Can the USA fund its debt?

[MRC & Co]

[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.

 

[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..........

 

[MRC & Co]

Lucky inflation is soft hey!

More printing to be done.

 

[Timmy]

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."

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).

 

[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.

 

[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

 

[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*

 

[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"??

 

[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

 

[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!!

 

[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

 

[tothemax6]

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".

 

[Glen48]

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

 

[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.

 

[LifeChoices]

 

[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.

 

[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......

 

[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.

 

[Knobby22]

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??

 

[Julia]

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.