One way the USA has changed policy to make the debt burden more managable is increasing retirement age and decreasing benefits. They will probably make similiar changes in the future. Another way, and you can take this to the bank, is that taxes will be raised.
Why would you sell products to someone you know will not be able to pay you
I think it is a VERY big assumumption to say the USA will not pay its debts. The USA is the strongest country on the planet by any metrics. But to go on with my point, many companies in the past 6 months have gone to their bankers and renegotiated debt covanents. Many consumers have gone to their banks and renegotiated mortgage and credit card terms. Many producers have gone to their suppliers and renegotiated supply contracts.
<< <i>One way the USA has changed policy to make the debt burden more managable is increasing retirement age and decreasing benefits. They will probably make similiar changes in the future. Another way, and you can take this to the bank, is that taxes will be raised. >>
OK, good example. But I think politically feasible options are limited. Raising the age is about all a politician can get away with. Anything more extreme is political suicide, and I don't think they can really raise the age any further. I suppose it's possible, but it's a difficult position for a politician to take, no matter how necessary the action is.
Raising taxes will also be tough, especially in a recession/depression, and this will most likely be done through deceit. As long as they can make you think that *your* taxes aren't going up, they tend to get away with it.
<< <i>Why would you sell products to someone you know will not be able to pay you
I think it is a VERY big assumumption to say the USA will not pay its debts. The USA is the strongest country on the planet by any metrics. But to go on with my point, many companies in the past 6 months have gone to their bankers and renegotiated debt covanents. Many consumers have gone to their banks and renegotiated mortgage and credit card terms. Many producers have gone to their suppliers and renegotiated supply contracts. >>
Strongest country how? Not financially. Our debt increases every year (and at a faster rate), and there are no feasible plans for a balanced budget anytime soon, let alone a plan to pay down the debt. The real problem will come soon when the US loses its AAA rating (although it's a joke that we still have it). We can afford interest payments at these levels, but what happens when when the interest rates double or triple? The US has two choices. Monetize debt and keep interest rates low, which will devalue the dollar and cause inflation. Or, the US can raise interest rates, increasing our national debt burden and choking economic recovery.
The fed is talking out of both sides of its mouth. They used to discuss their "strong dollar" policy domestically, but have dropped that for "quantitative easing" - i.e., inflation. Although they still talk about a strong dollar when visiting china. You can't have it both ways.
Excerpt: “I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’,” Yu said in an interview yesterday. “The euro is an alternative. And there are lots of raw materials we can still buy.”
Excerpts: But data from the Treasury Department shows that investors in China have sharply curtailed their purchases of bonds in January and February.
"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.
Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.
"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.
I've already stated why the Chinese have curtailed buying of US debt and have posted links above stating that the US credit card has not been cancelled.
I suppose we could go on and on about the death of the dollar and while I am not trying to convince you that it will not happen, and respect your opinion, I am merely presenting arguement why I feel it is highly unlikely.
Time will prove and personally I am not that concerned.
For example I point to Japan and their much maligned currency. People in Japan live very nice lives--although WAY too crowded for me--and demonstrate that life is what you make of it.
Not sure where to post this, but it is germane. I think this is a good explanation of the difference between inflation and hyper-inflation. The crux is that the people of this country (or I suppose other countries, or both) have to lose faith in the USD for HI to happen. Hyperinflation is caused by a mad rush to exchange dollars for assets. Really, the other things we've discussed in the past - money supply, velocity, etc. - are relevant but almost moot. You can also start to foresee how HI will start... with durable goods and commodities well before luxury goods and consumables. This is because if the desire is to convert cash into physical assets, precious metals and the like are the most attractive as wealth storage is less burdensome and practical for most people, as well as it has little or no maintenance requirements. I realize PM's require secure storage, but that's pretty easy to obtain, rather than the difficulties for an average person to store large amounts of grain, oil, meat, etc. I would assume for this reason that non-bullion coins and art and the like will do OK as well.
So while 'normal' inflation is driven by consumer-pull for goods, hyper-inflation is driven by saver-push of money, and this explains a big qualitative difference between inflation and hyper-inflation.
Modest inflation through undersupplied goods has a negative feedback because new supply pulls prices back, bringing the economy back to equilibrium. Hyper-inflation does the opposite. Once it starts it suffers a positive feedback by encouraging more and more savers to dump cash. What starts as a trickle accelerates into an unstoppable torrent of savings pouring into circulation.
Excerpt: Those kids who laughed at Geithner not withstanding, the Treasury Secretary claims it remains strong and that the Chinese have strong confidence in the resilience and dynamics of our economy (though they're obviously not that confident, since they're constantly jawboning and shifting more and more of their purchases to the short end of the curve).
Is the rest of the world going to sit by and watch the value of their holdings go down? Or are they going to join Russia and get out while they still can salvage something?
Is the rest of the world going to sit by and watch the value of their holdings go down? Or are they going to join Russia and get out while they still can salvage something?
I wish I could be that optimistic. >>
Absolutely. The auction went VERY well with $29 billion offered buy $11 billion worth of Treasuries. I see the appetite as insatiable.
Think of why Russia is selling. They maybe using the mask of talking about their fear of a falling dollar, but rather it is the fear that they themselves are bankrupt. Russia has spent nearly all the reserves they had with the oil runup trying to supprt the ruble--which they have devalued numnerous times in the last 6 months--and in trying to stimulate their economy. Unlike the USA, Russia has NO BUYERS for their debt. They need to raise cash to keep their citizens happy. Russia is FUBAR. Fear them only for their political instability, not for economic strength.
The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.
China, the largest holder of U.S. Treasury securities, trimmed their holdings to $763.5 billion in April, from $767.9 billion in March. Japan, the second largest holder of Treasury securities, reduced their holdings to $685.9 billion, from $686.7 billion a month earlier.
I wouldn't call it an insatiable appetite if a) the fed had to raise the rate to get people to buy and b) overall holdings from our biggest customers dropped. After all, I can sell anything to anyone if it's cheap enough. the 80% decline in stocks, notes, and bonds is also significant.
Your theory on Russia is plausible and made me think. I'd like to believe it, but IIRC, Russia planned to sell US bonds and buy IMF bonds.... so it's not like they are raising cash, they are changing where their money is invested. We can argue about the honesty of the report and the Russian government, but on the surface, it doesn't appear to be an issue of raising cash. Not to mention, the rising price of oil is helping them considerably, but I don't know if it's enough.
I've said all along that if we raise interest rates buyers will come out of the woodwork. And they have. Rates are currently at multi decades lows. Low rates do not encourage saving and we need saving to get us through this mess. We dont need to have every person holding a job, but we do need to give people a reason to save. To paraphrase Ronald Reagan in a Berlin speech, "Mr Bernanke, raise those rates!!!"
From what I see Russia wants to buy $10 billion of IMF bonds. If they have a higher yield than US Treasuries, then I would do the same assuming they carry equal risk. Foreign holders of US debt have been selling to pay for the massive stimulus programs each country is pursuing. They are not selling cuz they think the USA wont pay, but rather that they dont, or cant, increase their own debt load.
The drop in holdings by China is about 1/2 of 1% and by Japan is 1/10 of 1%. That doesnt look like selling to me.
In May, the BRIC nations spent more than $60 billion buying foreign currencies, mainly dollars, to stop their currencies from gaining, according to central bank data and strategist estimates.
Statements about changing the global foreign exchange system are “just a political gesture,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “At the end of the day, there is only one reserve currency on the planet.”
While the ballooning budget deficit is keeping the U.S. reliant on foreign financing, the world’s biggest economy is almost double the size of Brazil, Russia, India and China combined, based on 2008 figures compiled by Bloomberg. America’s market sustains the world’s biggest developing nations, with China increasing sales to the U.S. to $337.7 billion last year from $321.4 billion in 2007.
Bonds sold in dollars have beaten domestic debt in part because Russia and China manage the ruble and yuan. Those denominated in the U.S. currency can trade more freely, giving fund managers confidence
cohodk, from the general tone of your posts you seem to be saying that the US continues to be, and will continue to be a safe haven for capital...
What is your assessment of the impact of rising long term rates, the ever-increasing debt burden of interest payments and burgeoning entitlement programs upon the economy and retirement savers?
Granted that other countries may be in worse shape, but I'm still thinking that we're in deep doo-doo.
Q: Are You Printing Money? Bernanke: Not Literally
To add to jmski's question, the 6 month bonds are bringing about 0.3%, while the 10 year is up near 4%. Investors feel they are safe on the 6 month time fram, but they are more unsure about the 10 year picture.
At some point though, the US can no longer afford to raise the rates. I'd say we're at that point now, but our debt level is so great that interest rates at 8 or 10% or higher will severly criple us. We'll be at a point where we either start monetizing debt (by a bigger factor than we currently are) or defaulting on it... and defaulting isn't really an option. Of course, once it gets that bad, our rating starts to decline, countries start divsting their USD assets (even faster than they currently are) and the spiral continues.
<< <i>cohodk, from the general tone of your posts you seem to be saying that the US continues to be, and will continue to be a safe haven for capital...
What is your assessment of the impact of rising long term rates, the ever-increasing debt burden of interest payments and burgeoning entitlement programs upon the economy and retirement savers?
Granted that other countries may be in worse shape, but I'm still thinking that we're in deep doo-doo. >>
That would be a very accurate assessment. The USA "enjoys" the lowest tax rates in the world. Taxes will be raised to pay for this increased burden. Regulations will also help to smooth out the increased burden. Then in 25 or so years, when the bulk of the baby boomers are gone, the burdens will be greatly diminished.
I hope you like this analogy. The baby boom generation is like a giant groundhog that has been eaten by a snake. At first it is hard to swallow--ie the 1970's, then the benefits of its nourishment provide strength and vigor, ie 1980-2007, then as it passes into the bowels the snake gets bloating and gas, ie 2007-?. Then relief as it is passed.
To add to jmski's question, the 6 month bonds are bringing about 0.3%, while the 10 year is up near 4%. Investors feel they are safe on the 6 month time fram, but they are more unsure about the 10 year picture.
In 1994 the 10yr yield was 7.75%. Were investors so "unsure" 15 years ago? The 10yr today is still at the bottom end of a trading range going back to 1998. 4% is a riduclously low interest rate. These are rates we havent seen since the 50's. They are not high. I dont think this economy will have any problem with 6%+ interest rates. In fact, it will be welcomed by the baby boomers who are now forced to be savers. I believe higher rates are the "plan". They raise rates which encourages saving. It reduces demand for money and goods, which holds back inflation. It makes our debt easier to swallow for our creditors. It stabilizes the dollar--thereby stabilizing most all currencies-- which benefits the world. Of course this hurts the global economies---4-6% global growth is probably unsustainable anyway---but this creates a better, slow and steady, economy that is easier to plan for. There is nothing wrong with a global economy that goes sideways for a decade after a 60 year bull run. It is healthy. It is necessary.
I agree with you that if we stay the course we will be in deep do-do. And I think everyone thinks so also. So why stay the course? We wont. Be prepared to pay higher taxes and receive reduced or postponed benefits.
Comments
From Bloomberg.com today... international demand for American financial assets is as high as ever
Treasuries, Dollar ‘Only Game in Town’ as China Buys
One way the USA has changed policy to make the debt burden more managable is increasing retirement age and decreasing benefits. They will probably make similiar changes in the future. Another way, and you can take this to the bank, is that taxes will be raised.
Why would you sell products to someone you know will not be able to pay you
I think it is a VERY big assumumption to say the USA will not pay its debts. The USA is the strongest country on the planet by any metrics. But to go on with my point, many companies in the past 6 months have gone to their bankers and renegotiated debt covanents. Many consumers have gone to their banks and renegotiated mortgage and credit card terms. Many producers have gone to their suppliers and renegotiated supply contracts.
Knowledge is the enemy of fear
China launched an aggressive bank recapitalization program ........The continuing need for bailouts
Knowledge is the enemy of fear
Knowledge is the enemy of fear
<< <i>One way the USA has changed policy to make the debt burden more managable is increasing retirement age and decreasing benefits. They will probably make similiar changes in the future. Another way, and you can take this to the bank, is that taxes will be raised. >>
OK, good example. But I think politically feasible options are limited. Raising the age is about all a politician can get away with. Anything more extreme is political suicide, and I don't think they can really raise the age any further. I suppose it's possible, but it's a difficult position for a politician to take, no matter how necessary the action is.
Raising taxes will also be tough, especially in a recession/depression, and this will most likely be done through deceit. As long as they can make you think that *your* taxes aren't going up, they tend to get away with it.
<< <i>Why would you sell products to someone you know will not be able to pay you
I think it is a VERY big assumumption to say the USA will not pay its debts. The USA is the strongest country on the planet by any metrics. But to go on with my point, many companies in the past 6 months have gone to their bankers and renegotiated debt covanents. Many consumers have gone to their banks and renegotiated mortgage and credit card terms. Many producers have gone to their suppliers and renegotiated supply contracts. >>
Strongest country how? Not financially. Our debt increases every year (and at a faster rate), and there are no feasible plans for a balanced budget anytime soon, let alone a plan to pay down the debt. The real problem will come soon when the US loses its AAA rating (although it's a joke that we still have it). We can afford interest payments at these levels, but what happens when when the interest rates double or triple? The US has two choices. Monetize debt and keep interest rates low, which will devalue the dollar and cause inflation. Or, the US can raise interest rates, increasing our national debt burden and choking economic recovery.
The fed is talking out of both sides of its mouth. They used to discuss their "strong dollar" policy domestically, but have dropped that for "quantitative easing" - i.e., inflation. Although they still talk about a strong dollar when visiting china. You can't have it both ways.
Here's a good article today:
China's Yu Tells U.S. Not to Be Complacent About Debt
Excerpt: “I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’,” Yu said in an interview yesterday. “The euro is an alternative. And there are lots of raw materials we can still buy.”
Excerpts:
But data from the Treasury Department shows that investors in China have sharply curtailed their purchases of bonds in January and February.
"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.
Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.
"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.
I suppose we could go on and on about the death of the dollar and while I am not trying to convince you that it will not happen, and respect your opinion, I am merely presenting arguement why I feel it is highly unlikely.
Time will prove and personally I am not that concerned.
For example I point to Japan and their much maligned currency. People in Japan live very nice lives--although WAY too crowded for me--and demonstrate that life is what you make of it.
Knowledge is the enemy of fear
The First Steps to Hyper-Inflation
So while 'normal' inflation is driven by consumer-pull for goods, hyper-inflation is driven by saver-push of money, and this explains a big qualitative difference between inflation and hyper-inflation.
Modest inflation through undersupplied goods has a negative feedback because new supply pulls prices back, bringing the economy back to equilibrium. Hyper-inflation does the opposite. Once it starts it suffers a positive feedback by encouraging more and more savers to dump cash. What starts as a trickle accelerates into an unstoppable torrent of savings pouring into circulation.
geithner-china-will-keep-funding-us-and-were-not-monetizing-the-debt
Excerpt:
Those kids who laughed at Geithner not withstanding, the Treasury Secretary claims it remains strong and that the Chinese have strong confidence in the resilience and dynamics of our economy (though they're obviously not that confident, since they're constantly jawboning and shifting more and more of their purchases to the short end of the curve).
made out of wax paper be just as effective?
Camelot
Today's auction was terrible, and the rate is almost up to 4%. How much higher can they raise rates?
Now the US has competition. Russia is selling their treasuries.
Here we go:
Russia to Sell Treasuries
Is the rest of the world going to sit by and watch the value of their holdings go down? Or are they going to join Russia and get out while they still can salvage something?
I wish I could be that optimistic.
<< <i>Cohodk, are you still sure we're going to be able to sell our treasuries?
Today's auction was terrible, and the rate is almost up to 4%. How much higher can they raise rates?
Now the US has competition. Russia is selling their treasuries.
Here we go:
Russia to Sell Treasuries
Is the rest of the world going to sit by and watch the value of their holdings go down? Or are they going to join Russia and get out while they still can salvage something?
I wish I could be that optimistic. >>
Absolutely. The auction went VERY well with $29 billion offered buy $11 billion worth of Treasuries. I see the appetite as insatiable.
Think of why Russia is selling. They maybe using the mask of talking about their fear of a falling dollar, but rather it is the fear that they themselves are bankrupt. Russia has spent nearly all the reserves they had with the oil runup trying to supprt the ruble--which they have devalued numnerous times in the last 6 months--and in trying to stimulate their economy. Unlike the USA, Russia has NO BUYERS for their debt. They need to raise cash to keep their citizens happy. Russia is FUBAR. Fear them only for their political instability, not for economic strength.
Knowledge is the enemy of fear
You say that the auction went well, but didn't the fed have to raise rates to get those results? Everything has a price.
Found this article today: Foreign demand for US financial assets falls
The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.
China, the largest holder of U.S. Treasury securities, trimmed their holdings to $763.5 billion in April, from $767.9 billion in March. Japan, the second largest holder of Treasury securities, reduced their holdings to $685.9 billion, from $686.7 billion a month earlier.
I wouldn't call it an insatiable appetite if a) the fed had to raise the rate to get people to buy and b) overall holdings from our biggest customers dropped. After all, I can sell anything to anyone if it's cheap enough. the 80% decline in stocks, notes, and bonds is also significant.
Your theory on Russia is plausible and made me think. I'd like to believe it, but IIRC, Russia planned to sell US bonds and buy IMF bonds.... so it's not like they are raising cash, they are changing where their money is invested. We can argue about the honesty of the report and the Russian government, but on the surface, it doesn't appear to be an issue of raising cash. Not to mention, the rising price of oil is helping them considerably, but I don't know if it's enough.
From what I see Russia wants to buy $10 billion of IMF bonds. If they have a higher yield than US Treasuries, then I would do the same assuming they carry equal risk. Foreign holders of US debt have been selling to pay for the massive stimulus programs each country is pursuing. They are not selling cuz they think the USA wont pay, but rather that they dont, or cant, increase their own debt load.
The drop in holdings by China is about 1/2 of 1% and by Japan is 1/10 of 1%. That doesnt look like selling to me.
Knowledge is the enemy of fear
In May, the BRIC nations spent more than $60 billion buying foreign currencies, mainly dollars, to stop their currencies from gaining, according to central bank data and strategist estimates.
Statements about changing the global foreign exchange system are “just a political gesture,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “At the end of the day, there is only one reserve currency on the planet.”
While the ballooning budget deficit is keeping the U.S. reliant on foreign financing, the world’s biggest economy is almost double the size of Brazil, Russia, India and China combined, based on 2008 figures compiled by Bloomberg. America’s market sustains the world’s biggest developing nations, with China increasing sales to the U.S. to $337.7 billion last year from $321.4 billion in 2007.
Bonds sold in dollars have beaten domestic debt in part because Russia and China manage the ruble and yuan. Those denominated in the U.S. currency can trade more freely, giving fund managers confidence
Knowledge is the enemy of fear
What is your assessment of the impact of rising long term rates, the ever-increasing debt burden of interest payments and burgeoning entitlement programs upon the economy and retirement savers?
Granted that other countries may be in worse shape, but I'm still thinking that we're in deep doo-doo.
I knew it would happen.
At some point though, the US can no longer afford to raise the rates. I'd say we're at that point now, but our debt level is so great that interest rates at 8 or 10% or higher will severly criple us. We'll be at a point where we either start monetizing debt (by a bigger factor than we currently are) or defaulting on it... and defaulting isn't really an option. Of course, once it gets that bad, our rating starts to decline, countries start divsting their USD assets (even faster than they currently are) and the spiral continues.
<< <i>cohodk, from the general tone of your posts you seem to be saying that the US continues to be, and will continue to be a safe haven for capital...
What is your assessment of the impact of rising long term rates, the ever-increasing debt burden of interest payments and burgeoning entitlement programs upon the economy and retirement savers?
Granted that other countries may be in worse shape, but I'm still thinking that we're in deep doo-doo. >>
That would be a very accurate assessment. The USA "enjoys" the lowest tax rates in the world. Taxes will be raised to pay for this increased burden. Regulations will also help to smooth out the increased burden. Then in 25 or so years, when the bulk of the baby boomers are gone, the burdens will be greatly diminished.
I hope you like this analogy
To add to jmski's question, the 6 month bonds are bringing about 0.3%, while the 10 year is up near 4%. Investors feel they are safe on the 6 month time fram, but they are more unsure about the 10 year picture.
In 1994 the 10yr yield was 7.75%. Were investors so "unsure" 15 years ago? The 10yr today is still at the bottom end of a trading range going back to 1998. 4% is a riduclously low interest rate. These are rates we havent seen since the 50's. They are not high. I dont think this economy will have any problem with 6%+ interest rates. In fact, it will be welcomed by the baby boomers who are now forced to be savers. I believe higher rates are the "plan". They raise rates which encourages saving. It reduces demand for money and goods, which holds back inflation. It makes our debt easier to swallow for our creditors. It stabilizes the dollar--thereby stabilizing most all currencies-- which benefits the world. Of course this hurts the global economies---4-6% global growth is probably unsustainable anyway---but this creates a better, slow and steady, economy that is easier to plan for. There is nothing wrong with a global economy that goes sideways for a decade after a 60 year bull run. It is healthy. It is necessary.
I agree with you that if we stay the course we will be in deep do-do. And I think everyone thinks so also. So why stay the course? We wont. Be prepared to pay higher taxes and receive reduced or postponed benefits.
Knowledge is the enemy of fear