U.S. Debt Default Bullish for Bitcoin?

[Biomech]

Not going to comment in great detail on this. Solex largely got it right, but left out a lot of detail.

However, a "shut down" such as they are doing right now is a political stunt. They'll send a few people on vacation (paid) and put on a dog and pony show until a "compromise" is reached. They've done this, about this time of year, for at least a decade.

How this will impact bitcoin is of course somewhat unpredictable, but I would think it would have little effect.

However, a true default, i.e. repudiation of the debt, would probably strengthen bitcoin for a bit, but not because people were buying it with suddenly defunct greenbacks. Rather, it would strengthen it because it would likely become much higher in demand BY MERCHANTS due to lack of faith in the dollar.

In the long run, a true default is the only thing that might save the dollar. It would KILL the current US government, and I can see very little negative about that, but the dollar, if reestablished, would have to be based on something tangible or at least much more sound than the current policies. I would hope that in such an event, the people at large and the states would demand that the Fed obey the alleged source of their authority, the US constitution, and accept and issue monies only in silver and gold.

Now, if a government were to ADOPT bitcoin as it's national currency, then that would boost the hell out of it!

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[johnyj]

The most direct effect is that the unemployment rate will spike up

Money loaned to government, it spent too much, went bankrupt
Money loaned to enterprises, most of them went bankrupt too

[Alonzo Ewing]

Once in a blue moon you people need to abandon your weird-ass views and  think logically.

The ONLY basis for the  worth placed in the USD is the faith in the US Government.
A default of the US Government undermines faith in the USG, therefore harming the USD. 

That's not correct.  A default makes the fiat currency stronger, not weaker.  There's a difference between faith in the US Govt paying its debt obligations and faith in the US Govt-issued currency.

A default causes people to lose faith, yes, but they lose faith in the ability of the US govt being able to pay its debts.  So when the govt asks for a loan, people ask for more interest.  Bond prices go up because faith in the govt paying you back is diminished.

But bonds are different from fiat.  When loans are less likely to be paid back, people want fiat.  It becomes more valuable.

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You may not believe this argument, so let me put it another way.  We all know the US govt is not going to be able to pay its promises.  So it has two options:

1) Admit it can't pay its obligations.  Cancel its promises.  This is called a "default".
2) Print money to pay its obligations.

Clearly, the second option is inflationary.  But what's less clear is that the former is deflationary.  It increases the value of fiat money because people know the govt won't debase the currency.  People lose faith in the ability of the govt to keep its promises and pay its obligations, but they know the govt will not debase the currency.  Their faith in the currency increases.

[theonewhowaskazu]

Once in a blue moon you people need to abandon your weird-ass views and  think logically.

The ONLY basis for the  worth placed in the USD is the faith in the US Government.
A default of the US Government undermines faith in the USG, therefore harming the USD.  

That's not correct.  A default makes the fiat currency stronger, not weaker.  There's a difference between faith in the US Govt paying its debt obligations and faith in the US Govt-issued currency.

A default causes people to lose faith, yes, but they lose faith in the ability of the US govt being able to pay its debts.  So when the govt asks for a loan, people ask for more interest.  Bond prices go up because faith in the govt paying you back is diminished.

But bonds are different from fiat.  When loans are less likely to be paid back, people want fiat.  It becomes more valuable.

------

You may not believe this argument, so let me put it another way.  We all know the US govt is not going to be able to pay its promises.  So it has two options:

1) Admit it can't pay its obligations.  Cancel its promises.  This is called a "default".
2) Print money to pay its obligations.

Clearly, the second option is inflationary.  But what's less clear is that the former is deflationary.  It increases the value of fiat money because people know the govt won't debase the currency.  People lose faith in the ability of the govt to keep its promises and pay its obligations, but they know the govt will not debase the currency.  Their faith in the currency increases.

Lol @ "cancel" promises. You can't "cancel" promises, you can only break them.

You seem to think that the value of something is based purely out of the amount of that thing that exist. It does, but only in part. There needs to be demand for that thing as well as limited supply, for that thing to have value. Since the USG effectively lied (that they would back it with their full faith and credit) to their bond investors, why would anybody have any reason to believe that they wouldn't lie to the owners of USD? Bonds are one of the things that determine the credit of the united states. Literally the USD is backed by the credit of the united states, it quite literally says so right on the bill. Just as a Gold ETF (note backed by gold) becomes worth less if what its backed by (gold) is worth less, so does the USD become worth less if the underlying (the credit of the united  states) is worth less.

That's just the immediate effect. Should the USG default, there would be huge fallout that would likely make the dollar almost entirely worthless, at least outside of the United States. The FDIC is also 'backed' by the USG, but why would anybody trust that if the USG just defaulted on other debts? Why not withdraw your money from US banks which are now effectively uninsured and deposit into institutions ensured by the Swiss Government, denominated in the CHF not the USD,  a government that hasn't broken its promises? That's just one other side effect, among many, causing USD outflows.

A government can't just default. It undermines the social contract between the government and the people. After all, imagine you're a bond investor, the government defaults, and then asks for taxes from you. You think you'd be OK with that? I agree that inflation isn't ideal, but a default would be orders of magnitude worse. A best case scenario would be uber high interest rates payable in assets the USG can't inflate; a worst case scenario would be anarchy.

[thezerg]

the level of taxation to some degree can be considered an indication of how much the people want the government to spend... yet long term govt bonds derail this system by essentially hiding spending where it is difficult for people to get upset about, while simultaneously offering a carrot that the beneficiaries CAN get excited about.

Every American is essentially in debt via bonds floated by the USG.  Perhaps there needs to be a constitutional right that affirms that no entity can lay debt upon the person or property of any individual without that individual's handwritten signature.  This is already the case, EXCEPT it can be done via the government's taxation right. 

So essentially the govt could not write many debt instruments.  But SOME could be written; for example a mortgage to buy conservation land, build a building, etc could be secured by the land or building itself.  That would be one way to keep the budget balanced.

Would be hard to get from here to there though :-)

[waveaddict]

Debt defaults and bankruptcies are bullish for fiat currencies as these events make fiat more scarce (deflation).

This isn't true when it is the  issuing government (as opposed to a private bank) defaulting. It undermines trust in said government which sort of renders the entire currency meaningless.

It is the opposite.
This stalemate is good for the dollar because it shows that a number of politicians are serious about reining in spending. The USG will stop entitlement spending before it stops bond redemptions at maturity and interest payments.  The equity markets are high in recent years only because of money printing. People think that markets crashing because of the stalemate is "bad" whereas it is a pricing in of the necessary economic (painful) medicine which needs to be taken now instead of an (agonizing) Zimbabwe-like currency collapse taken later.

Once in a blue moon you people need to abandon your weird-ass views and  think logically.

The ONLY basis for the  worth placed in the USD is the faith in the US Government.
A default of the US Government undermines faith in the USG, therefore harming the USD.

The USG owed value to two people: People who own their currency, backed by the full faith and credit of the US Government, and people who own their bonds, also backed by the full faith and credit of the US Government. If they default on their bonds then clearly the full faith and credit of the US Government is useless, rendering the dollar worthless.

According to your twisted logic, a person's credit rating should go UP when they declare bankruptcy since they now have fewer obligations and thus have more capacity to pay you.

I think you are misunderstanding what kind of default we are looking at here. Because the US is required by law to pay the interest on its debt -- an amount that can easily (6% of budget) be covered by tax revenues -- before any other obligations, there is no real threat of bonds defaulting. The US would simply stop paying for government programs and services which would be deflationary in nature and thus increase, in theory, the value of the US dollar. The fear mongering talk about the US defaulting on its bond obligations is nothing more than political theater.

[Alonzo Ewing]

You can call it whatever you want - canceling, breaking, repudiating, etc - if you prefer.  I'm not going to play semantics.

When govts fail to pay back their bonds, they're signaling to the world that they're not going to debase the currency, because that's the alternative.

Defaults aren't what cause currency collapse.  No, what causes currency collapse is when the govt prints money to avoid a default.  

Defaults and currency collapses are, in many ways, opposites.  Defaults are highly deflationary and send people scurrying for currency.  Currency collapses are highly inflationary and people will do anything to get rid of the currency.

Lol @ "cancel" promises. You can't "cancel" promises, you can only break them.

You seem to think that the value of something is based purely out of the amount of that thing that exist. It does, but only in part. There needs to be demand for that thing as well as limited supply, for that thing to have value. Since the USG effectively lied (that they would back it with their full faith and credit) to their bond investors, why would anybody have any reason to believe that they wouldn't lie to the owners of USD? Bonds are one of the things that determine the credit of the united states. Literally the USD is backed by the credit of the united states, it quite literally says so right on the bill. Just as a Gold ETF (note backed by gold) becomes worth less if what its backed by (gold) is worth less, so does the USD become worth less if the underlying (the credit of the united  states) is worth less.

That's just the immediate effect. Should the USG default, there would be huge fallout that would likely make the dollar almost entirely worthless, at least outside of the United States. The FDIC is also 'backed' by the USG, but why would anybody trust that if the USG just defaulted on other debts? Why not withdraw your money from US banks which are now effectively uninsured and deposit into institutions ensured by the Swiss Government, denominated in the CHF not the USD,  a government that hasn't broken its promises? That's just one other side effect, among many, causing USD outflows.

A government can't just default. It undermines the social contract between the government and the people. After all, imagine you're a bond investor, the government defaults, and then asks for taxes from you. You think you'd be OK with that? I agree that inflation isn't ideal, but a default would be orders of magnitude worse. A best case scenario would be uber high interest rates payable in assets the USG can't inflate; a worst case scenario would be anarchy.

[dasein]

The cost of protecting against a default on US Treasuries for one-year has surged to 60bps this morning. This is the highest since the Debt-ceiling debacle in 2011 and worse than Lehman. The 1Y cost is the highest relative to the 5Y cost ever.

However, many people look at the 60bps and shrug it off as de minimus, after-all, JCPenney trades at 1200bps-plus and is still alive. This is a mistake.

The price of protection for US sovereign debt depends on recovery expectations AND the EURUSD exchange rate expectations. Based on current levels, USA CDS imply a 5.9% probability of default - the same as JCPenney in July.

When an entity defaults, the CDS is triggered and an auction takes place to settle the transaction... the buyer of insurance delivers a bond and the seller of protection delivers "par" or 100 cents on the dollar. Therefore the buyer of protection pockets the difference between the cheapest-to-deliver bond and 100.

In the case of US Treasuries, the cheapest to deliver bond is a longer-dated bond trading around $84 (and so that will be in big demand should a technical default occur as protection buyers scramble to lock in their profit.)

Also, given that the current premium is 60bps (and it trades in EUR since there would be no protection in USD as the US government could simply print more money to pay its debt and the owner of debt would be unprotected from wealth destruction), which is around 80bps in USD, a recovery of 84c implied a 5.9% chance of US Treasury technical default over the next year.

In the case of JCPenney, assuming the standard 40% recovery (which could be worse given Goldman's 1st lien), the US Treasury default rate of 5.9% implies a spread of around 300bps for JCPenney - a level which it was at in July.

The bottom line is that considering 60bps as a small number is a mistake and we hope we have clarified a little about just how concerned investors should be at these levels in this arcane marketplace.

(Note: bear in mind there are a miriad of additional technical details that complicate this analysis further but we hope this gives a sense of the relative scale of a 60bps level for 1Y USA default protection).

http://www.zerohedge.com/news/2013-10-08/us-treasury-default-risk-now-same-jcpenneys-was-july

[notme]

To me it seems like the US federal government is acting like an addict.

It has a country full of enablers. If someone kept feeding me checks I would probably spend like a moron too!

Enablers who risk jail time if they don't agree to enable.

[mccoyspace]

It's hard to see how a default on US Treasuries will be bullish for bitcoin.

TLDR = in the wake of a world-wide asset price collapse and recession, new money will not be pouring into the bitcoin economy.

Without raising the debt ceiling the US government has an instant cash flow problem. Taxes cover about 60% of expenditures and borrowing covers about 40%. So right away we are talking about a 40% reduction in government spending. So now what do they do? Do they default on debt obligations or don't they? Do they pay defence contractors or don't they? Do they pay retirees their Social Security checks or don't they? Do they pay doctors and hospitals for Medicaid care or not? Is the US Treasury's payment system flexible enough to instantly prioritize payments so that some people will get paid or will there be blanket IOUs?

The bond market is governed by legal contract and by market sentiment. In the case of default, both of those influences will say "sell."
The price will drop and the yield (interest rates) will rise. Non payment to retirees, defence contractors, doctors and hospitals will reduce the flow of money into the economy by about 1.4 trillion (40% of the 3.5T US annual budget). That is an instant 10% cut to US GDP. That is a deep recession. Stocks will sell off precipitously. Consumers and businesses will be faced with loss of income, loss of revenue, loss of investment values and higher borrowing costs. Will they then say "now is the time to get set up on that bitcoin exchange and put some of my money thats left in there." I don't think so. Their won't be new money coming in and many current holders will have other needs for their bitcoin investment money and they may want to sell.

The Austrian vs Keynesian debates are interesting, the differences between inflationary and deflationary money systems are interesting. I read these forums, Zerohedge, Of Two Minds, Naked Capitalism, Alt-Markets, etc, etc. That's all fine. But something that destabilizes the world financial system is going to hurt everybody, for sure over the next several years.

What will power the next phase of bitcoin's development are better wallets, better payment systems, more integration with financial parties, and, yes, some kind of detente with Governments over regulation so that exchanges can flourish. Those things will raise the price and they take investments. I don't see them happening when the global financial system is melting down.

I could be wrong. I am long bitcoin. And I fully expect the debt ceiling won't be raised. No one is going to budge. So we'll see soon enough.

[ronimacarroni]

I have one thing to say to the tea party members holding the country hostage.
Woooo, do it faggot, default on that bitch.
Wallstreet and big daddy gubmit are about to get a spanking. 

[adamstgBit]

I have one thing to say to the tea party members holding the country hostage.
Woooo, do it faggot, default on that bitch.
Wallstreet and big daddy gubmit are about to get a spanking. 

If US defaults, I consider all conspiracy theories 100% true.