Trump would default on US debt?

[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.

[Pointedstick]

What does "unfunded" actually mean? These welfare programs are transfer payment schemes "funded" via current tax revenue. It's not really "funded" by some kind of endowment the way the term makes you think of. Even the vaunted "Social Security Trust Fund" isn't really a real trust fund, like you might imagine a pension fund; it's simply a bucket for surplus tax revenue to sit until it needs to be spent later. Not at all anything like "33x projected Social Security expenses in perpetuity" that a real trust fund or endowment would be.

[MachineGhost]

What does "unfunded" actually mean? These welfare programs are transfer payment schemes "funded" via current tax revenue. It's not really "funded" by some kind of endowment the way the term makes you think of. Even the vaunted "Social Security Trust Fund" isn't really a real trust fund, like you might imagine a pension fund; it's simply a bucket for surplus tax revenue to sit until it needs to be spent later. Not at all anything like "33x projected Social Security expenses in perpetuity" that a real trust fund or endowment would be.

It is a real trust fund.  The 15% FICA tax goes directly to the trust as I mentioned before.  The fund then swaps the money for special, non-marketable Treasuries -- if there is a profit after paying current claims.  Back in the beginning the trust fund actually had dead, stagnant money reserves sitting around doing nothing, but it was too deflationary to the economy, so they switched over to pay-as-you-go.  Much better!

"Unfunded" means that you like have a $50K income and a $500K mortgage.  After putting down a 20% down payment, you have an "unfunded liability" of 400K whereas your debt service is no more than 40% of your income.  Like the debt to GDP ratio, it's just rightwing cognitive dissonance fearspeak for political purposes of "starving the beast".

BTW, OASDI isn't welfare.  It's an entitlement.  Important difference.  Welfare has means-testing.  It's like the difference between the Citizen's Dividend (Universal Basic Income) and a Guaranteed Minimum Income.

[jalanlong]

https://www.pragcap.com/the-us-governme ... -the-hole/

https://www.pragcap.com/biggest-myths-in-economics/


Here are some contrarian views on the US debt and QE. The articles are a few years old but I would be interest to read some opinions on them.