Gyroscopic Investing

Posted: **Tue May 31, 2011 7:24 am**

The PP is based on the premise that the U.S. government CAN'T default because the debt is denominated in currency it can print more of any time it wants to.

The idea that the U.S. would forfeit what is basically a game of Monopoly because it wouldn't print up a new batch of paper money is hard to fathom.

Defaulting in such a situation would surely go down in history as the single dumbest fiscal decision a government had ever made. It would be the sovereign equivalent of drowning face down in a 2 inch deep puddle because you were too stubborn to pull your face out of the water.

Posted: **Tue May 31, 2011 8:47 am**

Agreed 100% with MT.

However, I'd imagine gold would skyrocket, while treasury bonds and stocks fall significantly.

Posted: **Tue May 31, 2011 11:51 am**

LGrand85 wrote:
MediumTex wrote: The PP is based on the premise that the U.S. government CAN'T default because the debt is denominated in currency it can print more of any time it wants to.

The idea that the U.S. would forfeit what is basically a game of Monopoly because it wouldn't print up a new batch of paper money is hard to fathom.

Defaulting in such a situation would surely go down in history as the single dumbest fiscal decision a government had ever made. It would be the sovereign equivalent of drowning face down in a 2 inch deep puddle because you were too stubborn to pull your face out of the water.
Not arguing with you that it is unlikely to occur, but there is a probability of it. I think no matter what side, Republican or Democrat, in the Congress, they will all make the choice to print more. There is no political divide when it comes to devaluing the US Dollar and spending money.

Just to make sure I am understanding our terms here, we are talking about a situation where the U.S. government would simply unilaterally declare one day that it would not repay any holder of treasury debt. Is that what we are talking about here, or are we talking about something more like a delay in interest payments or something like that?

A true default and repudiation just seems incredibly unlikely. It would benefit no one, including the politicians.

Posted: **Tue May 31, 2011 1:46 pm**

Argentina defaulted in the 90's.

Here's the link to Wikipedia if anyone cares to read it:

http://en.wikipedia.org/wiki/Argentine_ ... tructuring

Posted: **Tue May 31, 2011 1:58 pm**

pershing83 wrote: Argentina defaulted in the 90's.

Here's the link to Wikipedia if anyone cares to read it:

http://en.wikipedia.org/wiki/Argentine_ ... tructuring

Countless countries through history have defaulted, but never one that had the luxury of printing the world's reserve currency.

Default is normally what happens when you don't have any other options. A reserve currency issuer always has the option of printing more money to pay the bills.

Posted: **Tue May 31, 2011 2:09 pm**

MediumTex wrote: Default is normally what happens when you don't have any other options. A reserve currency issuer always has the option of printing more money to pay the bills.

Maybe my definition of "reserve currency" is flawed, but I thought it simply meant that many countries hold a given currency in their reserves, not necessarily that currency's tie (or lack thereof) to gold or ability to print away debts.

Isn't that a "monopoly issuer of a sovereign currency?" Couldn't a world's reserve currency also be backed by a gold standard, and therefore printing isn't an option?

I believe Argentina's currency was tied to the dollar... kinda like a gold-standard but with $$'s instead of bullion as a backing to their currency. In that case, default IS an option, but it really has nothing to do with foreign reserves, does it?

Posted: **Tue May 31, 2011 2:38 pm**

Historically, a country's currency has only been as good as the assets that backed it, or the military that enforced it.

One lens through which to view the last few decades of world history is that the U.S. dissolved the Bretton Woods system (whereby the world's other currencies were pegged to the dollar, which was pegged to gold) when it closed the gold window. From there, it set up a de facto "oil backed currency" via the petrodollar regime and the implicit (and sometimes explicit) threat of U.S. force to protect world oil supplies. According to this logic, the strength of the dollar would be driven, in part, by the U.S.'s presence and capabilities in the Middle East.

Check this theory against reality and it matches up pretty well.

The implication of this theory is that the U.S. dollar is still sort of an asset backed currency, which provides a bit more security against massive devaluation than is often appreciated, so long as the military part of the equation remains potent (see the late 1970s for what happens when the perception of U.S. military stregnth in the Middle East wanes).

I think that all of this is just a peek into a mechanism that is far more complex than the sound bites suggest, but the bottom line is that default is a complete nonstarter, and it is only being put out there for entertainment and political purposes.

Think of the U.S. as simply "Country X."

Country X has:

1. the world's reserve currency
2. the world's most powerful military
3. one of the world's richest deposits of natural resources
4. a population that is mostly compliant, hardworking, well educated and not given to destabilizing political activity
5. the world's largest economy
6. the world's largest manufacturing sector
7. debt levels similar to its industrialized peers
8. well developed rule of law and respect for property rights
9. favorite destination for international capital during times of crisis

Does that sound like a country that is on the verge of default on its debt obligations, especially due to an arbitrary decision by a group of politicians who don't want to raise a debt ceiling that has been raised continuously for decades?

When evaluating questions like these, it's important to ask "who benefits?" from different possible outcomes. In the default scenario no one would benefit (neither the debtor, the creditors, nor anyone else), which makes me wonder why we are even talking about it at all.

Posted: **Tue May 31, 2011 2:43 pm**

It's political theater. This is all just a pre-game show for the 2012 elections, so politicians can tour the country and say "I voted against raising the debt ceiling before I voted for it."

Posted: **Tue May 31, 2011 3:13 pm**

LGrand85 wrote: ...a temporary delay in payments

What would be the point of delaying payments if it is within the power of the government NOT to delay payments?

How would that benefit those who are making these decisions?

I understand why Greece may need such a measure because they don't have the ability to print euros, but the U.S. is not in that position.

It would be like an individual intentionally paying all of his bills late, accumulating late fees and ruining his credit score when he had the money in the bank to pay the bills but just decided not to pay them as some type of protest.

Posted: **Tue May 31, 2011 3:50 pm**

MediumTex wrote: Historically, a country's currency has only been as good as the assets that backed it, or the military that enforced it.

One lens through which to view the last few decades of world history is that the U.S. dissolved the Bretton Woods system (whereby the world's other currencies were pegged to the dollar, which was pegged to gold) when it closed the gold window. From there, it set up a de facto "oil backed currency" via the petrodollar regime and the implicit (and sometimes explicit) threat of U.S. force to protect world oil supplies. According to this logic, the strength of the dollar would be driven, in part, by the U.S.'s presence and capabilities in the Middle East.

Check this theory against reality and it matches up pretty well.

The implication of this theory is that the U.S. dollar is still sort of an asset backed currency, which provides a bit more security against massive devaluation than is often appreciated, so long as the military part of the equation remains potent (see the late 1970s for what happens when the perception of U.S. military stregnth in the Middle East wanes).

I think that all of this is just a peek into a mechanism that is far more complex than the sound bites suggest, but the bottom line is that default is a complete nonstarter, and it is only being put out there for entertainment and political purposes.

Think of the U.S. as simply "Country X."

Country X has:

1. the world's reserve currency
2. the world's most powerful military
3. one of the world's richest deposits of natural resources
4. a population that is mostly compliant, hardworking, well educated and not given to destabilizing political activity
5. the world's largest economy
6. the world's largest manufacturing sector
7. debt levels similar to its industrialized peers
8. well developed rule of law and respect for property rights
9. favorite destination for international capital during times of crisis

Does that sound like a country that is on the verge of default on its debt obligations, especially due to an arbitrary decision by a group of politicians who don't want to raise a debt ceiling that has been raised continuously for decades?

When evaluating questions like these, it's important to ask "who benefits?" from different possible outcomes. In the default scenario no one would benefit (neither the debtor, the creditors, nor anyone else), which makes me wonder why we are even talking about it at all.

Great post.

Do you think there's a chance we'll ever simply be able to leave the Middle East?

Posted: **Tue May 31, 2011 3:55 pm**

Adam1226 wrote: Do you think there's a chance we'll ever simply be able to leave the Middle East?

Between Israel and oil...no.

I have personally always thought that a creative solution would be to adopt some variation of the Pickens plan and move to a natural gas based economy, while doing a "Truman Show"-like maneuver and completely uprooting and moving all of Israel to a location in the Utah desert near the Great Salt Lake.

The flaw I see in this plan is that the Mormons and the Israelis would probably start fighting over the "homeland" borders and we would be back where we started.

Posted: **Tue May 31, 2011 4:58 pm**

Well, I posted we could print money when I first arrived on this MB and the subject of debt came up. At least I think I did. Argentina did not have that option. After the default in Argentina, I was there in, maybe 2002 or 3. The dollar was almighty.

We went to one of the best restaurants in BA and had dinner for $5 each. Now, you had to like beef. I remember the cab over was $1 for 4..

If we have a disaster in this country the pp might not look so good. Nothing is permanent. Black swans etc.

Posted: **Tue May 31, 2011 5:03 pm**

pershing83 wrote: If we have a disaster in this country the pp might not look so good. Nothing is permanent. Black swans etc.

I think the PP would allow the PP to weather such an event about as well as could be expected.

Iceland was hit by a flock of black swans in 2008 that destroyed the stock market and currency almost overnight.

An Icelandic PP investor would have survived the event with far less damage than his fellow countrymen.

The question to ask as well when planning anti-black swan maneuvers is what is going to provide better protection than the PP, since we have to do something with our money.

Posted: **Tue May 31, 2011 6:04 pm**

pershing83 wrote: Argentina defaulted in the 90's.

Here's the link to Wikipedia if anyone cares to read it:

http://en.wikipedia.org/wiki/Argentine_ ... tructuring

No, "Argentina defaulted on part of its external debt." Why? Because the debt had to be paid in a currency that Argentina did not control.

Same thing happened to Germany in 1920's re. war reparations.

Your U.S. Treasuries are denominated in U.S. dollars which are controlled by the U.S. To default would be exactly like drowning yourself in a 2" puddle out of spite.

Now if somehow you have treasuries payable in gold, there might (will) be a problem.

Posted: **Tue May 31, 2011 6:06 pm**

MediumTex wrote:What would be the point of delaying payments if it is within the power of the government NOT to delay payments?

Political hardball by the current regime.

Posted: **Tue May 31, 2011 7:10 pm**

The term black swan was a Latin expression—its oldest known reference comes from the poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno" (6.165).[3] In English, this Latin phrase means "a rare bird in the lands, and very like a black swan." When the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproved. In this case, the observation of a single black swan would be the undoing of the phrase's underlying logic, as well as any reasoning that followed from that underlying logic. (Wiki)

So, who knows...

The Shadow knows... heh, heh.

Posted: **Tue May 31, 2011 7:49 pm**

MediumTex wrote: The flaw I see in this plan is that the Mormons and the Israelis would probably start fighting over the "homeland" borders and we would be back where we started.

Haha... This is funny, but in truth I think the Mormons and Israelis would get along great. Many Mormons take trips to the "holy land" and are quite fond of Israel. The Mormons even believe that there was a 13th tribe of Israel that came to the Americas pre-Christ. Don't ask me how I know all of this...

Posted: **Tue May 31, 2011 8:39 pm**

MediumTex wrote:
Adam1226 wrote: Do you think there's a chance we'll ever simply be able to leave the Middle East?
Between Israel and oil...no.

I have personally always thought that a creative solution would be to adopt some variation of the Pickens plan and move to a natural gas based economy, while doing a "Truman Show"-like maneuver and completely uprooting and moving all of Israel to a location in the Utah desert near the Great Salt Lake.

You may have posted this in jest, but that would be an ideal --even if totally impossible to implement-- solution, and one that I have suggested from time to time.

Posted: **Wed Jun 01, 2011 9:51 am**

Speaking of bad things happening, Harry Browne said in his Fail-Safe Investing (1999) one should have an overseas account, secret if possible. He suggested Austria or Switzerland. Might be easier said than done in 2011.

Posted: **Wed Jun 01, 2011 11:07 am**

pershing83 wrote: Speaking of bad things happening, Harry Browne said in his Fail-Safe Investing (1999) one should have an overseas account, secret if possible. He suggested Austria or Switzerland. Might be easier said than done in 2011.

On that front, bad things have already happened in the form of the post-9/11 dragnet.

Posted: **Thu Jun 02, 2011 2:09 pm**

l82start wrote:
Gumby wrote:
I can't say anyone would know for sure. But, I seriously doubt they would say, "ok, thanks! We're good."
i think if you give into their demands the first thing you will hear.... is more demands...

This issue was addressed in a speech I heard on C-SPAN. May have been biased (didn't seem to be ideologically biased to me, though the facts very often fell onto the left side of the spectrum), but the evidence pointed to the fact that terrorism actually died down when "demands" were met. I do wonder, though, if you're right. I'm not convinced either way.

Posted: **Thu Jun 02, 2011 2:09 pm**

I moved this discussion to Other Discussions.

Posted: **Fri Jun 03, 2011 3:29 pm**

The thing that I can't figure out is why Treasury can't simply prioritize interest payments over other expenditures, thus making default essentially impossible. If it really came down to defaulting on its sovereign debt or making the Department of Energy wait on its budget, I would hope that this would be an extremely simple choice.

Posted: **Fri Jun 03, 2011 11:04 pm**

I've been waiting for someone to raise the consequences of continually printing more Monopoly money to avoid defaulting on trillions of dollars of national debt. How long before we face the long promised spector of taking a wheelbarrow full of paper to the store for a loaf of bread?

Or ... is MT's military scenario the more predictable outcome?

Gyroscopic Investing

What Happens if the US Defaults on Debt?

What Happens if the US Defaults on Debt?

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