US Default on Treasury Bonds

[doodle]

Getting out from underneath debt does require fiscal austerity....or extremely high growth. HOWEVER, I realize that austerity is not politically possible because of the pain dimension. I think eventually this takes us down the road to default / debt restructuring (a'la England 1976)....or inflation if the money printing continues endlessly without real economic production to back it up.

I think it is a mistake to use the WWII analogy that Kuttner uses:

We finally blasted our way out of the Great Depression by using the monumental deficit spending of World War II to put Americans back to work and recapitalize US industry. We did not use budget austerity to produce the wartime and postwar boom - quite the opposite. Then when prosperity returned, high growth made it easy to return to fiscal balance and pay down the war debt.

While I agree that we need to stimuluate our industrial base, no one has yet to explain to me how you can do this when all the multinationals are producing in China or Indonesia with a labor cost of 2 dollars an hour.

This argument that monetary sovreignty will be our salvation is somewhat short sighted I think because ultimately every currency is subject to the laws of supply and demand. At the moment we are safe because there aren't any alternatives on the world stage but if / and when the day comes that there is loss of reserve currency status it will severely reduce our ability to aquire funding at the rates that we do today.

I continue to hold T Bonds however I am very wary regarding the steps that our leadership is taking to solve this problem. I have great belief that if any country can get through the current situation it is America. HOwever we need a plan and so far I see none other than to keep kicking the can down the road. Eventually (and I agree there is no telling when) you do get to the end of the road.

[MediumTex]

I continue to hold T Bonds however I am very wary regarding the steps that our leadership is taking to solve this problem. I have great belief that if any country can get through the current situation it is America. However we need a plan and so far I see none other than to keep kicking the can down the road. Eventually (and I agree there is no telling when) you do get to the end of the road.

By saying you are "wary" it suggests to me that you have at least some faith that politicians will make hard choices and come up with creative solutions.  I think this faith is probably only going to lead to disappointment.

I think a better approach is to focus on your own life and your own happiness (along with those people you care about) and leave the rest of this stuff alone.

One of the premises behind the PP is that politicians are NOT enlightened, and that's why we own gold, and we own enough gold to make the PP more or less stupid-government-proof.

If you are protected against the incompetence of others (or at least as much as you can be), why lament the incompetence of others?

[Lone Wolf]

It sounds like you're reading a lot of one sided opinions arguing for austerity. Here's an interesting perspective on why austerity measures would be terrible for our economy while unemployment is high:

With respect, isn't the article you posted extremely one-sided?  I mean, the "implicit violence of Tea Party billionaire populism"?

Language like that is included by design to make you think less clearly and less rationally.  Why would the author feel the need to do that?  How highly does someone who speaks this way value whether or not I leave an article better informed?

I'd recommend instead this CBO report that lays out the numbers.  It strongly bolsters doodle's argument that the situation has noticeably worsened in the last few years:

"At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (a little above the 40-year average of 37 percent)... By the end of this year, the Congressional Budget Office (CBO) projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II. "  (Emphasis added.)  If a trillion dollars of "stimulus", excessive entitlement spending and wartime spending got us into this mess, why would we ever believe that "hair of the dog" would get us out?

Now where I agree with you, Gumby, is that none of this means we know how this will all shake out.  I strongly believe that government should be far smaller and that we as a country will have to learn to live within our means.  However, the fact that the government doesn't behave the way I wish does not mean that we'll face consequences anything like what I envision (or that there will even be any specific consequences!)

Or at least that's what I have to tell myself to stomach holding 30-year Treasury bonds!  :)

[Gumby]

It sounds like you're reading a lot of one sided opinions arguing for austerity. Here's an interesting perspective on why austerity measures would be terrible for our economy while unemployment is high:

With respect, isn't the article you posted extremely one-sided?  I mean, the "implicit violence of Tea Party billionaire populism"?

Absolutely it's one sided. It's the other side of the coin. That was why I posted it. So he could see that the deficit hawks don't necessarily have the correct opinion. He seems to be only reading opinions from deficit hawks. I try to expose myself to opinions from many different schools of thought.

Language like that is included by design to make you think less clearly and less rationally.  Why would the author feel the need to do that?  How highly does someone who speaks this way value whether or not I leave an article better informed?

I agree with what you are saying. And I don't necessarily agree with everything or anything in the article. But, I don't believe that the deficit hawks are any more correct or incorrect. Every opinion piece has an agenda.

I'd recommend instead this CBO report that lays out the numbers.  It strongly bolsters doodle's argument that the situation has noticeably worsened in the last few years:

There is no doubt that the situation has worsened. My point is that it's unclear how this is all going to turn out. The deficit hawks may be right. The deficit doves may be right. The CBO may be right (though it rarely is). The Functional Financiers may be right. I don't know. None of us know. The chances of any of us figuring out what our future will look like is quite slim. So, it's illogical to worry yourself sick over something that A) you can't control, and B) you can't even foresee. Live your life, enjoy it, and ignore the agendas of politicians and pundits, who are likely all going to be wrong.

"At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (a little above the 40-year average of 37 percent)... By the end of this year, the Congressional Budget Office (CBO) projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II. "  (Emphasis added.)  If a trillion dollars of "stimulus", excessive entitlement spending and wartime spending got us into this mess, why would we ever believe that "hair of the dog" would get us out?

I don't believe anyone ever said we'd get out of this mess. Some economists and pundits just believe that the size of the deficit doesn't matter as long as unemployment is high. I have no clue about who is right or wrong. I'm fairly certain that none of us know who will be right or wrong.

Now where I agree with you, Gumby, is that none of this means we know how this will all shake out.

Whoah... Slow down there, LW. Now your putting words in my mouth. I couldn't agree with you more. I never said that anybody knows how this is going to shake out. My only point was that doodle seems to think he knows exactly how this is going to shake out. He can't seem to envision any other way out than the future he's imagined. I merely showed him an argument that disagrees with his point of view. I never ever said that I agree with that point of view. I'm the one who keeps saying that none of us have a clue how this is going to shake out.

Pete Peterson has an agenda. Kuttner has an agenda. Everyone has an agenda. Ignore the pundits — any of them could be wrong. THAT'S what I'm saying.

I strongly believe that government should be far smaller and that we as a country will have to learn to live within our means.  However, the fact that the government doesn't behave the way I wish does not mean that we'll face consequences anything like what I envision (or that there will even be any specific consequences!)

EXACTLY!!!

Or at least that's what I have to tell myself to stomach holding 30-year Treasury bonds!  :)

Exactly. And that's what I think all of us are trying to tell doodle. Nobody in the world knows how this is going shake out. It's NOT a foregone conclusion. So, it doesn't make sense worrying about it...unless you don't have a PP (in which case you're screwed.)

[moda0306]

Can't we all admit that with 25% gold if the world's reserve currency were to collapse or to default on a chunk of its debt we'd be just fine.

Don't get me wrong, I love all the economic debate about treasuries, but if this is truly about convincing doodle to not replace LTT's with anything else (doodle, PLEASE don't do this), maybe illustrating how insanely well gold will perform would be on the top of our to-do list.

I feel just fine with the PP in the circumstances doodle describes... I'd be able to hold my head high by owning the PP (and 25% gold) and keep from looking at the greener grass on the other side of the fence.

It's the 1981 real-interest-hike malaise I fear.  Not that rates will skyrocket to 18%, but if short rates rise to 3%, long-rates stay about even or go up, stocks sputter, and gold collapses (I could see all this happening), the PP will take only a moderate hit, but it will be one that more crushes my spirits, even though we've seen it before and the gains that can follow.

[Lone Wolf]

Now where I agree with you, Gumby, is that none of this means we know how this will all shake out.

Whoah... Slow down there, LW. Now your putting words in my mouth. I couldn't agree with you more.

Yep!  Read me again there, brother -- we're in violent agreement. 

Exactly. And that's what I think all of us are trying to tell doodle. Nobody in the world knows how this is going shake out. It's NOT a foregone conclusion. So, it doesn't make sense worrying about it...unless you don't have a PP (in which case you're screwed.)

That's right.  I still wish things were different (since it's my kids that'll be the ones trying to service this debt) but there's not a person alive to whom it matters what I "wish" about the way of the world.  On the other hand, I can do a lot to live my own life as well as possible.  You've got to put your energy into what yields the most profit.

Can't we all admit that with 25% gold if the world's reserve currency were to collapse or to default on a chunk of its debt we'd be just fine.

Exactly, exactly.  The whole PP is built on a series of "if this thing that might happen occurs, then this asset steps up."  You don't have to know which "if" it'll ultimately be.

[doodle]

I just want to clarify that I am definitely NOT worried sick about this. I would liken it more to maybe a Mets or Cubs fan looking at the sorry streak their team is going through and talks about how he feels the manager is making a bad call.

Some people enjoy talking about sports....I just tend to look at the economy as a more complicated and interesting sport. In our four team league of Stocks, Bonds, Cash and Gold...I am making the argument that although the "bond team" has established a 30 year dynasty, the managers continue to make a lot of dumb decisions that will ultimately lead to its downfall.

[moda0306]

Ah doodle,

That analogy was MT-esque... you're really starting to mind-meld here methinks.

LW,

Yeah... Don't get me wrong, if I lived in Japan or Zimbabwe or Ireland, I'd have doubts about my PP's functionality, but in the event of USD problems, Gold will absolutely destroy everything in its path IMO.

[MediumTex]

Ah, wonderful sports analogies.

For me, the parallels between the U.S. government and the Dallas Cowboys are almost overwhelming--a formerly great franchise plagued by years of poor management and the persistent delusion that a return to former glory is just around the corner.

[Gumby]

I am making the argument that although the "bond team" has established a 30 year dynasty, the managers continue to make a lot of dumb decisions that will ultimately lead to its downfall.

Right. I think all of us are prepared for the possibility that our government can fail. All we're saying is that despite all of these terrible calls, there is definitely a real possibility that the Bond team may be the winning team for the next 20 or 30 years for all we know. It's just a possibility we all have to consider, no matter how unfathomable that outcome may seem to most rational people. I was getting the impression that you can't envision that outcome, where Bonds win and save our hides. I find that it helps to envision that outcome as a real possibility.

[doodle]

Looks like one of the managers just walked out the door:

http://www.cnbc.com/id/43509588

[MediumTex]

Looks like one of the managers just walked out the door:

http://www.cnbc.com/id/43509588

Biden should challenge Cantor to a duel.

That would be awesome.

[doodle]

Biden should challenge Cantor to a duel.

That made me chuckle...

[Gumby]

In my opinion, I think the bond market is the first place we'll see evidence that it's time to worry.

[doodle]

The problem is....it happens like in 5 minutes.

[MediumTex]

The problem is....it happens like in 5 minutes.

Does it?

When is the last time it happened in five minutes in the largest bond market in the world?

And when all that money exits the treasury market, where does it go?  To Japan?  To the EU?  To Russia?  To India?  To Brazil?  Somewhere else? 

If treasuries are losing, who is winning?

[doodle]

The safety of the PP allows me to make foolish statements and then rush back into my little fortress

That was hyperbole but I think a crisis of confidence could unfold rather quickly. However, we are being buttressed by the fact that there really isn't anything else to go into at the moment. So maybe you are right....it could be a slow move as other currencies slowly become more attractive to the US dollar.

I really think we are in a race with the Euro. If they get things stabilized before us we could see financing costs rise here. 

[moda0306]

Watching us race the Euro is like watching an ice-skater race a biker.

The two currency's are so different that I just can't compare the two on a mathmatical basis (debt/gdp, defecit/gdp ratios don't work if you're comparing two completely different currencies).

That said, I think we're in much better of a position than the PIIGS countries, if not most/all Euro countries.

[MediumTex]

I really think we are in a race with the Euro. If they get things stabilized before us we could see financing costs rise here.  

That makes me feel a lot better.  The EU has so many problems I wouldn't want to guess when they are going to get it all straightened out.

And unlike the U.S., which has only had one civil war, Europe has been fighting among its members for centuries.

Note, too, that financing costs are already a LOT higher here than in Germany (4.17% vs. 3.57% on the 30 year bond), so I think some of what you are saying is already baked in.

I think if you are a middle aged turtle you are probably a little nervous heading to your first track meet.  If when you get there, however, all you see is a bunch of old out of shape turtles, you probably feel better.

When you look at the future liabilities of the EU, its demographic profile, and the structural political instability that is emerging, it looks like an old turtle to me.

[EDIT: It looks like moda was thinking the same thing as me as far as the race analogy and the general screwed-upness of the PIIGS situation.]

[moda0306]

I think more important than the "How screwed are the PIIGS countries?" (They're in a REALLY screwed spot IMO), is how is that going to affect the other Euro countries and the Euro itself when it comes to fruition?

Is it eventually going to really hurt Germany's economy and/or national debt interest rates?  That's the real question... we all know Greek bonds are basically junk bonds at this point, but how is this going to all effect Germany?

Let's remember, Ireland was not too long ago running surpluses, with low debt, low taxes and a growing economy.

[MediumTex]

Is it eventually going to really hurt Germany's economy and/or national debt interest rates?  That's the real question... we all know Greek bonds are basically junk bonds at this point, but how is this going to all effect Germany?

Let's remember, Ireland was not too long ago running surpluses, with low debt, low taxes and a growing economy.

If you are a big and strong man and we are standing on a ship and I wrap a chain around your waist that is connected to an anchor and throw the anchor in the water, what effect would that have on you?

It would depend on the length of the chain, right?

We are watching as links are being added to the chain, seemingly with no appreciation for how silly this response is to the overall problem.

The chain needs to be CUT, not extended, but the problem is that the big banks are on the anchor end of the chain as well.

[moda0306]

MT,

That's the real thing here... I see the Euro having huge problems, and not just in the PIIGS countries going forward.

A currency race without the Euro is like the cold war without Soviet Russia... There aren't too many players in the race left at that point.

[Gumby]

The important thing to remember is that all of the risk, concern and worry that every rational and irrational individual on this planet is feeling about Treasuries is already reflected in the up-to-the-minute yields. It's not like the market doesn't see that the light at the end of the tunnel might be an oncoming train. That's already built into the price.

If there is even more of a reason to worry than what is already public knowledge, the market will adjust accordingly in front of our eyes. Trust the bond market to be the final judge for how risky Treasury bonds are.

[moda0306]

Wow, talk about pertinent (if not biased).  PK blog post on defaulting (could this be carried to devaluation) by Argentina.

http://krugman.blogs.nytimes.com/2011/0 ... argentina/

[doodle]

PK is right. That is why I think default is the preferable option to all this debt. Austerity is so drab.