U.S. Debt discussion

[freedogger]

Originally Posted by Tinordi

Have you bothered to look at yields on U.S. t-bills? Hell they've barely budged even amid this tempest. Many many people are still willing to invest in the U.S. economy.

Yields don't tell the whole story, the cost to insure against default is more telling. Both will move in the hurting direction if rating agencies downgrade as they have threatened to do.

[Cowboy89]

An agreement is not necessarily going to avoid a downgrade from AAA- to AA+ from S&P. S&P has maintained that $4 Trillion over 10 years needs to be cut/raised through taxation in this agreement to stave off a downgrade. Looking at the Senate bill from Reed and the Republican house bill from Boehner it seems to be short 1-1.3 trillion in the cuts/added revenue department, meaning a compromise deal still equals downgrade and negative implications.

[freedogger]

Originally Posted by Cowboy89

An agreement is not necessarily going to avoid a downgrade from AAA- to AA+ from S&P. S&P has maintained that $4 Trillion over 10 years needs to be cut/raised through taxation in this agreement to stave off a downgrade. Looking at the Senate bill from Reed and the Republican house bill from Boehner it seems to be short 1-1.3 trillion in the cuts/added revenue department, meaning a compromise deal still equals downgrade and negative implications.

And further to this, treasuries are often used as collateral for margin accounts, swap markets and other short-term funding. This changes if the USA downgrades to AA. Anyone at the edges of a levered position would be forced to post more collateral or sell assets to meet margin requirements.

Many money market funds are often predicated on AAA-rated securities being used in the transaction (by contract or by prospectus). This action could lead to a freezing of short-term funding markets, same problem we had in 2008.

Life insurance companies own a ton of long government paper because it's AAA-rated. Not clear to me that this is a non-event, more likely the elephant in the room.

[Cowboy89]

Originally Posted by giver99

And further to this, treasuries are often used as collateral for margin accounts, swap markets and other short-term funding. This changes if the USA downgrades to AA. Anyone at the edges of a levered position would be forced to post more collateral or sell assets to meet margin requirements.

Many money market funds are often predicated on AAA-rated securities being used in the transaction (by contract or by prospectus). This action could lead to a freezing of short-term funding markets, same problem we had in 2008.

Life insurance companies own a ton of long government paper because it's AAA-rated. Not clear to me that this is a non-event, more likely the elephant in the room.

Likely anyone managing fixed income funds with stipulated weighted average weightings would be forced to actually buy more US Treasuries and to sell their riskier assets to maintain their averages. This would be a forced 'flight to quality.'

[Tinordi]

To be clear I'm not saying that this is a non-issue. I was arguing to a poster's claim that this was happening because of impending financial collapse. It's not. It's happening because of an arbitrary political limit subject to, it appears only the U.S. of the wealth nations.

To belabour the point, the U.S. isn't being dragged here like how the EU is because of market limitations. It's a domestic political limitation. Big difference. And a likely also a big difference in the fallout in the event of a default. Although a default under any situation is very bad.

[Cowboy89]

Originally Posted by Tinordi

To be clear I'm not saying that this is a non-issue. I was arguing to a poster's claim that this was happening because of impending financial collapse. It's not. It's happening because of an arbitrary political limit subject to, it appears only the U.S. of the wealth nations.

To belabour the point, the U.S. isn't being dragged here like how the EU is because of market limitations. It's a domestic political limitation. Big difference. And a likely also a big difference in the fallout in the event of a default. Although a default under any situation is very bad.

Oh I wasn't piling on your comment. I wholeheartedly agree that this is different to the PIGS situation in that the US isn't seeing yields blow out and there is still endless demand for their bonds at those yields.

That's probably why we're headed for a half measure compromise that doesn't come up with $4 Trillion spending cuts/revenue increases.

And the partisans in this thread can seriously give their head a shake. Democrat sympathizers should realize that their plan doesn't cut at the heart of government spending and is actually just predicated on less military involvement abroad. Cuts should be more broad based to inflict the efficiencies that are necessary. Republicans need to give their heads a shake too because it's not like necessary tax increases are going to mark the end of the world as we know it. Compromise on a $4 Trillion budget revision that includes small tax increases and heavy cuts, and increase the debt ceiling so the treasury has enough to get past the next election cycle.

No Downgrade
No Default
No artificial recession

[Flames Fan, Ph.D.]

Originally Posted by giver99

And further to this, treasuries are often used as collateral for margin accounts, swap markets and other short-term funding. This changes if the USA downgrades to AA. Anyone at the edges of a levered position would be forced to post more collateral or sell assets to meet margin requirements.

Many money market funds are often predicated on AAA-rated securities being used in the transaction (by contract or by prospectus). This action could lead to a freezing of short-term funding markets, same problem we had in 2008.

Life insurance companies own a ton of long government paper because it's AAA-rated. Not clear to me that this is a non-event, more likely the elephant in the room.

Yes, but funds and various other vehicles have apparently already started making a small exception to their charter for a downgrade of US debt.

So that is not going to be an issue. Any fund manager worth his salt would make sure he doesn't get caught in these debt ceiling shenanigans.

[Flash Walken]

Originally Posted by Azure

Pretty much an estimate.

Did Bush plan on Iraq taking as long as it did until the US could withdraw? Of course not.

Does Obama know what the true cost of his health care program will be? I doubt it.

You're working on projections here. And in 2000 the projection wasn't that the US would have a trillion dollar deficit in 2011.

This one is just too rich.

Good stuff.

[Gozer]

Originally Posted by Cowboy89

And the partisans in this thread can seriously give their head a shake. Democrat sympathizers should realize that their plan doesn't cut at the heart of government spending and is actually just predicated on less military involvement abroad.

This is from April, whether that makes it more or less relevant is debatable:

A list of cuts separated by sector:
http://www.usatoday.com/news/washing...udget-cuts.htm

Deficit
•Obama: Cuts $4 trillion over 12 years, including $1 trillion already outlined in his proposed 2012 budget.
•Fiscal Commission: Cuts $3.9 trillion over 10 years.
•Bipartisan Policy Center: Cuts $5.9 trillion over 10 years.
•House Republicans: Cuts $4.4 trillion over 10 years.

[freedogger]

Originally Posted by Cowboy89

Likely anyone managing fixed income funds with stipulated weighted average weightings would be forced to actually buy more US Treasuries and to sell their riskier assets to maintain their averages. This would be a forced 'flight to quality.'

If US treasuries are downgraded, they become the riskier assets so how does this work???

[Cowboy89]

Originally Posted by giver99

If US treasuries are downgraded, they become the riskier assets so how does this work???

If for example you have a portfolio with a weighted average of 'A' rated securities consisting of corporate bonds, government bonds, a dip in Treasuries from AAA- to AA+ would force you to sell your BBB holdings and buy Treasuries at AA+ to maintain an overall 'A' weighting. So really the full brunt of this won't necessarily be treasuries where yields blow out but rather the more riskier assets. Since the whole world's government debt is something like $42 Trillion and the US has $14 or so of it, you can't easily replace US treasuries with other soveriegn AAA bonds.

[Flash Walken]

Krugman Editorial:

No, the cult that I see as reflecting a true moral failure is the cult of balance, of centrism.
Think about what’s happening right now. We have a crisis in which the right is making insane demands, while the president and Democrats in Congress are bending over backward to be accommodating — offering plans that are all spending cuts and no taxes, plans that are far to the right of public opinion.

So what do most news reports say? They portray it as a situation in which both sides are equally partisan, equally intransigent — because news reports always do that. And we have influential pundits calling out for a new centrist party, a new centrist president, to get us away from the evils of partisanship.

The reality, of course, is that we already have a centrist president — actually a moderate conservative president. Once again, health reform — his only major change to government — was modeled on Republican plans, indeed plans coming from the Heritage Foundation. And everything else — including the wrongheaded emphasis on austerity in the face of high unemployment — is according to the conservative playbook.

What all this means is that there is no penalty for extremism; no way for most voters, who get their information on the fly rather than doing careful study of the issues, to understand what’s really going on.

You have to ask, what would it take for these news organizations and pundits to actually break with the convention that both sides are equally at fault? This is the clearest, starkest situation one can imagine short of civil war. If this won’t do it, nothing will.

[seattleflamer]

Originally Posted by Tinordi

To be clear I'm not saying that this is a non-issue. I was arguing to a poster's claim that this was happening because of impending financial collapse. It's not. It's happening because of an arbitrary political limit subject to, it appears only the U.S. of the wealth nations.

To belabour the point, the U.S. isn't being dragged here like how the EU is because of market limitations. It's a domestic political limitation. Big difference. And a likely also a big difference in the fallout in the event of a default. Although a default under any situation is very bad.

Agreed. The debt ceiling is an artificial creation which no other G7 country invokes.

It reminds me of statuatory balanced budgets amendments at the state level. It unnecessarily handcuffs government with artificially created laws in the guise of living within one's means using the metaphor that families are forced to live within their means.

Of course, these same families never ever take out equity loans to improve their houses or student loans to improve their employment prospects since they always pay cash....right?

Families never get into good debt nor should the govt....right?


Shortsighted people with no perspective using false analogies. It would be so funny if it weren't so sad.

[freedogger]

Originally Posted by seattleflamer

Agreed. The debt ceiling is an artificial creation which no other G7 country invokes.

Originally Posted by seattleflamer

It reminds me of statuatory balanced budgets amendments at the state level.
It unnecessarily handcuffs government with artificially created laws in the guise of living within one's means using the metaphor that families are forced to live within their means.

Of course, these same families never ever take out equity loans to improve their houses or student loans to improve their employment prospects since they always pay cash....right?

Families never get into good debt nor should the govt....right?
Shortsighted people with no perspective using false analogies. It would be so funny if it weren't so sad.

A legislated debt ceiling is a bit ridiculous. With the USA's political system it seems like this is the only mechanism by which they will come to terms with debt and deficits.

The argument is not about debt being good or bad, its about too much debt. Families with too much debt will not be able to service it and they will go bankrupt. Same with countries and corporations (excluding bailouts which are a whole other thing...)

If it wasn't legislated, the market will dictate this ceiling. This is what is happening in the USA right now. Rating agencies are imposing their own debt ceiling by threatening a downgrade if deficits are not reduced. The threat of a downgrade is forcing the debt ceiling hike legislation to include deficit reduction measures.

A couple of posts on Zerohedge today illustrate these points. The first one on consequences of a downgrade:
http://www.zerohedge.com/news/nomura-us-downgrade-may-cause-repo-market-liquidity-freeze

The USA's debt to tax receipt ratio:
http://www.zerohedge.com/news/time-debt-ceiling-hike-really-different

[Gozer]

Originally Posted by Flash Walken

Krugman Editorial:

That's very much how I feel. Chris Matthews did a spot with the guy who wrote cut-cap-balance and tried to call him on the carpet for all his bullshinguard.

But voters are steadfastly commited to false equivalancies - which is letting the Tea Party drag Obama as deep into the mud low as they want.

[Azure]

What does the Reid plan do insofar as closing loopholes and revising the tax code?

The media isn't doing such a great job of covering the specifics of either plan.

At this point the Republicans are looking pretty stupid if the only thing holding them back from voting on the Reid plan is not having a two part raising of the debt ceiling. Its very obvious that its a political issue too.

[Slava]

Originally Posted by Azure

What does the Reid plan do insofar as closing loopholes and revising the tax code?

The media isn't doing such a great job of covering the specifics of either plan.

At this point the Republicans are looking pretty stupid if the only thing holding them back from voting on the Reid plan is not having a two part raising of the debt ceiling. Its very obvious that its a political issue too.

From what I read earlier both the Boehner and Reid plans appear to over-estimate the cuts they put forward. Boehner is releasing his tomorrow now because a lot of the Republicans wouldn't support it.

They just can't help but play politics i suppose..but this dithering is makkng them look ridiculous...

[Flames Fan, Ph.D.]

Originally Posted by Slava

From what I read earlier both the Boehner and Reid plans appear to over-estimate the cuts they put forward. Boehner is releasing his tomorrow now because a lot of the Republicans wouldn't support it.

They just can't help but play politics i suppose..but this dithering is makkng them look ridiculous...

Turns out that the uber conservative (in the new way) Republican Study Committee of the House had members trying to mobilize outside conservative groups to kill Boehner's bill.

Now that the Democrats and Obama have thrown their constituents under the bus and given up the fight, the only battle remaining is the far right of the Republican party versus the rest of the Republican party.

[seattleflamer]

Originally Posted by giver99

A legislated debt ceiling is a bit ridiculous. With the USA's political system it seems like this is the only mechanism by which they will come to terms with debt and deficits.

The argument is not about debt being good or bad, its about too much debt. Families with too much debt will not be able to service it and they will go bankrupt. Same with countries and corporations (excluding bailouts which are a whole other thing...)

If it wasn't legislated, the market will dictate this ceiling. This is what is happening in the USA right now. Rating agencies are imposing their own debt ceiling by threatening a downgrade if deficits are not reduced. The threat of a downgrade is forcing the debt ceiling hike legislation to include deficit reduction measures.

A couple of posts on Zerohedge today illustrate these points. The first one on consequences of a downgrade:
http://www.zerohedge.com/news/nomura...quidity-freeze

The USA's debt to tax receipt ratio:
http://www.zerohedge.com/news/time-d...ally-different

Yes, it is a question of total debt rather than just good or bad debt and that in the long run, deficit/debt need to be addressed and I agree the market will be the final arbiter of any downgrade.


The second link is less predictive of any potential downgrade since tax receipts have fallen from a combination of reduced economic activity during a near economic catastrophe and from self imposed income reduction via tax cuts when expeditures increased concurrently wth the tax cuts ie. Bush tax cuts versus 2 wars, medicare part d etc. In other words, increasing govt revenue is as simple as legislating it given the political will to do so just as there was the will to cut taxes in the early 2000s.

Any analysis of the debt crisis that focuses strictly on budget deficits and/or debt side of the ledger alone to the exclusion of the income and net worth side of the balance sheet really doesn't give the entire picture.

GDP (or income) of the US economy is ~14 trillion dollars with an aggregate networth of 50/60 trillion in assets.

1.5 trillion deficit and a 14 trillion debt is a big scary number but in comparsion to the income and wealth of the US and relative to the 16 trillion dollar debt (in 2011 dollars) incurred during the 1940's and early 1950's, it is historically manageable but not sustainable long term.

The US has a long way to hitting the market's wall from metrics like having a lower debt to GDP ratio compared to Greece or other sea change events like WWII, to its reserved currency status and "flight to safety" cache which no currency is even close to becoming whether it is the Euro or renmbi.

It is going to be an interesting August.

Here is OMB spreadsheet on the debt to GDP ratio:

http://www.whitehouse.gov/sites/defa...s/hist07z1.xls)

[Calgaryborn]

Originally Posted by Azure

What does the Reid plan do insofar as closing loopholes and revising the tax code?

The media isn't doing such a great job of covering the specifics of either plan.

At this point the Republicans are looking pretty stupid if the only thing holding them back from voting on the Reid plan is not having a two part raising of the debt ceiling. Its very obvious that its a political issue too.

The Reid plan is just a blank check for Obama through the next election. It doesn't do anything productive.

The Boehner plan of course creates a huge problem for Obama by forcing a look at the books around Christmas which would play against his election bid. It also forces the Senate to vote on a balanced budget amendment before Christmas. If the Senate votes down the amendment it might hurt some of their election bids. That's why they have avoided voting on the measure.

On the productive side it does provide some time for the government to look into the tax code and also make some decisions regarding entitlements. Even if there was a will to address those things now there is no time left.

The Tea party believes they were elected to balance the budget and they aren't too interested in even Boehner's plan of delaying the hard decisions by allowing the Government to borrow a little until Christmas. I suppose if Aug 2 comes and Obama has to shut down most government operations it will be a powerful incentive to get something done. Also, even if the government's rating is downgraded on the second it isn't unreasonable to think that rating might be restored whenever a plan is finally adopted. Surely whatever they came up with under that pressure would be deeper and more meaningful then anyone has come up with so far.