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Saturday, September 03, 2011

Capping Out On Current Debt Limit


You can get a constantly updated version of this graph here. This is bundled with Treasury Direct's Debt To The Penny site, which you should also have bookmarked.

The debt limit deal raised limits in stages. We are currently at 10.06 trillion (9/1) of Debt Held By The Public. Debt subject to the limit (includes intragovernmental holdings such as the SS and Medicare trust funds) was 14.7 trillion. From here on out it is by presidential request.

Nominal GDP (annualized and seasonally adjusted) as of Q2 was 14.996 trillion. Real GDP was 13.26 trillion. DHTP/nominal GDP ratio is thus 67%. The DHTP/real GDP ratio is 75.9%. We are getting far too close to the Rogoff/Reinhart lower limit.

It's all very well to talk about stimulus, but Mr. Market is going to start getting nervous when we add about 2 trillion dollars to Debt Held By The Public, and that is currently going to happen by 2014.

Since 1917, the US Congress has set a limit on the amount of allowable public debt. Obviously the ceiling has been raised as required! I just added this information because some people seem to be imagining that this is some new innovation. The Second Liberty Bond Act of 1917 (war funding) was the first time the US legislature set a debt limit. One reason why they did was that bonds were selling below par, and in fact in the 1930s the fourth round of Liberty Bonds did technically default (payment was due in gold, and no, bondholders did not get their gold.) Angry Saver might want to read about Liberty Bonds. The US has defaulted before, and bondholders have historically had some interest in the limits on public debt. After a certain point, either US bondholders will demand payment in gold again, or longer Treasuries will lose a lot of value.



Comments:
When more debt is not the solution and austerity will
kill off the economy what is the solution ? They have opted
To kick the can and hope that favorable variable comes into play. Sounds like a lost decade or two.
Sporkfed
 
Debtholders will eventually ask for repayment in the form of something they value that we have, and is worth more than gold: looking the other way when a war breaks out, patents, Federal lands, spy data, etc. They do have the leverage, and we have no idea if they're already utilizing it. Perhaps thwarting Keystone-XL development is something they want us to do.
 
Spork - Read Calvo's question, and let me know what you think.

IMO, despite spending 5 trillion dollars in four years (Sept 2001 we were at 5 trillion debt held by the public), we have not yet tried true fiscal stimulus.

I have one rather powerful partial criticism of Calvo's position, but I'd like to hear your reaction.
 
MOM,

After a certain point, either US bondholders will demand payment in gold again, or longer Treasuries will lose a lot of value.

This is where you and I differ.

I am not at all worried about a Liberty Bond style default. We promised to pay in paper dollars and that's exactly what we will continue to do.

I do not believe that bondholders are in a position to demand anything, just like Japan's bondholders were not in a position to demand anything.

It is why I locked in rates on long-term TIPS before others did.

I'm not saying nominal treasuries are a bargain here, but hindsight could show that they are.

The money has to go somewhere.

I believe that real yields will remain low for many, many years and that inflation will mostly be contained.

It is based on the premise that it will be harder and harder to make money off of money. It will also be harder and harder to make money off of mainstream investments. In a nutshell, it will be harder to make money off of anything.

There's too much global money chasing too few good global investments. Investors will eventually settle for what they can get. Perhaps I would think differently if I believed in Chinese economic miracle theories. I do not.

It's a very bearish outlook clearly.
 
Anonymous,

They do have the leverage, and we have no idea if they're already utilizing it.

I disagree.

I am a debtholder. Most of my nest egg sits in US government debt (TIPS). I have no leverage. I am not in a position to demand much of anything.

If I was in a position to demand something, then real yields on today's I-Bonds and 10-year TIPS would not be 0.00%.
 
MoM,
I've read Calvo's question and agree with the solution.
However, until tax and trade policies are changed, both
Austerity and stimulus will fail. Household budgets have
Got to be repaired and that means compensation labor.
Without compensating labor, asset prices will continue
To fall and drag the economy down with them.
Sporkfed
 
"I am a debtholder. Most of my nest egg sits in US government debt (TIPS)."

And I think you are taking a massive risk with poor risk/return.


"I have no leverage."

You are a small-time above-board debt holder. It seems pretty clear that Anonymous@10:00 was talking about slightly bigger/badder players than yourself.

Furthermore, all US retail investors combined is still small-time. So not only don't you matter, you're not even part of a group that matters.


"I am not in a position to demand much of anything."

That isn't quite right. You could refuse to lend unless they offered higher rates, stabilized the dollar and put forth a credible plan to keep things stable at least until some time after the debt matures. [looks over his cards and says:] I see your TIPS, and raise you fraudulent CPI.

As far as you not being in a position to demand the kinds of things that certain foreign countries may be in a position to demand -- well, duh.


WV = "xlxtend", as in our debt is XL and we aim to extend it
 
Sporkfed, your comments made me wonder about something:

Is your opinion that we need tariffs on all imported goods, or would it be sufficient to penalize a few of the bad actors? China ferinstance.
 
foo,

And I think you are taking a massive risk with poor risk/return.

Well, we can't all be as smart as you are. Some of us were just born dumb no doubt.

You are a small-time above-board debt holder. It seems pretty clear that Anonymous@10:00 was talking about slightly bigger/badder players than yourself.

Yes. I am pathetically small. Thanks so much for pointing that out. I can't disagree. Such tact you have.

And what of it? The bigger/badder players will do what exactly? Sell to other bigger/badder players? Bill Gross tried that. It didn't work out so well in hindsight. He admitted defeat. He's back.

That isn't quite right. You could refuse to lend unless they offered higher rates, stabilized the dollar and put forth a credible plan to keep things stable at least until some time after the debt matures.

I could? Perhaps I could just bury my paper dollars in my backyard and beg for higher interest rates and no inflation? Or I could throw my money into the stock market in hopes that it miraculously finds success? Or perhaps I could buy oil at $80+ and hope that it will continue higher even if the global economy stalls again?

As far as you not being in a position to demand the kinds of things that certain foreign countries may be in a position to demand -- well, duh.

You mean like China? We BEG them to allow our currency to depreciate relative to theirs. We BEG them. Or perhaps you mean Europe. Yes, indeed. They are in fine shape. They'll no doubt be making demands of us shortly, well, once they figure out how to fix their own problems anyway.

Have you given any thought to playing nicely with others on the Internet? Your tone towards everyone you meet is amazingly -- well, duh.

I am sorry that you cannot find your intellectual equal on all of the Internet and are forced to correspond with us mere mortals. It must be truly difficult for you.
 
Mom says “Mr. Market is going to start getting nervous when we add about 2 trillion dollars to Debt…..” Oh yes? So why is “Mr Market” pouring every spare penny into government debt – to the extent that yields on government debt are at a record low? Not that I wish to suggest that more debt is a good idea – which leads me nicely into a question asked by Anonymous (6:25 AM).

Anon asks “When more debt is not the solution and austerity will
kill off the economy what is the solution?” The answer was given by Keynes in a letter to Roosevelt in the 1930s, namely that an economy can be boosted EITHER by borrowing and spending, OR simply by printing money and spending it (and/or cutting taxes). Plus if the extra money is channelled into the pockets of the sort of people likely to spend the extra money (middle and low income people), we’d get a decent increase in demand and jobs.

But of course the elite would hate to see extra cash in the pockets of middle and lower income earners.

Anon (10am) says “Debtholders will eventually ask for repayment in the form of something they value that we have, and is worth more than gold..” Sorry, but debtholders have no legal right to anything other than to be repaid in dollars.
 
I agree with Calvo when he writes that there are a lack of imagination on the part of the private business and a need for sound judgment on the part of the banking community. However, I disagree with him that decoupling – removal of the US-China labor arbitrage – through wage depression here would solve our problems. First, the first rule of business is to never compete on price. Aside from China there are lots of other Asian countries where per capita income is even lower, It would quickly become a race to the bottom.

Second, the cost of living it the US – and the developed world in general - is comparatively very high. Presently a family needs a vehicle or two, a daycare or school and an appropriate size housing unit (housing occupancy and school attendance are regulated by law). In poor countries, people get to work by riding a bicycle or taking cheap public transportation, or live in barracks nearby, shop in small neighborhood stores, and occupy small flats in multistory apartments, where grandparents, parents and children are all crammed together. Going from the former to the latter would cause an awesome demand destruction in everything and monumental changes in the way of life. I would venture to guess that some people would not willingly consent to the change, and although the government has an equally awesome suppression machine at its disposal, when it's all done, we would be in a totally different mental state than now and with a totally different world view.

Third, note that most of those cheap labor countries, starting with China, are neither democracies nor market economies. Democracies and market economies need well-educated well-off independent people who can read and hold educated opinions. When there is no demand, there is no market and investment and entrepreneurship are no longer the sources of wealth.

To spend or not to spend is a false dichotomy. The question is what would it take to rejuvenate our market economy.
 
If a country Pegs their currency to the dollar to gain
Imports , then yes, tariffs on their exports. Those who
Say this would drive up the cost of living are right,
but they ignore the cost of US unemployment caused by
our Free Trade policies.
Sporkfed
 
"Well, we can't all be as smart as you are. Some of us were just born dumb no doubt."

Yes, because in the bit you are responding to I said that it's a matter of fact that I'm right, you're wrong, and you're stupid. Oh wait... I said *none* of those things. All I did is state my opinion on the riskiness of holding US debt. Do you also feel personally insulted when Jim Rogers says he's shorting US debt?


"Yes. I am pathetically small. Thanks so much for pointing that out. I can't disagree. Such tact you have."

Again, you're distorting this into some kind of personal insult when it is no such thing. I am also small-time -- I also have no ability to force specific results, only the freedom of choice. It's not an insult -- it's just a fact. (I would have thought that it not being about you personally would have been clear when I said that "all US retail investors combined is still small-time".)


"And what of it? The bigger/badder players will do what exactly? Sell to other bigger/badder players?"

I think the primary fear of the US gov is that they switch from buying to selling in a disorderly fashion. Or more to the point, the likely fear (and therefore potential leverage) is over yield going up significantly. Such an action of course is a double-edged sword as any US debt they currently held would then quickly lose a lot of value and they would take major losses off-loading it -- but when you're dealing with a ponzi, eventually you have to cut your losses. (And of course: "He who panics first, panics best.") It's hard to know what kind of back-room deals might be (and perhaps already have been) made.

Say you're right -- China has no leverage. In that case what is the US response if China shows concern about our ability to pay our debt? Maybe we'd ignore them, or publicly rebuke their claim. What we *wouldn't* do in that case is send the Vice President to China to reassure them. If I was worried about the solvency of the company of some stock I owned, and they sent a VP to visit me to assure me the company was OK, that would tend to make me suspect I may have some sway with them.
 
"Bill Gross tried that. It didn't work out so well in hindsight. He admitted defeat. He's back."

So your argument is that someone took a short position in US debt, and in the short-term that turned out to be a bad trade, and that somehow validates the soundness of holding US debt long-term? If so, such poor logic doesn't require any rebuttal. If not, you'll have to clarify.


"I could?"

Yes, you could. I have refused to hold US debt (at least long term) in the current situation, and as far as I know I have no special "magical powers". Of course you are free to invest as you see fit -- but the choice *is* (at least for now) yours to make.


"Perhaps I could just bury my paper dollars in my backyard and beg for higher interest rates and no inflation? Or I could throw my money into the stock market in hopes that it miraculously finds success? Or perhaps I could buy oil at $80+ and hope that it will continue higher even if the global economy stalls again?"

Or perhaps you could have been buying gold for the past decade and made 500% nominal (less taxes). Unfortunately all kinds of things (not the least of which is our own government) has been killing holding of *anything* as a safe way to preserve wealth (and that includes dollars, US debt, and gold). Forget earning additional wealth -- just trying to reliably hold on to most of what you have now is made ridiculously difficult. But it does not appear to be logically sound to suggest that somehow these difficulties can be plugged into some kind of valid/objective equations and the answer that pops out is "hold US debt".


"You mean like China? We BEG them to allow our currency to depreciate relative to theirs. We BEG them."

I think that's just for show. It's just so the politicians here have a foreign "meanie" to point to when it comes time to explaining why all the jobs went away. If we really wanted to break their peg, we could prevent China from owning or borrowing (directly or indirectly) any new US debt by indicating that any such debt would be summarily repudiated. Then over time (as old debt matured) they would lose their ability to peg their currency without investing (and assuming risk) in the US economy. That we don't do that, I think, is an indicator of what the truth of the situation really is (i.e., we're a lot more concerned about having buyers of our debt than we are about the yuan peg).


"Have you given any thought to playing nicely with others on the Internet? Your tone towards everyone you meet is amazingly -- well, duh."

So are you asserting that Anonymous@10:00 was actually talking about small-time players like retail investors and subsequently saying that you stand by the relevance of your response to him/her? Or are you instead saying that, while your response was ridiculously off the mark, your skin is too thin to be called out on that ridiculousness? Is there some specific syntax I should use to point out that ridiculousness that would less-offend your apparently delicate sensibilities? Or am I simply not allowed to point out the ridiculousness of anything you say?


"Sorry, but debtholders have no legal right to anything other than to be repaid in dollars."

That may be true, but it's not exactly relevant to what was said. Anonymous@10:00 was talking about leverage, not legal rights. (Plus, leverage might be used to acquire new legal rights, if not for existing debt then perhaps for new debt.)
 
foo,

"Or perhaps you could have been buying gold for the past decade and made 500% nominal (less taxes)."

I already owned gold and silver from 2004 to 2006. I had a third of my investments in them. They treated me exceptionally well on an inflation adjusted basis. Your neverending fanatical faith in them truly is a sight to behold, as is your condescending attitude towards anyone with a differing opinion.

You are the one who presumes to know what Anonymous was saying. He said debtholders. I am a debtholder. You claim that not only do I not matter, but I'm not even in the group that matters.

Perhaps it is you that does not matter. I'm done conversing with you, and by the looks of it I am not alone.
 
We are seeing the return of multi-generational homes in the US. Young people are either having problems finding jobs, struggling with college debt or both. Few of my stepson's friends seem to be moving into careers. Most seem to be willing to settle. I believe the changes have already started. Having said that, middle class expectations in the 50s (when I was a kid) were much lower than what we've seen the last twenty years. Maybe we are just returning to what we used to do.
 
"Your neverending fanatical faith in them truly is a sight to behold"

Yes, my "neverending fanatical faith" in gold, like in my previous post where I *explicitly* said that holding gold is not a safe way to preserve wealth. (It might turn out to be a good way if inflation rules the day and there's no confiscation, just as bonds might turn out to be a good way if deflation rules the day and there's no default. But neither is safe.)


"You are the one who presumes to know what Anonymous was saying."

We both have an opinion about what Anon meant. Maybe Anon would be kind enough to clarify. Do you really think Anon was talking about small-time investors like us when talking about things like "looking the other way when a war breaks out" and "spy data"? To believe that, I think one would have to presume Anon is an idiot. You want to chastise me for a "condescending attitude" while you operate on this presumption that Anon is just stupid, and you've created this straw-man (small-time investor not having leverage) to "prove" Anon is wrong?

I on the other hand don't presume Anon is stupid. I don't have any knowledge of it happening yet with US debt, but it does look like it might start happening quite openly elsewhere: Finland insists on Greek debt collateral


"You claim that not only do I not matter, but I'm not even in the group that matters.
Perhaps it is you that does not matter."

I already said that we are *both* small-time. I say that for the kind of leverage Anon appears to be talking about (e.g., getting "spy data"), *neither* of us matter. Neither of us controls the kind of money that would warrant the specific interest of the US government, much less provide us the ability to actually influence it via US debt holdings. I accept this fact as the world I live in. You, on the other hand, seem to insist on it being some kind of personal insult.
 
Teri,

No surprise that we are seeing a return to behaviors common in the 1930s-1950s era. We've had a bubble pop and are in hard economic times. Call it the Mediocre Depression (after all, we seem to do few things half so well as our grandparents!). It's not quite so rough as the Great Depression, but no mere double-dip recession a la the 1980's that we can shrug off in a couple of years with a blazing year of 8% growth as we start borrowing like crazy. Not going to happen this time around, and the sooner people figure it out the better they'll weather it.
 
The first half of Calvo's question was a complete waste. I almost didn't get to the second half where the actual substance was.

My main contention with Calvo's proposal is that we are already forced to jack up spending just on maintaining the social programs we already have in place. In fact, they are the bulk of the budget and are already causing a heavy tax burden, especially if one considers the the state and local budgets in aggregate with the federal budget.

We could eliminate the entire federal budget except for the social programs and reduce defense by half; this still cuts less than a third of the federal budget. And while that money could be re-deployed to paying debt it doesn't even take into account the already increasing costs of the existing social programs which means that you'd be right back at square one in 10 years just with the existing programs - adding new social programs only exacerbates the current financial problem and adds a little more moral hazard to boot.

Once one sector of the economy is offered unlimited leverage, the trust in that sector will vanish. We're already seeing how allowing too much leverage to the FIRE sectors has destroyed trust in them; start allowing unlimited leverage to the government sector and you are asking for social upheaval based on mistrust. Bondholders won't have any leverage but potential bondholders will never become actual bondholders.
 
Another problem with Calvo's question is how exactly budget items get defined. Is the EPA a social program or not? It isn't a transfer payments system, but is that the definition of a social program>
 
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