How much weight do you put on the potential for a US sovereign debt default?

jmski52

Since this issue is a cornerstone of my own investment stance, I thought I'd see what y'all think. Here's my question - out of all the possible considerations you weigh in your investment mix, both positive and negative - what percentage weighting to you give to the (negative) possibility of the US defaulting on its debt?

***This could refer to a rolling default (progressing somewhat like Europe), an inflationary scenario (inflating away the debt over time), or a semi-cataclysmic event that destroys the currency altogether (Weimar runaway inflation).***

Regardless of which scenario you think most likely, what weight to you put on the possibility of a US debt default?

Justacommeman

15% chance so in my case 27 lbs.............MJ

pf70collector

The U.S. takes in about 2.5 Trillion in taxes, spends about 3.7 trillion yearly. Adding 2 trillion each year to infinity. Either default or inflate. Both will be disastrous. Inflate with price controls? NIxon did it in the 70s and it failed. What are the other options? Nixon Price Controls Even the IMF has limited resources? Who will bail us out? The fed did manage to give out $16 Trillion already. Could they do it again?

Baley

0.00%

It will NEVER happen.

MsMorrisine

If Greece hasn't defaulted, th US will NEVER default.

we'll just not pay all our bills with the money we make.

that's all.


no big deal.

OPA

Zilch...Nada...

Only a paranoid conspiracy theorist would think otherwise...

pragmaticgoat

are we not already defaulting by paying back debt in devalued dollars?

derryb

we will never default, we have more ink and paper than everyone else. US$ will be the last one standing. It's redeemable value will be a completely different story.

Justacommeman

Ok, after reading some of the responses I'm upping my weight to 20% or 30lbs .

I love the sound of zero and no chance. MJ

dpoole

Default by inflation, and inflation only.

PerryHall

<< <i>Default by inflation, and inflation only. >>



Agree. That's the reason most people that are putting away PM's would give---protection from the coming inflation.

cohodk

<< <i>Default by inflation, and inflation only. >>



I would agree with that, but believe the US will not be able to manufacture inflation for another decade, maybe longer. Its a possibility that we are right now living through the "most expensive" time period in US history.

I give a 0.00000000000000001% chance--just so MJ doesnt have to reassess-- of a straight out, "we're not gonna pay bondholders" default.

Justacommeman

<< <i>I give a 0.00000000000000001% chance--just so MJ doesnt have to reassess-- of a straight out, "we're not gonna pay bondholders" default. >>

mrpotatoheadd

"This could refer to ... an inflationary scenario (inflating away the debt over time)..."

<< <i>0.00%

It will NEVER happen. >>

Never???

The govenrment itself claims that $1.00 in 2011 has the buying power of four cents in 1913.

Baley

That's not what the word default means.

Twinturbo

If you read into the US system of debt and bond issuing through the treasury.
You will understand that for this nation to default would be practically impossible due to the system theyve set up.
Is our dollar worth as much? no but neitheir is the dollar we pay back or borrow. as a matter of fact those who are buying from us today will recieve less money in 30 years at this current rate.

Justacommeman

<< <i>If you read into the US system of debt and bond issuing through the treasury.
You will understand that for this nation to default would be practically impossible due to the system theyve set up.
Is our dollar worth as much? no but neitheir is the dollar we pay back or borrow. as a matter of fact those who are buying from us today will recieve less money in 30 years at this current rate. >>



True but then again 20 years ago, heck even ten years ago no one could ever imagine that we would ever even be having this discussion to begin with. You just never know when that proverbial Black Swan will rear it's ugly head and force an action never thought previously conceivable where default might be the preferred solution.

Will it ever happen? Probably not. Probably.

MJ

mrpotatoheadd

<< <i>That's not what the word default means. >>

The OP explicitly defined it that way.

Yukoncornelius1

<< <i>0.00%

It will NEVER happen. >>

Yukoncornelius1

<< <i>0.00%

It will NEVER happen. >>



One thing I've learned in my life is to never use the word "NEVER".
I would say it will not happen unless other nations find a new reserve currency backed by something tangible like PM's or oil rather than paper promises.

pf70collector

If we are no longer the world reserve currency, who will buy our debt? This is what makes printing to infinity possible. Without trust you have $0. In 1913 the Fed had no competition because we were the world's strongest economy. Today we are in a global economy with more countries who have more skin in the game. We are no longer the world's strongest economy and we may soon not not be calling the shots.

cohodk

Japan does not ahve a reserve currency and has no problem selling debt.

Perhaps the best thing for America would be to lose that reserve status. Without commodities being priced in dollars, they might actually get cheaper. IE, the dollar drops and oil goes up--how does that help us? End pricing in dollars and commodities may actually stabilize or at least be priced on a supply/demand equation.

gecko109

<< <i>That's not what the word default means. >>





Sure it is. If you lend me money.....and I devalue the money over time....and pay you back exactly the amount agreed to, but in dollars worth 10% of what they were when you lent me the money......then I have defaulted.

You may not see it as a default....because you did indeed get back the nominal value. But make no mistake.....hyperinflation has the exact same result as default does.

derryb

<< <i>That's not what the word default means.

Sure it is. If you lend me money.....and I devalue the money over time....and pay you back exactly the amount agreed to, but in dollars worth 10% of what they were when you lent me the money......then I have defaulted. You may not see it as a default....because you did indeed get back the nominal value. But make no mistake.....hyperinflation has the exact same result as default does. >>


devaluation is not a default. a default involves failure to meet an obligation. An obligation that is met, even with devalued funds, is by definition not a default. Loan documents, bonds etc. do not contain language that addresses devaluation, that is something a smart loaner builds into his interest rate.

Because two completely different things might produce the same result does not mean the two things are the same.



<< <i>If we are no longer the world reserve currency, who will buy our debt? >>


those who think we will honor it and it will involve a profit. It then becomes strictly an investment decision and not a matter of needing dollars to conduct international business.

Baley

Well, gecko, it may be a mistake, but I still disagree, because a "default" by hyperinflation affects the values of everything in the economic system, including compensation for the skilled labor I will provide in that future time, the values of all my other assets, as well as the debt I owe which is denominated in dollars, all of which would work in my favor, offsetting the "indirect" default on any T-bonds or T-bills i happen to own.

in contrast, a true default, meaning failure to pay interest or principle on that specific debt, affects only the holders of the defaulted debt.

It may be interesting for me to define "the earth is plunging into the sun" as the normal motion of the earth in it's orbit, it's not useful when I start drawing conclusions about the impending end of the world.

Fact is, we don't have hyperinflation. We're battling as hard as we can against the deflation caused by massive debt destruction of the credit bubble bursting

edit to add: thanks derry, well said

jmski52

edited to keep the original question.

derryb

Back to the OP question:


<< <i>out of all the possible considerations you weigh in your investment mix, both positive and negative - what percentage weighting to you give to the (negative) possibility of the US defaulting on its debt?

***This could refer to a rolling default (progressing somewhat like Europe), an inflationary scenario (inflating away the debt over time), or a semi-cataclysmic event that destroys the currency altogether (Weimar runaway inflation).***

Regardless of which scenario you think most likely, what weight to you put on the possibility of a US debt default? >>


I put little to no weight on the US not honoring its debt commitments (plenty of paper and ink in the warehouse). I put 100% weight, in my investment decisions, on long term US inflation, hopefully not Weimear style. Short/intermediate term deflation will continue. I don't believe inflating away debt over time (which we have been doing since 1913) should be considered failure to meet obligation to debt holders (default). Otherwise, I could not be 0% failure to meet obligation and 100% inflation at the same time.

cohodk

I dont see any similarity of the USA to Weimar.

Yes, Weimar had war debt to pay, but the MAJOR difference is that Germany had virtually no manufacturing capacity after WW1--the country was destroyed. As consumer demand came back after the war-to rebuild- Germany had no means to meet that demand. The lack of goods caused prices for the goods they could produce to rise so Germany had to print more Marks to meet these higher prices. The printing of Marks did not cause the hyperinflation, but rather the demand for Marks.

The USA is swimming in excess capacity. We have idled plants and workers everywhere. The economy is not demanding more dollars.


The Hyperinflation in Zimbabwe has very similar roots to that in Weimar.


The USA is not Zimbabwe or Weimar. Not even remotely close.

derryb

<< <i>I dont see any similarity of the USA to Weimar. >>


Similarities from When Money Dies: The Nightmare of the Weimer Hyperinflation:

(1) a high concentration of wealth among those who leverage

(2) the middle- and lower-classes falling behind, but not understanding or knowing it (or – knowing it but not allowing themselves to think about it)

(3) the rise of a gambling culture

(4) including financial speculation on the stock exchange, which spread to all ranks of the population

(5) the blossoming of a financial industry, with quantity crushing quality (Weimar bank tellers became financial advisers since most people were at a loss, and would take any advice, which was often horrible, but probably well-intentioned)

(6) the “striking displays of luxury beside poverty” (quoting Fergusson)

(7) a “growing lack of concern for one’s fellow man” (the difference between greed and the attempt to survive is blurred)

(8) values are distorted, in both senses, the one feeding the other: a wife selling her husband’s gold watch for four potatoes

(9) the quality of goods (and services) collapses (an evolution with consequences to morale and personal dignity)

(10) denial by the central bank that it is in any way attached to the inflation

cohodk

<< <i>

<< <i>I dont see any similarity of the USA to Weimar. >>


Similarities from When Money Dies: The Nightmare of the Weimer Hyperinflation:

(1) a high concentration of wealth among those who leverage

(2) the middle- and lower-classes falling behind, but not understanding or knowing it (or – knowing it but not allowing themselves to think about it)

(3) the rise of a gambling culture

(4) including financial speculation on the stock exchange, which spread to all ranks of the population

(5) the blossoming of a financial industry, with quantity crushing quality (Weimar bank tellers became financial advisers since most people were at a loss, and would take any advice, which was often horrible, but probably well-intentioned)

(6) the “striking displays of luxury beside poverty” (quoting Fergusson)

(7) a “growing lack of concern for one’s fellow man” (the difference between greed and the attempt to survive is blurred)

(8) values are distorted, in both senses, the one feeding the other: a wife selling her husband’s gold watch for four potatoes

(9) the quality of goods (and services) collapses (an evolution with consequences to morale and personal dignity)

(10) denial by the central bank that it is in any way attached to the inflation >>




I think those "contentions or assertions" are AFTER hyperinflation hit. I dont see any similarity of the USA to Weimar.


Want hyperinflation? Start a war, preferably civil, where we destroy our own agricultural and manufacturing capacities. Anything short of that, and no hyperinflation.

derryb

I like Gonzalo's take on the issue:

The Lehman-like event will never arrive because it won’t be allowed to arrive

derryb

<< <i>

<< <i>

<< <i>I dont see any similarity of the USA to Weimar. >>


Similarities from When Money Dies: The Nightmare of the Weimer Hyperinflation:

(1) a high concentration of wealth among those who leverage

(2) the middle- and lower-classes falling behind, but not understanding or knowing it (or – knowing it but not allowing themselves to think about it)

(3) the rise of a gambling culture

(4) including financial speculation on the stock exchange, which spread to all ranks of the population

(5) the blossoming of a financial industry, with quantity crushing quality (Weimar bank tellers became financial advisers since most people were at a loss, and would take any advice, which was often horrible, but probably well-intentioned)

(6) the “striking displays of luxury beside poverty” (quoting Fergusson)

(7) a “growing lack of concern for one’s fellow man” (the difference between greed and the attempt to survive is blurred)

(8) values are distorted, in both senses, the one feeding the other: a wife selling her husband’s gold watch for four potatoes

(9) the quality of goods (and services) collapses (an evolution with consequences to morale and personal dignity)

(10) denial by the central bank that it is in any way attached to the inflation >>




I think those "contentions or assertions" are AFTER hyperinflation hit. I dont see any similarity of the USA to Weimar.


Want hyperinflation? Start a war, preferably civil, where we destroy our own agricultural and manufacturing capacities. Anything short of that, and no hyperinflation. >>


The quoted similarities are what fueled hyperinflation, they are not a result of it.

cohodk

The quoted similarities are what fueled hyperinflation, they are not a result of it.


I guess I'll just have to disagree with the author.

Did Germany have much of a stock market after WW1?
What gambling was there?
Selling gold to buy potatoes is not a cause of hyperinflation, but rather an effect.
Inferior quality of goods is an effect of hyperinflation, not a cause.

I could go on, but I see the "reasons" for hyperinflation as proposed by the author to be symptoms, rather than causes.

jmski52

The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks - do they matter when you deliberate what might happen during all this "debt destruction"? The totals in these areas dwarf the Treasury debt, and the Treasury debt is *already* unmanageable.

How will these debts be serviced or neutralized, if not by default or dollar devaluation (i.e., inflation)?

derryb

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks - do they matter when you deliberate what might happen during all this "debt destruction"? The totals in these areas dwarf the Treasury debt, and the Treasury debt is *already* unmanageable.

How will these debts be serviced or neutralized, if not by default or dollar devaluation (i.e., inflation)? >>


Only one way out and it will be utilized. This is why inflation (although hidden by current deflation) is a given:

meluaufeet

If the country is an friend... maybe 1%

If the country is not an friend... maybe 99%

cohodk

The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF.

gecko109

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF. >>





So a U.S. treasury bond is not a contract? And loans are not promises? Im very confused.

EagleEye

US Sovereign Default has nothing to do with monetary policy. It has everything to do with Congress, since they control the nations purse-strings. Just like last summer - if they want us to default, they can do it whenever they want.

If we can get rid of the No-No's in Congress, then 0%.

cohodk

<< <i>

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF. >>





So a U.S. treasury bond is not a contract? And loans are not promises? Im very confused. >>



A treasury security is a direct loan to the govt. You gave them money and they "promise" to pay you back. This is much different than a promise from the G that they will provide for you in your old age and sickness. Government liabilities are not paid by the govt, but rather your neighbors. Chicago (your neighbors) promised to pay you handsomely in retirement. Expect this promise to be broken and plan accordingly.

derryb

<< <i>US Sovereign Default has nothing to do with monetary policy. It has everything to do with Congress, since they control the nations purse-strings. Just like last summer - if they want us to default, they can do it whenever they want.

If we can get rid of the No-No's in Congress, then 0%. >>


Monetary policy creates a need for more money. Need for more money creates government debt (bonds, etc.). Failure to pay that debt when due is default.

gecko109

<< <i>

<< <i>

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF. >>





So a U.S. treasury bond is not a contract? And loans are not promises? Im very confused. >>



A treasury security is a direct loan to the govt. You gave them money and they "promise" to pay you back. This is much different than a promise from the G that they will provide for you in your old age and sickness. Government liabilities are not paid by the govt, but rather your neighbors. Chicago (your neighbors) promised to pay you handsomely in retirement. Expect this promise to be broken and plan accordingly. >>






ANY debt that the government takes on is paid for with tax dollars or further lending....which, theoretically, is paid back in tax dollars. So whether its a direct loan, or a promise to pay your social security payments.......its the PEOPLE of the nation who are on the hook. Nothing is paid for by a "government". Things are paid for by people.

derryb

<< <i>

<< <i>

<< <i>

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF. >>





So a U.S. treasury bond is not a contract? And loans are not promises? Im very confused. >>



A treasury security is a direct loan to the govt. You gave them money and they "promise" to pay you back. This is much different than a promise from the G that they will provide for you in your old age and sickness. Government liabilities are not paid by the govt, but rather your neighbors. Chicago (your neighbors) promised to pay you handsomely in retirement. Expect this promise to be broken and plan accordingly. >>






ANY debt that the government takes on is paid for with tax dollars or further lending....which, theoretically, is paid back in tax dollars. So whether its a direct loan, or a promise to pay your social security payments.......its the PEOPLE of the nation who are on the hook. Nothing is paid for by a "government". Things are paid for by people. >>


Promises to pay, such as future entitlements, are not debt until money is borrowed through the sale of securities to pay the entitlements. A promise to pay me X amount of dollars in social security payments in 2015 does not become debt until it is funded. Breaking this promise is not a default on debt, it is a default on a promise and can be easily arranged if the politicians so desire. Unfunded entitlements are not debt in the sense of default, they are projected debt that may or may not become real. Unfunded liabilities only need be counted as future debt if there is full intention to pay them, and only become actual debt when money is borrowed to pay them.

gecko109

<< <i>

<< <i>

<< <i>

<< <i>

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF. >>





So a U.S. treasury bond is not a contract? And loans are not promises? Im very confused. >>



A treasury security is a direct loan to the govt. You gave them money and they "promise" to pay you back. This is much different than a promise from the G that they will provide for you in your old age and sickness. Government liabilities are not paid by the govt, but rather your neighbors. Chicago (your neighbors) promised to pay you handsomely in retirement. Expect this promise to be broken and plan accordingly. >>






ANY debt that the government takes on is paid for with tax dollars or further lending....which, theoretically, is paid back in tax dollars. So whether its a direct loan, or a promise to pay your social security payments.......its the PEOPLE of the nation who are on the hook. Nothing is paid for by a "government". Things are paid for by people. >>


Promises to pay, such as future entitlements, are not debt until money is borrowed through the sale of securities to pay the entitlements. A promise to pay me X amount of dollars in social security payments in 2015 does not become debt until it is funded. Breaking this promise is not a default on debt, it is a default on a promise and can be easily arranged if the politicians so desire. >>





I understand your point. And as soon as the 1st SS check is cancelled, do we get to cancel the 15.3% that the government takes from every paycheck to pay for those entitlements?

derryb

<< <i>

<< <i>

<< <i>

<< <i>

<< <i>

<< <i>The debt we don't talk about - unfunded government liabilities & bad derivatives on the books of banks

I would argue that this is not debt. The govt liabilities are promises and the derivatives are contracts. Both can and are often broken, usually with little monetary consideration. Unless that promise and contract is marriage, then you have to pony up HALF. >>





So a U.S. treasury bond is not a contract? And loans are not promises? Im very confused. >>



A treasury security is a direct loan to the govt. You gave them money and they "promise" to pay you back. This is much different than a promise from the G that they will provide for you in your old age and sickness. Government liabilities are not paid by the govt, but rather your neighbors. Chicago (your neighbors) promised to pay you handsomely in retirement. Expect this promise to be broken and plan accordingly. >>






ANY debt that the government takes on is paid for with tax dollars or further lending....which, theoretically, is paid back in tax dollars. So whether its a direct loan, or a promise to pay your social security payments.......its the PEOPLE of the nation who are on the hook. Nothing is paid for by a "government". Things are paid for by people. >>


Promises to pay, such as future entitlements, are not debt until money is borrowed through the sale of securities to pay the entitlements. A promise to pay me X amount of dollars in social security payments in 2015 does not become debt until it is funded. Breaking this promise is not a default on debt, it is a default on a promise and can be easily arranged if the politicians so desire. >>





I understand your point. And as soon as the 1st SS check is cancelled, do we get to cancel the 15.3% that the government takes from every paycheck to pay for those entitlements? >>


You have my permission.