[patientrenter]

Planned outcome for California state budget:

1. Federal bail-out (both current and future, through bond repayment guarantees; and direct and indirect, through inflation)

2. Increase in CA state taxes (and fees etc) in the present and also the future, through more state borrowing

3. Small spending cuts designed to maximize public pain and scare the public into choosing more taxes instead. [Release criminals before cutting state pensions etc.]

I apologize that this is a near-repeat of an earlier post I made, but the question never dies, even though we know the answer, and it never changes.

The latest proposal from the governor is obviously just one more note in the carefully orchestrated campaign to limit spending cuts. No one in govt really wants to cut govt spending by a large amount, like 25-40%.

[patientrenter]

Planned outcome for California state budget:

1. Federal bail-out (both current and future, through bond repayment guarantees; and direct and indirect, through inflation)

2. Increase in CA state taxes (and fees etc) in the present and also the future, through more state borrowing

3. Small spending cuts designed to maximize public pain and scare the public into choosing more taxes instead. [Release criminals before cutting state pensions etc.]

I apologize that this is a near-repeat of an earlier post I made, but the question never dies, even though we know the answer, and it never changes.

The latest proposal from the governor is obviously just one more note in the carefully orchestrated campaign to limit spending cuts. No one in govt really wants to cut govt spending by a large amount, like 25-40%.

[patientrenter]

Planned outcome for California state budget:

1. Federal bail-out (both current and future, through bond repayment guarantees; and direct and indirect, through inflation)

2. Increase in CA state taxes (and fees etc) in the present and also the future, through more state borrowing

3. Small spending cuts designed to maximize public pain and scare the public into choosing more taxes instead. [Release criminals before cutting state pensions etc.]

I apologize that this is a near-repeat of an earlier post I made, but the question never dies, even though we know the answer, and it never changes.

The latest proposal from the governor is obviously just one more note in the carefully orchestrated campaign to limit spending cuts. No one in govt really wants to cut govt spending by a large amount, like 25-40%.

[patientrenter]

Planned outcome for California state budget:

1. Federal bail-out (both current and future, through bond repayment guarantees; and direct and indirect, through inflation)

2. Increase in CA state taxes (and fees etc) in the present and also the future, through more state borrowing

3. Small spending cuts designed to maximize public pain and scare the public into choosing more taxes instead. [Release criminals before cutting state pensions etc.]

I apologize that this is a near-repeat of an earlier post I made, but the question never dies, even though we know the answer, and it never changes.

The latest proposal from the governor is obviously just one more note in the carefully orchestrated campaign to limit spending cuts. No one in govt really wants to cut govt spending by a large amount, like 25-40%.

[patientrenter]

Bob and Arraya,

I am still puzzled why you think inflation cannot be achieved.

If I understand you correctly, you think that the Federal Reserve’s purchases of US Treasuries will lead to a meltdown in the bond market, because it will lead to China pulling back from the US Treasury market.

Let’s follow that logic. China holds less than $1 trillion of US Treasuries. Sure, China could roil the Treasury market by threatening to sell some. They could go further and actually sell a chunk. But let’s consider a worst case scenario, and assume that China sells all its US Treasury holdings now. Does the US govt have the instruments to prevent a spike in US Treasury yields? Sure. The Federal Reserve can simply buy all the additional Treasuries on the market at a high enough price to keep the yield at today’s levels.

Will everyone be happy with that? Not everyone, but the Fed can certainly do it. It will lead to a quick devaluation in the dollar. But that just adds more import price inflation to the sum of inflationary pressures.

That’s an extreme reaction (US govt) to an extreme action (Chinese govt). In reality all the govts are more careful than that, so we are more likely to see carefully managed gradual movements spread over years.

What am I missing?

[patientrenter]

Bob and Arraya,

I am still puzzled why you think inflation cannot be achieved.

If I understand you correctly, you think that the Federal Reserve’s purchases of US Treasuries will lead to a meltdown in the bond market, because it will lead to China pulling back from the US Treasury market.

Let’s follow that logic. China holds less than $1 trillion of US Treasuries. Sure, China could roil the Treasury market by threatening to sell some. They could go further and actually sell a chunk. But let’s consider a worst case scenario, and assume that China sells all its US Treasury holdings now. Does the US govt have the instruments to prevent a spike in US Treasury yields? Sure. The Federal Reserve can simply buy all the additional Treasuries on the market at a high enough price to keep the yield at today’s levels.

Will everyone be happy with that? Not everyone, but the Fed can certainly do it. It will lead to a quick devaluation in the dollar. But that just adds more import price inflation to the sum of inflationary pressures.

That’s an extreme reaction (US govt) to an extreme action (Chinese govt). In reality all the govts are more careful than that, so we are more likely to see carefully managed gradual movements spread over years.

What am I missing?

[patientrenter]

Bob and Arraya,

I am still puzzled why you think inflation cannot be achieved.

If I understand you correctly, you think that the Federal Reserve’s purchases of US Treasuries will lead to a meltdown in the bond market, because it will lead to China pulling back from the US Treasury market.

Let’s follow that logic. China holds less than $1 trillion of US Treasuries. Sure, China could roil the Treasury market by threatening to sell some. They could go further and actually sell a chunk. But let’s consider a worst case scenario, and assume that China sells all its US Treasury holdings now. Does the US govt have the instruments to prevent a spike in US Treasury yields? Sure. The Federal Reserve can simply buy all the additional Treasuries on the market at a high enough price to keep the yield at today’s levels.

Will everyone be happy with that? Not everyone, but the Fed can certainly do it. It will lead to a quick devaluation in the dollar. But that just adds more import price inflation to the sum of inflationary pressures.

That’s an extreme reaction (US govt) to an extreme action (Chinese govt). In reality all the govts are more careful than that, so we are more likely to see carefully managed gradual movements spread over years.

What am I missing?

[patientrenter]

Bob and Arraya,

I am still puzzled why you think inflation cannot be achieved.

If I understand you correctly, you think that the Federal Reserve’s purchases of US Treasuries will lead to a meltdown in the bond market, because it will lead to China pulling back from the US Treasury market.

Let’s follow that logic. China holds less than $1 trillion of US Treasuries. Sure, China could roil the Treasury market by threatening to sell some. They could go further and actually sell a chunk. But let’s consider a worst case scenario, and assume that China sells all its US Treasury holdings now. Does the US govt have the instruments to prevent a spike in US Treasury yields? Sure. The Federal Reserve can simply buy all the additional Treasuries on the market at a high enough price to keep the yield at today’s levels.

Will everyone be happy with that? Not everyone, but the Fed can certainly do it. It will lead to a quick devaluation in the dollar. But that just adds more import price inflation to the sum of inflationary pressures.

That’s an extreme reaction (US govt) to an extreme action (Chinese govt). In reality all the govts are more careful than that, so we are more likely to see carefully managed gradual movements spread over years.

What am I missing?

[patientrenter]

Bob and Arraya,

I am still puzzled why you think inflation cannot be achieved.

If I understand you correctly, you think that the Federal Reserve’s purchases of US Treasuries will lead to a meltdown in the bond market, because it will lead to China pulling back from the US Treasury market.

Let’s follow that logic. China holds less than $1 trillion of US Treasuries. Sure, China could roil the Treasury market by threatening to sell some. They could go further and actually sell a chunk. But let’s consider a worst case scenario, and assume that China sells all its US Treasury holdings now. Does the US govt have the instruments to prevent a spike in US Treasury yields? Sure. The Federal Reserve can simply buy all the additional Treasuries on the market at a high enough price to keep the yield at today’s levels.

Will everyone be happy with that? Not everyone, but the Fed can certainly do it. It will lead to a quick devaluation in the dollar. But that just adds more import price inflation to the sum of inflationary pressures.

That’s an extreme reaction (US govt) to an extreme action (Chinese govt). In reality all the govts are more careful than that, so we are more likely to see carefully managed gradual movements spread over years.

What am I missing?

[patientrenter]

4plex, my point was that the US govt can ALWAYS repay its dollar-denominated debt, so the chance that it won’t seems vanishingly small to me. Yes, the real value of the repayments may shrivel due to inflation (and my opinion is that they will), but are the rating agencies really factoring in that future implicit partial default caused by inflation into their US Treasury credit risk ratings? Do they actually say that?

[patientrenter]

4plex, my point was that the US govt can ALWAYS repay its dollar-denominated debt, so the chance that it won’t seems vanishingly small to me. Yes, the real value of the repayments may shrivel due to inflation (and my opinion is that they will), but are the rating agencies really factoring in that future implicit partial default caused by inflation into their US Treasury credit risk ratings? Do they actually say that?

[patientrenter]

4plex, my point was that the US govt can ALWAYS repay its dollar-denominated debt, so the chance that it won’t seems vanishingly small to me. Yes, the real value of the repayments may shrivel due to inflation (and my opinion is that they will), but are the rating agencies really factoring in that future implicit partial default caused by inflation into their US Treasury credit risk ratings? Do they actually say that?

[patientrenter]

4plex, my point was that the US govt can ALWAYS repay its dollar-denominated debt, so the chance that it won’t seems vanishingly small to me. Yes, the real value of the repayments may shrivel due to inflation (and my opinion is that they will), but are the rating agencies really factoring in that future implicit partial default caused by inflation into their US Treasury credit risk ratings? Do they actually say that?

[patientrenter]

4plex, my point was that the US govt can ALWAYS repay its dollar-denominated debt, so the chance that it won’t seems vanishingly small to me. Yes, the real value of the repayments may shrivel due to inflation (and my opinion is that they will), but are the rating agencies really factoring in that future implicit partial default caused by inflation into their US Treasury credit risk ratings? Do they actually say that?

[patientrenter]

I too don’t understand why sovereign US debt (denominated in dollars) wouldn’t always be AAA-rated. I thought the rating agencies only rated for legal default. When the US defaults, it will not be a legal default, it will be an effective but partial and indirect default using inflation.

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