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Record debt and who are the creditors?
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This could be a real problem because governments have to pay interest on their debt. The traditional way where this was not a problem was to spend the borrowings on infrastructure, thus a lot of roads, etc were built in the early 20th century, and the subsequent economic expansion actually made the debt problem trivial. The problem now is that governments are borrowing to give tax relief to the rich, who are doing their best to avoid tax by putting money in tax havens, and that is hardly productive. The only good news in the short time is that politicians are very reluctant to admit there is a bomb coming. My guess is the bond holders are going to be in trouble, as well as the small savers, such as you and me. But there is no advantage in being in debt, because in such times, debts get called in, the weak bankrupted, and the rich scoop up all the assets. The rich might take a nominal haircut, but that is quickly made up by cheap asset purchases.
In the context of creditors, China holds a big portion of US debt. In the situ when you accuse them of stealing hundreds of billions worth IP rights annually, what's the incentive to have the debt paid?
Interesting comment, Nik. I guess you are saying that the IP was worth hundreds of billions, so let's call it a deal and wash it. Don't know how that would play out, but China's options are not good for recovery of the debt
Nik wrote: "In the context of creditors, China holds a big portion of US debt. In the situ when you accuse them of stealing hundreds of billions worth IP rights annually, what's the incentive to have the debt ..."And this is why our debt is so dangerous. We owe so much to China that really, what leverage do we have over them when it comes to these trade disputes? If they decide to stop loaning us money, we have to scramble to find new creditors before the next round of bills come due...if we can't pay those bills, then we become the next Greece where we run out of money. All the people depending on the social programs will stop getting checks and benefits because the government doesn't have the money to pay out. Our military will be stuck working for free. Not to mention if our credit rating sinks, it will cost us more to borrow, and that will lessen the spending power of those borrowed funds.
As J.J. notes, once you start irritating your lenders, and definitely once you wash the debt, you have to stop borrowing. That would mean the US government has to either increase taxes very significantly, slash severely its social programs, or greatly reduce its military expenditure, or some combination. What politician wants to do that?
Rita wrote: "America never pays its debts!"Yes, but it pays its interest on them and that is starting to get uncomfortably high. What happens when it gets too high for the politicians?
I don't believe they think further than the next election.
I'm not sure US borrows money per se. It sells securities, bonds yes, but not necessarily takes loans. Besides, why take loans if you can print more money, when needed? The way the dollar is dominant today in payments and reserves, it could be difficult to not use it and if it devaluates vs other currencies, the better it is for US exporters. Don't know whether this site is accurate but it attempts to give a break down of US debt.. https://www.thebalance.com/who-owns-t...
Bonds and other securities are debt the same as loans because they have a time when they have to be redeemed, and you pay interest on them. The problem is future obligations and interest. What I found so astounding in Nik's link is the huge surplus from things like Medicare and Veteran's - I was under the impression these were struggling to service what should be their obligations.
From Nik's link directly above.Why the Federal Reserve Owns Treasurys
As the nation's central bank, the Federal Reserve is in charge of the country's credit. It doesn't have a financial reason to own Treasury notes. So why did it double its holdings between 2007 and 2014?
That's when it ramped up its open market operations by purchasing $2 trillion in Treasurys. This quantitative easing stimulated the economy by keeping interest rates low. It helped the United States escape the grips of the recession.
Did the Fed monetize the debt?
Yes, that's one of the effects. The Fed purchased Treasurys from its member banks, using credit it created out of thin air. It had the same effect as printing money. By keeping interest rates low, the Fed helped the government avoid the high-interest rate penalty it would usually incur for excessive debt.
The US Federal Government with the FED can simply monetize debt until the US Dollar is destroyed - as to when that might happen - who knows?
Personally, the current $USD game could continue for decades with US Govt debt heading to and than surpassing $100T, just that interest rates will stay at ridiculously low levels, or even go negative as they have done for Germany and some others.
REF: Bloomburg: German Bond Rates -ve: https://www.bloomberg.com/gadfly/arti...
And the statement
This quantitative easing stimulated the economy by keeping interest rates low.Could just as easily have been read as "This quantitative easing stimulated asset bubbles that favored the rich over the poor exacerbating social inequality."
Hi Graeme,I think the thing you are missing is that the 2 trillion in Treasury bonds (or whatever they are called) more or less matched the 2 trillion locked away in tax havens, and hence out of circulation. Accordingly, the Fed kept the US economy going .he more interesting question is what happens if this cash is brought back to the States? That is when the bubble might get out of control.
I suspect the current problems is because the aberrant behaviour of Wall St prior to 2007 with there "financial products" is still operating, and who knows what will fall out of that because I doubt anyone other than a fe insiders even have any idea of what is really going on and what depends on what.
Hi Ian,The FED bailed out the banks during the GFC by buying the toxic debt off their balance sheets at $1 for $1 (i.e. nominal prices). That toxic sludge is still with the FED.
There are a lot of $USD around the world, if it all came back to the US at the same time - it would be potentially disastrous to the US economy.
We are still in a monetary system (post 1974) where the USD is linked to the trading of oil. If that changes, and the Saudi's start using Yuan, or something else, I would expect the stagflation regime that existed from 1969 (when Nixon took the $USD off Gold (40% base at that time) to 1974 to return with a vengeance.
However, I also think that for the Saudi's to stop using the $USD for oil trade would be linked with them going to another party (cough, China, cough) to underwrite their security.
Hi Graeme,That 23 trillion has a lot of villains lurking. And yes, a lot of US creditors have their problems, which may be why China is busy selling the dollar debts it has. It is hard to know where it is lurking now.
Can it happen that one day that debt ceiling won't be increased, on purpose or not?
Nik wrote: "Can it happen that one day that debt ceiling won't be increased, on purpose or not?"One for our US members, but from across the pond my understanding is it would cause a default similar in effect to budget failure i.e. Gov shutdown but much worse on international and national stock markets. Think Greece only trillions of times worse.
It may become too tempting at some circumstances
The "good" thing about the debt is that inflation is eating away at it too. making it easier to repay.
In the low interest environment borrowing funds became all too easy, but as the interest grows, many might be caught unable to service their debts. As it may happen - the "weak", such as middle-level individual borrowers, will lose everything, while the "strong", such as corps, tycoons and governments might achieve haircut write-offs, restructuring and repayment holidays.
Another question is who the creditors are?
There might be a few explanations, but here is one of them: https://www.quora.com/When-the-whole-...