The U.S. Does Not Have a Debt Problem

Nobody is arguing that there are benefits of debt. But excessive debt promotes financial and economic instability.

 

What does a small business person do when confronted with a perverse economic incentive?

 

Please elaborate.

 

A small business person will adapt to perverse incentives by trying avoidance. When the law imposes threshholds the small business person avoids the threshholds. The ACA is an example. The ACA can be avoided by limiting the number of employees one has and by limiting the hours they work.

 

Yep, it's a terrible bill. Most liberals and conservatives agree on that.

 

I expect this is the truth. The Republicans will cry bloody murder over our fiscal policies until they get re-elected, then they'll continue business as usual while spinning it in the opposite direction. It's what they've always done anyway.

 

The Republicans will never again hold the presidency. The Democrats imported illegals who changed the demographics of the country. The Democrats changed the culture and destroyed K-12 public schools. Now the voters lack the ability for critical analysis.

 

Sorry, but if they can't win back the presidency, that's their failure. I mean, FFS, the best they could do last time around was Mitt Flip-Flop Romney and his little Christian fundamentalist sidekick. That's pathetic.

 

You have no respect for conservatives do you? Destroy conservatives and something much worse will emerge that weakens this country immeasurably.

 

It's what they always do. And the sad part is Romney probably would have been able to convince the retard Republican's to spend more money and they would have come up with every excuse in the book of why it's necessary. They are hypocrites and it's sick that they are intentionally making the country suffer so that Obama can't look good by helping it. The blood is on their hands!

 

Than you have to prove what "excessive debt levels" are. If you think $16 trillion is excessive just because it's a large number, than you have no argument. What makes our current debt level excessive and why isn't $5 quadrillion excessive or why isn't $5 excessive?

You realize 75 years ago we had this same argument when the debt was $42 billion. All the conservatives went crazy about how much debt their was and it was excessive, their grandchildren would have to pay it off, etc, etc. In 75 years when the debt is almost $1 quadrillion, people will be saying the same stuff. They are always wrong.

 

There is just so much wrong with this. What kind of "conservatives" do you want in power? A bunch of ineffectual religiously and socially conservative doofuses who pretend to be fiscally conservative, or the Libertarians? That is our clear choice now. The Republicans do not deserve to be elected any more than the Democrats do, but both parties are, and long have been, propped up solely by the two party system.

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Why can no one on the internet use then, than, there, their and they're correctly? It's not that hard to figure out the differences.

 

Lol, that was pretty bad. I'm a little drunk right now, that's my excuse, haha.

 

The specific issue is that FedGov is ripping off the People of the United States.

In fact, it's so entirely obvious that even a 12-year old can see it.

Here, listen to the 12-year old. She's talking about Canadian banks, but we have the exact same system here.

Why is our government ripping off its citizens?

[video=youtube;Bx5Sc3vWefE]http://www.youtube.com/watch?v=Bx5Sc3vWefE&feature=player_embedded[/video]

 

Do you know Nassim Taleb's Turkey Problem? It's really interesting.



On day zero, the turkey is distrustful of it's owner. The turkey doesn't know whether or not to trust him. But as each day passes, and the owner feeds and cares for the turkey, the turkey begins to trust the owner more and more. The turkey's trust for his owner rises. For 1000 days, the turkey grows even more happy and content. Then, on day 1001, the owner kills the turkey for Thanksgiving dinner and the turkey's well being falls to zero.

That's kind of like the debt. That the scaremongers have been wrong in the past does not mean they will be wrong in the future. We as a society may grow more and more comfortable with more and more debt, then one day, BANG!, something happens and we have a crisis. Unknown, unknowns, Chaos Theory, and all that. The one grain of sand suddenly topples the whole sand pile over. That's usually how financial crises begin.

I agree that the concept of excessive debt is fungible. I also concede that I may be wrong. I would also say that as of this day - February 25 2013 - we do not have excessive debt. The Treasury market has not collapsed. We don't have a currency crisis. But the future? Debt cannot grow faster than GDP indefinitely. That is a mathematical fact. I define excessive debt as when debt becomes a potential problem. You might think differently.

Debt - on any asset - isn't a problem as long as it can be serviced. A potential problem is when we run a stress test and the asset becomes distressed in the conditions of the stress test.

When you do a stress test on a potential investment, you should model substantial downside and determine if the debt can still be serviced. Today, we are paying $400 billion in interest on Treasury debt, or just under 3% of GDP. The weighted average rate on Treasury debt is about 3.5%. There is $11.75 trillion in publicly held debt outstanding. That number is expected to be $15 trillion in ~5 years, assuming no fiscal changes. If interest rates average 3%, then its not a problem. Debt service costs will be $450 billion in a few years. But what happens if interest rates spike to 6%? Our debt at 6% a year is nearly $1 trillion in interest costs. Think that can't happen? The Fed funds rate was 5% twice over the past 15 years, and the 10 year Treasury yield has been over 6% for most of the past 40 years. Today, total federal government spending is $3.5 billion a year. And the Treasury has been shortening the duration of the debt, making it more vulnerable to a spike in rates. So, it appears that the US government does not have much margin of safety. If interest rates rise to 6% or above, cost to service the debt will rise, and other expenditures will have to be significantly cut or taxes increased. To me, that's excessive debt. If you stress test a balance sheet with not unrealistic assumptions and it brings about a stressful outcome, we have excessive debt.

That doesn't include the trajectory composition of our spending. Federal government spending has averaged 18.5% of GDP since WWII. By 2050, Medicare and Medicaid and Social Security will account for 18.5% of GDP. Best that we get government spending under control earlier rather than later. If it's later, and the financial markets impose discipline, it will be very messy.

Think that can't happen? Today in Japan, federal income tax revenues equal social security and interest payments, and that's it. Japan is totally f***** if they can't find a solution some time in the future. When? I have no idea.

But you can buy swaptions on long-dated JGB interest rates dirt cheap because volatility has been virtually zero. Put options on TIBOR trading on the Singapore exchange were dirt cheap. A while ago, 96 TIBOR future put LEAPS could be had for $1500 with payoffs of as high as $4,000,000 if they dropped to 94. (When I last checked, TIBOR futures were at 99.6, and had been around there for many years.) Lots of convexity in that trade. Haven't checked that price in a while, admittedly. However, one can afford to burn a ton of premium for that payoff.

 

The problem you are having is not understanding the differences in debt. The United States does not need to borrow it's own made up money. It does so as a regulatory mechanism to control the money it creates. As long as the debt is owed in our own made up money, we will never have a problem paying off our debt. We don't need China to give us our own money, we don't need anyone to give us our own made up money in order to spend our own made up money. You are thinking a national debt in a currency issuing nation is like your debt or Greece's debt. It is not.

Interest rates are controlled by the Fed... we have Primary Dealers and the Fed that can handle any amount of debt created. All this fear you have of the debt is not substantiated by facts. Just like the people that were screaming Armageddon 75 years ago when the debt was $40 billion. People will be as confident as you are in 100 years that the debt is too much when it's $1 quadrillion. You guys will always be wrong.

 

I understand your argument totally. I think you are over-estimating the efficacy of government action. Lots of people believed that Tech Bubble was real and housing prices could never go down. When I hear people say that government debt can never be a problem, it reminds me of tech stocks and house prices. It reinforces my belief that the ultimate end game may be a currency crisis and a route of the government bond market.

There used to be these guys known as "bond vigilantes." They aren't imaginary fairy tale creatures. They are lurking. They may never come out. But to say they will never come out completely misunderstands the market and our own economic history.

Want to know something interesting? The Kingdom of the Netherlands has issued debt for 495 years. Last November, yields on Dutch government bonds hit a 495-year low. Don't think that's indicative of a problem? I do.

 

The tech bubble and housing bubble are real fundamental problems that occur in real markets. The Fed can't buy houses, the Fed doesn't invest in tech companies or borrow money to create the next dot com site. However, the Fed does buy Govt debt, and it does use Govt debt to control interest rates and reserves in our monetary system. They are two completely different things. There will never be a debt bubble in America because it is not controlled by a private market. It is controlled by entities that can do whatever they want. Imagine if you owned a country and could create money to buy your own debt whenever you wanted or to force someone to buy the debt when you want to. Primary Dealers are mandated by the Federal Reserve to do what the Fed wants. If the Fed wants them to purchase treasuries off them, they have to, if the Govt wants to spend $1 trillion, the PD's have to make a market for that $1 trillion in debt and they have to pay a "reasonable price" for it. And by reasonable, whatever the Fed forces them to pay it for.

You are discounting the fact that the Fed has more control than you are giving them credit for.

They are imaginary. There is no such thing as bond vigilantes in a currency issuing nation. The Fed and the Primary Dealers have complete control over our debt. If some bond vigilante wanted to dump tons of bonds at once, the PD's could swoop them up and the Fed can pick them up off the PD's with out any problem in the bond markets whatsoever.

 

You look at this too theoretically. We had bond vigilantes in the not too distant past. Remember when Clinton said "You mean my Presidency is dependent on a bunch of f****** bond traders?" That wasn't too long ago.

The Fed feeds liquidity to the market. It did so to bail out the stock market in 1987, LTCM in 1998, and when the Funds rate dropped to 1% in 02. Liquidity flows to the hottest areas, like water finding the lowest spot. This happened during the Tech Bubble and during the Housing Bubble. Bubbles are difficult to form without excessive liquidity.

Hubris kills. I have seen too many investors and traders carried out because they believed something couldn't happen. If I had to bet my life savings, I'd bet we don't have a dollar collapse and an implosion of the Treasury market. I think the dysfunctional political system will get around to cutting spending and raising taxes, and growth should start trending towards normal within a year or two. However, the risk of a collapse is significantly above zero, and higher than most people think. Given the inability of economists to even recognize that there were massive bubbles over the prior two decades, they wouldn't be the first group I'd turn to for advice on what is going to happen to the bond market and currencies in the future.

 

Dude, we have had this system for over 80 years now... you are acting like Govt bonds are equivalent to normal markets. They are not. No other market has multi billion dollar banks mandated to purchase the securities. The Fed would never allow bond vigilantes to destroy the bond market just like they haven't in the past 80 years. We have had more bonds issued in the past 4 years than any time in American history and absolutely nothing happened in the bond market. It is completely controlled by the Fed. And the Fed pumps liquidity in to the banking sector, they do not pump liquidity in to the nonbank public. They set rates for us to borrow, that's about it.

And you would probably be one of the last people I would turn to, to get advice about currency and bond market bubbles, lol.

 

I'm an institutional investor with a very good long-term track record. I have, however, sucked the past few years, at least on my personal account, and I haven't recovered from 2011 when I was down 8%, my worst year. But I'm up by over 400% since 1998.

That something has lasted for 80 years doesn't mean it's safe, or that it is invincible. Communism lasted for 70 years in the USSR. Home prices never fell for 60 years. The dollar system is not the first currency system the US has had.

Having said that, I don't think there is going to be a collapse. But I think the probability of it is higher than most people think. If the market loses faith in the Fed, you will find your faith to be terribly misplaced.

 

Govt debt in a currency issuing fiat nation is not the same as anything you listed. Just look at the past 4 years. We went through the biggest economic crisis since the Great Depression. One would think that would mean treasuries would sky rocket as people became less willing to invest in an economy in turmoil. But what a shocker, it went the complete opposite direction and is now at record lows. So what would cause this bond collapse you are talking about and why would it crash?

Like, I'm not even sure there is a logical explanation that you can come up with to convince me that govt bonds will collapse and what this "collapse" would entail. The Fed just showed clearly how easy it is for them to manipulate the govt bond market. Not sure why you think that would stop in the future.

 

Depends what you mean by "collapse." What I envision is that if there is a collapse, there is a violent move in interest rates, maybe 2%-4% over a short period of time. Then maybe another 2%-6% over a few months. That's not Argentina-like, but given that volatility in the Treasury market is 3%-4%, it would cause carnage in the bond market and probably cause a recession similar to what we had in 08/09.

The Fed is focusing on asset markets like never before, and they are creating enormous imbalances. Bernanke acknowledged this risk in front of Congress yesterday (but said the benefits outweigh the risks). I've thought for more than a decade that the ultimate end-game in this asset-bubble economy is a currency crisis. Reinhardt and Rogoff is a great source on this. We're having a currency crisis in Europe now. We will almost certainly have one in Japan within a decade. We may have one in America. The stock, gold and currency markets are disagreeing with me, however, at least this year.

 

First off, what would cause the Fed to increase interest rates drastically like that? Second off, why would an increase in bond yields cause a recession? If bond yields increased it would be more of a sign of a prospering economy than anything negative as that would be an indication of less demand.

Japan is in the same situation as us. Incredibly low interest rates and low yields on debt. Why would they jack up their interest rates like you are describing?

Currency and Govt debt denominated in that nation's currency is not the same thing as the markets you are describing... like gold or stocks. Those are volatile markets that are controlled by the private sector. Currency/Govt debt are controlled by entities that have complete control of them. You will not see any crazy bond bubbles, the Fed would never allow it. Japan's central bank would never allow it in Japan either.

And Europe is having a currency/debt crisis because their countries have no control over their monetary system. So countries like Greece, Spain, etc have a legitimate concern over their ability to pay off their debt, which is why their interest rates are 20%+. They have a completely different monetary system than ours. In fact the IMF came out saying that the plan is to slowly integrate the Euro system in to the American system where there is one bonding agent. So they can control bonds like we control bonds. Otherwise, they are gonna be in shambles for a long time. Too many countries with no control. Either they will leave or the EU will change.

 

The problem happens when Treasuries stop being bought and especially when they start being sold in size, and money starts cascading out of America. If there is a crisis, that is how it will occur. It won't matter how much the Fed buys. People will want to get their money out of America and the dollar will collapse. Interest rates will spike by default, or there will be serious inflation. That is, if it happens.

http://www.nytimes.com/1992/09/17/news/17iht-perc.html

I agree on the euro. It's a political problem more than an economic problem. If the more productive north agrees to subsidize the less productive south forever, then it will work. Having said that, those problems have not yet been solved and there is a currency crisis in Europe, though tail risk has been taken off the table for now.