# Can the USA fund its debt?



## lookout

I'm trying to get my head around this issue and I'm hoping someone here can help. My understanding is that the US will attempt to sell trillions of dollars worth of bonds, but foreigners will demand higher interest rates for their money, thereby forcing up mortgage and business interest rates, thus sinking the US economy. They can try to avoid higher interest rates by printing but that will cause further loss of faith by foreign lenders who will reduce purchases of US bonds. Catch 22. Have I got that right and if so, how might things play out?

Also, if the US can't sell it's own debt will that choke off Australia's money supply and force up rates here?

All comments/education welcome.


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## Macquack

Lookout, you might find the following short article interesting from "The Straight Dope"

*How much money is there? With the U.S. borrowing so much, why aren't we broke? *
http://www.straightdope.com/columns/read/719/how-much-money-is-there



> The whole financial system is a house of cards......The government will never pay back the money it owes and nobody expects it to.


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## Aussiejeff

Macquack said:


> Lookout, you might find the following short article interesting from "The Straight Dope"
> 
> *How much money is there? With the U.S. borrowing so much, why aren't we broke? *
> http://www.straightdope.com/columns/read/719/how-much-money-is-there




Or, looked at with my somewhat jaded eye, utilising the same admirable spirit of entrepreneurship shown by Ponzi friends such as Mr Madeoff who NEVER intended to repay HIS debts EVER either, the merchants of light & happiness (gummints of the world) have agreed to embark on the "Greatest Legalised Ponzi Scam In The History Of The Universe".

The debt will NEVER be repaid. Simply written off with strokes of magik, invisible ink penz.

It's all rather comforting, eh? Enjoy the party!


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## Beej

Macquack said:


> Lookout, you might find the following short article interesting from "The Straight Dope"
> 
> *How much money is there? With the U.S. borrowing so much, why aren't we broke? *
> http://www.straightdope.com/columns/read/719/how-much-money-is-there




That's actually not a bad article and a good summary of the fractional reserve system and money creation therein. Re:



> The whole financial system is a house of cards......The government will never pay back the money it owes and nobody expects it to.




I think to be clear, and to understand how the system works, this quote from that article needs to be considered in proper context. What people do expect is that the government will pay the INTEREST on their "borrowings" (ie the regular yield on the bond they issued), much like the bank expects you as a private borrower to pay your mortgage payment each month.

When a bond reaches it's expiry and the "lender" wants their capital back, the lender also does certainly expect to get their capital back. The government always has the option to "roll over" the debt in effect by issuing a new bond to cover the pay out requirement on an old one, much as corporations often do with their debt. So I think this is what is meant when the above article states that no-one expects the government to repay it's debt.

There is nothing inherently evil in the above - the lenders are happy as they get their interest, and they get the capital back at the end. If the government did have the cash (raised through taxation on productive activity within their economy). The fact that *the interest is paid via taxation of productive activities* is what makes the "ponzi scheme" allegation incorrect IMO. In a true ponzi the "interest" is paid purely from newly invested funds, with no ability for the "interest" to be paid when/if the inflow of new funds ceases. This is absolutely NOT the case with government debt/bonds.

A government can reduce/pay back debt ultimately by buying the bonds back or paying them out with surplus cash - as has been the situation in Australia for example for the past 10 years (up until present time anyway). 
Or they can "roll the debt over" - a government in theory lives "forever" so again it's the interest bill that matters more than the actual debt in terms if the impact on government budgets, revenues etc etc in the long term.

Cheers,

Beej


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## lookout

Thanks for the replies guys. I was hoping some knowledgeable person would point out a glaring fault in my post. It appears to me that the US is finally snookered and can't avoid a depression due to excessive debt. Is there some clever way out that I'm not seeing?


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## prawn_86

Beej said:


> I think to be clear, and to understand how the system works, this quote from that article needs to be considered in proper context. What people do expect is that the government will pay the INTEREST on their "borrowings" (ie the regular yield on the bond they issued), much like the bank expects you as a private borrower to pay your mortgage payment each month.
> 
> When a bond reaches it's expiry and the "lender" wants their capital back, the lender also does certainly expect to get their capital back. The government always has the option to "roll over" the debt in effect by issuing a new bond to cover the pay out requirement on an old one, much as corporations often do with their debt. So I think this is what is meant when the above article states that no-one expects the government to repay it's debt.
> 
> There is nothing inherently evil in the above - the lenders are happy as they get their interest, and they get the capital back at the end. If the government did have the cash (raised through taxation on productive activity within their economy). The fact that *the interest is paid via taxation of productive activities* is what makes the "ponzi scheme" allegation incorrect IMO. In a true ponzi the "interest" is paid purely from newly invested funds, with no ability for the "interest" to be paid when/if the inflow of new funds ceases. This is absolutely NOT the case with government debt/bonds.
> 
> A government can reduce/pay back debt ultimately by buying the bonds back or paying them out with surplus cash - as has been the situation in Australia for example for the past 10 years (up until present time anyway).
> Or they can "roll the debt over" - a government in theory lives "forever" so again it's the interest bill that matters more than the actual debt in terms if the impact on government budgets, revenues etc etc in the long term.
> 
> Cheers,
> 
> Beej




Great post Beej. Very informative and well structured


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## Knobby22

lookout said:


> Thanks for the replies guys. I was hoping some knowledgeable person would point out a glaring fault in my post. It appears to me that the US is finally snookered and can't avoid a depression due to excessive debt. Is there some clever way out that I'm not seeing?




The US is a very disparite society that has much extreme wealth and extreme poverty.
At the moment, the richer you are the less % tax you pay. The opposite of Australia and most of the rest of the world.

They could pay off their debts easily by raisng taxes to the richer members of society.

Warren Buffett has stated the unfairness of this system, refer following:

“The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” 

Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.

http://www.timesonline.co.uk/tol/money/tax/article1996735.ece


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## glads262

lookout said:


> Thanks for the replies guys. I was hoping some knowledgeable person would point out a glaring fault in my post. It appears to me that the US is finally snookered and can't avoid a depression due to excessive debt. Is there some clever way out that I'm not seeing?




Nope.
Wayout = stop spending on worthless banks, declare them & the auto's bankrupt. Allow the system to heal itself. Reduce the military budget by 80% (only spend on national security, not international security), Increase retirement age to 75, introduce a 100% tax on consumption goods (they are still spending money on crap despite being broke).

Eventually, the increased savings rate in America will assist in funding the national debt - as happens in Japan. But the debt is growing much faster than savings at the moment.

If America keeps on its current course, the only way out will be to inflate prices and kill the USD (perhaps by printing money??)

eg - Imagine if Australia had the same deficit. 15% of our GDP = $160 billion dollars. 
Makes our (soon to be) $60billion dollar deficit seem tame.


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## glads262

Knobby22 said:


> They could pay off their debts easily by raisng taxes to the richer members of society.
> http://www.timesonline.co.uk/tol/money/tax/article1996735.ece




http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

Have a look at these for tax rates!!!!

And they don't even use bracket creep!!!!
(why, when you are in terminal deficit, you wouldn't use bracket creep is beyond me....)

If the US want the larger govt that they have, then they need to pay for it.

The obvious categories to raise a truckload more tax here are

1. Increase 33% and 35% tax brackets to 45%. If you want decent healthcare and social security, you have to pay for it!!

2. Increase 25% & 28% brackets to perhaps 30%. This could be used to pay back the debt.


Problem with this, increasing taxes will reduce consumer spending on plastic crap from China meaning the whole FALSE economy would fall on its face.


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## alphaman

Beej said:


> The government always has the option to "roll over" the debt in effect by issuing a new bond to cover the pay out requirement on an old one, much as corporations often do with their debt. So I think this is what is meant when the above article states that no-one expects the government to repay it's debt.



Good point Beej. Obviously unlike governments, corporates don't always have the option to roll over. That's more of the bank's option.

Actually even governments do not always have the option e.g. Iceland.


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## Macquack

lookout said:


> Thanks for the replies guys. I was hoping some knowledgeable person would point out a glaring fault in my post. It appears to me that the US is finally snookered and can't avoid a depression due to excessive debt. *Is there some clever way out that I'm not seeing*?




The obvious "clever way out" is to *inflate* their way out of debt.


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## lookout

I don't think they can inflate their way out this time, not for a few years anyway, due to the sheer magnitude of the deflation that is occurring (collapsing real estate, debt default). If they try to borrow the funds necessary to counter the deflation, interest rates soar. If they try to print sufficient funds, foreign lending to the US dries up because nobody wants to get paid back in devalued dollars. I think they have to tolerate a period of deflation whether they like it or not.


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## Glen48

USA has a policy for funding the retired's  medical costs and no party is game to revoke the funding.. this funding will consume more money in years to come as the B Boomers move in than USA can afford. Just another nail in their coffin.


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## lookout

Yes, the financial instability and coming social upheaval across much of the developed world is setting the scene for a grim future - I wonder which major power will be the first to opt for war as a way to unite the rebellious masses. Maybe the Vulcans will arrive just in time to save us from ourselves.


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## questionall_42

Beej said:


> I think to be clear, and to understand how the system works, this quote from that article needs to be considered in proper context. What people do expect is that the government will pay the INTEREST on their "borrowings" (ie the regular yield on the bond they issued), much like the bank expects you as a private borrower to pay your mortgage payment each month.
> 
> When a bond reaches it's expiry and the "lender" wants their capital back, the lender also does certainly expect to get their capital back. The government always has the option to "roll over" the debt in effect by issuing a new bond to cover the pay out requirement on an old one, much as corporations often do with their debt. So I think this is what is meant when the above article states that no-one expects the government to repay it's debt.
> 
> *There is nothing inherently evil in the above *- the lenders are happy as they get their interest, and they get the capital back at the end. If the government did have the cash (raised through taxation on productive activity within their economy). The fact that *the interest is paid via taxation of productive activities* is what makes the "ponzi scheme" allegation incorrect IMO. In a true ponzi the "interest" is paid purely from newly invested funds, with no ability for the "interest" to be paid when/if the inflow of new funds ceases. This is absolutely NOT the case with government debt/bonds.
> 
> A government can reduce/pay back debt ultimately by buying the bonds back or paying them out with surplus cash - as has been the situation in Australia for example for the past 10 years (up until present time anyway).
> Or they can "roll the debt over" - *a government in theory lives "forever" so again it's the interest bill that matters more than the actual debt in terms if the impact on government budgets, revenues etc etc in the long term*.
> 
> Cheers,
> 
> Beej





Interesting take, but the question in play now is "where will this head?".  can this go on forever? This model of an unlimited supply of money, coupled with an financial system based on exponential growth of debt on a finite planet... where does it end? 

I urge everyone to do Chris Martenson's "crash course on the economy": www.chrismartenson.com - he is a master communicator and it is perhaps the best 3-4 hours of education you can get. After watching this, I would be interested in your take on where things are heading from a financial system perspective.


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## Uncle Festivus

_California insolvent, now LA too?_



> _Citing a $529-million budget deficit, Mayor Antonio Villaraigosa urged the City Council on Tuesday to declare a fiscal emergency and called for mandatory work furloughs and layoffs targeting 1,000 city employees._
> _"The gravity of the fiscal emergency that we face is enormous," Villaraigosa said. "Unless we act with urgency, the city will face a cash flow crisis, raising the prospect of running out of cash between November and February. "_






> _The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates. Budget office figures released Monday would add $89 billion to the 2009 red ink ”” increasing it to more than four times last year’s all-time high as the government hands out billions more than expected for people who have lost jobs and takes in less tax revenue from people and companies making less money._




_What comes in doesn't cover what goes out - otherwise known as a deficit?_

Income - it is estimated that it would need employment growth of 350,000 per month minimum for 4 years just to erase the jobs lost so far in this recession! Current employment growth is negative 550,000 per month.


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## GumbyLearner

Uncle Festivus said:


> _California insolvent, now LA too?_
> 
> 
> 
> 
> 
> _What comes in doesn't cover what goes out - otherwise known as a deficit?_
> 
> Income - it is estimated that it would need employment growth of 350,000 per month minimum for 4 years just to erase the jobs lost so far in this recession! Current employment growth is negative 550,000 per month.




Also, you need to add Chrysler & probably GM dealership job losses as well as auto-part, accessory maufacturers to those numbers. Most likely already factored in by the market.


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## Aussiejeff

Can the USA fund it's debt?

Well, Standard & Poors are now "pondering" that question for the UK. Apparently, Mr Market was a bit shocked by this overnight - which I find a tad laughable, since I am being lectured all the flamin' time by any number of experts about how Mr Market is supposed to be very clever and factors *everything* in 12 months ahead to give a true market value NOW? LOL

Well, surely Unca ObamSan's credit rating has to come under scrutiny sooner or later too?

What effect a downgrade of credit rating for either or both the UK & US would have on the markets is anyone's guess (though I'd be surprised if it didn't involve some significant downward corrections)? 

C'mon Mr Smarty Market - tell me what you have already got "factored in".... 


Chiz,


aj


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## lookout

Mr. Market is so perverse/corrupted/manipulated at the moment that anything is possible within a deteriorating trend (as I see it). I see US treasuries are under pressure again - I wonder how long before higher interest rates knock the stuffing out of our real estate and stock markets.

Question: which countries does Australia get its foreign funding from?


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## Grandpop

lookout said:


> Question: which countries does Australia get its foreign funding from?




I'm sure China will buy as much of Australia as Mr. Rudd will sell them, at least they can exchange Aussie dollars Austrailian commodities.  The one trillion US dollars China is currently holding will be devalued to toilet paper by existing US gov't. policy.


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## CamKawa

A couple of interesting short videos on US debt

The National Debt Road Trip

Obama Budget Cuts Visualization


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## Green08

They will be more selective in depopulating their masses. Have to keep the earners on for tax. The rest a waste. Lets see how it pans out in the next couple of years. But hey, isn't the front line where they send those exspendable.


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## CamKawa

Beej said:


> That's actually not a bad article and a good summary of the fractional reserve system and money creation therein. Re:
> 
> 
> 
> I think to be clear, and to understand how the system works, this quote from that article needs to be considered in proper context. What people do expect is that the government will pay the INTEREST on their "borrowings" (ie the regular yield on the bond they issued), much like the bank expects you as a private borrower to pay your mortgage payment each month.
> 
> When a bond reaches it's expiry and the "lender" wants their capital back, the lender also does certainly expect to get their capital back. The government always has the option to "roll over" the debt in effect by issuing a new bond to cover the pay out requirement on an old one, much as corporations often do with their debt. So I think this is what is meant when the above article states that no-one expects the government to repay it's debt.
> 
> There is nothing inherently evil in the above - the lenders are happy as they get their interest, and they get the capital back at the end. If the government did have the cash (raised through taxation on productive activity within their economy). The fact that *the interest is paid via taxation of productive activities* is what makes the "ponzi scheme" allegation incorrect IMO. In a true ponzi the "interest" is paid purely from newly invested funds, with no ability for the "interest" to be paid when/if the inflow of new funds ceases. This is absolutely NOT the case with government debt/bonds.
> 
> A government can reduce/pay back debt ultimately by buying the bonds back or paying them out with surplus cash - as has been the situation in Australia for example for the past 10 years (up until present time anyway).
> Or they can "roll the debt over" - a government in theory lives "forever" so again it's the interest bill that matters more than the actual debt in terms if the impact on government budgets, revenues etc etc in the long term.
> 
> Cheers,
> 
> Beej



Russell Napier reckons that when yeilds get to about 6% the US maybe in trouble. 

The Ascent of Money is a good doco that explains bonds. Take note of the Argentinean experience. Will the US go down this path?


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## bongcso

Yeah, I watched the Ascent of Money on bond markets too and it sure is scary. The host Niall Ferguson wrote an article in the Financial Times on 29 May 2009 and he was very concerned about USA's escalating debt. I could not read the full article because I don't have a paid subscription to ft.com but a synopsis of what he wrote can be found in an article in  
businessinsider.com/henry-blodget-niall-ferguson-paul-krugman-is-wrong-2009-6

Even more worrying is what Bill Gross, CEO of PIMCO the world's largest bond fund has said recently. He says holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. I read in The Age last Friday that last month, Temasek Holdings announced it had sold its stake in Bank of America and Temasek's chief executive Ho Ching said that it would reduce its exposure to Western nations and increase its focus in Asia and other emerging markets such as Latin America and Russia.

IMHO, if USA does not find a way to reduce spending, high inflation and devaluation of the dollar would be inevitable.

Christina
slisuper.wordpress.com/category/opinions/


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## Uncle Festivus

CamKawa said:


> Russell Napier reckons that when yeilds get to about 6% the US maybe in trouble.
> 
> The Ascent of Money is a good doco that explains bonds. Take note of the Argentinean experience. Will the US go down this path?




6% you say? I would say that due to the higher debt burden things will start to get interesting long before that, going on the 10 years T's?


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## rainylake

I agree on Treasury rates going up.  It may take longer than a lot of people think but it's probably one of the most solid trends out there IMHO.


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## Wysiwyg

In the past the USA has had blowout debt and has managed to pull the debt back down again. As seen in the graph below, debt has peaked and come back down on every occasion. It will again but the blowout could be over 100% of GDP (presently about 88%) with the baby boomers adding to the social security and health care systems in increasing numbers. The USA will pull their debt down but it still has yet to peak.

my  after watching I.O.U.S.A.


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## Aussiejeff

**** 12 TRILLION & counting...... ****



> The US public debt topped $US12 trillion ($A12.8 trillion) for the first time in history, Treasury officials disclosed on Tuesday, moving past a key barrier that raised hackles in Congress.
> 
> Treasury data showed Monday's outstanding debt at $US12.031 trillion ($A12.83 trillion), up from $US11.999 trillion ($A12.8 trillion) on Friday.
> 
> The ballooning debt reflects the massive deficit spending by the government in an effort to revive an ailing economy over more than one year.
> 
> The public debt topped $US10 trillion ($A10.67 trillion) in September 2008.
> 
> _*The debt is quickly approaching the statutory limit of $US12.104 trillion ($A12.91 trillion), meaning Congress would have to raise the ceiling to prevent a shutdown of government operations.*_





http://www.thebull.com.au/articles_detail.php?id=7435

Time for Unca Obamasan to crank up the ol' DollaBill Fax machine agin'.


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## Nyden

Wysiwyg said:


> In the past the USA has had blowout debt and has managed to pull the debt back down again. As seen in the graph below, debt has peaked and come back down on every occasion. It will again but the blowout could be over 100% of GDP (presently about 88%) with the baby boomers adding to the social security and health care systems in increasing numbers. The USA will pull their debt down but it still has yet to peak.
> 
> my  after watching I.O.U.S.A.




Long time ago, but good post Wysiwyg. It's good to see some sense around here.


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## Agentm

forget the quadrillions in dollars to be funded to bail the last subprime securities failure....

here is the next bubble in the USA that needs to be funded as we hit the second collapse in the very near future..  and is being ignored by everyone here on these forums...

where its different to the subprime bubble, this one is extremely visible, but regardless its being totally ignored by all.

no lessons learned from the last one, no leglislation changes, no watchdogs looking for the bubbles, nothing in place to regulate against this, and all this at the detriment of a further financial collapse..  or can the markets just sustain this one for ever more??  

lol

wake up and smell the roses!


Commercial mortgage-backed securities (CMBS)


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## lasty

Agentm said:


> forget the quadrillions in dollars to be funded to bail the last subprime securities failure....
> 
> here is the next bubble in the USA that needs to be funded as we hit the second collapse in the very near future..  and is being ignored by everyone here on these forums...
> 
> where its different to the subprime bubble, this one is extremely visible, but regardless its being totally ignored by all.
> 
> no lessons learned from the last one, no leglislation changes, no watchdogs looking for the bubbles, nothing in place to regulate against this, and all this at the detriment of a further financial collapse..  or can the markets just sustain this one for ever more??
> 
> lol
> 
> wake up and smell the roses!
> 
> 
> Commercial mortgage-backed securities (CMBS)





There will be a foreclosure sign on the lawns of the Whitehouse very soon.


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## Ageo

Just by going off all those graphs it looks like the U.S is pretty f****d at this stage dont you think??


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## pilots

Ageo, we could be in the same boat when it comes to Commercial real estate, I know of places that the banks would sell up if they could get a buyer, as no one is interested they banks are leaving the owners in place.


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## Aussiejeff

Ageo said:


> Just by going off all those graphs it looks like the U.S is pretty f****d at this stage dont you think??




IMO, won't happen.

US is TOO BIG TO FAIL.

Ergo, the Great World Bank Of China & others funding the spending habits of rich, fat Americans will almost certainly "forgive" UncaSam's sinful descent towards debt oblivion with a mere penstroke. Them with the moolah to burn can afford it. Think of the cred. 

So, they will let UncaSam off with a "clean sheet" - next best thing to going bankrupt, eh?! 

All that bad do-doo's will be consigned to a paper shredder. So no need to fret. ChObamaInc has it covered. 

Ain't life grand?


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## lasty

"US is TOO BIG TO FAIL"

Thats what they think.. The Brits still wont let their fallen empire go...


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## Wysiwyg

Ageo said:


> Just by going off all those graphs it looks like the U.S is pretty f****d at this stage dont you think??




Does that mean a solid bull run on U.S. equities. Maybe the DOW to push 18000 points.


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## Wysiwyg

lasty said:


> "US is TOO BIG TO FAIL"
> 
> Thats what they think.. The Brits still wont let their fallen empire go...



Thinking of our northern cousins, when are all those English roses coming to Australia to share a wonderful new life beside the coast with a strong supportive loving Australian man.


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## tunrida

[The U.S. and the U.K.] “deserve to keep the Aaa rating (…) the likelihood of a default is so small, particularly in the U.S. because all we do is print money to pay it back (…) The notion of a default is so absurd, it’s another reflection of the absurdities in the financial markets.” -- Nobel laureate Joseph E. Stiglitz, 2010.02.08


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## acouch

hope you don't get dizzy watching it
ac 

http://www.usdebtclock.org/


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## wayneL

tunrida said:


> [The U.S. and the U.K.] “deserve to keep the Aaa rating (…) the likelihood of a default is so small, particularly in the U.S. because all we do is print money to pay it back (…) The notion of a default is so absurd, it’s another reflection of the absurdities in the financial markets.” -- Nobel laureate Joseph E. Stiglitz, 2010.02.08




Yet it is unlawful for us plebs to do so. 

How is that fair?


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## MRC & Co

tunrida said:


> [The U.S. and the U.K.] “deserve to keep the Aaa rating (…) the likelihood of a default is so small, particularly in the U.S. because all we do is print money to pay it back (…) The notion of a default is so absurd, it’s another reflection of the absurdities in the financial markets.” -- Nobel laureate Joseph E. Stiglitz, 2010.02.08




It's not a notion of default of the US that is the problem.

It's the notion of a run on their bond market IMO after printing too much money.

A situation whereby high inflation, low rates and a plummeting USD, will cause a run on the bond market, whereby yields will rally sharply, the bond market will take a hammering, the USD even worse and you will get a serious, but required, economic meltdown and subsequent years (multiple decades) of stagnation, aka Japan.  

That or there is an orderly period of decades of flat growth and no meltdown following this period of bringing the financial system back from the brink, but this is less likely due to Governmental short-term goals.  This is the flaw of our current democratic system.


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## Uncle Festivus

Now the Fed's QE winds down, the market takes control.....and rates rise



> April 5 (Bloomberg) -- Treasury  yields were at the highest level since June, after *the biggest two-week rout in prices* this year, as economists said a report today will show U.S. services industries are growing as the job market improves.
> Traders added to bets  the Federal Reserve will raise interest rates as the fastest employment growth in three years indicates companies are gaining confidence. The U.S. is scheduled to sell $8 billion of 10-year Treasury Inflation- Protected Securities today, the first of four auctions this week totaling $82 billion. A three-year sale tomorrow will be for a record-matching $40 billion.
> “Treasury rates will soar,” said Kazuhito Miyabe,  who helps oversee $12 billion as head of foreign fixed income in Tokyo at Toyota Asset Management Co., a unit of the world’s largest automaker. “Many investors may sell.”



They still don't have a plan?



> For years it has been apparent that rising health care costs and population aging would eventually present a serious fiscal challenge.  With the baby-boom generation now beginning to retire, that challenge is upon us.  Total spending on Medicare, Medicaid, and Social Security is
> expected to rise by approximately 3 percent of GDP between 2008 and 2020.  *In combination with the fiscal imbalance resulting from past budget deficits and the impact of the economic downturn, the Government is on a trajectory that will result in deficits of 5 percent of GDP even after the economy recovers*.



From http://www.gao.gov/financial/fy2009/09guide.pdf

And what would those policy changes be that would reduce the future interest expense? Time for plan B, C, D..........


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## MRC & Co

Lucky inflation is soft hey!  

More printing to be done.


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## Timmy

Uncle Festivus said:


> Now the Fed's QE winds down, the market takes control.....and rates rise
> 
> 
> 
> 
> April 5 (Bloomberg) --
> Traders added to bets the Federal Reserve will raise interest rates ...
> "Treasury rates will soar," ...
> "Many investors may sell."
Click to expand...



The charts show how this call didn't work out ... instead of falling, there has been a massive rally:







But I reckon there is more to the story ... and a good opportunity for learning ... let me just carefully affix my tinfoil hat ... OK, here goes...

Something caught my eye this morning:
http://www.zerohedge.com/article/coming-america-pimcos-total-return-fund-rotates-out-europe
From the article (posted on 19 May 2010), underlining mine:
“The April update for Pimco's Total Return Fund is out. The credit fund, … has rotated aggressively out of non-US developed holdings (i.e. Bund and other exposure), and put the money back into the US.”

This is really, really interesting. PIMCO is the world’s biggest manager of fixed-income securities, quarter of a trillion dollars! - absolutely massive fund.  So, how do you rotate your portfolio when you are this big?  

When in late March/early April, the US Treasuries were increasing in yields, i.e. the price was falling.  This was accompanied by many, many articles, blog posts, opinions etc. that yields would continue to rise (i.e. prices continue to fall) and therefore to sell US notes, bonds etc.  Here are some reports on comments coming out of PIMCO around that time (underlining mine):

March 30, 2010 Headline: *Treasury Bonds: “Bill Gross, who manages the world’s biggest bond fund, says the 30-year bull market in fixed-income securities is ending.”*
“Bond investors are nervous because interest rates are rising, reducing the market value of their securities.”
“Rates reflect the flood of Treasury bonds being sold to cover the U.S. budget deficit, which hit $1.4 trillion in fiscal 2009.”
“rising yields and falling bond prices are here and now.”
“While Gross is giving stocks an indirect plug, he's still buying bonds. He recommends, for instance, longer-term securities of Germany and Canada, whose governments are more frugal than that of the U.S. Pimco's $1 trillion or so of assets are still overwhelmingly in bonds”
http://www.bloomberg.com/apps/news?pid=20601039&sid=aHwhhQIwHrO8

March 25, 2010 Headline:  *Gross: Long-term bondholders beware*
“As a November IMF staff position note aptly pointed out, high fiscal deficits and higher outstanding debt lead to higher real interest rates and ultimately higher inflation, both trends which are bond market unfriendly. In the US in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments”
“The trend promises to get worse, not better”
http://www.investmentpostcards.com/2010/03/25/gross-long-term-bondholders-beware/

March 24, 2010 Headline: *Is Bill Gross Spooking The Bond Market? *Observations From BTIG's Mike O'Rourke
http://www.zerohedge.com/article/bill-gross-spooking-bond-market-observations-btigs-mike-orourke
(This guy seems to have been the only one knowing what was going on).

March 26, 2010
Headline: *Guest Post: The Case for Buying Foreign Bonds from Low-Deficit Countries*
As Pacific Investment Management Co.'s Gross, manager of the world's biggest bond fund, said yesterday in an interview with Tom Keene on Bloomberg Radio that “[U.S.] bonds have seen their best days."
“one of the main reasons that Gross is now bearish on U.S. treasuries is because he is convinced the U.S. be hit with massive inflation.”
http://www.nakedcapitalism.com/2010...foreign-bonds-from-low-deficit-countries.html

Apr. 12, 2010
*PIMCO's Bill Gross Frantically Dumping Treasuries, Thinks US Interest Rates Will Soar*
http://www.businessinsider.com/henr...aign=Feed:+businessinsider+(Business+Insider)

Pretty emotive stuff & there are many, many more articles around on how the US Treasuries were to collapse in price from around that time.

Back to my original question: 
Q: _So, how do you rotate your portfolio when you are this big?_
A: Ya gotta suck in the punters ... and it sure looks like Bill Gross knows how to play the market for suckers. (Except for Mike O'Rourke, he was on the ball).


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## MRC & Co

ha ha, nice post Timmy!

Also, with the breakup of the EUR becoming a large fear, expectations of a stronger US dollar are being seen.  USD can perhaps, even start to rally with 'risk', as has been the case lately due to liquidity looking for a home and peripheral currencies too small to house it.

An increasing USD or expectation thereof, will also cause the yield curve to flatten (as we are seeing) due to lower yield required (risk) of holding US dollars.


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## Aussiejeff

and the beat goes on..... 



> *[size=+1]U.S.’s $13 Trillion Debt Poised to Overtake GDP: Chart of Day[/size]*
> 
> By Garfield Reynolds and Wes Goodman
> 
> June 4 (Bloomberg) -- President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.”
> 
> The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. *The amount owed will surpass GDP in 2012*, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades.
> 
> “Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”
> 
> Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”
> 
> Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s.
> 
> *“The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. "Do you really want to buy the debt of the biggest issuer?” *



http://www.bloomberg.com/apps/news?pid=20601109&sid=aa0cI64Gx.4E

Not: I have overlaid a red line on the graph to show the approximate _trend_ over time of US GDP since the halycon year of 1984. I feel the "average" line of about 3.5% they have shown is a bit misleading (IMO over-optimistic). The _trend_ is DEFINITELY heading down since '84 (from around 4% to a miserable 1.5%). What can possibly stop that?  Even worse, where is that DEBT curve going to be by 2015? 

Crikey, this next 5 years is gonna be one helluva rollercoaster....!

cheers,

aj


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## Aussiejeff

More great news!



> One of the world's most eminent experts on public finance says *the west is headed for a fiscal crisis of the state, and the United States will be broke within 15 years unless it addresses its unsustainable budget deficit*.






> "Under current projections, the United States debt to GDP ratio will reach an all time high within the next 15 years. That is it'll be higher than the debt as a share of national income that we left World War II with.
> 
> "Unlike, in 1946 though, when we didn't have very significant fiscal commitments and were able to start reducing our debt very rapidly, *the US in 15 years will be in no position to stop accumulating debt.*
> 
> "So we're heading toward an unsustainable level of debt in 15 years, capital markets presumably will look ahead and understand that and not let us get to the end of that 15 year period."
> 
> In the worst scenario, he says America could face the same problems that Greece is experiencing where capital markets basically go on strike and refuse to fund the debt.
> 
> *"We do not have 15 years. The capital markets will react sooner. The US may have a little bit more time than another country in a similar situation as long as the dollar is the currency that people hold and that investors flee to when there's general turmoil in financial markets," he cautioned.*



http://www.abc.net.au/news/stories/2010/06/22/2933526.htm

Oh well, I'll prolly be gaga in a dementia unit by then. :silly:

These days, 15 years seems like a lifetime - though he does say the markets will likely seize up well before then. 

Mr "Helicopter" aka "The Stimulator" Benwankee to the rescue??

Sure, sure.....

*sigh*


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## Aussiejeff

...and there's more...DEBT that is... http://noir.bloomberg.com/apps/news?pid=20601087&sid=aukn.A07DiN0&pos=7

From that article..



> June 25 (Bloomberg) -- *Regulators closed banks in Florida, Georgia and New Mexico today*, awarding a third financial institution to Bond Street Holdings LLC, an investment firm that first bought banks in January.
> 
> Bond Street’s Premier American Bank purchased Englewood, Florida-based Peninsula Bank, according to a statement on the Federal Deposit Insurance Corp.’s website. The three failures today cost the agency’s deposit-insurance fund $284.6 million.




and



> The FDIC has now closed 86 banks this year and is on pace to exceed last year’s total of 140, which was the most bank closings since 1992 as lenders across the country buckle under the weight of soured real-estate loans. The failures will drain $60 billion over the next three-and-a-half years from the FDIC’s fund, the agency said June 22. *The fund dipped into deficit in the third quarter.*




Well, blow me down with a feather, but pardon all that posi-spin by Uber-bulls. This data doesn't look like a recovery in any wave, shape or form to me. 

Add to that the Mc-Too-Big-To-Fail bwanks getting a mere slap on the wrist by gutless regulators overnight (including what appears to be a whole pile of Get Out Of Jail Free cards) + pathetic consumer spending + pathetic new housing starts & house values data + pathetic Eurozone economics and what are we REALLY looking at? 

Not forgetting this either..  http://noir.bloomberg.com/apps/news?pid=20601109&sid=atxrhPqbty_4&pos=10


> *States of Crisis for 46 US Local Governments Facing Greek-Style Deficits *
> 
> June 25 (Bloomberg) -- Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end.
> 
> Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue.
> 
> Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone.
> 
> Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. *State spending is 12 percent of U.S. GDP*.
> 
> “States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”
> 
> *Stimulus Dries Up *
> 
> State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. *[size=+1]By Jan. 1, funds from the $787 billion federal stimulus bill will dry up[/size]. That money from Washington has helped cushion state budgets as tax revenue has plunged*.




What the hell then???? More bailouts by the bucketfull??

Perhaps we are more likely on the cusp of GFC MkII than any flamin' "sustained recovery"??


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## Aussiejeff

This latest economic forecast bodes ill. Worsening indicators bolded. Last three especially..  



> Bloomberg Survey
> 
> ==============================================================
> Release    Period      Prior     Median
> Indicator                         Date                 Value    Forecast
> ==============================================================
> Pers Inc MOM%                 6/28      May       0.4%      0.5%
> Pers Spend MOM%             6/28      May       0.0%      0.1%
> Case Shiller Monthly YO       6/29     April       2.4%      3.5%
> Consumer Conf Index          6/29      June      63.3      *62.9*
> Chicago PM Index               6/30      June      59.7      *59.0*
> Initial Claims ,000’s              7/1      26-Jun     457       455
> ISM Manu Index                  7/1       June      59.7      *59.0*
> Construct Spending MOM%   7/1       May       2.7%     *-0.7%*
> Pending Homes MOM%         7/1       May       6.0%     *-14.4%*
> Nonfarm Payrolls ,000’s        7/2       June      431       *-110*
> Private Payrolls ,000’s          7/2       June       41       113
> Manu Payrolls ,000’s            7/2       June       29        *25*
> Unemploy Rate %                7/2       June      9.7%      *9.8%*
> Hourly Earnings MOM%         7/2       June      0.3%      *0.1%*
> Factory Orders MOM%         7/2       May       1.2%     *-0.5%*
> ==============================================================




http://noir.bloomberg.com/apps/news?pid=20601010&sid=aYpSdKKVCNqA


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## Aussiejeff

**Bloomberg Survey Update**

============================================================
                               Release     Period  Prior     *Median*         Actual
Indicator                      Date                Value    *Forecast*      Value 
============================================================
_Case Shiller Monthly YO_   6/29      April    2.4%    *3.5%* *3.8%*
_Consumer Conf Index_       6/29     June    63.3     *62.9* *52.9*

_"Unexpectedly" very bad_ result for US consumer confidence. No wonder the Eurozone & Dow tanked last night.

Also... 



> Consumers’ plans to buy automobiles, appliances and homes declined in June, with *the percentage of people who said they intend to buy a car dropping to the lowest since records began in 1967*, today’s report showed. Vacation plans also fell. http://noir.bloomberg.com/apps/news?pid=20601087&sid=alVvoM9lnelQ




The slightly better Case Shiller Monthly Year On Year Index result (house prices) is simply reflecting the influence of the gummint's $8,000 home buyer's grant, which ended 1 Jul. Expect this index to start falling over coming months as the residual effect of the grant wears off (settlements for claim extended from 1 Jul to 30 Sep last night).

Expect more dismal data on the way in the next few days.

Watch out belooooowwwwwww!!


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## warennie

The US Debt Ceiling will be reached today (Monday) in the states. Hows congress going to go deal with the ceiling? Interesting times ahead.

LINK: http://www.abc.net.au/news/stories/2011/05/16/3218127.htm


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## tothemax6

warennie said:


> The US Debt Ceiling will be reached today (Monday) in the states. Hows congress going to go deal with the ceiling? Interesting times ahead.
> 
> LINK: http://www.abc.net.au/news/stories/2011/05/16/3218127.htm



They will call Mr Bernanke and ask him to order some more paper.
"Big job coming through, Benny".


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## Glen48

Llittle Timmy is looking for another $20 B asap or we will all die we gotta save those banks at all cost.


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## yusufn93

USA will always be able to fund both its interest payments and size of its debt due to a) quantitative easing, b) inflation c) the dollars status as the worlds reserve currency.


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## LifeChoices




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## Aussiejeff

QE3 "wunderbar" news right on queue, Benny....



> Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling.



http://www.bloomberg.com/news/2011-07-13/fed-prepared-to-respond-if-needed-bernanke.html

Is that the whine of the printing presses I can hear as they hit $$$$$$$$$$$$$$$$$$$$$$$$ overdrive?

LOL

Meanwhile, Moody's is getting itchy feet... 







> Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.
> 
> The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.



http://www.bloomberg.com/news/2011-...downgrade-by-moody-s-as-debt-talks-stall.html

Expect Fitch & S&P to follow suit.

Double LOL.


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## Uncle Festivus

The very fact that ratings agencies give insolvent companies such as those mentioned Aaa ratings just goes to show what a farce the whole Ponzi is......


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## tinhat

The USA can fund its debt if it addresses its structural deficit by both increasing taxes and reducing spending. Whether it will or not, I don't know.


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## Knobby22

tinhat said:


> The USA can fund its debt if it addresses its structural deficit by both increasing taxes and reducing spending. Whether it will or not, I don't know.




Absolutely true.
It is crazy how the Republicans are resisting tax loopholes for the rich. 
How can they even argue the case??


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## Julia

Knobby22 said:


> Absolutely true.
> It is crazy how the Republicans are resisting tax loopholes for the rich.
> How can they even argue the case??



Surely they're going to have to give way on this before 2 August.


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## joea

yusufn93 said:


> USA will always be able to fund both its interest payments and size of its debt due to a) quantitative easing, b) inflation c) the dollars status as the worlds reserve currency.




I thank you for that. Behind the scene , USA is fighting for democracy of mankind.
The republicans put USA into this position, and now have the audicity to dictate in opposition.
God help America.
joea


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## Logique

Julia said:


> Surely they're going to have to give way on this before 2 August.



Or sooner. By 22nd July (end of next week) to enable them to meet 2 August.


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