How much debt can the US handle? (transaction, tier, borrowing)

[gwynedd1]

Originally Posted by hindsight2020

Sure, which means everybody gets their coffee which is great....until someone says 'nope, not gonna take that IOU from you anymore'. The question is, are we at risk of the latter happening?

Not nationally. Obviously its going to be a problem to tax China. However if dollars keep leaking out of the country, then the Triffin dilemma problem arises where dollars need to flow back into the domestic market.

Look at the fix China is in if the dollar weakens. China can stop buying our treasuries any time it likes so why doesn't it? What would happen is more demand for US labor and less demand for them. The fact is there is a minority interests that are benefiting on both sides.

Keynes gets beat up a lot around here but his Bancor looks pretty good right now.

[Butterfly4u]

Gwynedd,
So if the government of this country paid off all of the back debt it owes form all
those years, the trillions in debt it has that isn't even counted in the budget, it
is technically cancelling it out.
So how can it cancel it out if to pay it off it would have to print more debt?
Did I understand that right?
The USA will never pay off all the debt it owes, it can't.

[gwynedd1]

Originally Posted by Butterfly4u

Gwynedd,
So if the government of this country paid off all of the back debt it owes form all
those years, the trillions in debt it has that isn't even counted in the budget, it
is technically cancelling it out.
So how can it cancel it out if to pay it off it would have to print more debt?
Did I understand that right?
The USA will never pay off all the debt it owes, it can't.

It could pay off all its interest bearing debt by minting coins. If you have a $100 treasury note, here is your coin. Yet the coin is still effectively a debt because it a fiat token. Does da guberment really need that coin back? Better its lost in a sewer. Now this may create an avalanche of spending. So, just tax the coin back in at high rates. No inflation at all. That's how we got here, ZIRP and Bush deficits.


Now they could just pay off the debt and then let banks create credit. Why we would let those scum create our legal tender I would have no idea. Europe has lost its mind.

[texdav]

Te US can go bankrupt in practical terms just has states can.It occurs when you can't pay your bills and can't borrow at rates that will allow you to eventaully pay off the loans and still operate.Its what is happening to greece now.It will before that tho act just has it has i Greece;with rising unemployemnt and lowered GDP because the rest of the econmy will do what they have had happen;they dig in and avoid nay chnace that future liabilty will bankrupt them individually. That is what has slowed us now people startig to hunker down with mountig debt makig future liailties uncertain.Its called risk off in markets.

[gwynedd1]

Originally Posted by texdav

Te US can go bankrupt in practical terms just has states can.It occurs when you can't pay your bills and can't borrow at rates that will allow you to eventaully pay off the loans and still operate.Its what is happening to greece now.It will before that tho act just has it has i Greece;with rising unemployemnt and lowered GDP because the rest of the econmy will do what they have had happen;they dig in and avoid nay chnace that future liabilty will bankrupt them individually. That is what has slowed us now people startig to hunker down with mountig debt makig future liailties uncertain.Its called risk off in markets.

Comparing Greece and the US is not appropriate. The US can manipulate its currency. Greece cannot and owes a foreign debt in a foreign currency. Even if no one accepted US dollars we would still be better off because we could still have domestic liquidity. Americans could still work for Americans. That is what Greece cannot do. Same thing happened with Germany when no gold was in the country. The foreign debt is only half the problem. They were using a currency they didn't have. Greece can't even hire a Greek plummer. That can't happen in the US.


What would happen if a fully self sufficient hunter gather tribe using barter decided to use the Euro? Since they don't have any they would have their economy collapse. Its not just a foreign debt problem.

[Mircea]

Originally Posted by lynxville

I just wonder what's the dollar amount of loans the government can handle before we go bankrupt?

Loans, like guaranteed student loans, or like guaranteed FHA mortgages?

Maybe you meant to say securities.

Wondering...

Mircea

Originally Posted by Willy702

Just gotta love the current environment. Every question about economics just elicits political posturing and unproven economic ideals couched in political posturing. To answer the question without a political angle:

Sorry I couldn't rep you.

Originally Posted by Willy702

1. Sovereign debt doesnt declare bankruptcy and to imply there is anything like the term in sovereigns is just plain wrong. If a country cannot pay its obligations it negotiates. Every single time. No country is going to stop operating or liquidate bcause of its debt load. Combine negotiations with currency rate adjustments and agreements are eventually made with most, but not always all debt holders.

That has been the history of all countries that have defaulted on debt payments or other obligations to date.

Originally Posted by Willy702

2. Sovereign debts of most countries are never intended to be paid off. They are expected to be refinanced through other debt issuances. The government may occasionally have a surplus and use it to pay down debt, but this is not an implied expectation held by the creditors.

Uh, I might take issue with that, if for no other reason than to clarify it. I think you can say that is true for governments who issue securities, but not true for governments who have borrowed money -- like Greece.

Originally Posted by Willy702

3. Countries generally don't pay off debts or finance budget deficits through printing money as mentioned by many replies. They fund by taking on more debt. Printing to pay off debt is a total last resort move done basically in spite. Printing money to pay debt does a nation little good because once again the way out of a bad debt situation is to negotiate.

Again, we'd have to differentiate between countries who defaulted on securities, and governments who defaulted on loans -- since loans and securities are not the same thing.

My thinking is that many don't fully comprehend the situation in Europe. Greece is to the European Union as California is the United States. Greece cannot "print" Euros any more than California can "print" US Dollars.

Greece can certainly decouple from the Euro currency, returning to the Drachma, but that would actually make things more difficult for Greece, not less difficult.

First, assuming the Drachma is accepted as an international currency -- and that's a big "if" -- then what would be the value of the Drachma in relation to the Euro, or the US Dollar?

Maybe for the sake of those who do not understand, I should point out that not all currencies are or have been accepted on the World Market. When a country settles its trade accounts, it does that through the BIS (Bank of International Settlements). The BIS only accepts currencies traded on the World Market.

For example, during the Cold War, the US and Britain barred the ascension of the Ruble and other East Bloc currencies. That means the Soviet Union and East Bloc countries could only settle their trade accounts in US Dollars (or German Marks or French Francs if the Soviets were trading directly with those countries).

The Drachma was internationally traded in the past, so let's assume it will be accepted again. So 1 Drachma = $0.18 US Dollars and 0.10 Euros. Super.

Now what, Greece is going to start printing Drachma? Great -- now 10,000 Drachmas = $0.08 US Dollars and 0.01 Euros.

So how is Greece ever going to pay their debt -- which is owed in Euros, not Drachmas?

Originally Posted by Willy702

4. Maximum capacity levels for debt are sort of a merely academic exercise and have no real world use. Too much debt is decided by market interest rates. If a country has half the debt to GDP ratio as another nation but the market wants 3 times higher rates to be compensated for perceived risk, the lower debt load is little consolation.

Again, that would depend on whether you're talking about securities or loans.

A country that is economically unstable does not issue securities for its debt. If it does, then they are usually purchased by citizens, businesses and municipalities within the country, and only rarely by foreigners.

So how does a country (like Greece) that cannot issue/sell securities handle its debt? It borrows money from the IMF, from the World Bank, from the Paris Club of Creditors, from central banks and from major private banks.

When it appears that such a country can no longer pay its debt, it is cut-off, until some kind of re-payment program is negotiated. That is what happened to Russia (who inherited the debts of the former Soviet Union), Argentina and a few others.

In the case of the Dominican Republic, the US simply invaded, took over the country, over-threw the government, installed a puppet-dictator, and then started draining Dominican banks.

Originally Posted by Willy702

5. Market rates for debt and debt load can be quite different. When considering solvency issues only current rates matter, but proper planning can be even more important than how the market reacts. This is more a corporate bond market concept but it has relevance to sovereigns as well.

But you must remember that credit rating matters.

For example, States and cities in the US own $444 Billion worth of US treasury notes and bonds.

Cities like Cincinnati, when they ran a budget surplus in the past, would buy US treasury notes. They also bought US treasury notes for their city pension plans. Additionally, they bought other types of securities. You can imagine a situation where an unsavory politician might spend city funds to purchase securities from an associate -- perhaps as a token of appreciation for political support -- and then those bonds fold.

Ooops. The tax-payers just got taken to the cleaners.

So to prevent that, Cincinnati, and nearly all cities and States, unions, and other organizations have charters or by-laws or rules and regulations that limit the purchase of bonds, whether issued by a government or corporation or other business, to only those with a certain credit rating.

Each time the US credit rating drops, there are many entities that cannot legally purchase US treasury notes. Many cities and States are barred from legally purchasing bonds that are not rated "A" or better.

So when the US bond rating drops to BBB+, that will hamper the sale of US treasury securities.

Bankrupting...

Mircea

Originally Posted by BadJuju

Thank you for this. People seem to think that defaulting means that things come to a dead stop and its a curtain call on the debt. No, a default will simply result in renegotiation.

Uh, it's a little more complicated than that. Of the $15+ TRILLION in debt:

1] $6.4 TRILLION is held by the Federal Reserve and US Government

2] $286 Billion is held by US banks other than the Federal Reserve

3] $185 Billion in US Savings Bonds

4] $715 Billion in private pension funds

5] $188 Billion in State/municipal government employee pension funds

6] $252 Billion by US insurance companies

7] $797 Billion by US-based mutual funds

8] $444 Billion by States/municipalities/townships

9] $5.93 TRILLION by foreign governments, foreign banks, foreign corporations or private investors (both US and Foreign).

So when you're talking about "renegotiating" you're perfectly willing to take a reduction in your monthly private pension plan, right?

Or you're willing to accept a loss of your personal savings or 401(k) because mutual funds, banks and corporations took an hit, right?

Because that, is what we're talking about.

Negotiating...

Mircea

Originally Posted by bbnetworking

I was reading other day that $1 dollars today is worth about 4 pennies back in 1930. That's all because of compounded inflation.

What kind of inflation?

Curiously...

Mircea

Originally Posted by gwynedd1

Comparing Greece and the US is not appropriate. The US can manipulate its currency.

Not relevant. Manipulating the currency is not going to entice investors to purchase US treasury notes.

Originally Posted by gwynedd1

Even if no one accepted US dollars we would still be better off because we could still have domestic liquidity.

Better off? You mean like the Soviet Union? Because no accepted their currency.

Originally Posted by gwynedd1

Americans could still work for Americans.

What, the barter system? "You irrigate my colon and I'll take out your tonsils."

For Generation X and Y, that would be, "You come over and fix my transmission, and I'll go to your home and surf the web, talk on my cell-phone, text all my friends, and shuffle papers for 8 hours while talking about Chemtrails."

I'm sure that will work.

Originally Posted by gwynedd1

Greece can't even hire a Greek plummer. That can't happen in the US.

Yes, it can.

Economically...

Mircea

[tickyul]

USA....Bankrupt, no need for that, we can print our own money.

The problems come when the government and its citizens are locked in a little fantasy bubble...they think that there are NO consequences for being reckless in monetary policy.

The average joe has to worry about what effect the stupid policies will have on their spending power, that is a very real world consequence that will hurt a lot of Americans. Food, gas, housing, medical....everything will hurt due to very high inflation.

Another problem is the ability of the government to provide more and more of what people should be providing for themselves. We see a less productive society that has more and more people living off the printed/borrrowed money......it is like a cushy fantasy world.

A society that gets weaker and weaker will be the result of so much government printing of money.....the fantasy world is great for a while. What will happen when the consequences of this fantasy world built on printed money, above and beyond what is taken in as taxes, must be scaled back.........oh my, the gnashing of teeth and wailing. Even the Demor**s MIGHT realize that this fantasy world is not good if we want a productive society that is supposedly based somewhat on free markets.

When the deficit gets nasty(haha, 1 trillion or more) what can you do??? Well, you can cut things or raise taxes. You think it is not going to happen......the scramble to try and ease the deficit will bring out a big push to try and rake in more money.............real cuts are a big, scary thing for any Politician who wants to stay in office. So we raise taxes on the horrific, murderous, baby-killing, evil, rich companies. Hey, it is a global economy......to stay competitive many companies will say sayonara to the USA, an already poor place to do business for many.

There are many problems with printing more and more debt. But this country honestly will not deal with them until the things I described above are very bad.

We can put off reforms a lot longer than countries that cannot print their own currency.......I think that may be a bad thing in the long run.

[gwynedd1]

Not relevant. Manipulating the currency is not going to entice investors to purchase US treasury notes.

You comment is not relevant. Have you turned to pithy out of context replies? What ever happened to swamping us with a pedagogical flood? I'll tell you why. I exposed your phantom article in the Lisbon treaty.

Better off? You mean like the Soviet Union? Because no accepted their currency.

Yeah better off, except they had plenty of domestic problems to go along with it. You want to just start tossing out random events and locations as if you made the point?

What, the barter system? "You irrigate my colon and I'll take out your tonsils."

Your stool seems loose enough to me.

[Frank Shoemaker]

Originally Posted by gwynedd1

Its also called running a surplus and increasing interest rates. In no time that %10 could be mopped up.

I think that you haven't looked at the dynamic. Back in 1987 the DOW dropped 20% in one day. If you tried to sell enough T-bills IN ONE DAY to get the price down to 80 cents on the dollar then the Fed would step in and buy T-bills to support the price. That extra cash would drive the price of everything else up fast and hard. The only way to pull that much extra cash out of circulation fast enough is for the Fed to sell T-bills. The Fed can't do that as it would drive the price down and the yield up to far.

Originally Posted by gwynedd1

How can you inflate away the debt without just ending the reserve ratios because as of now inflation is driven by more debt. The national debt is the money supply. The national debt is the money supply. The national debt is the money supply. All work and no play makes Johny a dull boy.....



Let me tell you how we got here. See that note below? It certifies a deposit and they will pay you a silver coin on demand valued at one dollar. Its a debt.




If you purchased a treasury it was an interest bearing debt that would pay the face value at maturity. Oftern this was exchanged to non interest bearing notes. Note means debt.



These notes were very fungible and fully negotiable. People exchanged these government IOUs as if they were specie coin.


Now they are not redeemable for anything. So guess what the money is?


Its the national debt.



These IOUs are then reused like a hash mark in the bank credit system. The bank loans out a government IOU and then often gets the same one as a deposit. They can then lend it out again. So banks loan government debts and use it as a tool of credit(quite horribly I am afraid with asset ponzi schemes).


The national debt is the money. If you plan on inflating the debt away, thats a neat trick because the only way to inflate the core money supply is with more government debt. The only other way is to bloat bank credit which means the private economy needs to be drowning in debt.

Its a credit monetary system. Its all run on debt.

Credit Money Definition | Investopedia

debt is money and money is debt.

The coins in your pocket are not part of the national debt. The bills in your pocket are. Mint coins and give them to everyone. Do enough of this and you can get inflation without more debt. Increase the minimum wage at the same time and you have more unleveraged income. Do enough of that and you can get true inflation with the total debt going down in %GDP. Full employment and less debt per-income. We need to get the total debt as %GDP down to 125~150% of GDP.

[gwynedd1]

Originally Posted by Frank Shoemaker

I think that you haven't looked at the dynamic. Back in 1987 the DOW dropped 20% in one day. If you tried to sell enough T-bills IN ONE DAY to get the price down to 80 cents on the dollar then the Fed would step in and buy T-bills to support the price. That extra cash would drive the price of everything else up fast and hard. The only way to pull that much extra cash out of circulation fast enough is for the Fed to sell T-bills. The Fed can't do that as it would drive the price down and the yield up to far.

If the Dow dropped then that means cash appreciated. Do people realize that a stock market crash is a in one sense a dollar rally? And who cares about that anyway? The stock market ought to crash when its bloated. What we are doing now is far worse by bloating it. Wage inflation quickly adds support to asset prices in a much more stable manner. Look how quickly Internet wages in the 90s add price support for assets. Doesn't work the other way around. Asset inflation stagnates wages. Leveraged ownership though cheap credit is the source of all the problems and that is the play we have been running soon to go on its 5th year.

A rush of dollars would shock the system, but it isn't doomsday. Brazil just went through it and stabilized the country with the then fictitious real. Make it scarce, make it in demand and people will trust its buying power. It can be mopped up. I'd rather avoid continuing the imbalances but after say the Asian currency crisis, I see Asia is still there. If anything a dollar devaluation would be much more of a creditor problem, a 1%er problem since the middle class is the debtor class.

The coins in your pocket are not part of the national debt.

Yes it is. China's wad of cash if it be treasuries or dollar notes represents a lean against the economy. How about you give me some poker chips for nothing and then agree to accept them as payment of debts? That sound like it isn't debt to you? A cheap, fiat coin is a facade of commodity equity.

The bills in your pocket are. Mint coins and give them to everyone. Do enough of this and you can get inflation without more debt. Increase the minimum wage at the same time and you have more unleveraged income. Do enough of that and you can get true inflation with the total debt going down in %GDP. Full employment and less debt per-income. We need to get the total debt as %GDP down to 125~150% of GDP.

All money is a debt instrument. All stocks and bonds are debt instruments. Its a claim ticket for wealth. That includes coins with no use-value.