While we have a moment, I feel as though I really must offer up a concern I have, with regards to a fairly outrageous development in the markets.
To be sure, it has been most hilarious, watching S&P get painted orange by the bond market while Bill Gross cries himself to sleep at night. But I am completely on their side with regards to their initial sentiments about the security of the United States government as a credible borrower.
Here there are two key worries that I feel need to be brought up.
The first is this: The U.S. government’s most rosy projections had a full and massive recovery taking place to cover much of the shortfall of their budget deficits. Even should the economy hold activity perfectly constant, that will create a most massive deficit, which of course will very quickly return us to the newly agreed upon debt ceiling.
The argument that raged from March to August will be back soon enough.
The second is this: The U.S. government’s repayment schedule is highly asymmetrical. A disproportionate amount of money that they owe comes due within the next five years. I read of this the other day, and it frightened me greatly.
So foremost, the heated debate of whether or not the government can even borrow money to repay existing lenders is very much not off the table. And aft we need to question whether, if the U.S. government will even permit itself to lend more money, there will be sufficient interest to allow the government to restructure its debt to a more uniform repayment schedule.
Remember that even invoking cooperation from the lender of last resort, if the Fed takes on extensive 30+ year obligations that will still leave us with the problem of many billions or perhaps even trillions of dollars in debt coming due and reentering the economy, and no controlled method of withdrawing them from circulation.
While for the moment I feel the dollar can get much stronger, that sentiment does rely on my initial belief that we are not going to re-enter recession. It also is somewhat an act of priorities, as businesses will likely be desperate for cash to keep their doors open.
However, in modern day governance, willful default is not to be expected. And this issue could turn into extreme inflation in quite a hurry.
Thus, for the time being, holding precious metals is still a good move, even though they may get hammered. Holding cash is an equally good move, as before devaluation occurs, people will clamor for it.
In both cases, those two assets act as extreme-case insurance policies.
If the government defaults, there will be no limit to what you can buy with your cash. If they try to print their debts away, your PM’s will be irreplaceable.
But the one thing I would not be doing in any instance is loaning money directly to these clowns.
If you enjoy the content at iBankCoin, please follow us on Twitter
I have a 3% return on my government agency bonds while the market has lost 10% during the same period…
I have a zero percent return on my carefully selected portfolio of stocks and hedges and am not at risk of blowing the fuck up.
If the government blows up then I suggest that you buy an M4 and take lessons at your local rifle range. And then when you need ammo I’ll sell you a box of 50 for an ounce of gold…
I disagree…
The federal gubmint could blow up and, in the short run, no one would notice beyond financial effects.
Case in point – when the earthquake hit DC a week or two ago, the bulk of the federal apparatus shut down and everybody went home. If not for Drudge, the rest of the country wouldn’t have even noticed.
The financial effects will depend entirely on what Bernanke & company do if this happens – remember they control the currency and by extension financial markets, not Treasury.
I think shutting down for an early afternoon is slightly different than shutting down forever.
Covered my ERX short for $44.83 from $48.14
The only controlled method of withdrawing dollars from circulation is taxes.
The bond market doesn’t really fund the federal government anymore. It hasn’t since the gold standard was abolished. The federal government is the monopoly supplier of currency. It technically doesn’t need to borrow anything from anyone.
The U.S. government will never default, no matter what all the talking heads on TV try to scare the masses with in their ratings grab.
Forex- I think in this case “default” means we decline to pay debt, not that the dollars are not available. Everyone knows the USA can create dollars, but threat of default is excellent theatrical material for all, and much better than Americans actually having to cut back on our gluttony, or the other six things.
Reserve accounting and your basic household/business/state accounting is literally totally opposite of each other. Why don’t people understand this?
I don’t know. I’m just tired of the idiots on both the “left” and the “right” side of the equation. left + right = cluster fuck or morons that don’t understand what they’re dealing with.
How is cash best during a devaluation. Thx
I mean defaults
During a US default, those holding bonds will get poleaxed in the face. That includes numerous and massive financial institutions who have predefined obligations in dollars.
The expiring treasuries are typically comprised of those obligations; banks play with their customers money after all. In order to meet the now defunded obligations the institutions will need cash and lots of it. The real value of money will increase accordingly.
It would be a buffet of all the worlds assets at potential fire sale prices.
People who doubt this do so because they assume the Fed will immediately enter the market with massive intervention. There’s merit to that, but before they move you would still see a huge drawdown in prices.