Uh oh. FHA negative reserves…Say it ain’t so!

[Rich Toscano]

[quote=kev374]well, since the Obama administration…[/quote]

This is bordering on political threadjack territory… it seems like a gratuitous shot at the “Obama administration” considering that Bernanke (the head of the organization that actually prints the money) was appointed by Bush.

[Rich Toscano]

[quote=dumbrenter]
To make things even interesting, the US can not only choose the interest rate, but the debt is denominated in paper that the US can print at will.
So where exactly is the problem? [/quote]

The problem is that it will eventually seen that we CAN’T print at will. Then things will get a lot harder.

[scaredyclassic]

printing money is non-partisan. im pretty sure if Willard Romney had won he woulda been printing too.

the word threadjack keeps making me think of montereyjack cheese.

threadjack cheese.

we have a cat named pinta we call weenta, and we always go around incorporating the phrase “weenta cheese” into virtually every single family conversation.

why don’t more people call willard by his real name?

some names never recover after a bad motion pic

[dumbrenter]

[quote=Rich Toscano][quote=dumbrenter]
To make things even interesting, the US can not only choose the interest rate, but the debt is denominated in paper that the US can print at will.
So where exactly is the problem? [/quote]

The problem is that it will eventually seen that we CAN’T print at will. Then things will get a lot harder.[/quote]

My question was in the context of debt. WE can make the debt disappear at the stroke of a keyboard if we choose to. A luxury that makes us very unique in the world. Of course there will be a fallout, but it will not be a debt crisis!!

How will it be seen that we can’t print at will? This is where I get lost. And why will things get harder? Given that US is 25% of world economy, and given the natural resources at our disposal, the world will need us more than we need them even after we screw them over by devaluing their dollar denominated assets. This is in spite of the aging population.

To give a historical perspective, everybody else got screwed over in ’74 when Nixon took USD off gold standard. That was some big time devaluation. That did not stop anybody from trading with us.

[dumbrenter]

BTW I do understand that current monetary policies do punish savers (who hold dollars) and distort asset prices from their ‘true’ value as it would have been without such intervention.

By my questions are more specific to how it affects debt (public and private).

[Rich Toscano]

[quote=dumbrenter]
My question was in the context of debt. WE can make the debt disappear at the stroke of a keyboard if we choose to. A luxury that makes us very unique in the world.
[/quote]

How is that at all unique? Any country in the world could do that, with the exception of the members of the Euro (and the ECB as a whole could do that; it’s just that individual Euro countries can’t do it unilaterally).

[quote=dumbrenter]
How will it be seen that we can’t print at will? This is where I get lost. And why will things get harder?
[/quote]

In my view the result will be rising interest rates and excessive price inflation, OR severely tight monetary policy to head those off… either way is equivalent to “things getting harder.”

[quote=dumbrenter]
Given that US is 25% of world economy, and given the natural resources at our disposal, the world will need us more than we need them even after we screw them over by devaluing their dollar denominated assets. This is in spite of the aging population.
[/quote]

I’m sorry, I just don’t buy the old “this time is different”/”we’re different”/”the rules don’t apply to us” trope. Yes, we have certain advantages, of course… but doesn’t justify the idea that we can infinitely print money with no negative repercussions.

[quote=dumbrenter]
To give a historical perspective, everybody else got screwed over in ’74 when Nixon took USD off gold standard. That was some big time devaluation. That did not stop anybody from trading with us.[/quote]

Right, and we endured a decade of high inflation and economic stagnation. Things got harder, to bring it full circle. (Not that I believe it was the result of Nixon’s single action you noted, but rather, that action and the stagflation were both the results of years of overly loose monetary policy).

BTW I never said anything about people not trading with us. I was rebutting your idea that because we have a printing press, there’s no problem.

[dumbrenter]

[quote=Rich Toscano]
How is that at all unique? Any country in the world could do that, with the exception of the members of the Euro (and the ECB as a whole could do that; it’s just that individual Euro countries can’t do it unilaterally). [/quote]

Because US is the only country with debt denominated in its own currency. All other countries have their external debt denominated in some other currency. This big difference is being overlooked. If Australia print excessively, then at some point their trade partners will demand payments in USD and not in Australian currency. Not a lot of people hold their currency as reserves like they do for USD, so if Aus do print excessively, there will be more incentive for external entities to dump and make a run on their currency starting a downward spiral.
Question is does/if/when the same even applies to USD?

[quote=Rich Toscano]
In my view the result will be rising interest rates and excessive price inflation, OR severely tight monetary policy to head those off… either way is equivalent to “things getting harder.” [/quote]

Understood, but at least it will not be a debt crisis!

[quote=dumbrenter]
Given that US is 25% of world economy, and given the natural resources at our disposal, the world will need us more than we need them even after we screw them over by devaluing their dollar denominated assets. This is in spite of the aging population.
[/quote]

[quote=Rich Toscano]
I’m sorry, I just don’t buy the old “this time is different”/”we’re different”/”the rules don’t apply to us” trope. Yes, we have certain advantages, of course… but doesn’t justify the idea that we can infinitely print money with no negative repercussions.

BTW I never said anything about people not trading with us. I was rebutting your idea that because we have a printing press, there’s no problem.[/quote]

Here is where I can flip your argument against your position. The last time we devalued, nothing earth shattering happened; yes there was some short term pain, but we made through it. So why does “this time it is different” apply now and not in ’74?

I do agree that those investors/speculators who get the timing of this asset markdown right will see returns that are “quite satisfactory”.

[Rich Toscano]

[quote=dumbrenter]
Because US is the only country with debt denominated in its own currency. All other countries have their external debt denominated in some other currency. [/quote]

That’s just not the case… (I agree it is an important factor, but many countries issue bonds in their own currencies).

[quote=dumbrenter]
This big difference is being overlooked. If Australia print excessively, then at some point their trade partners will demand payments in USD and not in Australian currency. Not a lot of people hold their currency as reserves like they do for USD, so if Aus do print excessively, there will be more incentive for external entities to dump and make a run on their currency starting a downward spiral.
Question is does/if/when the same even applies to USD?
[/quote]

You could also argue that at some point, if we trash the USD enough, people won’t want to buy USD-denominated bonds. I agree that being the reserve currency has bought us a certain amount of leeway… but not an infinite amount. There are limits on how much we can print/monetize before we experience problems as a result. That’s really all I’m trying to argue here.

[quote=dumbrenter]
[quote=Rich Toscano]
In my view the result will be rising interest rates and excessive price inflation, OR severely tight monetary policy to head those off… either way is equivalent to “things getting harder.” [/quote]

Understood, but at least it will not be a debt crisis!
[/quote]

OK, well, that’s just quibbling about semantics and doesn’t really address the point I am trying to make.

[quote=dumbrenter]
Here is where I can flip your argument against your position. The last time we devalued, nothing earth shattering happened; yes there was some short term pain, but we made through it. So why does “this time it is different” apply now and not in ’74?

I do agree that those investors/speculators who get the timing of this asset markdown right will see returns that are “quite satisfactory”.[/quote]

I’m sorry, that doesn’t flip anything. “This time is different” is shorthand for when people try to rationalize that there won’t be consequences from economic imbalances or mispricings. It doesn’t mean that every instance is exactly the same as everything else, and I never said that’s the case. There are many differences between now and the 1970s, of course. In fact the imbalances are even worse now, which does portend that the outcome could be more severe — but acknowledging that fact isn’t the same as saying “this time is different” in the pejorative sense you are implying.

Also where did I use the word “earth shattering?” In the 70s we got years of double-digit inflation, double digit interest rates, and a stagnant economy — you try to dismiss that as “some short term pain” but I think it fits perfectly as an example of real economic consequences to loose monetary policy — which I only brought up in the first place because you invoked the 1970s as an example where other people suffered the consequences instead of the US.

Again, my original point was this — you said (paraphrased) “The US can print money to buy its own debt, so what’s the problem?” The problem is that monetizing huge amounts of debt has historically led to serious consequences. Just because we are getting away with it at this brief point in time doesn’t mean it’s a long term solution.

I highly recommend Kyle Bass’ latest letter to investors. This gives a good explanation… it is more focused on Japan, but the same arguments apply to all over-indebted countries that are trying to print away the debt… even if they have the reserve currency. A good read. http://www.scribd.com/doc/113643591/Kyle-Bass-Hayman-Capital-on-why-Japan-will-default-November-15th-2012

Happy Thanksgiving!

[davelj]

Bass’s logic is compelling. The problem, of course, is always timing. We’ll get that inflation at some point… but it could still be several to many years off (see Japan, which he spends some time on – folks have been trying to make money shorting Japanese bonds for over a decade). Bass’s investors will give him a long rope because he’s made folks a crapload of dough with some well-timed calls. But most folks don’t have a decade – which is a possibility – to be proven right. I know I don’t.

It’s a strange financial world…

[Zeitgeist]

Thanks for the link Rich and Happy Thanksgiving to you. It is full of useful information.

[dumbrenter]

[quote=Rich Toscano]
Again, my original point was this — you said (paraphrased) “The US can print money to buy its own debt, so what’s the problem?” The problem is that monetizing huge amounts of debt has historically led to serious consequences. Just because we are getting away with it at this brief point in time doesn’t mean it’s a long term solution.

I highly recommend Kyle Bass’ latest letter to investors. This gives a good explanation… it is more focused on Japan, but the same arguments apply to all over-indebted countries that are trying to print away the debt… even if they have the reserve currency. A good read. http://www.scribd.com/doc/113643591/Kyle-Bass-Hayman-Capital-on-why-Japan-will-default-November-15th-2012

Happy Thanksgiving![/quote]

Happy thanksgiving to you too.
You have paraphrased my question accurately. I used to believe in the serious consequences theory of monetizing huge debt but just had a serious rethink, hence my question.

If the best way to quantify it is to say that we will have double digit inflation & interest rates, I think thats a very small price to pay for what we are doing with the debt now (i.e. practically looting other’s work & resources for a piece of paper).

The link you referenced argues your case and claims that market can turn at astonishing speed. Bass could be right (and thanks for that link BTW), but the question is where would the markets go? What options do these markets have? Gold? I hope not given recent history of correlated movement and a very good possibility that the boys in DC can pull the “confiscation card” from their bag of tricks.
Funnily enough, here is what I see on the top right hand side of that link: “Kyle Bass Hayman Capital on why Japan will default November 15th 2012”
I’ll give him till the end of the year to see his default.

Fundamentally where we disagree is that you believe that being a reserve currency has given us just a slight edge over others, I recently changed my mind and now believe that “edge” is huge, very huge, very very huge (I hate to use the word infinite here). If I am wrong, I get to change my mind again and pay a small fee for revising opinions.

[livinincali]

[quote=dumbrenter]
You have paraphrased my question accurately. I used to believe in the serious consequences theory of monetizing huge debt but just had a serious rethink, hence my question.
[/quote]

It’s really as simple as understanding a balance sheet. For every debt there is a corresponding credit. Most of the credits correspond to somebody’s wealth, whether it’s a pension fund holding bonds or a banks balance sheet. By replacing a promise of future productivity with the equivalent of paper with numbers on it you removed the real wealth. The thing of value is the future productivity not the paper bill.

The flaw in the monetize the debt argument is that people feel like with proper management of money you can remove the debt but still preserve the wealth. Reserve currency status just means you have a higher natural demand for dollars which allows them to preserve their value better than other counter parts. That demand isn’t infinite or guaranteed. It’s just want people happen to value right now.

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