Trump would default on US debt?

[Xan]

What does everyone think of the recent comments about getting creditors to take a haircut?  Here's an interesting article on it:
http://www.thefiscaltimes.com/Columns/2 ... -It-Sounds

[Ad Orientem]

The man's incompetence on very basic matters of policy, coupled with his temperament, disqualify him from consideration as a serious candidate for president. Barring a criminal indictment, the wicked witch will be the next POTUS.

[sophie]

Trump seriously needs to install a better brain to mouth filter, and also get himself some useful advisors.  I assume the latter will start to happen soon.  Unfortunately the former is not likely to happen.

[Reub]

Trump is far from incompetent. He is in fact a genius!

[MachineGhost]

The man's incompetence on very basic matters of policy, coupled with his temperament, disqualify him from consideration as a serious candidate for president. Barring a criminal indictment, the wicked witch will be the next POTUS.

The newly attracted voters don't care about Trump being serious enough for President, but in throwing the bums out.  Same as with Sanders voters who are hanging in there against all odds to topple the wicked witch.

[jafs]

Another facet of this is that interest rates for US treasuries are low precisely because they're seen as a safer investment.

Higher risk investments usually compensate investors for taking that risk with higher interest rates.

[sophie]

Another facet of this is that interest rates for US treasuries are low precisely because they're seen as a safer investment.

Higher risk investments usually compensate investors for taking that risk with higher interest rates.

Yes, exactly.

The safety of US Treasuries is also the foundation for half of the PP.  In order to keep a PP going, we'd have to find the next safest long and short term assets.  No particularly good candidates come to mind.

[rickb]

No particularly good candidates come to mind.

Hillary.

[Ad Orientem]

No particularly good candidates come to mind.

Hillary.

[goodasgold]

Another facet of this is that interest rates for US treasuries are low precisely because they're seen as a safer investment.

Higher risk investments usually compensate investors for taking that risk with higher interest rates.

Trump IS talking about a U.S. Treasury default, the first candidate to openly do so, which is historic in a grim sort of way. As vast unfunded obligations lay in the nest, waiting to hatch, the U.S. faces two choices to pay for them: default or inflation (which is a form of stealth default.)

Either way, it looks to me like gold will be a winner, and interest rates will go up as a form of security demanded by future bondholders. Now that the new Argentine prez has agreed to pay some diehard debt holders, he is planning to issue more bonds for sale on the international market. It will be interesting to find out what the interest rate will be.

The bottom line is: I think we should consider adding gold to our VP as well as the boilerplate PP.

[sophie]

Definitely agree that gold would do well under a US Treasury default scenario.  I was fretting that the whole reason for including US Treasury bonds and t bills in the portfolio would be undermined by a default, because presumably US Treasuries would no longer be a "safe haven" asset.

In that event, what do you all think would replace US Treasuries as the safe haven of choice?  Or would Treasuries continue to be regarded as the safest option despite a default?  I think we'd have to wait and see, because the answer is not obvious.

[MachineGhost]

In that event, what do you all think would replace US Treasuries as the safe haven of choice?  Or would Treasuries continue to be regarded as the safest option despite a default?  I think we'd have to wait and see, because the answer is not obvious.

Fortunately for us, the Treasury can't default.  Where the credit risk and volatility will come from would be the "powers that be" working to replace the overstrong USD reserve currency with a basket of reserve currencies.  A second Bretton Woods, if you will.

I don't see that any economy in the world is going to overtake the US anytime soon, not even China.  That might is what backs Treasuries.

[curlew]

David Stockman likes the idea.....

http://davidstockmanscontracorner.com/t ... ic-policy/

[goodasgold]

David Stockman likes the idea.....

http://davidstockmanscontracorner.com/t ... ic-policy/

Looks like especially bad news for long-term treasury bonds; the prospects for I-bonds and TIPS ain't looking so good either.

As Craig and Medium T noted concerning TIPS in their book: "Don't buy fire insurance from arsonists and don't buy inflation insurance from inflationists." [IIRC] Looks like in the next edition they'll need to add: "And don't buy bankruptcy medicine from serial bankrupts like Donald Trump." But the problem, if Trump and Stockman are correct, is that all politicians will eventually have to face the music and deal with the reality of our bankrupt nation. Stormy weather ahead, shipmates.

[Pointedstick]

This risk is exactly why I decided to diversity my long bond holdings with long duration high-rated corporates.

[MachineGhost]

Looks like especially bad news for long-term treasury bonds; the prospects for I-bonds and TIPS ain't looking so good either.

As Craig and Medium T noted concerning TIPS in their book: "Don't buy fire insurance from arsonists and don't buy inflation insurance from inflationists." [IIRC] Looks like in the next edition they'll need to add: "And don't buy bankruptcy medicine from serial bankrupts like Donald Trump." But the problem, if Trump and Stockman are correct, is that all politicians will eventually have to face the music and deal with the reality of our bankrupt nation. Stormy weather ahead, shipmates.

Ught, more doom porn.  Inflation has been a public policy since the first gold alloy coins were invented 2626 years ago.  Nothing new there.

The US isn't bankrupt.  Does a 36% debt to income ratio strike you as bankrupt? 



Over 20,000 millionaires migrated to the USA last year.  What do they know that you don't?  P.S.  When are you leaving?

[jafs]

Well, that's just on the edge of what's considered a good debt/income ratio according to a couple of sites I looked at.

The bigger concern would be the huge unfunded liabilities, though, wouldn't it?  Looks like those are about 33x the income levels.

[MachineGhost]

Well, that's just on the edge of what's considered a good debt/income ratio according to a couple of sites I looked at.

The bigger concern would be the huge unfunded liabilities, though, wouldn't it?  Looks like those are about 33x the income levels.

Unfundend liabilities aren't legal obligations so they can be eliminated at anytime.  Japan has about a 18% DTI if I calculated it right (not counting unfunded liabilities, if any).  Someone may want to spot check that.

The size of a debt relative to income is irrelevant.  What matters is cash flow and debt service ability.  Ignore all the doom porners pushing an agenda -- essentially anyone that throws out that nonsensible GDP / Debt ratio is a doom porner because they're displaying their economic and operational reality ignorance.

[jafs]

I'm not at all sure that's true.

What's in those unfunded liabilities?  If it's stuff like SS/Medicare, there are legal obligations about those (they could be changed, but it would require laws, and those programs are extremely well-entrenched by now).

[MachineGhost]

I'm not at all sure that's true.

What's in those unfunded liabilities?  If it's stuff like SS/Medicare, there are legal obligations about those (they could be changed, but it would require laws, and those programs are extremely well-entrenched by now).

Unless it's in a constitution, it's not legally protected.  Some states like Illinois won't constitutionally allow current pensions and unfunded future pensions to public employees to be reduced, reformed, modified or eliminated in any which way or form, hence it's full steam ahead into bankruptcy.  As states are currency users and not currency issuers like the Federal govenrment, they can't avoid bankruptcy when their cash flow doesn't service their obligations.  PR is a current sad case in example.

P.S.  I didn't realize it includes the debt held by the public.  That's interesting.

P.P.S.  I believe states are't legally allowed to file for bankruptcy either!

[jafs]

If it's not in the constitution, it's not "constitutionally" protected.  I wouldn't call that the same as not legally protected, if there are laws that protect it.

So treasury bonds aren't constitutionally protected?

States aren't allowed to file bankruptcy, but cities are - hence Detroit.

And, as I said, even though it's theoretically possible for SS/Medicare to be eliminated, it would be political suicide to even go near that.

[MachineGhost]

If it's not in the constitution, it's not "constitutionally" protected.  I wouldn't call that the same as not legally protected, if there are laws that protect it.

There are no laws that protect it.  It is for Congress to do as it sees fit.

The fact that workers contribute to the Social Security program's funding through a dedicated payroll tax establishes a unique connection between those tax payments and future benefits. More so than general federal income taxes can be said to establish "rights" to certain government services. This is often expressed in the idea that Social Security benefits are "an earned right." This is true enough in a moral and political sense. But like all federal entitlement programs, Congress can change the rules regarding eligibility--and it has done so many times over the years. The rules can be made more generous, or they can be made more restrictive. Benefits which are granted at one time can be withdrawn, as for example with student benefits, which were substantially scaled-back in the 1983 Amendments.

There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.

In this 1960 Supreme Court decision Nestor's denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor's benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right.

BTW, FICA goes directly into the Trust Fund.  it's "off-budget" so the revenues can't be used to counteract other Federal government liabilities to make the deficit look smaller than it really is.  However, the interest income paid to the Treasuries held in the Trust Fund are still considered an expense.

So treasury bonds aren't constitutionally protected?

Whatever the hell gave you that idea?  The only thing backing up Treasuries is a tradition of contract law.  I'm pretty sure I know who would lose if it ever went to court.

[jafs]

We're saying different things.

I don't know what you think legal protection is, other than a law setting forth various things, like the SS Act of 1935.

Part of that law includes the ability to change it, but that's true with all laws - if Congress wanted to, they could change them at any time.  There's no constitutional right to SS, which is why Congress could change/eliminate it.

It's not as iron-clad as a constitutional right, but it's better than nothing.  Given how entrenched SS is, it would be political suicide to try to eliminate it.

[MachineGhost]

It's not as iron-clad as a constitutional right, but it's better than nothing.  Given how entrenched SS is, it would be political suicide to try to eliminate it.

I said the unfunded liabilities could be eliminated at any time, not SS.

[jafs]

The unfunded liabilities include SS, from one of your posts, as well as Medicare parts A, B and D.