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dumbrenter
Participant[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”.
ParticipantBTW 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).
Participant[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.
Participant[quote=livinincali][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? How can we be over-leveraged when we get to control the rate AND the denomination in which the debt is serviced?We can keep issuing debt till there is no buyer at which point we cannot issue debt anymore which means there is no more debt problem.
OR we will reach a point of exchange rates / devaluation / inflation where it will become cheaper to make things here instead of making them overseas and shipping them here. Which means more jobs here and a vibrant economy.
Looks like folks holding dollar or dollar denominated assets will win in either case. Or so it seems to this dumb renter.[/quote]The problem is that real wealth is the promise of future productivity. We put that debt in terms of dollars but a dollar in itself has almost zero tangible value. When you print too much and people lose faith in actually getting paid back in productive output and instead bags full of paper money you get hyper inflation.[/quote]
Given the demand for dollar now, I question if we are anywhere close to a point where people lost faith in USD. Our experiences in 2008 and 2011 show that as crisis hits, dollar becomes more expensive relative to other currencies. So, relative to other currencies, USD does have tangible value and each time we have a crisis, it seems to even appreciate in value (i.e. opposite of hyperinflation).
Based on this experience, this non-economist dumb renter questions if US even has a debt crisis.This write up makes sense when putting USD in terms of demand and supply : http://www.zerohedge.com/news/2012-11-18/guest-post-understanding-exorbitant-privilege-us-dollar
None of the rules that applied to other economies, currencies throughout our history apply here anymore, so we have no history to look back to.
In my view, we are all actually sitting very pretty and need to thank our good fortune that folks outside our shores have an insatiable appetite for our paper. The only risk is when major commodities / goods will be priced in currencies other than USD. Unlikely to happen for grain and agriculture related ones since US still dominates that trade as an exporter. So that only leaves out oil or in general any energy source. As long as they are priced in USD, all is good.Participant[quote=davelj][quote=dumbrenter][quote=davelj]
Yes, debt has been growing at a much faster rate than GDP, so we know that it has had a positive impact on GDP (in the past). Now we’re at the point where debt is so large that it has a negative impact on GDP (too much to service). We have too much debt – there’s no question about that. But… you’re dramatically overstating your case when you suggest that there hasn’t been ANY economic growth ex-debt over the last 30 years; this is empirically incorrect. In fact, there’s been a bit of research done on this subject and most of it concludes that about 50-100 bps of annual GDP growth over the last 30 years has been the result of incremental debt.[/quote]Would it be correct to say that the debt service payments will be a short-term liability (i.e. in current portion of liability) while the same debt used productively will be having a positive effect on the revenue portion of the income statement?[/quote]
This is an interesting issue and it’s complicated by politics and the fact that our economy isn’t a corporation, although they share certain similarities. A traditional view of corporate finance suggests that you issue debt and invest in projects so long as the new projects’ expected rate of return is greater than the weighted-average cost of capital (weighting both debt and equity). As debt increases, the individual costs of both equity and debt increase (as the whole enterprise becomes more risky), but the weighted-average cost declines (because debt is cheaper than equity) UP TO A POINT. At a point – and this varies by company – the overall cost of capital starts to increase with each unit of additional debt – this is, in theory, where the “optimal capital structure” lies. To use extreme examples, the optimal debt-to-capital ratio for a tech start-up is zero (as it’s a very risky enterprise). Conversely, the optimal debt-to-capital ratio for a utility is fairly high, as its cash flows are highly predictable.
Which brings us to the US. Aggregate debt, in and of itself, is not a bad thing. And the US doesn’t have a “true” cost of capital because it’s not a corporation (the Federal Reserve can print money, after all). Arguably, however, at the point at which $1 of incremental debt no longer produces $1 of incremental GDP… well, you need to start asking some hard questions. Perhaps that $1 of debt will pay off in the longer term. For example, a corporation doesn’t issue $1 of debt assuming it’s going to generate a like $1 of earnings in year 1 – that’s absurd. But over time… it needs to generate something positive. The problem that we face now, of course, is that $1 of new debt generates about $0.15 of incremental GDP. While I don’t know what the optimal capital structure is for the US (I’d have to really think about that), it’s not what we have currently – we’re over-leveraged. The only reason we can service our debt right now (and for the foreseeable future) is that Mr. Bernanke has fixed interest rates at a very low level.
So, in a corporate context, it’s much easier to determine whether or not an enterprise is over-leveraged. It’s much more difficult when you look at an economy. But I think when you look at the mountain of debt we have today relative to GDP it’s pretty clear we have a problem. The debate is whether it’s a painful, albeit surmountable, problem over the long term or completely insurmountable. The jury’s still out on that question.[/quote]
Thanks.
So going to back to what I am trying to figure out:
A debt issued by government is very different from that of a corporation.
Additionally, while the interest rate on a bond issued by a corporation is dependent on market, the US government at this time can choose the interest it wants to pay on its debt.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? How can we be over-leveraged when we get to control the rate AND the denomination in which the debt is serviced?We can keep issuing debt till there is no buyer at which point we cannot issue debt anymore which means there is no more debt problem.
OR we will reach a point of exchange rates / devaluation / inflation where it will become cheaper to make things here instead of making them overseas and shipping them here. Which means more jobs here and a vibrant economy.
Looks like folks holding dollar or dollar denominated assets will win in either case. Or so it seems to this dumb renter.Participant[quote=davelj]
Yes, debt has been growing at a much faster rate than GDP, so we know that it has had a positive impact on GDP (in the past). Now we’re at the point where debt is so large that it has a negative impact on GDP (too much to service). We have too much debt – there’s no question about that. But… you’re dramatically overstating your case when you suggest that there hasn’t been ANY economic growth ex-debt over the last 30 years; this is empirically incorrect. In fact, there’s been a bit of research done on this subject and most of it concludes that about 50-100 bps of annual GDP growth over the last 30 years has been the result of incremental debt.[/quote]Would it be correct to say that the debt service payments will be a short-term liability (i.e. in current portion of liability) while the same debt used productively will be having a positive effect on the revenue portion of the income statement?
Participant[quote=squat250]someone said…
This is why we have to make this count and screw up big time. There will be no second chance to screw up again.[/quote]
this seems to be the plan.[/quote]
that would be yours truly.
A corollary to that would be that each screw up has to be bigger than last time. Repeat screw up at smaller scale would not be helpful at all.
What this means is that the magnitude of next screw up after housing bubble has to eclipse the housing bubble in scale.Participant[quote=CA renter][quote=dumbrenter][quote=livinincali][quote=dumbrenter]
That’s a pretty good explanation of wealth backed by debt, livinincali.
But if there is a debtor, there needs to be the counter-party creditor.
In this situation, who is the creditor? folks who buy the treasury bonds?
Is it the banks? The FED? Treasury? Foreign governments that peg their currency to dollar?How are they going to react once they find out that there is very little for them to claim in terms of what they lent against (i.e. assets)?[/quote]
The creditor is the big banks, pension funds, the growing wealth gap between rich and poor. As the American populace has taken on increasing amounts of debt to buy things they want now rather then waiting they made the rich people wealthy. They are responsible for the large wealth gap in this country.
In all honesty I think this is just the natural state of affairs based on the demographics. People are growing older and are desperate to acquire assets to be sold to finance consumption in retirement. The need for somebody to owe you in retirement has lead to the loose money policies. People nearing retirement are desperate to claim part of a future workers productivity.[/quote]
How can a creditor be a “wealth gap between rich and poor”? Shouldn’t the rich become poorer because of loss of wealth.
Let me see if this makes sense:
Poor need “things” right now.
Rich have Money.
Rich loan money to poor buy “things”
Poor default
Rich are left holding a highly devalued asset as a repo.
Poor are exactly where they began other than losing FICO score.
Rich have lost wealth (in real terms).So from above, the deleveraging process actually evens out the wealth field rather than concentrating it.
Maybe unless the rich get the government to buy the devalued asset and make them whole and stick the difference to the tax payers who are mostly poor. But that would never happen in a democracy, right? :-)[/quote]
DR,
You are right about the eventual conclusion IF we allowed all the defaults to happen. This is why we’re seeing all of the interventions. As you noted, this is why we’ve racked up all of this govt debt. It’s not for the poor people that they’ve initiated all the foreclosure moratoriums, bank bailouts, unemployment insurance extensions (so the debtors can pay off more of their debts), etc.; we’re deeper in debt because they are trying to protect the asset prices of the rich…in order to maintain the wealth gap. Now, they are trying to deflect blame by claiming that workers are somehow responsible for these debts.
While I agree that debtors are indeed responsible for part of this wealth gap as livinincali mentioned, that’s just part of the story. What caused everyone to go into debt is the loss of decent, middle-class jobs in the U.S. that resulted from outsourcing jobs (and bringing in cheap/illegal labor). Americans were trying to maintain their former standard of living, since they were often told that the “downturns” would be temporary, so they started using credit instead of savings for consumption.
Globalization is the leading cause of the wealth gap, and this benefited the rich as their profits increased as a result, and the workers saw their wages decline/stagnate over decades.
Tax policies that favored investment income over labor then finished the job. The rich were then able to accelerate the accumulation of wealth since investment income is taxed at such a low rate. Their wealth compounded at an incredible rate because the tax savings enabled them to use that money to make even more money, which was taxed at a lower rate, and on and on it went.
Joe Sixpack, the worker, never stood a chance.[/quote]
CAR,
I fail to see the relationship between asset prices and unemployment insurance extensions. For you everything seems to be about unions and globalization.
If the asset prices are maintained for the rich, then you the poor unions/middle class can force their hands by reverting to simple living, not buying their stuff and maybe not even paying taxes. Paying taxes can be avoided if poor simply barter goods/services with each other.
If the union folks and middle class default things and default big time, the asset prices are bound to fall. However, they will never get that next ipad or the smart phone on credit.But going back to my original question, the drop in asset prices will affect the rich most. The unions and middle class had nothing to begin with other than being sold some “dreams” and “told” about things.
The question is: how will the creditors react when they find out they have lost a chunk of their asset values and very little to claim against it?Participant[quote=carlsbadworker]
Strategically, this allows me to reach my goal of being a landlord at 40 ahead of schedule. I can tolerate slight negative cash flow at the beginning years, with rent inflation giving me positive cash flow in future years. My zillow rent estimates is $1.2k above my mortgage, $700 above PITI+ HOA, so hopefully there is some cushion because I am not handy.
Hopefully, everything works out, less stressed about buying this time around.[/quote]
Congratulations. Are the rent estimates you mention i.e. $1.2k > mortgage on a per year basis?
Participant[quote=Diego Mamani][quote]Obviously the insurance company will try to sell you too much but you have to consider your own personal situation e.g. if you have a working vs non-working spouse, number of children, time it takes for your family to bounce back and be ok without you etc.[/quote]Something to consider too is the level of assets you currently own. You may have enough in savings, investments, home equity, etc., that you may end up needing little or no insurance.[/quote]
Good point. Many people with assets forget to account for that and go with higher payout (and premium).
Participant[quote=livinincali][quote=dumbrenter]
That’s a pretty good explanation of wealth backed by debt, livinincali.
But if there is a debtor, there needs to be the counter-party creditor.
In this situation, who is the creditor? folks who buy the treasury bonds?
Is it the banks? The FED? Treasury? Foreign governments that peg their currency to dollar?How are they going to react once they find out that there is very little for them to claim in terms of what they lent against (i.e. assets)?[/quote]
The creditor is the big banks, pension funds, the growing wealth gap between rich and poor. As the American populace has taken on increasing amounts of debt to buy things they want now rather then waiting they made the rich people wealthy. They are responsible for the large wealth gap in this country.
In all honesty I think this is just the natural state of affairs based on the demographics. People are growing older and are desperate to acquire assets to be sold to finance consumption in retirement. The need for somebody to owe you in retirement has lead to the loose money policies. People nearing retirement are desperate to claim part of a future workers productivity.[/quote]
How can a creditor be a “wealth gap between rich and poor”? Shouldn’t the rich become poorer because of loss of wealth.
Let me see if this makes sense:
Poor need “things” right now.
Rich have Money.
Rich loan money to poor buy “things”
Poor default
Rich are left holding a highly devalued asset as a repo.
Poor are exactly where they began other than losing FICO score.
Rich have lost wealth (in real terms).So from above, the deleveraging process actually evens out the wealth field rather than concentrating it.
Maybe unless the rich get the government to buy the devalued asset and make them whole and stick the difference to the tax payers who are mostly poor. But that would never happen in a democracy, right? 🙂
Participant[quote=The-Shoveler]
Not quite, The fed is a branch of the Gov,
The Federal Reserve is not a private bank it works for and is part of the U.S Gov., whatever profit it makes it must return to the USA treasury the first of every year.
If it wanted to it could buy all the outstanding T-notes (treasuries) and burn them essentially ending our debt.[/quote]So let’s see: The Gov prints T-bills, creates debt and uses up that debt for defence/infra/medicare/whatever. This debt represented as a t-bill is sold to FED which is another part of the Gov.
And this other part of Gov can simply burn this off thus ending our debt.This sounds like a really good deal. {Dumbrenter scratching his head here} So may I ask what exactly is this problem with debt? Why do we have CNBC anchors and folks on this board hyperventilating over such a good deal.
We are in a unique position in human history where one country’s printed note is good in any corner of the world. This has never happened before and once we screw up, this will never happen again. This is why we have to make this count and screw up big time. There will be no second chance to screw up again.
Participant[quote=The-Shoveler][quote=dumbrenter][quote=The-Shoveler]Actually were doing about average as far as debt,
pretty much the whole world is in debt.except china and a few other exceptions.
Automation and other Tech, will be a big equalizer in the end IMO.[/quote]
Again, if everyone is in debt, who and where are the creditors?
Anybody, Anybody other than the Chinese bogeyman for which the numbers don’t add up anyway?And if other countries stop selling us stuff, doesn’t this mean our own economy will improve due to more manufacturing jobs? Somebody gotta make the stuff that goes for sale on WalMart.[/quote]
Yes my point, we will have to make our own stuff, but don’t count on me to put your shoes together LOL.
Actually the biggest buyer right now is our FED reserve, there are a lot of good things (ie… the debt can become a paper error at any point) and a lot of Bad things (ie… the foreign owners of our debt are dumping on the fed, actually I think this is also good).
To be honest I think the Chinese are really playing the same game internally, and I would look for them to step that up after these elections they just went through, who knows maybe in 5 years they will be in Debt TOOO!!! LOL.[/quote]
But the FED is made up of member banks which are rational profit making entities. Why would they want to keep buying debt that they know is becoming worthless soon?
Participant[quote=The-Shoveler]Actually were doing about average as far as debt,
pretty much the whole world is in debt.except china and a few other exceptions.
Automation and other Tech, will be a big equalizer in the end IMO.[/quote]
Again, if everyone is in debt, who and where are the creditors?
Anybody, Anybody other than the Chinese bogeyman for which the numbers don’t add up anyway?And if other countries stop selling us stuff, doesn’t this mean our own economy will improve due to more manufacturing jobs? Somebody gotta make the stuff that goes for sale on WalMart.
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