Dumping US Bonds...

[doodle]

I watched a good discussion on CSPAN tonight regarding solving the debt issue. Some of the panelists were optimistic....others very pessimistic regarding our ability to get a solution short of experiencing a crisis. All agree that the primary problem with solving this issue doesn't lie with the general population understanding the gravity of the issue, but rather our political process in dealing with it.

Now, I am trying to stay optimistic, but at what point would anyone here consider dumping US bonds and moving into bonds from our relatively stable neighbor to the north or some basket of intl bonds? There must be some point where a rational investor looks at the United States as a borrower and says...."I'm not going to lend to that deadbeat!"

[moda0306]

Japan is a pretty good example of a country that attitude should have happened to, and with a debt-to-gdp ratio of twice what the U.S. is at (and a similar, sovereign currency), they are lending out their 30 year bonds at less-than 3%.

I think the ability for the U.S. to print money to pay off debts really changes the game... and the full implications of how exactly it changes the game aren't fully understood by anyone, but 1) the U.S. really never has to pay down debt, as long as it can refinance (as it's a country, not a retiree), and 2) by "printing money" to repurchase bonds, the federal reserve can basically act as the treasury's own financier.

This tends, it would seem, to prevent the "default risk" spiral that countries like Greece, Portugal and Spain are experiencing, where they can't simply print away a refinanace of their debt.

Some feel that this "counterfeiting" is a game that foreigners and Americans alike will "catch on" to and the dollar will susequently collapse.  Others (modern monetarists) see our "debt" and "defecits" as nothing more than the means by which a sovereign currency controls interest rates and the money supply.

It's an interesting debate to be sure... but I am a deflationist, if you can't tell, so I'm sure others will have different input.

[AdamA]

I think the ability for the U.S. to print money to pay off debts really changes the game... and the full implications of how exactly it changes the game aren't fully understood by anyone, but 1) the U.S. really never has to pay down debt, as long as it can refinance (as it's a country, not a retiree), and 2) by "printing money" to repurchase bonds, the federal reserve can basically act as the treasury's own financier.

I think another thing that kind of changes the game is that the Japanese were/are savers.  A large part of Japanese debt is to the Japanese.  A large part of US debt is to other nations. 

I am not sure how exactly this changes things, though...

[moda0306]

Adam,

Point definitely taken.  I think that's the biggest question regarding our path vs Japan's.  I try to think logically through how that might change things... and I don't end up with much substance... I don't know if that is a good sign or bad.

I take it to the most simple level.... we don't own many of our own bonds mostly because we're abysmal savers compared to Japan.  This will lead to some much-needed deleveraging for retirees to survive, no?  Isn't that going to have the same affect on interest rates?

Just thinking out loud.

[MediumTex]

If we don't own much of our own debt right now isn't that an enormous potential market for this debt in the future?

In prior periods, Americans DID have enormous treasury holdings.

I would be more concerned if we DID own a lot of our own debt, because that would make me worry about where future purchasers would come from.

[Gumby]

I watched a good discussion on CSPAN tonight regarding solving the debt issue. Some of the panelists were optimistic....others very pessimistic regarding our ability to get a solution short of experiencing a crisis.

That pretty much describes every TV roundtable discussion about anything. Media outlets purposefully look for "experts" who have very opposite opinions. Neither side knows anything more about the future than the other.

All agree that the primary problem with solving this issue doesn't lie with the general population understanding the gravity of the issue, but rather our political process in dealing with it.

I'm sure everything will work out fine then

Now, I am trying to stay optimistic, but at what point would anyone here consider dumping US bonds and moving into bonds from our relatively stable neighbor to the north or some basket of intl bonds? There must be some point where a rational investor looks at the United States as a borrower and says...."I'm not going to lend to that deadbeat!"

To answer your question. US Debt is still the best horse in the glue factory, hands down. And the entire world is well aware of that. I would not dump my Treasuries unless I felt that the US was unable to fund its own military. Despite our budget problems, and the inability of Congress to ever get anything done, there are no good substitutes to US Debt during in a crisis. If you dump your Treasuries, you really lose that crisis protection in terms of supporting your entire portfolio.

Keep in mind that Harry Browne was also quite skeptical at ability of Congress to solve our budget problems. And yet, he put a lot of faith into Treasuries, because there is no other substitute for them (for a US investor). Having said that, I would be uncomfortable holding Treasuries without holding gold bullion.

[pershing83]

It should be noted the US gov't itself holds 4-5 trillion of this debt, SS trust funds etc.

I don't care for the state of the nation (makes me very nervous), but bonds have held up in spite of all the problems. There is spreading doubt the China may not continue thrive, India, too. We know about W Europe.

[moda0306]

Gumby,

Totally agreed regarding needing that gold piece as that final piece of insurance.  Unlike other country PP's where a currency collapse may not see a leveraged reaction by gold (moreso a 1:1 reaction), the U.S. being the worlds reserve currency means that when the U.S. has problems (especially when our currency has problems) gold is going to react in immense ways, due to the worldwide macroeconomic nature of the implications of a dollar collapse.

That's kind of why I feel bad for other PP's (Japan particularly).  Gold was "doing its own thing" when Japan's stock market collapsed.  Had that been ours, I doubt gold would have continued it's prosperity-driven collapse.

[Gumby]

And I think it's important to understand that the PP was really designed with US Investors in mind. International PPs can certainly work (or even fail), but HB didn't give non-US PPs nearly as much thought.

If the Dollar collapsed, the world would essentially be screwed because capitalism is pretty much based on these worthless scraps of paper we call Federal Reserve Notes. The entire world is basically a ponzi scheme fueled by US Dollars that are, luckily, backed the best military the world has ever known. There's nothing else out there that can replace that ponzi scheme right now.

[moda0306]

The ability for the government to force some people, at the point of a gun, to pay taxes seems to be kind of a nifty way of describing how the dollar can hold its value.

If a society existed with a military government and a bartering system and said "this is inefficient, lets find something else for a medium of exchange."  Imagine the government "collecting taxes" by simply collecting goods and services from the people... very inefficient.

They don't have gold (hypothetically) so they decide to mail out to each citizen 10,000 pieces of paper with the president's face on it.  The people don't care... in fact they almost throw them away... until they see the attached note that says "You must remit 500 of these per year to the government, or you'll go to jail for 5 years."

I then like to imagine a collective epiphany.

Somehow, these things now had value... kind of like a get-out of jail free card.  These pieces of paper were now fiat currency, with absolutely no backing except the military's threat to put you in jail if you don't pay your taxes.

Are new issuances of this "currency" a threat?  Absolutely, but as long as the military has clout to keep you in jail and they properly control the issuance/taxing, the currency holds some value, if a varied and unstable amount.

The stability of that currency may not be as important as the military's clout in putting you in jail for not paying taxes.

[MediumTex]

The stability of that currency may not be as important as the military's clout in putting you in jail for not paying taxes.

Yep.

And the rest of the world is also part of the scheme, it's just that the relationship between using the dollars and the threat of force is more subtle.

Once you start to understand the role of the U.S. military in the overall world economic apparatus, lighbulbs start coming on everywhere.

The British Empire did exactly the same thing when they were the lone superpower--i.e., use the military to enforce a certain set of international economic arrangements with Britain at the top.

[MediumTex]

Once you start to understand the role of the U.S. military in the overall world economic apparatus, lighbulbs start coming on everywhere.

Saw on the BBC news this evening that China is now looking to build a fleet of aircraft carriers. First one nearing completion with 4 more queued to be built in the next few years and 'many' more to follow after that.

To be a superpower you must have a potent navy, so I don't blame China for wanting to collect some "peace machines", as U.S. defense contractors call them.

It will be interesting to see in coming decades how China's ambition to be a world power will mesh with its historical desire to remain isolated.

As far as what a communist government presiding over the world's largest capitalist economy will look like in coming decades, I'm just going to have to wait and see on that one (I'm having a hard time picturing it).

China reminds me of a puppy, a bit clumsy, not entirely housebroken and with a tendency to chew its master's slippers when annoyed.  I wonder what kind of dog it will grow into.

[BearBones]

China reminds me of a puppy, a bit clumsy, not entirely housebroken and with a tendency to chew its master's slippers when annoyed.  I wonder what kind of dog it will grow into.

Like the analogy. But one can also argue that the US has been the clumsy one lately, an aging pit bull that is increasingly being bullied by the dachshund and poodle next door, not to mention many of the new puppies of the neighborhood.

[MediumTex]

China reminds me of a puppy, a bit clumsy, not entirely housebroken and with a tendency to chew its master's slippers when annoyed.  I wonder what kind of dog it will grow into.

Like the analogy. But one can also argue that the US has been the clumsy one lately, an aging pit bull that is increasingly being bullied by the dachshund and poodle next door, not to mention many of the new puppies of the neighborhood.

Everyone's fortunes are constantly in the process of rising and falling.

The U.S. has probably not been any less clumsy than other superpowers in world history.  It's a tough job. 

[KevinW]

China reminds me of a puppy, a bit clumsy, not entirely housebroken and with a tendency to chew its master's slippers when annoyed.  I wonder what kind of dog it will grow into.

I see what you're going for, but the puppy analogy rankles a bit since China's been around so much longer than the USA has.

IMO China is like Dr Who: they've existed since the start of time; get reinvented often which dooms them to reinventing history; and they make a lot of sudden grand gestures, half of which turn out to be based on ancient wisdom, the other half of which are theatrics for their own sake.

[MediumTex]

China reminds me of a puppy, a bit clumsy, not entirely housebroken and with a tendency to chew its master's slippers when annoyed.  I wonder what kind of dog it will grow into.

I see what you're going for, but the puppy analogy rankles a bit since China's been around so much longer than the USA has.

IMO China is like Dr Who: they've existed since the start of time; get reinvented often which dooms them to reinventing history; and they make a lot of sudden grand gestures, half of which turn out to be based on ancient wisdom, the other half of which are theatrics for their own sake.

How about an old grumpy inscrutable dog that occasionally bites people?

The whole prospect of a bunch of communists who went to the "Art of War" school of diplomacy leading a modern capitalist economy sounds like an idea for a CBS prime time drama (except it might actually be entertaining).

[KevinW]

It sure is weird huh!  It's hard to make sense of all the contradictions.

[Drewskers]

Bill Gross had some pertinent words on this topic today, in two different venues:

http://money.cnn.com/2011/06/08/markets ... e_business

Note the debt and dividend recommendations Gross makes in this piece:

http://discuss.morningstar.com/NewSocia ... upons.aspx

[BearBones]

The U.S. has probably not been any less clumsy than other superpowers in world history.  It's a tough job. 

Exactly. That's why they are not superpowers any more... Really think US policies of materialism, dependency on foreign oil, massive debt, overextension of military, and inability to make tough political choices will lead us in a different direction?

[MediumTex]

The U.S. has probably not been any less clumsy than other superpowers in world history.  It's a tough job.  

Exactly. That's why they are not superpowers any more... Really think US policies of materialism, dependency on foreign oil, massive debt, overextension of military, and inability to make tough political choices will lead us in a different direction?

Of course not.

The questions are timing and succession.

[MediumTex]

Clive,

You think the euro will make it to 2020?

I think the whole idea of a currency that is not connected to a sovereign entity is doomed from the start.

[Pkg Man]

I agree with Clive that the Euro will survive, but at the expense of individual and national freedoms. I have a great deal of suspicion in the supra-national governmental structure they are creating.

[cabronjames]

but at what point would anyone here consider dumping US bonds and moving into bonds from our relatively stable neighbor to the north or some basket of intl bonds?

Short answer yes, would consider, but for us USians with funds at a US custodian, the following doesn't exist AFAICT, or exists at a non-US exchange (such as Toronto Stock Exchange) & has cost-prohibitive commissions/fees
1 nation-specific LT bond funds, eg. a Canada sovereign bond version of TLT with similar avg maturity & duration
2 even if #1 doesn't exist, an ex-US index of LT bond funds
3 direct purchase of a 30 year sovereign Canadian bond without exorbitant minimum purchase size or cost prohibitive fees.

as the childhood saying goes "I might if I could but I can't so I won't"

--

It is amazing to me that such obscure assets, like Corn futures inverse leveraged -3X (I might be exaggerating, but not by much), are available as ETFs, yet there is no Canada, Switzerland, S Korea, Germany, etc version of TLT that trades on a US exchange. *smh*  Perhaps there really is not enough investor interest to make such an ETF have the minimum economies of scale needed to run?

[Jan Van]

Debt: $12.8B
Domestically owned : $8.89B ~ 69%
Foreign owned: $3.88B ~ 31%

Chart: http://www.mint.com/blog/trends/who-own ... splay=wide

Also fun to read: Be Careful What You Wish For: the Balanced Budget Amendment

[quote=Be Careful What You Wish For: the Balanced Budget Amendment]Everyone can appreciate that the intention of a proposed balanced budget amendment (BBA) would be to impose some discipline on government. Today, there is absolutely no operational constraint on government spending, and the debt ceiling is just a legislative choice.

Most people also believe that there is at least some long-term constraint on government spending as we are always hearing about government debt and our need to borrow from China (etc.) to cover our profligacy. Yet, the cause and effect are the other way around. The US government, like all truly sovereign governments, issues its own currency. Therefore, it doesn’t need loans from China to spend. Rather, it creates the currency, which is sent by exporters to China, before China can “lend it back”? to us.[/quote]