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There have been several news reports here in the USA on the debate in congress over whether or not to increase the statutory limit on national debt. Its hardly made the main stream news but the implications are horrendous. One democrat has suggested that the USA identify certain types of debt to default on. We are not talking about a theoretical process this is here and now. At the current rate of debt accumulation the crisis will start in May and not March as originally thought.

I find it amazing there is so little discussion in the mainstream news here and that the EU are not warning the US of retaliation. We are talking about whole tranches of bonds and treasuries many of which are held by overseas investors. Given the arrogant protectionist stance of the democrats it would not surprise me to see them stiff Europe, china and the middle east once again. This is the stuff of wars.

If you think I am the one who is nuts then look at these:

Ryan Witt

WSJ

There are many others if you care to look.

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I agree with you both in some regards - but this time its different. There are limits to how much debt the market will bear and the spread on CDS is telling us something new. In 2009 the issue was the collapse in equities and failing banks. This time the spread is due to concerns that the USA is looking at structured defaults on debts. Geithner made some very alarming comments this week, and there are hawks who want to use this opportunity to stab at China - the largest (foreign) holder of US debt. All very unsettling.

As they can print dollars, a nominal default is improbable. US CDS's were trading amuch higher than they are now (about 100bp) at the worst point of the downturn in early 2009, so I think it's just a game being played by the market and the childish 2 heads of the US political body to get the ceiling lifted under pointless threats and forcing hands. There's no debate really, just posturing.

Edited by bpw

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There are limits to how much debt the market will bear

that is only true as long as there is somewhere better for the debt to go, which can absorb all of the fleeing creditors. Have you got a candidate for that?

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The Beginning Of The Ponzi End: As Of Today, The Biggest Holder Of US Debt Is Ben Bernanke

That means that already that share of debt held by the fed has been written off/defaulted on.

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Guest sillybear2

They've already started to default by stealth, it's called QE & QE2, I guess QE3 is just a matter of time.

Bernanke has already told the politicos to STFU in case it undermines the bond markets, apparently they don't want the limit to become a bargaining chip :-

http://thehill.com/blogs/on-the-money/budget/141993-bernanke-dont-make-debt-limit-a-bargaining-chip

Edited by sillybear2

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Such an abrupt move against china whoule be mutually assured destruction at a bad moment in time, so that won't happen now. Anyhow perhaps it's just the chinese buying the insurance via proxies to play their own game.

Why do you think they keep buying lots of yellow shiny stuff? They even changed the laws a couple years ago so that civilians can buy gold and silver.

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Yes Scepticus - gold and commodities. Why hold US debts when you know there is a risk of default? And why not lend to developing nations - you might as well if the risk is the same and the returns are higher.

Thanks Chris - hadn't noticed that Uncle Ben is now the largest holder of rotten assets. Of course Tyler gets a LOT of stick for getting it wrong but in this case he may be right. What is more interesting is the bar chart on his posting. Look at who is also holding a massive amount of Uncle Sam's bile...... good old UK.... i.e. you!

UST%20Holdings%2011.23.jpg

that is only true as long as there is somewhere better for the debt to go, which can absorb all of the fleeing creditors. Have you got a candidate for that?

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As they can print dollars, a nominal default is improbable. US CDS's were trading amuch higher than they are now (about 100bp) at the worst point of the downturn in early 2009, so I think it's just a game being played by the market and the childish 2 heads of the US political body to get the ceiling lifted under pointless threats and forcing hands. There's no debate really, just posturing.

At the current rate of oil price rises it wont be long till gas approaches $4 a gallon. Printing money will certainly not help that.

$4 gallon is politically unacceptable and will probably send the US back into recession.

Talk of this doesnt surprise me.

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Yes Scepticus - gold and commodities. Why hold US debts when you know there is a risk of default?

A common fallacy if I may say.

The whole notion of commodities as a store of value assumes that people will pay never ending amounts of their wages to access more consumption and cheap tat. Of course they won't do, and when that point gets reached they will constrain their demand and then its goodbye commods as a store of value.

It is reasonable to set against this argument the notion that a world as full of people and as short of land, food and water as ours will keep commodities afloat. There is a lot to be said for that argument, but firstly, this is somewhat separate to the notion that commods are a viable alternative store of vale per se, and secondly, when shortages really bite various nations will restrict exports and confiscate private holdings of commodities which will block access to these investments in sufficient quantity to absorb money fleeing bonds. Besides, this argument can equally well be made for land.

As for gold, if the shortage of vital items becomes sufficiently acute to support a commodity store of value for a time then I would suggest that all those other commodities would rise against gold as well as everything else.

The reality is that ageing populations can accommodate a reset to a lower level of consumption, and once there will be perfectly happy with it (its the transition that is painful). In fact it is already happening which is why we see inflation and stagnant wages in the west and inflation and rising wages in the east.

That said I have no issues with tipping my hat to a decade long commodities boom (in fact I'm invested for a bit of that) but it won't last.

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There have been several news reports here in the USA on the debate in congress over whether or not to increase the statutory limit on national debt. Its hardly made the main stream news but the implications are horrendous. One democrat has suggested that the USA identify certain types of debt to default on. We are not talking about a theoretical process this is here and now. At the current rate of debt accumulation the crisis will start in May and not March as originally thought.

I find it amazing there is so little discussion in the mainstream news here and that the EU are not warning the US of retaliation. We are talking about whole tranches of bonds and treasuries many of which are held by overseas investors. Given the arrogant protectionist stance of the democrats it would not surprise me to see them stiff Europe, china and the middle east once again. This is the stuff of wars.

If you think I am the one who is nuts then look at these:

Ryan Witt

WSJ

There are many others if you care to look.

And who will go to war against America. I pitty the fool who starts that war. I can't name a nation that is brave enough or stupid enough to pick a fight with America on home turf. Even China & Russia combined doesn't have the fire power graze Americas mass of military might.

If they default the rest of the world will just put up and shut up.

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The Beginning Of The Ponzi End: As Of Today, The Biggest Holder Of US Debt Is Ben Bernanke

That means that already that share of debt held by the fed has been written off/defaulted on.

As the Fed can't go bust and can's suffer any losses, that would indeed appear to be the case.

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And who will go to war against America. I pitty the fool who starts that war. I can't name a nation that is brave enough or stupid enough to pick a fight with America on home turf. Even China & Russia combined doesn't have the fire power graze Americas mass of military might.

If they default the rest of the world will just put up and shut up.

Not quite if they default everyone will default.

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And who will go to war against America. I pitty the fool who starts that war. I can't name a nation that is brave enough or stupid enough to pick a fight with America on home turf. Even China & Russia combined doesn't have the fire power graze Americas mass of military might.

If they default the rest of the world will just put up and shut up.

Firstly for how long? Carthage and the Roman empire (especially after the Marian reforms) were the most powerful military empires for a long time. So were the greeks and so was the British empire. Yet over time economics meant they could not afford to run their war machines. 2000 years ago these empires ran on grain. Today's military machine runs on extremely complex machines which require immense amounts of maintenance and fuel. And new uber weapons are getting canned all the time. The RAH-66 Commanche was canned a few years ago. The F22 has been effectively canned as well. All those developing nations aren't stupid, when you can't fight toe to toe you simply don't fight toe to toe.

See Lebannon in 2006 the IDF had its ass handed to it on a plate by blokes with beards (and missiles) the IDF IS the most powerful military in the region.

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International Diabetes Federation? I didnt' realise they were "tooled up"! :huh:

Edited by MrPin

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China have a choice. It's up to them whether they take it or not.

Nobody can say they haven't been warned plenty of times.

What is also bad is that the Chinese have been saving (all their hard work for decades) in the form of US debt, and out of thin air the Fed has surpassed them - with no work or useful goods produced whatsoever..

Not really. It simply represents the undervaluation of their dollar peg over the period. In a rational world these reserves wouldn't exist in the first place. They'd have been rebalanced away via a floating renminbi.

They represent theft via mercanitiism if you like. 'Illegal' profits from selling goods and services below value.

Ultimately they have to give them back. The only real question is how that is achieved.

The US is correct to default on them if they won't play fair. I can't see much argument against that.

Edited by Red Karma

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Why do you think they keep buying lots of yellow shiny stuff? They even changed the laws a couple years ago so that civilians can buy gold and silver.

Are you writing this in 1977 using a time machine?

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And who will go to war against America. I pitty the fool who starts that war. I can't name a nation that is brave enough or stupid enough to pick a fight with America on home turf. Even China & Russia combined doesn't have the fire power graze Americas mass of military might.

If they default the rest of the world will just put up and shut up.

The rest of the World will simply stop buying UST

That will leave the Bernank and his printer as the sole buyer

While the US remains an energy importer, this will impoverish Americans to the point of implosion (civil war/ revolution/ secession). I don't think they're that far from that now anyway

And if you hadn't noticed, US hegemony in the middle east is crumbling

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A common fallacy if I may say.

The whole notion of commodities as a store of value assumes that people will pay never ending amounts of their wages to access more consumption and cheap tat. Of course they won't do, and when that point gets reached they will constrain their demand and then its goodbye commods as a store of value.

It is reasonable to set against this argument the notion that a world as full of people and as short of land, food and water as ours will keep commodities afloat. There is a lot to be said for that argument, but firstly, this is somewhat separate to the notion that commods are a viable alternative store of vale per se, and secondly, when shortages really bite various nations will restrict exports and confiscate private holdings of commodities which will block access to these investments in sufficient quantity to absorb money fleeing bonds. Besides, this argument can equally well be made for land.

As for gold, if the shortage of vital items becomes sufficiently acute to support a commodity store of value for a time then I would suggest that all those other commodities would rise against gold as well as everything else.

The reality is that ageing populations can accommodate a reset to a lower level of consumption, and once there will be perfectly happy with it (its the transition that is painful). In fact it is already happening which is why we see inflation and stagnant wages in the west and inflation and rising wages in the east.

That said I have no issues with tipping my hat to a decade long commodities boom (in fact I'm invested for a bit of that) but it won't last.

Have been reading some of your blog Scepticus, and we hold a similar view on commodities. I agree that demand for commodities is elastic and that as a result, there is limited upside on commodities.

That's pure commodities by the way, I am not lumping gold/silver in with commodities. No one needs these to live, so such upside constraints are not in place for gold/silver. In your blog you outline the fallacy of marginal utility in certain scenarios (like American citizens and food), again I agree with this and I'm sure most of us would agree that man has no limit on his greed for money, he pretty much treats every unit with equal value and as such will always seek to acquire more. Therefore, I believe gold has far greater upside potential than commodities (of course I still have quite a bit more of your thoughts to digest - but this is just my thoughts on what I have read so far).

BTW - I don't agree that gold can't be sent down a wire any less that pounds or dollars can be sent down a wire. Although your point about loaves of bread and ounces of gold has given me something to think on.

Edited by General Congreve

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As the Fed can't go bust and can's suffer any losses, that would indeed appear to be the case.

Exactly, they can't suffer a loss as the money they conjured up to buy the treasuries never existed in the first place. However, the fallout from this is a different story.

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And who will go to war against America. I pitty the fool who starts that war. I can't name a nation that is brave enough or stupid enough to pick a fight with America on home turf. Even China & Russia combined doesn't have the fire power graze Americas mass of military might.

If they default the rest of the world will just put up and shut up.

Maybe - but how do they then propose to keep funding their huge deficit?

That military strength is going to cost them a huge chunk of their own productive capacity to maintain if they can no longer sell their debt and get away with printing money on the side, as they have been doing thanks to the reserve/petro currency status of the dollar.

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Not quite if they default everyone will default.

At which point the fiat ponzi ends and the suckers left holding the baby are screwed - basically all of us. If the Dollar goes up in flames then it's all over, deals will be negotiated down the barrels of a shotgun.

This game of double or quits is getting very worrying indeed especially now the quits options is off the table. Still there is no inflation so no worries :P

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that is only true as long as there is somewhere better for the debt to go, which can absorb all of the fleeing creditors. Have you got a candidate for that?

what has it always been? come on - you know by now...

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"The rest of the World will simply stop buying UST."

A far more likely event than default. Although, a "failed bond sale" might be a more precise way to describe it.

Some Americans will bitch about raising ceilings, printing more money or doing whatever it is they have to and so there could be a missed payment or two caused by some institutional log jam but the Americans don't have the talent to default when they can print.

I think the interesting event to look for is the downgrading of Treasuries from AAA gazillion or whatever they are now. This will come first, is certainly possible and it's arguable it should have occurred already.

Incidentally, anyone following this earnings season?

It seems to be going rather well, like the last one.

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As this article from ftalphaville shows (quoting Morgan Stanley here)

The debt ceiling showdown amounts to a high stakes game of chicken. Obviously, Treasury officials want to avoid default at all costs. But, at the same time, they don’t want to make it appear that they can easily skirt the constraints imposed by the debt ceiling and allow the key players to continue bickering in a seemingly unending manner. Such a scenario could disrupt the standard and predictable cycle of debt issuance and raise borrowing costs. Since it often seems that Congress won’t act until forced to – and since a vote in favor of a hike in the debt ceiling is politically unpopular – the threat of default needs to be taken seriously enough to spur action. Hence, a game of chicken ensues. We expect to see an extended period of threats and counter-threats play out over the course of the spring and summer, leading to auction delays, shortened when-issued trading periods and investor uncertainty.

And the result

Statutory-Debt-Limit-1970-present-trillions-OMB.jpg

So nothing new under the sun

historym.jpg

This happens every year for 40 years, it's just politics.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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