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.

 

[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.

 

[Aussiejeff]

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!

 

[Beej]

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

 

[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?

 

[prawn_86]

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

 

[Knobby22]

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

 

[glads262]

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.

 

[glads262]

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.

 

[alphaman]

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.

 

[Macquack]

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.

 

[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.

 

[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.

 

[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.

 

[questionall_42]

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.

 

[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.

 

[GumbyLearner]

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.

 

[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

 

[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?

 

[Grandpop]

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.