US Default on Treasury Bonds

[doodle]

I don't know what the answer is, but the political instability that normally follows austerity measures makes it hard to see that approach as much of a solution.  Look at Greece right now.  Does that look like a country that is on the verge of anything good happening?  What is austerity really going to mean for them?  I woud say it is probably just going to destabilize things even more.

You're right MT. I don't think austerity will work. That is why I think that restructuring or default on obligations to seniors or bondholders is the only way we can clear to system for renewed growth.

[MediumTex]

It seems like one should run away from the storm...not straight into it.

Sure, but what's the storm?

If the storm is deflation, holding long term non-callable sovereign debt is anything but running into the storm.

[MediumTex]

I don't know what the answer is, but the political instability that normally follows austerity measures makes it hard to see that approach as much of a solution.  Look at Greece right now.  Does that look like a country that is on the verge of anything good happening?  What is austerity really going to mean for them?  I woud say it is probably just going to destabilize things even more.

You're right MT. I don't think austerity will work. That is why I think that restructuring or default on obligations to seniors or bondholders is the only way we can clear to system for renewed growth.

And the chances of that are what?

This is the road that Japan has travelled.  Once financial institutions reach a certain threshold of influence and power, these debt overhang situations can easily turn into a chronic condition that can make any meaningful recovery virtually impossible. 

[doodle]

I think the chances for default are pretty good considering my generation doesn't want to spend its entire life paying off its parents debts and funding their retirement and medical care.

Someone is going to get "defaulted" on. Either bondholders down the road...or our seniors pretty soon.

Like you said, austerity is looking less and less like it will work. As we go deeper into debt the chances to slog through this get more and more remote. That leaves two options:

1. Keep the party going until eventually 10 years from now we are so mired in debt we have no option but to default.

2. Default on promises to seniors right now which will be interesting to see how that works politically.

I can say one thing for sure....I'm not going to spend the rest of my life working to pay down the debts of my parents and for their medical care and social security. That might sound heartless but I can guarantee you that younger generations are going to feel that way.

[moda0306]

Doodle,

I don't ever plan on "paying off" my parents (national) debts... The U.S. is a country, not a married couple... it doesn't need to deleverage over its life.  Even in Euro countries where the can't print.

Here, where we CAN print, we have even more flexibility.  If servicing our debt is a matter of button-pushing, then why would we worry about paying down "our parents' debt."  Why do you think we'll have to default if printing is defaulting?  If you had a conterfeit printing press in your basement, would you worry about debt at anywhere near the degree that your neighbor would?  And for God's sake, why in a million years would you ever default?  Because the interest payments were killing you?  No they weren't.  We just established you have a printing press... the interest payments are a matter of pushing a button.

[doodle]

Printing your way out of debt is the same thing as defaulting....it is just called something different: inflation.

You can go very quickly from deflation to hyperinflation if you just flip the switches on the printing presses and start paying off debt with monopoly money. Would you buy debt from someone who would do that? If not, how could LT rates go lower?

My premise is that serious deflation at the moment is as big a threat to LT treasuries as inflation is.

[moda0306]

Ok, if inflation is the same as defaulting in some ways, fine.  We've already issued bonds to the dupes in the rest of the world... now let's inflate it away.

Over the next 30 years, pay back all our debt with printed money... therefore, we'll have inflation happening all along, but won't have any more national debt by the end of the period.  Now since much of our debt is held by foreign countries, and many people are in debt in the U.S., let's look at how this would work.

We've eliminated the debt of the US government, and in the meantime, put trillions of devalued dollars in the hands of foreigners who just got hosed on the devaluation... but the money is STILL worth something, and they will want to do something with it as they accumulate it over the next 30 years.... what will they do?  They'll invest in the U.S. or try to spend their money along the way as it becomes more and more devalued.

Meanwhile in the US, the citizens are seeing their balance-sheets improve due to increased foreign demand for our goods and reducing our real-debt balances.

Does this sound like a reasonable description of how a 30-year long "inflation default" would work?

Even better, what if the fed directly funded U.S. defecits at this time to ensure proper entitlement spending and tax rates could be maintained.

I guess this is to illustrate that the U.S. can simultaneously pay down all of its existing debt with ZERO new debt issued, and even finance its own defecits if need be (if the demand/investment from foreign dollars now not investible in US bonds wasn't enough to spur demand for US goods).

[doodle]

Well, some of those dupes with the LT debt would be us.

Inflation is destructive to business growth and investment so I don't think this would be a great path to prosperity either.

I really think that if we get our act together in the next year or two and basically adopt the Simpson-Bowles commissions proposals we stand a fighting chance at regaining our former glory.

If politics gets in the way and we hit a quagmire I think that really the only way out is going to be a restructuring / default a'la England 1976....who could also print their own money by the way.

Read this for a synopsis of their soft default / bailout: http://news.bbc.co.uk/2/hi/uk_news/politics/4553464.stm

[AdamA]

I think the chances for default are pretty good considering my generation doesn't want to spend its entire life paying off its parents debts and funding their retirement and medical care.

I think there is definitely a good chance that default will be a problem.  The thing, default comes in many forms. 

Much more likely than the US Federal Government folding on its debt would be that it simply allows other institutions (banks, govt programs, etc) to default on their obligations.  If that occurred, the surviving dollars (US Treasuries) would do very well. 

For the record, I don't think either of these scenarios is very likely. 

[Lone Wolf]

Certainly inflation is an ever-present danger in a fiat world.  Still, try not to look at the assets in isolation.  If horrible inflation emerges and everyone abandons the dollar, we hold 25% gold for just such an event.

[Gumby]

Printing your way out of debt is the same thing as defaulting....it is just called something different: inflation.

You can go very quickly from deflation to hyperinflation if you just flip the switches on the printing presses and start paying off debt with monopoly money. Would you buy debt from someone who would do that? If not, how could LT rates go lower?

My premise is that serious deflation at the moment is as big a threat to LT treasuries as inflation is.

And yet, the bond market doesn't believe this story. Yields on Treasuries have been dropping for years as the situation gets worse and worse. Yields on Japanese Gov Bonds continue to drop as the situation gets worse and worse. How can you not see that you might be wrong about how the situation turns out? How are you so sure of the outcome you are imagining?

[doodle]

I think the most logical argument is that we are looking at a bit of a bond market bubble based on a great deal of uncertainty in the world and a lack of safe asset classes at the moment. In addition you have the Fed interfering in the market as the biggest purchaser of bonds to keep rates low.

Of course strange things could happen and LT treasuries could be our last salvation but I highly doubt it goes down that way over the next 10 years.

The whole western world is in a debt quagmire. Getting out of this will require severe austerity. Austerity is hard if not impossible to sell politically and even if you do sell it politically for a while, my generation will probably rebel against the dim future prospects that it creates for our lives.

At a certain point people go to the streets like Greece and say to hell with it. I know that we have monetary sovreignty (unlike Greece) but that still doesn't change the fact that we have HUGE unfunded liabilities that cannot be supported.


Someone is going to have to pick the short stick. If the seniors take it on the chin and forego their benefits it will be slow growth soup, ugly deflation and discontent. Considering the government and banks are floating in debt I doubt they like they deflation scenario.


The other option is continued stimulus a'la Japan. If that continues for ten years we will truly be looking at such a ridiculous amount of debt that it will be inconceivable to ever pay it back. At that point the younger generation now votes to repudiate debt.

Does anyone really think the whole western world is going to limit their future prosperity while we watch China and India climb to the top of the mountain?We will do what is necessary to get our economy comeptitive and growing again. If that means we wipe the slate clean...then so be it.

[moda0306]

Those "unfunded liabilities" may not be as big a fix as you think.  With SS, we could raise payroll taxes or raise the cap on them, raise the retirement age, reduce benefits, etc.  It's really not in that rough of a spot IMO.

With medicare, I agree we have a problem.  I think we have a system of public/private interaction that rewards the wrong behavior and creates a moral crisis for both patients and doctors.  I think this is much less a problem of defecits and raw math as it is of proper legislation and rewarding the proper behavior.

[MediumTex]

I think the most logical argument is that we are looking at a bit of a bond market bubble based on a great deal of uncertainty in the world and a lack of safe asset classes at the moment. In addition you have the Fed interfering in the market as the biggest purchaser of bonds to keep rates low.

Does this look like a bubble to you?  It looks to me more like a long term secular bull market.  We may get a bubble in the future in the form of a blow off top, but I see nothing bubbly about where we are right now.

Of course strange things could happen and LT treasuries could be our last salvation but I highly doubt it goes down that way over the next 10 years.

The whole western world is in a debt quagmire. Getting out of this will require severe austerity. Austerity is hard if not impossible to sell politically and even if you do sell it politically for a while, my generation will probably rebel against the dim future prospects that it creates for our lives.

Why austerity?  If it's never worked anywhere else, why will it work here? 

The last time we were in this situation in the mid-1930s, there was an attempt at austerity; it achieved nothing.

At a certain point people go to the streets like Greece and say to hell with it. I know that we have monetary sovereignty (unlike Greece) but that still doesn't change the fact that we have HUGE unfunded liabilities that cannot be supported.

Really?  I don't see anything like that in Japan, and they are WAY farther down the debt and deficit road than we are.

It looks like when they take to the streets it's to go shopping:

Someone is going to have to pick the short stick. If the seniors take it on the chin and forego their benefits it will be slow growth soup, ugly deflation and discontent. Considering the government and banks are floating in debt I doubt they like they deflation scenario.

The other option is continued stimulus a'la Japan. If that continues for ten years we will truly be looking at such a ridiculous amount of debt that it will be inconceivable to ever pay it back. At that point the younger generation now votes to repudiate debt.

Does anyone really think the whole western world is going to limit their future prosperity while we watch China and India climb to the top of the mountain?We will do what is necessary to get our economy comeptitive and growing again. If that means we wipe the slate clean...then so be it.

doodle, I would respectfully suggest that you are trapped within a certain market narrative and the range of potential outcomes is far greater than you are allowing for.

I see Japan as an amazing real-time demonstration of how everything that is supposed to happen when certain debt levels are reached doesn't necessarily have to happen at all, and often the exact opposite is what actually happens.

Common sense would suggest that Japan's debt levels would result in higher interest rates, currency devaluation and capital flight.  The reality is that for many years now just the opposite has happened.

Rather than bang my head against the wall because things are not unfolding the way I think they should, I would rather just buy the PP and let the world be as rational or irrational as it wants to be, and I can live my life without being overly troubled one way or another.

One of the insights that Harry Browne offered in "How I Found Freedom in an Unfree World" is that all of these BIG problems that the world is facing are not your personal responsibility.  You didn't cause these problems, and you are not the one in charge of solving them.  The media has a way of working people up into such a frenzy over things that they have absolutely no control over and people are often left with "screwed up world fatigue" after being constantly exposed to one after another of seemingly huge problems with no solutions.

What if it was all just entertainment?  What if you insulated yourself emotionally from all of the things that your TV would like you to be upset about?  What if you focused on your own happiness and left the problems of the world to the politicians and central bankers who created them?  What if you set up your PP with the confidence that it would protect you whether the world got better or worse, and whether our leaders were or were not enlightened?

Would you be better or worse off if you took this approach?

I used to get upset about all of this stuff as well, and I still do sometimes.  I think, however, that what we are all seeking is a lot simpler than we sometimes imagine, and it is just a certain state of mind, or in Harry Browne's words "a mental state of well-being."  To the extent that ruminating over some of these issues undermines your mental state of well-being, I would say what's the point of wasting your time on them? 

The PP offers you a ready-made means of protecting yourself from virtually any bad financial event that one could imagine.  Why not just put your protection in place and begin focusing on your own happiness and peace of mind and let the rest of the world do what it wants?

[MediumTex]

Another thing to keep in mind when thinking about Japan is this:

If you look at the entire 20th century, some of the most fanatical behavior you will see anywhere is that of the Japanese.

In WW2, the Japanese:

1. Committed horrible acts of atrocity against prisoners of war.
2. No Japanese military unit ever surrendered prior to the end of the war; fighting to the death was normal and expected.
3. Were absolutely brutal occupiers of foreign lands.
4. Thought nothing of sending hundreds of pilots on suicide missions.

In many ways, the Japan of the 1940s would be hard to distinguish from some of the terrorist groups we see today, except they did things on a larger scale.

So when we are talking about Japan not being the kind of society that would do anything radical or revolutionary, consider Japan's history.

One of the major differences with Japan today is simply its demographics.  Old people are simply not as prone to  revolutionary behavior as younger people.  I think that is one reason that any significant political instability in the U.S. is unlikely in coming years, simply because a society with its largest demographic group heading into its retirement years just doesn't have enought angry young people as a percentage of the whole population to really get things stirred up.

Contrast the U.S. and Japanese populations with the populations in the Middle East, and you will see that it's not surprising that there are revolutions popping up everywhere over there when the largest demographic group in most of those countries is 18-35 year olds.

[Gumby]

Doodle,

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:

 http://www.dissentmagazine.org/online.php?id=397

Perhaps this opinion against austerity is wrong. I don't know. But, I just find it surprising that you can't concede that the opinion against austerity might be right.

[6 Iron]

Classic post, Tex. All it needs is a little polishing with this:

http://www.yodaspeak.co.uk/index.php

[MediumTex]

To borrow a Palinism, I don't mean to get all Keynesiany here, but if an economy is in recession it means that private sector demand is weak compared to the available supply of goods and services.  One effect of this economic condition is that government tax collections tend to decline because there is less economic activity to tax.  If in a situation like this the government puts in an austerity program you now have weak demand in both the private sector AND the public sector, which tends to make underlying economic conditions even worse.

This pattern has been repeated over and over all over the world, and it never seems to end well for anyone, even though the theory behind the austerity measures is somewhat appealing on paper.

I don't know what the right answer is, but simply following an austerity plan is, IMHO, unlikely to provide any kind of satisfactory solution to the underlying problems we are discussing.

[MediumTex]

Classic post, Tex. All it needs is a little polishing with this:

http://www.yodaspeak.co.uk/index.php

Wow, what a great tool.

Here is a bit of my post translated:

My head against the wall rather than banging because things are not unfolding the way I think they should, rather I might just buy the PP and let the world be as rational or irrational as it wants to be, and live my life without being overly troubled one way or another I would. 

Of the insights that Harry Browne offered in "How I Found Freedom in an Unfree World", one important is that these big problems that the world is facing your personal responsibility they are not.  Cause these problems you did not not, and the one in charge of solving them you are not.  The media has a way of working people into a frenzy over things that caused they did not, absolutely no control over them do they have, but left with "screwed up world fatigue" they are. 

What if all just entertainment it was, hmm?  Like you to be upset about it they would, but insulate yourself from it emotionally you must, and turn off the TV you should, hmm? 

What if you focused on your own happiness and left the problems of the politicians and central bankers to those who created them, perhaps happier you would be, hmm?  What if you set up your PP with the confidence that you would be protected whether the world got better or worse, and whether our leaders were or were enlightened not, hmm? 

This approach, would be better or worse off if you took, hmm? 

To get upset about all of this stuff is human, to care is understandable, but trouble yourself you must not.  What we are seeking is a lot simpler than we sometimes imagine, and just a certain state of mind it is we seek, or in Harry Browne's words  "well-being is a mental state."  To the extent that ruminating over some of these issues undermines your mental state of well-being, waste your time on them I would not.

Imagine, the pp offers you a ready-made means of protecting yourself from virtually any bad financial event that one could encounter.  Just put your protection in place and begin focusing on your own happiness and peace of mind and let the rest of the world do what it wants.  Is this not the way of the Force, hmm?

[moda0306]

I just plugged in one of MT's responses to the Yoda calculator.

Instead of "Why Austerity?"  The caluclator put "Why Austerity, hmmmm?"

That one change made my day.

[HB Reader]

Rather than bang my head against the wall because things are not unfolding the way I think they should, I would rather just buy the PP and let the world be as rational or irrational as it wants to be, and I can live my life without being overly troubled one way or another.

One of the insights that Harry Browne offered in "How I Found Freedom in an Unfree World" is that all of these BIG problems that the world is facing are not your personal responsibility.  You didn't cause these problems, and you are not the one in charge of solving them.  The media has a way of working people up into such a frenzy over things that they have absolutely no control over and people are often left with "screwed up world fatigue" after being constantly exposed to one after another of seemingly huge problems with no solutions.

MT --

Thanks for writing that.  You saved me the trouble.

I have to remind my wife of this frequently.  Many (maybe most) of the things we see presented as a major problems have more to do with the agenda of the presenting "expert" than our life.  By all means, be willing to reform your little corner of the world and take whatever direct action you can to insulate yourself or improve things, but don't expect others to act or perceive the "problem" or "solution" in a similar manner.  The world seldom conforms with the idealized notions in our heads of how things will or should be. 

[doodle]

Maybe my writing comes off as more upset than I really am. I was upset about what I was watching on TV 6 months ago. Now I find it rather entertaining....sometimes funny.

I don't know where people have gotten the idea that I am advocating austerity either. I don't think austerity works.

I am simply looking at the numbers that come from the CBO and other interested parties such as the Pete Peterson Foundation and I come to the conclusion that we are on a one way path to burying ourselves in a mountain of debt.

Sooner or later the day of reckoning does arrive. Again just as Treasury yields can't go negative (with the exception of the freaky situation mentioned in Japan) there is ultimately an upper limit to how much debt and liability a government can take on and still continue to entice people to buy more.

Have we reached that point yet in the United States? I would argue no because there is currently no viable alternative to the dollar at the moment. There are many people however who are upset about what we are doing with regards to the reserve currency and if we are not careful people will begin to bypass the dollar in international transactions. More supply of dollars and less demand ultimately leads to a lower price. In addition less demand for dollars means it will take higher interest rates to attract capital and investment.


Again, I don't think this will happen overnight, but currently there is no indication to me that we have come to the realization of the magnitude of the changes that we must undergo to get our fiscal house back in order. Sombeody is going to be let down.

[Gumby]

I don't know where people have gotten the idea that I am advocating austerity either. I don't think austerity works.

Hmm...maybe it was when you said:

The whole western world is in a debt quagmire. Getting out of this will require severe austerity.

...

I am simply looking at the numbers that come from the CBO and other interested parties such as the Pete Peterson Foundation and I come to the conclusion that we are on a one way path to burying ourselves in a mountain of debt.

You mean that movie, I.O.U.S.A? Yeah, I saw that. Neat graphics. That got me upset for a few days too. The only problem is that they are making you believe that the government needs to run its balance sheet like a household. That's not necessarily true. Some economists believe that a surplus would actually do us no good when we have access to unlimited money.

Sooner or later the day of reckoning does arrive. Again just as Treasury yields can't go negative (with the exception of the freaky situation mentioned in Japan).

That's incorrect. From mid-1932 through mid-1942, the vast majority of coupon-bearing U.S. government securities bore negative nominal yields as they neared maturity. Treasury bonds with less than a year to maturity reached a magnitude as low as -1.7%.

[moda0306]

I think another reason to like LTT's is not just because it's backed by the full faith and credit of the US treasury, but it's rare in its contractual arrangement that might make it EXTREMELY valuable if the right deflationary circumstances arise.

Currently, most municiple and corporate debt are made up of callable bonds.  The issuer can pay them off if rates fall.  This creates a Heads I win, Tails you Lose scenario.

It also creates a bit of a systemic problem in the bond market where if people are relying on bonds, and the vast majority of the bonds are callable (or the funds their in contain mostly callable bonds), then the rush into treasuries (like in 2008) could be extremely strong so retirees can have some form of fixed, long-duration nominal return.  It'd be one thing if there were funds like "AAA Corporate Non-callable bond fund" or "AAA Muni non-collable bond fund," but there aren't... and personally I'm quite surprised they don't pick those out as a uniquely appealing asset to guarantee income.

I think this "gap" in the market will continue to make LTT's particularly appealing when the stock market takes a dive.

[Gumby]

Regarding the Peterson Foundation, not everyone agrees with his deficit hawk agenda.

Here's one critique: Robert Kuttner: Fiscal Folly

And here's an interesting quote from the piece:

It's worth a look at the Peterson Foundation's website, which is one part fiscal fear-mongering and one part homilies about thrift so syrupy that they would make Polonius blush. If you want the counter-argument, have a look at fiscalhighroad.org, a partnership of the Economic Policy Institute, Century Foundation and Demos (where I am a part time senior fellow.) Another good resource is the Scholars' Strategy Network, founded last year by Harvard's Theda Skocpol.

So, there you have it. Not everyone agrees with Pete Peterson's agenda. Peterson may likely be wrong, just as much as Kuttner may be wrong. We don't know. My recommendation is that you don't get sucked into any one outcome — especially coming from those with an agenda. Be prepared for anything. I find that it helps tremendously to learn about opposing views and why they may have validity.