The Debt Ceiling and Treasuries

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Kevin K.
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The Debt Ceiling and Treasuries

Post by Kevin K. » Mon Aug 07, 2017 2:47 pm

Two editorials of possible interest in today's NY Times:

https://www.nytimes.com/2017/08/07/opin ... ght-region

https://krugman.blogs.nytimes.com/2017/ ... ght-region

To be clear, I'm not trying to stir the political pot here but am interested purely in the practical implications for Treasuries in particular and the markets and of course the PP if the powers-that-be again decide to do the unthinkable and insert a large asterisk by the once-sacred "full faith and credit" of our government.

I guess at the end of the day U.S. Treasury Bonds are still (in Medium Tex's incomparable phrase) "the best horse at the glue factory" but I do have to wonder for how long - and how much the flight-to-safety premium is going to be worth going forward.
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ochotona
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Re: The Debt Ceiling and Treasuries

Post by ochotona » Mon Aug 07, 2017 4:09 pm

Best thread in a long time. Getting out the popcorn.
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Re: The Debt Ceiling and Treasuries

Post by barrett » Mon Aug 07, 2017 8:09 pm

My first thought is that if the US essentially starts defaulting on its debt, the greenback would lose its place as the world's number one currency. In that case, if Harry Browne's thinking was correct, the price of gold should skyrocket.
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ochotona
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Re: The Debt Ceiling and Treasuries

Post by ochotona » Mon Aug 07, 2017 10:02 pm

barrett wrote:My first thought is that if the US essentially starts defaulting on its debt, the greenback would lose its place as the world's number one currency. In that case, if Harry Browne's thinking was correct, the price of gold should skyrocket.
The world economies are quite tightly coupled, and everyone is in debt way past their nutsack. What if they all defaulted more or less together? (maybe it would be done by design that way?)

CB engineered debt jubilee?
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Hal
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Re: The Debt Ceiling and Treasuries

Post by Hal » Tue Aug 08, 2017 5:27 am

ochotona wrote:
barrett wrote:My first thought is that if the US essentially starts defaulting on its debt, the greenback would lose its place as the world's number one currency. In that case, if Harry Browne's thinking was correct, the price of gold should skyrocket.
The world economies are quite tightly coupled, and everyone is in debt way past their nutsack. What if they all defaulted more or less together? (maybe it would be done by design that way?)

CB engineered debt jubilee?
Why not?
Ray Dalio seems to think so. A beautiful deleveraging @ 26 min mark

https://www.youtube.com/watch?v=PHe0bXAIuk0

Top marks for who posted this link on the forum earlier - permanently bookmarked!
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Re: The Debt Ceiling and Treasuries

Post by barrett » Tue Aug 08, 2017 6:11 am

Hal, I don't think Ray Dalio was talking about countries working together in a group debt forgiveness cooperation agreement (GRO-DE-FO-CON-AG) when he talked about beautiful deleveraging. He was talking about households and individual governments. Households here in the US have actually reduced their debt over the last eight years or so... at least relative to income.

I too have thought about the possibility of this massive debt write off but the implications are too great. I guess the scenario would be the Chinese, Japanese, Americans and Europeans getting together and working out how much could be lopped off their total debt, but these countries often can't even work together on simple things.

I'd personally be taking at least a haircut on I-Bonds, EE-Bonds, long and short-term treasuries. If that happens, I am no longer a lender to the USG. The USG needs to be able to borrow money because they are incapable of making cuts and running a balanced budget. No, whatever happens will be sloppy and totally chaotic at some point. It just may not happen for an extremely long time.
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Hal
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Re: The Debt Ceiling and Treasuries

Post by Hal » Tue Aug 08, 2017 7:33 am

barrett wrote:Hal, I don't think Ray Dalio was talking about countries working together in a group debt forgiveness cooperation agreement (GRO-DE-FO-CON-AG) when he talked about beautiful deleveraging. He was talking about households and individual governments. Households here in the US have actually reduced their debt over the last eight years or so... at least relative to income.

I too have thought about the possibility of this massive debt write off but the implications are too great. I guess the scenario would be the Chinese, Japanese, Americans and Europeans getting together and working out how much could be lopped off their total debt, but these countries often can't even work together on simple things.

I'd personally be taking at least a haircut on I-Bonds, EE-Bonds, long and short-term treasuries. If that happens, I am no longer a lender to the USG. The USG needs to be able to borrow money because they are incapable of making cuts and running a balanced budget. No, whatever happens will be sloppy and totally chaotic at some point. It just may not happen for an extremely long time.

Hi Barrett,

I think that is why it is called a "Beautiful Deleveraging" !! - The principal can apply internationally, have a look at the research papers if you have some time: http://www.economicprinciples.org/

It would indeed be positive if countries could work together, but history implies otherwise.
Interesting enough, I was at a conference where Jim Rickards and Jim Rogers, amongst others, were talking about international deleveraging. The key point I remembered was; "It's going to happen, but who are going to take the losses...."

And I suspect we will be the last to know.....

To paraphrase Donald Rumsfeld "A known unknown" - hence why I use the PP

Will be interested on every ones views on this interesting topic
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Re: The Debt Ceiling and Treasuries

Post by jhogue » Tue Aug 08, 2017 9:43 am

barrett wrote:Hal, I don't think Ray Dalio was talking about countries working together in a group debt forgiveness cooperation agreement (GRO-DE-FO-CON-AG) when he talked about beautiful deleveraging. He was talking about households and individual governments. Households here in the US have actually reduced their debt over the last eight years or so... at least relative to income.

I too have thought about the possibility of this massive debt write off but the implications are too great. I guess the scenario would be the Chinese, Japanese, Americans and Europeans getting together and working out how much could be lopped off their total debt, but these countries often can't even work together on simple things.

I'd personally be taking at least a haircut on I-Bonds, EE-Bonds, long and short-term treasuries. If that happens, I am no longer a lender to the USG. The USG needs to be able to borrow money because they are incapable of making cuts and running a balanced budget. No, whatever happens will be sloppy and totally chaotic at some point. It just may not happen for an extremely long time.
barrett ,

Isn’t it in times of the greatest economic uncertainty like these that the wisdom of the Permanent Portfolio’s primary focus on capital preservation makes the most sense? We can argue until we are blue in the face on this forum that dumping cash and gold from investors’ portfolios is a really bad idea, but if stocks and bonds get hammered in the wake of a Treasury default, we could be telling a lot of bogleheads (and others) “I told you so.”

-If you think your treasuries in PP Cash will take a haircut in a USG default (and they almost certainly would), can you imagine the scalping a bullet portfolio stuffed with FDIC-insured bank CDs would take?

-Speaking of bullet portfolios, does anyone think that now would be a particularly good time to sell off your gold from the Permanent Portfolio’s 25% down to, for instance, 10% and buy more 5 year CDs?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: The Debt Ceiling and Treasuries

Post by Cortopassi » Tue Aug 08, 2017 11:54 am

If the US defaults, the value of the PP will not be a top priority, I think!
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Re: The Debt Ceiling and Treasuries

Post by Lonestar » Thu Aug 10, 2017 12:04 pm

barrett wrote:
I'd personally be taking at least a haircut on I-Bonds, EE-Bonds, long and short-term treasuries. If that happens, I am no longer a lender to the USG. The USG needs to be able to borrow money because they are incapable of making cuts and running a balanced budget. No, whatever happens will be sloppy and totally chaotic at some point. It just may not happen for an extremely long time.
So, that being the case, where would be a safe harbor for CASH?
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Re: The Debt Ceiling and Treasuries

Post by sophie » Fri Aug 11, 2017 11:33 am

I wouldn't worry about trying to predict the event. If the US defaults on Treasuries, the rates will zoom up, Treasuries will drop like a rock, the markets will likely go into shock, and gold will go through the roof. As a PP investor you'll sit back and enjoy the ride. Don't forget to rebalance.

The PP's fundamental assumptions will still hold through a brief default - if it's clearly brief and due to Congress acting like seventh grade schoolkids and not any fundamental problem with the US economy. The problem will come if the world decides that US treasuries are no longer the ultimate safe haven, and they start fleeing to some other currency. What that would be I have no idea though...just have to watch the news and see.

If that happens, it might still be ok just to forge ahead with the PP. You'd have a European or Canadian-style PP in that situation, i.e. a PP founded on a hard currency that is not the world's standard. Based on that experience the PP would still function ok. What else would you do anyway? Stocks and bonds are going to look really bad in that situation, meaning it'll be time to buy as everyone else is panic selling. And what would you buy with if you have no cash and all your holdings have tanked and you have no gold?
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Re: The Debt Ceiling and Treasuries

Post by Kbg » Sat Aug 12, 2017 1:36 pm

There are 4-5 historical defaults on US government debt. I think history whether US or foreign is a pretty good guide. If there is a technical default in the near future there will be lawsuits but overall it will be a meh event for most of us. A possible delay in interest payments but that's about it.

One needs to worry if no kidding the government is unable to pay its debt. Don't confuse can't vs. won't for political reasons. The notable exceptions being Russia and China in their transitions to communism who could but we're giving the proverbial finger to "the man."

Ultimately a significant part of the R party is still favorable to business and it is readily apparent to anyone who is paying attention the tea party's power is fading..
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