So much for the "risk-free" nature of Treasuries

[Libertarian666]

"Holders of U.S. government debt draw up contingency plans for default"

A default by what has long been viewed as the world's safest credit would be such a seismic event that there appears to be no accepted play-book for its eventuality, despite the trillions of dollars of investments that would be affected.

"You can literally tear up every textbook you've ever read on finance. You could quite literally reverse that entire world view in the space of a day," said Ramin Nakisa, global asset allocation strategist at UBS.

"We are going to have to completely rethink the way we assess risk if U.S. Treasuries suddenly become a risky asset."

https://news.fidelity.com/news/news.jht ... g.RT&IMG=N

Obviously, anything that defaults has always been risky; it doesn't just become risky when it defaults.

[Kshartle]

It doesn't matter who you loan money to. There is always a risk they won't return it unless you have a time machine and can go into the future to know they will have paid you back.

[Libertarian666]

It doesn't matter who you loan money to. There is always a risk they won't return it unless you have a time machine and can go into the future to know they will have paid you back.

If I had a time machine, I would go into the past and invest in something more profitable than lending money to anyone.

Otherwise, you're completely correct. 

[Kshartle]

It doesn't matter who you loan money to. There is always a risk they won't return it unless you have a time machine and can go into the future to know they will have paid you back.

If I had a time machine, I would go into the past and invest in something more profitable than lending money to anyone.

Otherwise, you're completely correct. 

I would go into the future and buy a sports almanac and prevent guys named Biff from stealing it.

[Kshartle]

Why would there be a default if the government cannot borrow more? How could this possibly even happen? They take in 2.2 trillion in taxes. Does anyone actually believe it's possible they could default and why?

[Gumby]

Why would there be a default if the government cannot borrow more? How could this possibly even happen? They take in 2.2 trillion in taxes. Does anyone actually believe it's possible they could default and why?

As far as income/expenditures goes:

http://en.wikipedia.org/wiki/2013_Unite ... ral_budget

I don't believe they will default. It would be political suicide and seriously disrupt the world financial system — the government would be in serious trouble. It's just a ritualistic game of chicken to see how many bargaining chips can be bargained. Think about how many fights there have been over the debt ceiling (probably dozens). It's the same thing every time.

And as Vincent Reinhart recently pointed out, if the Congress fails to raise the debt ceiling, the Treasury Secretary or the Fed Chief has to break a law. They basically have to choose a crime:

http://dealbook.nytimes.com/2013/10/04/ ... ault/?_r=0

My guess is that, if forced to, they will break the law and choose to fund the government obligations in some way. And if the SHTF, I should think our gold should be able to compensate for the wreckage.

[Kshartle]

And as Vincent Reinhart recently pointed out, if the Congress fails to raise the debt ceiling, the Treasury Secretary or the Fed Chief has to break a law. They basically have to choose a crime:

http://dealbook.nytimes.com/2013/10/04/ ... ault/?_r=0

My guess is that, if forced to, they will break the law and choose to fund the government obligations in some way. And if the SHTF, I should think our gold should be able to compensate for the wreckage.

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

[Gumby]

And as Vincent Reinhart recently pointed out, if the Congress fails to raise the debt ceiling, the Treasury Secretary or the Fed Chief has to break a law. They basically have to choose a crime:

http://dealbook.nytimes.com/2013/10/04/ ... ault/?_r=0

My guess is that, if forced to, they will break the law and choose to fund the government obligations in some way. And if the SHTF, I should think our gold should be able to compensate for the wreckage.

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

Don't you think the government can simply choose to issue more short term debt if it is really worried about interest rates? It's not like it needs to issue all it's debt in 30 year treasuries. Or maybe the Treasury realizes that it's job is to issue as much debt as Congress instructs it to issue — and at various maturities to serve the private sector.

Keep in mind that Treasuries play a role in the financial system beyond funding the government. They are basically little savings accounts for the private sector and many funds and institutions are required to earn their interest payments from them.

[dragoncar]

And as Vincent Reinhart recently pointed out, if the Congress fails to raise the debt ceiling, the Treasury Secretary or the Fed Chief has to break a law. They basically have to choose a crime:

http://dealbook.nytimes.com/2013/10/04/ ... ault/?_r=0

My guess is that, if forced to, they will break the law and choose to fund the government obligations in some way. And if the SHTF, I should think our gold should be able to compensate for the wreckage.

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

IBM literally just did this (furloughs and bond issues in August).  Their mkt cap is still 195 billion.

[Kshartle]

And as Vincent Reinhart recently pointed out, if the Congress fails to raise the debt ceiling, the Treasury Secretary or the Fed Chief has to break a law. They basically have to choose a crime:

http://dealbook.nytimes.com/2013/10/04/ ... ault/?_r=0

My guess is that, if forced to, they will break the law and choose to fund the government obligations in some way. And if the SHTF, I should think our gold should be able to compensate for the wreckage.

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

IBM literally just did this (furloughs and bond issues in August).  Their mkt cap is still 195 billion.

IBM is not shutting down or telling it's creditors it might not pay if it can't borrow more.

Is management is arguing about whether or not to borrow more money so it can bring them back while having to perpetually borrow money to keep them? No? It is not literally doing anything remotely close to the government. Unless you literally are misusing the word literally. 

IBM had 16.6 billion in after-tax profit last year, not a perpetual deficit. The avg. analyst estimate for this year is about 18.6 billion in after-tax profit.

Any opinion on the government debt?

[dragoncar]

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

IBM literally just did this (furloughs and bond issues in August).  Their mkt cap is still 195 billion.

Yeah, lemme guess, management is arguing about whether or not to borrow more money so it can bring them back while having to perpetually borrow money to keep them? No?

Last time I checked IBM had 16.6 billion in after-tax profit, not a perpetual deficit. The avg. analyst estimate for this year is about 18.6 billion in after-tax profit.

Any opinion on the government debt?

Well the government can print whatever money it wishes to pay off any and all debt, so the US is in a much better position than IBM IMO.

As for perpetual borrowing, I have no detailed numbers but I suspect many major corporations are in the same perpetual debt cycle as the US:

http://www.american.com/archive/2013/fe ... deral-debt

[Kshartle]

So my analysis of the effects of their printing...........

How does printing ever solve their problem?

[dragoncar]

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

IBM literally just did this (furloughs and bond issues in August).  Their mkt cap is still 195 billion.

IBM is not shutting down or telling it's creditors it might not pay if it can't borrow more.

Is management is arguing about whether or not to borrow more money so it can bring them back while having to perpetually borrow money to keep them? No? It is not literally doing anything remotely close to the government. Unless you literally are misusing the word literally. 

IBM had 16.6 billion in after-tax profit last year, not a perpetual deficit. The avg. analyst estimate for this year is about 18.6 billion in after-tax profit.

Any opinion on the government debt?

Ok I see you edited you post.  IBM literally borrowed money to pay furloughed workers salaries as per your Apple hypothetical above, but it does not have a stock price of zero as you predicted.

I see no analysis of printing money

[Kshartle]

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipients, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

[Kshartle]

Ok I see you edited you post.  IBM literally borrowed money to pay furloughed workers salaries as per your Apple hypothetical above, but it does not have a stock price of zero as you predicted.

Borrowing money to pay furloughed workers salaries is not what is happening with the government. Never mind. Just forget it. IBM is projecting an after-tax profit of over 18 billion. It bears no resemblance whatsoever, suggesting that it does is silly and you know it.

The thread is about the treasuries. Please forget I mentioned how a business cannot operate by perpetually running a deficit and laying off "non-essential" workers when it hits a debt limit.

[Kshartle]

And as Vincent Reinhart recently pointed out, if the Congress fails to raise the debt ceiling, the Treasury Secretary or the Fed Chief has to break a law. They basically have to choose a crime:

http://dealbook.nytimes.com/2013/10/04/ ... ault/?_r=0

My guess is that, if forced to, they will break the law and choose to fund the government obligations in some way. And if the SHTF, I should think our gold should be able to compensate for the wreckage.

Why don't they just cut some other budgets? The debt service is paltry compared to the other expenditures. What will happen when the debt service is triple or quadruple? What will happen if interest rates rise by three or four points for a couple years, the debt is rolled over and now the deficit has another trillion tacked onto it just from interest? They won't be able to cover it in taxes. They will have to print. The printing will cause the prices of their other expenditures to go up and put even more pressure on rates. Their position will just continue to deteriorate.

Does anyone else think their situation looks hopeless? None of them have the individual political will to stand up and be the one to tell seniors, welfare recipiants, the military, millions of government "workers" etc. that they can't be paid, won't be paid, forget about the pensions etc.

They cannot get out of this mess. The printing press will not save them and borrowing more will not save them.

Incidently, only an organization as pathetic as the government could afford to tempoarily lay-off "non-essential workers" until it could borrow more money to pay them. Pathetic. What organization has "non-essential workers"?

Imagine Apple saying it needs to lay off workers until it can float enough bonds to cover their salaries. What a joke that would be. The stock would be zero. How obvious does it need to be that this is just a big parasite on the economy? - ahhhh but that's another thread.

Don't you think the government can simply choose to issue more short term debt if it is really worried about interest rates? It's not like it needs to issue all it's debt in 30 year treasuries. Or maybe the Treasury realizes that it's job is to issue as much debt as Congress instructs it to issue — and at various maturities to serve the private sector.

Keep in mind that Treasuries play a role in the financial system beyond funding the government. They are basically little savings accounts for the private sector and many funds and institutions are required to earn their interest payments from them.

They are issuing short term debt. That's the point. The average maturity on the debt is low. A very high percentage needs to be rolled over every three years. It's a gigantic adjustable rate mortgage. The more they borrow and the shorter the maturity the more dangerous their position. Printing to make up their deficit makes their costs go up and puts upward pressure on rates. Both increase the deficit and exacerbate the problem.

[Gumby]

Printing (either by the Fed or deficit spending) does not necessarily put upward pressure on rates. Once again, the data does not support your statement, and if anything, printing causes more demand for government bonds (see Japan and the US) since there are more dollars competing for government bonds.

In any case, are you saying it's a problem that the private sector receives these interest-bearing assets?

[Libertarian666]

Maybe the best result of a default would be that the MR enthusiasts would finally have to admit that the government can indeed default. 

[Gumby]

Maybe the best result of a default would be that the MR enthusiasts would finally have to admit that the government can indeed default. 

We've always said that the government can't default unless it chooses to default. There aren't too many fiat governments that choose to default (although Russia did).

[Kshartle]

Maybe the best result of a default would be that the MR enthusiasts would finally have to admit that the government can indeed default. 

POTUS and the speaker are flat out saying they might default if they can't borrow more.

Now I don't think it's happening anytime soon, but I don't see how they get out of it.  Does anyone think that the deficits won't be getting bigger and the FED will have to "monetize" it?

The only reason the debt doesn't seem like a crisis is because the rates are low. You have to believe they can be kept low forever and the debt service won't take up more and more of the government's budget. Do you guys think the rates can stay low forever? What happens if they don't? Do you ever ask yourself what will happen?

[Kshartle]

Maybe the best result of a default would be that the MR enthusiasts would finally have to admit that the government can indeed default. 

We've always said that the government can't default unless it chooses to default. There aren't too many fiat governments that choose to default (although Russia did).

So you have to believe they will never choose to then. You have to believe the consequences of defaulting will always be worse than not defaulting.

Here's a list of a bunch of governments that defaulted in their own FIAT currencies since '75 (I have not verified these): http://hnn.us/blog/110246

Question, why would they default if it's always better to not? They could have just printed their way out of it right? Did they not get the memo?

[Bean]

To service our national debt is something like $25B a month.  The US brings in $200B+ a month.  The priority of payments as mandated by law is debt is serviced first, then defense, then entitlements, and then discretionary spending.

All statements about defaults is a flat out lie, unless they do it on purpose. 

A default is the political equivalent of pushing the "red button" and flipping off the protective cover of laws they are bound to uphold.

[Kshartle]

All statements about defaults is a flat out lie, unless they do it on purpose. 

Why would they ever do it on purpose?

[Bean]

All statements about defaults is a flat out lie, unless they do it on purpose. 

Why would they ever do it on purpose?

Political advantage.  Periods of fear and crisis are the easiest times to make unpopular changes.

[Gumby]

So you have to believe they will never choose to then. You have to believe the consequences of defaulting will always be worse than not defaulting.

Well, I don't have to believe anything, since I own gold But, yeah, people who depend on the financial well-being of the dollar need to believe that.

Here's a list of a bunch of governments that defaulted in their own FIAT currencies since '75 (I have not verified these): http://hnn.us/blog/110246

I'm almost positive that all of those governments owed foreign denominated debt. (And any of those countries who didn't were at least severely corrupt or were experiencing a brutal war or a regime change). When a country owes foreign-denominated debt, it tends to kill a currency and that can kill the system that enables the debt-issuance, etc.

Question, why would they default if it's always better to not? They could have just printed their way out of it right? Did they not get the memo?

Foreign denominated debt, war, regime change, corruption, etc. There can be many reasons. It's a little silly to compare the US to those countries you mentioned. After all, if we choose to default, the modern financial system sort of crumbles to the ground. Not exactly the same thing as a third-world country defaulting.