-The stock market goes up and down all the time. -The credit rating was lowered because of our long term debt/deficit situation and our politicians inability to solve problems. It wasn't lowered because of the debt ceiling debate. -Business decision making was frozen because the economy was not good. The debt ceiling debate last year didn't cause any businesses not to do business imo. -That 19 billion number was over 10 years and I think it's a bs number. [rant]And why are all economic projections done over ten years now? We can hardly project 3 years out yet we want to make this stupid budget projections over 10 years)[/rant] Borrowing costs have only continued to decline because the economy has continued to suck. That article said that nebulous "investors" feared default. No serious people actually feared a US default and it's silly for them to suggest that.
Like I said it's not like the dollar is going to lose reserve currency status anytime soon, but we are completely reliant on our reserve currency status. I don't understand why forward thinking should be shunned just because things are all good now for our fiat currency. The inability to plan for "unforeseen" situations is what led us to the housing collapse and the American economy is still highly leveraged on debt.
Not really - it occurred directly because of (and in the midst of) the debt-ceiling stunt, it was cited in the various downgrades in the language. See e.g.: Not, of course, that the downgrade or the raters actually matter or have a model that we should give a flying f-ck about. Talk about a broken business model, their downgrade of US debt did nothing but cause people shift assets from equities into the very debt they just downgraded. That's about as embarrassing a failure of a business model that possibly exists outside of DaDakota's Houston Rockets player evaluations.
Sure - but when it's flying up and down based on politicians' comments on debt ceiling negotiations, then it's being impacted specifically by that. I don't think it was coincidental that the S&P dropped nearly 100 points during the final week of the debate when it looked like talks were collapsing. The market was in no way healthy during the latter parts of that debate. See SF's response. S&P specifically cited the way Congress acted as part of their reasoning for the drop. The economy was actually on an upswing, with the Dow hitting post-crisis highs just weeks before. But businesses stated that they were holding off on hiring and such due to the uncertainty - not just with the debate itself or threat of default, but with what the resolution would be and how it would affect the economy (higher taxes, lower government spending, etc). Maybe just a coincidence, but the months of the debate were easily the lowest job creation months of the year - by far, even with Europe collapsing later in the year. Pre-debate months (Jan-Apr): avg 206k jobs created Debate months (May-July): avg 78k Post-debate monhts (Aug-Dec, when Europe and the markets were in total freefall): avg 155k I don't think there was much projecting done here, if I understand the study correctly. It just looked at interest rates during the debate vs before and after, and looked at how much extra had to be paid for the debt borrowed during that period thanks to higher rates.
Although we do take advantage of reserve currency status in every way possible, I wouldn't necessarily say it's being "abused" per se, It's important to look back and understand how we became the world's reserve currency in the first place. They didn't exactly just pick the dollar out of a hat full of world currencies while blindfolded. Reserve currency status is earned. People hoard dollars for the same reason they hoard gold. There is a belief that it's inherently "worth" something, meaning that it can be exchanged in the future for real goods/services. Since there is a massive, $15 trillion, highly-liquid economy of real goods/services that can be exchanged at any time for pieces of paper with former presidents on them, it stands to reason that those pieces of paper will be "worth" something for quite a long while yet. It's the same reason why for all their fiscal woes, the Japanese Yen or the Euro are accepted worldwide as well as mediums of exchange...by virture of the very large economies that can back those currencies. Bottom line, the world's reserve currency is always the currency of the world's largest economy, i.e. the world's most productive country. In order to maintain reserve currency status, it's important to continue producing, which is why IMHO our sustained trade deficit is significantly more troubling to me than our budget deficit. As for my thoughts on-topic: These debt ceiling debates are probably the dumbest things in the world. It's like deciding to buy something on a credit card, but then refusing to pay when the bill comes due. If you didn't want to pay for it, you shouldn't have bought it in the first place.
It's not really about shunning anything - it's about not freaking out. It's not even just about the reserve currency - Japan has extremely low rates as well, and their debt burden is far higher than the US or even Greece.
As a comparison, we could add another $22 trillion in debt without the economy growing by one penny, and we'd still have a lower Debt/GDP ratio than Japan.
Yeah, that was I was referring to when I said our politicians inability solve fiscal problems was part of the reason for the downgrade. http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563 There's the whole report if you are bored. It's meh to read, but the bulk of the report talks about the numbers and the lack of confidence S&P has in our govt to address long term spending issues. The timing of the downgrade was directly related to the debt ceiling stunt, but the debt ceiling stunt was just another example of the inability to create a longer term plan to stabilize our deficit and escalating debt. I guess I am saying that the downgrade would have happened no matter what, because we were already on review for a credit downgrade for awhile. Yeah S&P sucks and no one should listen to them, but the interesting thing is how bonds and stocks have both rallied since then. Good thing we have a fiat currency and a bleh economy.
If someone is an investor then they should actually hope there is no deal agreed to quickly. This would cause the market to drop a good bit allowing for some good stuff to buy. Also, one would hope if politicians took longer to solve these problems then maybe a better long term solution could be agreed to (but that is probably just fantasy land talk). If people are worried about market gyrations then they probably should avoid the market. It was whipping around a lot, but we didn't breach any major support on the debt ceiling stunt last time. I trade the stock market a lot and it does a lot of stupid stuff. The last time this debate happened it only served as an opportunity to buy stuff. I agree it had to do with the downgrade, but we were under review for months prior to the downgrade. Interesting job numbers. I guess I live in a bit of a bubble here in Austin since things were cruising here. Maybe my memory isn't the best from the last debt ceilling stunt, but I don't remember it a certainty that taxes were going up like this time. Rates during the debate were basically flat. Since the debate they have declined significantly. The rates changing has more to do with Fed policies than the debt ceiling debate of 2011 ending. And how ****in nuts is it that a 30 year treasury is at 2.8%? Crazy stuff.
Great post and interesting point about the trade deficit. Just don't hold those dollars too long or they won't buy you as many goods and services.
F The whole concept of "abuse" implies a moral component which I don't think belongs in monetary policy and is a central tenet (pretextual?) of deficit scolds. Which is ironic becausetheyre otherwise proclaiming the virtues of unregulated markets divorced from messy things like compassion etc. Look no further than the Commodore's nonsensical posts in this thread where the moral evils of debt block out logic. Its not dissimilar to Republicans being the ostensible party of freedom yet wanting to legislate fewer rights for women, gays etc.
Hah well...inflation's a different discussion altogether. I always prefer to see sovereign debt as a liability more like a bank deposit. Even though banks debit their reserve account (i.e. your deposit money) to extend loans, your deposit is still a liability on the bank's books. The bank wouldn't be able to meet everyone's liabilities all at once (at least not without borrowing from the Fed), but your money hasn't exactly disappeared. It's just sitting idle not being used at moment. A T-bill/bond is very similar. You buy it, and your money gets redistributed elsewhere via government spending (like when a bank extends a loan). That bond is still an monetary asset and your money hasn't disappeared. The only difference is...the US Treasury (in conjunction with the Fed) is capable of meeting all its liabilities at once, by virtue of its ability to create currency at will. If everyone decided to redeem all their Treasuries at once, the Treasury could meet that obligation by creating the money out of thin air. Naturally, everyone will scream "HYPERINFLATIONZ!!" but would it really cause inflation? It's hard to say. Creating money in and of itself doesn't cause inflation. It all depends on what people end up doing with that money. If everyone redeemed their Treasuries at once and then deposited that money into their savings accounts, no inflation would ensue. That money's still sitting idle not being used. On the other hand, if everyone decided to go on a spending spree, then yes there would be inflation. Now there's an additional $16 trillion in the economy chasing after the same number of goods/services. Which is the more likely scenario? IMHO, the first is more likely simply because I don't think people would suddenly feel richer if you were to swap out their bonds with cash. Their spending habits would likely remain similar to (if not the same) as before. This is all conjecture of course...human behavior is hard to understand and predict.
Kyrodis, what do you think of this analysis starting at 20:32 http://www.coffeeandmarkets.com/CoffeeandMarkets112612.mp3
Sorry, prefer not to listen while I'm working (reading Clutchfans is distracting enough as it is). Either I get back to you later, or you can summarize.
I've listened to it and IMHO, he makes way too many leaps in logic that I flat-out don't understand. His first point: The large-scale asset purchases by the Fed have injected tons of money into the economy that are currently sitting in banks' reserve accounts. When the economy turns around, all that pent up reserve money will catapult its way into the economy, creating hyperinflation. He's correct that the Fed's purchases have significantly bolstered banks' reserves. However, he forgets that the Fed only transacts with banks. The Fed doesn't buy the bonds from you and me, so no money from QE or any other asset purchases is directly "injected into the economy." All of it ends up in banks' reserve accounts. He also assumes that when the economy turns around, banks will suddenly be armed with too much cash and lend freely, throwing money at anybody who walks by. I absolutely disagree with this notion. Bank lending standards don't rise and fall based on their reserve positions. They're not going to see a bunch of cash in the vault and say, "Well Mr. Poorcredit, your credit score is only 200, but we got enough cash in the vault, so here's your $1million home loan." In 2006, the banking system had practically zero excess reserves. Yet, banks were still originating liar's loans left and right, even borrowing from the discount window daily to meet overnight reserve requirements. These days, they're sitting on a mountain of reserves but underwriting standards are so much stricter. Lastly, he forgets that the Fed can destroy bank reserves as easily as it creates them. The Fed can force banks (and they must comply according to the Primary Dealers Act) to purchase newly issued long-term Treasuries, and suddenly all those once-overflowing reserve accounts are dry as a bone. His second point: Treasury debt is overpriced. Since it and other sovereign debt are the interest rate benchmark, interest all over the world is too low. The lid will one day blow (probably due to a major geopolitical event like a major war) and we're all screwed. I fail to understand how he goes from "interest rates are too low" to "we're all going to die." It's a massive leap and logic and the only connecting dot he offers is a "geopolitical event like a major war." The only I have to say to that is: If a major world-changing geopolitical event occurs, I'm almost 100% certain interest rates and sovereign debt levels will be the least of our concerns.
Just announced on CBS news that Congressional Republicans have agreed to a temporary raising of the Debt Ceiling. Didn't hear any details.
You know, this really wouldn't be such a problem if the democrats would actually make an effort to reduce spending. BUT, they know that's not good for votes, since they get votes by promising people free schit. So instead we'll just keep racking up debt non-stop
Considering that the payments on that debt are about 3% of GDP, there has never been a better time to refinance.
Congress needs to vote twice on the spending it by and large approved in the first place? yeah ok There's bigger fish to fry---Americans worried about a sustainable economic future need to start looking at the resource costs entailed with the current system and the sustainability of the banking system, instead of fixating a number that will reduce itself with growth, and is largely irrelevant in the American context of debt dynamics because investors by and large love American debt like Cersei loves Jamie (i use the metaphor because the love is so so wrong). yay sky low yields that descend after a downgrade.
