magic asterisk next to any economic results they don't feel emotionally comfortable with, to wave them away. But the numbers are what they are. Relative to the size of the economy, the amount of debt held by the Fed is DOWN over the course of the Obama years. Facts matter.

 

[Lukey]

And, of course, you are wrong (again). The "ridiculous" low interest rates have nothing to do with risk premia and everything to do with the "greater fool" theory. Investors are betting that the central banks can never normalize rates, and that this will put continued upward pressure on bond prices. For instance, I fully believe that our interest rates are at least two or three percent below their equalibria rate, but that eventually the Fed will implement NIRP (negative rates) here as Obamunism continues to exert downward pressure on the GDP growth rate. So bonds look like a buy, but it is a short term trade. No one is buying long bonds here with the intention to hold them to maturity.

 

[Arkady]

And, of course, you are wrong (again). The "ridiculous" low interest rates have nothing to do with risk premia and everything to do with the "greater fool" theory. Investors are betting that the central banks can never normalize rates, and that this will put continued upward pressure on bond prices. For instance, I fully believe that our interest rates are at least two or three percent below their equalibria rate, but that eventually the Fed will implement NIRP (negative rates) here as Obamunism continues to exert downward pressure on the GDP growth rate. So bonds look like a buy, but it is a short term trade. No one is buying long bonds here with the intention to hold them to maturity.

It's possible for people to think that way and to mis-value assets for a considerably length of time on that basis -- such as the way the "greater fool" theory played into the run-up in housing prices in the later part of the Bush presidency. People figured that they could always find someone else to buy the house if they needed to sell, or to buy up the mortgage. Eventually, things changed and there were no longer enough "greater fools" left, and things fell apart. Will that eventually happen with Treasuries? I suppose it's possible. But we see no warning signs of that, at this point. Despite the fact the Fed holds less US debt on a per-GDP basis than before Obama took office, rates remain low.

And I can't say I disagree with those who see the US debt as safe. Look at it in historic and global terms. Historically, the US worked its way out of more debt than this after WWII (when we owed about 120% of GDP). And several other leading nations have done the same, historically (e.g., the UK, which has done it multiple times). And there's also the fact we're under-taxed, relative to first-world norms. That gives us a lot of room to hike taxes, without moving outside of what has been shown to be compatible with growing economies, if at some point our debt obligations eat up too big a share of our total revenues.

To try to analogize to everyday life, we're like someone with impeccable payment history, a $100,000 income, and $583,000 outstanding on a mortgage, and massive assets. But we're like someone who's pulling down that $100k per year while semi-retired, such that we could conceivably boost income considerably , if at some point his debt obligations eat up too big a share of his total income. It's not ideal, but neither is it something to send lenders screaming for the hills.

That's not to say we should ignore the problem. Our debt is pretty high right now and we should be thinking hard about how to bring it down. A good start would be not cutting taxes in a way that would created almost $10 trillion in new debt over the next decade, the way Trump has called for. Something more like a Clinton-style upper-class tax hike could put us back on the path we were on in the Clinton years, when gross federal debt dropped by more than ten points as a share of GDP over the course of five years.

 

[as seen on tv]

a number of legitimate economists are pointing out that fed rates will rise in 2017, no matter who is elected. in fact, they view the current (renewed) hiatus on fed rate increases as an attempt to manage voter perceptions before the election.