Is American Debt default really possible??

[Iseree22]

Some say that the recent American debt crisis is a non-issue. America can never default on it's debts since it is the issuer of the American Dollar, and all Government debt is issued in American Dollars. When it comes time to repay the debt, the American state can create more money. There is only one risk, and that is inflation. Since America's core inflation is 3.8% then this is not a real issue.

I think of it in terms of Bitcoin, lets say that there is also a decentralized Bitcoin Central Bank. Miners create Bitcoin Treasuries instead of Bitcoin Dollars. Bitcoin Treasuries are a promise to pay $100BTC at some future date. The total sum of BTC Treasuries created by Miners is the 'National Bitcoin Debt'. BTC Treasuries are sold at auction for BTC Dollars. If the number of BTC Dollars in circulation is too small, then naturally the price of BTC Treasuries will fall significantly below $100BTC. So the BTC Central Bank purchases BTC Treasuries and 'creates' new BTC Dollars to pay for the BTC Treasuries. This action pushes the price BTC Treasuries back up towards $100BTC.

From this view-point the recent American Debt Crisis is a non-issue. And the American Debt is not a debt in the traditional sense, rather it is a measure of the total amount of money created.

Greece is in a different position. Since Greek debt is denominated in Euro's, the Greek's have to attract Euro's from the market. The Greek's do not create Euro's, and so they can default on their debt.

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[Gabi]

There is only one risk, and that is inflation. Since America's core inflation is 3.8% then this is not a real issue.

3.8% now

If they start printing tons of dollars to pay all the debts then inflation skyrocket, or better, more than skyrocket, it directly light it's Warp drive to go faster than light; a dollar will be worth nothing, less than the cost of the paper used to make it.

[mikethebodacious]

America has defaulted on it's debt before.  To understand the creation of money and it's impact on society you should go watch Secret of Oz by Bill Stills.  Bill Stills has another document called The Money Masters which also is a good watch.  Bill is definitely a paperbug versus a bullionbug and he makes very valid points as to why we need paper money versus a gold standard.  Anyways, anyone who says America hasn't defaulted on it's debt is a liar, we've defaulted twice so far and definitely on track for a third time.

[Iseree22]

There is only one risk, and that is inflation. Since America's core inflation is 3.8% then this is not a real issue.

3.8% now

If they start printing tons of dollars to pay all the debts then inflation skyrocket, or better, more than skyrocket, it directly light it's Warp drive to go faster than light; a dollar will be worth nothing, less than the cost of the paper used to make it.

What is more important, inflation or unemployment? Monetary inflation will only occur once unemployment falls dramatically, and that clearly isn't the case in America at the moment. The more people that become employed, the more goods and services produced by America to meet the increased demand caused by printing money.

The inflation America is experiencing at the moment is caused by a shortage of essential resources. This type of inflation is solved by increasing the supply of such resources.

BTW when the Fed commenced quantative easing, this did not cause a net increase in the amount of exchangeable financial assets. The idea that the FED has been debasing the dollar is fictitious. The Treasury is the only authority that can debase the U.S Dollar.

[Iseree22]

America has defaulted on it's debt before.  To understand the creation of money and it's impact on society you should go watch Secret of Oz by Bill Stills.  Bill Stills has another document called The Money Masters which also is a good watch.  Bill is definitely a paperbug versus a bullionbug and he makes very valid points as to why we need paper money versus a gold standard.  Anyways, anyone who says America hasn't defaulted on it's debt is a liar, we've defaulted twice so far and definitely on track for a third time.

Had a quick look at the money masters, which I think Bill produced? Below is a quote from the site.

1. Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt.
2. Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt.
http://www.themoneymasters.com/

This is exactly what should happen in America. The first point would end this perpetual 'debt' non-issue that occurs periodically.

America has defaulted on its debt, but the circumstances were significantly different. Today America issues its own money backed by nothing more than the faith of the people. The first time America defaulted in 1779, the U.S dollar was backed by the Spanish Dollar. This is exactly the same as the Greek situation today, where America has to source Spanish Dollars to service it's currency. The default of 1862 is similar, except instead of the currency backed by Spanish Dollars it was backed by Gold. Once again this is similar to Greece, America must source Gold to produce Dollars. So when America couldn't source enough Spanish Dollars or Gold, obviously this is the definition of default. This is the same situation that Greece faces.

However, since America has gone off the Gold Standard, the creation of the Dollar is no longer constrained by the amount of gold available. The American debt created today is denominated in U.S dollars and since America is the issuer of its own currency then there will always be enough U.S dollars to pay back the debt. Therefore as long as America remains the issuer of its own currency, which I'm sure she will, and backed by nothing more than the faith of the people, America can not default on its debts.

[worldinacoin]

Greece is in a bad situation.  Cannot be compared to the USA.  Greece debts are in Euros, even if they abandon the euros and print their own currencies, no matter how they devalue their currencies, the Euro debts will still be there and growing larger.  Americans are lucky as their debts are denominated in USD.  But of course devaluation hurts the general population.

[netrin]

Europe will print more euros. This is why Jurgen resigned. The US will print more dollars. And yes, the US Fed creates inflation. That was one of the key points to QE*. Congress spends money it doesn't have. The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates. Oh and the Chinese will print more yuan, Swiss more francs, Japan more yen. Anyone not printing paper?

Core CPI is 3%, but real inflation including such frivolities as food and energy is 12%.

[Iseree22]

Europe will print more euros. This is why Jurgen resigned. The US will print more dollars. And yes, the US Fed creates inflation. That was one of the key points to QE*. Congress spends money it doesn't have. The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates. Oh and the Chinese will print more yuan, Swiss more francs, Japan more yen. Anyone not printing paper?

The Fed doesn't cause inflation. All quantitative easing did was exchange one form of money(U.S Debt) for another form(U.S Dollar). The size of the monetary base remained the same.

http://research.stlouisfed.org/fred2/series/WRESCRT?cid=32215

This shows that the balance sheet of the Fed increased from 800 billion to 2 800 billion since 2008. That means the Fed has increased the amount of money by a factor of 3.8 since 2008. It would be reasonable to assume that if the FED was a significant source of inflation, then America should be experiencing an inflation of atleast 200%, and it is not. This is because the FED also purchased U.S debt equal to the increase, and U.S debt can be used for money.

The amount of money in the U.S has increased by a factor of 3.8 but serious inflation has not occurred.


Like I said before the inflation America is currently experiencing is caused by a shortage of essential resources.

[netrin]

No, because M3 collapsed 110%. The Fed's monetary inflation countered unprecedented deflation. The reserves parked at the Fed are keeping the banks solvent, yet they are only hanging on by a thread. In addition to buying back toxic debt from banks at nearly 0% interest, the Fed also bought UST driving yields down. When interest rates go up, there will be more contraction. Housing, finance, and gadgets have a long way to go down. Volatility has increased and hard commodities, food, and energy are double digits and climbing.

PS - M3+ dwarfs M0 by an order of magnitude and there's more deleveraging that still needs to happen.

[indio007]

The US can never default. FRN's are not money. They are a promise to pay money. No one ever even attempts to collect so how can there ever be a default until people redeem their FRN's for lawful money?

U.S. v. Thomas 319 F.3d 640

Paper currency, in the form of the Federal Reserve Note, is defined as an "obligation[] of the United States" that may be "redeemed in lawful money on demand." 12 U.S.C. § 411 (2002). These bills are not "money" per se but promissory notes supported by the monetary reserves of the United States.

[netrin]

The US can default on its $14 trillion public debt, but then it'll have trouble paying it's future $56 trillion obligations (social security, medicare, etc).

BTW, the US population (including children and elderly) is about 300 million. Do you think US debt and obligations will ever be repayed? At what point will markets realize the inflationary risk on their 0% interest bonds is a shady deal? The roulette wheel keeps spinning because it's the only game in town.

[penix]

The USA will not "default" as long as they can just print more money. There is no reason to. That in itself it a type of default, but it is not recognized in the same respect. Make no mistake about it, the USA cannot repay the debt that has been accrued.

[Iseree22]

The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates.

The Treasury can always repay the debt, as long as the debt ceiling keeps rising.

I think of it in terms of Bitcoin, lets say that there is also a decentralized Bitcoin Central Bank. Miners create Bitcoin Treasuries instead of Bitcoin Dollars. Bitcoin Treasuries are a promise to pay $100BTC at some future date. The total sum of BTC Treasuries created by Miners is the 'National Bitcoin Debt'. BTC Treasuries are sold at auction for BTC Dollars. If the number of BTC Dollars in circulation is too small, then naturally the price of BTC Treasuries will fall significantly below $100BTC. So the BTC Central Bank purchases BTC Treasuries and 'creates' new BTC Dollars to pay for the BTC Treasuries. This action pushes the price BTC Treasuries back up towards $100BTC.

Building on the Bitcoin Example in the OP:

When the Miners create BTC Treasuries they will eventually have to redeem the value of the BTC Treasuries using BTC Dollars. The amount of BTC Treasuries that miners can create is subject to a hypothetical BTC Debt Ceiling. Periodically the BTC debt ceiling is raised so that new BTC Treasuries can be sold. When a BTC Treasury comes due, the miner will create a new BTC Treasury and sell it at auction, for BTC dollars that are given to the holder of the expired BTC Treasury. If there is not enough BTC Dollars in circulation then the price of BTC Treasuries will fall and the corresponding 'interest yield' on BTC Treasuries will increase. This is when the BTC Central Bank steps in and prints BTC Dollars to purchase BTC Treasuries. This has the effect of lowering the yield on BTC Treasuries. Therefore as long as the BTC debt ceiling keeps raising there is no possible way that issuers of BTC Treasuries can default.

[indio007]

Your not getting it. The US doesn't "pay" anything. They discharge debts via tendering paper promises. It doesn't matter what the US owes. As long as people accept as valuable the paper, the debt is discharged.

[netrin]

The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates.

The Treasury can always repay the debt, as long as the debt ceiling keeps rising.

Is this the same Iseree22 who said "The Fed doesn't cause inflation"? Whether you blame the supplier, the buyer, or the drinker, the fact is, this economy is drunk.

If you're talking about core CPI, then you are correct, the Fed has not increased non-food non-energy price inflation above pre-2008 levels. If on the other hand, you discuss its countering effect, then the Fed massively reflated the base money supply as higher aggregates collapsed. Do you believe the Fed can claim 'mission accomplished' and perform no more conversion of "one form of money(U.S Debt) for another form(U.S Dollar)"? If not, what effects will further Fed manipulation have on the economy? But if so...?

[Iseree22]

Your not getting it. The US doesn't "pay" anything. They discharge debts via tendering paper promises. It doesn't matter what the US owes. As long as people accept as valuable the paper, the debt is discharged.

Perhaps I'm wrong, but given U.S Treasuries are denominated in 'Reserve Promises'. If there are not enough 'reserve promises' in circulation, then that is a default.

[indio007]

Your not getting it. The US doesn't "pay" anything. They discharge debts via tendering paper promises. It doesn't matter what the US owes. As long as people accept as valuable the paper, the debt is discharged.

Perhaps I'm wrong, but given U.S Treasuries are denominated in 'Reserve Promises'. If there are not enough 'reserve promises' in circulation, then that is a default.

The only way to get a true default is to perform a notarial presentment and see get a certificate of protest for non-payment/non-acceptance. AFAIK T-bills and T-Bonds are all in electronic format now. The law has not been update to give the same type of rights and remedies as a signed  and/or sealed promise in writing.

[Aelfgar]

The US can never default. FRN's are not money. They are a promise to pay money. No one ever even attempts to collect so how can there ever be a default until people redeem their FRN's for lawful money?

U.S. v. Thomas 319 F.3d 640

Paper currency, in the form of the Federal Reserve Note, is defined as an "obligation[] of the United States" that may be "redeemed in lawful money on demand." 12 U.S.C. § 411 (2002). These bills are not "money" per se but promissory notes supported by the monetary reserves of the United States.

So where do I go to redeem my green food stamps for lawful money?  Yeah, good luck with that one.  Maybe Santa Claus, or The Tooth Fairy can redeem them for me...

I keep seeing claims that debt is money.  No, it is not.  If I borrow $100 from the bank with an unsecured loan, pay back $10 of the loan, and then declare bankruptcy because I spent my $100 on high living and fast women (i.e., I have not gained any physical assets from my $100) then $90 of the bank's money is gone.  Except that these days they aren't calling in that loan because they know it is worthless and the assets they can recover from me aren't worth much either so they keep the loan on their balance sheet and pretend it is still an asset.

If you think I am wrong explain it in terms a child would understand.  According to Einstein (my personal hero) if you can't explain it to a child you probably don't really understand it.

Here's a great story, I don't know anything about the author, but I think he has hit the mark with this one: Why We Are Totally Finished: http://www.financialsense.com/contributors/d-sherman-okst/why-we-are-totally-finished

[mikethebodacious]

I think to really understand the answer to this question one should ask "What is money?"  I think Bill Stills does a great job of covering that, but I also remembered this excellent audio clip that had some valid points:

http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

Their answer is that money is fiction, but I would say that currency is fiction and not money.  I would consider gold to be a currency AND a money, but the Federal Reserve Note is just currency since it has no intrinsic value other than toilet paper or kindling in the event of currency failure.  So in essence the FRN is fiction, it can be printed at a whim and can be exchanged for REAL money or commodities (that is where the scam lies).  That isn't to say that once the US defaults we will not have to trade commodity or other assets for the foreign debt being held.

I am pretty impressed with everyone's responses on this posting and have thoroughly enjoyed the discussion so far.  I think Bitcoin will succeed as a currency, mainly because everyone supporting it here is quite intelligent (forget the speculators).  It is just a matter of time before it catches on (we need decentralization around the globe).

[netrin]

Both of these resources are great:

@ http://www.financialsense.com/contributors/d-sherman-okst/why-we-are-totally-finished
The third bubble IMO is the bond market, and by extension fiat currency exchange and depreciation.

@ http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money
This makes the case for bitcoin without mentioning them by name. While bitcoins are incredibly abstract, they are a completely discreet, quantifiable money supply. They could become a standard asset.

I'd add this to the list, re: 2008:
http://www.thisamericanlife.org/radio-archives/episode/365/another-frightening-show-about-the-economy

[cbryant23]

What we've been learning in my business classes is it's always a possibility and the likeliness of it is next to immpossible and would take some catastrophic event for this to occur, but the market has to take alot of factors into consideration beyond just Americas ability to pay its debt.

[netrin]

What we've been learning in my business classes is that time travel is always a possibility and the likeliness of worm holes are next to immpossible and would take some catastrophic event for galactic implosion to occur, but the market has to take alot of energy, mass, and chiclets into consideration beyond just Americas ability to pay its debt.

Could you clarify that with commas, fewer pronouns, and perhaps take away information?

What about the collapse of BAC and the Fed's refusal to bail it out? Suppose interest rates went to say, oh I don't know 0.75%; What about 20%?

[ThePiachu]

Speaking of some enlightening information about money:

Money As Debt:
http://www.youtube.com/watch?v=Dc3sKwwAaCU

Probably one of the most accessible explanations of how money is created today (goldsmith's tale) and what is it really worth. It also lists some predictions as to what a good future currency should be, and Bitcoin seems to fit it quite well.

If you like it, check out part two at:
http://www.youtube.com/watch?v=rCu3fpg83TY&feature=related

[Iseree22]

If you're talking about core CPI, then you are correct, the Fed has not increased non-food non-energy price inflation above pre-2008 levels. If on the other hand, you discuss its countering effect, then the Fed massively reflated the base money supply as higher aggregates collapsed. Do you believe the Fed can claim 'mission accomplished' and perform no more conversion of "one form of money(U.S Debt) for another form(U.S Dollar)"? If not, what effects will further Fed manipulation have on the economy? But if so...?

The Federal Reserve only exchanges one form of money for another. It can't create 'new' money. Sure it can create new cash and purchase treasuries or other forms of government debt, but all forms of government debt function as a form of money. So when the Fed 'massively'(not!) reflated the money supply, all it did was print a whole heap of money and purchase U.S Treasuries. The net effect is very close to zero and has little if any effect on inflation. I'll repeat what I said before:

The amount of cash created by the FED in the U.S has increased by a factor of 3.8 but serious inflation has not occurred.

This is the equivalent of the BTC Central bank purchasing more BTC Treasuries in exchange for newly minted BTC Dollars. At the end of the day the amount of total money is exactly the same. If I was selling something and a customer only had BTC Treasuries would I accept BTC Treasuries as payment? Of course, eventually the BTC Treasury must be redeemed for BTC Dollars there is little difference.

And the base money supply was reflated by the massive deficit spending done via the stimulus package, and the bailing out of the banks. Although it would have been more effective to nationalize the banks like Sweden has done and given more cash to households.

Using the OP I'll show that the Quantitative easing done by the FED has had little effect upon the U.S economy. So the BTC economy has a banking crisis, and the BTC Central bank decides to rescue the BTC economy using Quantitative easing. They do this by purchasing a massive amount BTC Treasuries in exchange for BTC Dollars. But this does very little to stimulate the BTC economy, and BTC economists are scratching their heads trying to understand why this hasn't worked.

But some citizens argue that Quantitative easing does little, because although the FED has pumped a whole heap of cash into the economy, at the same time they have removed the same amount of BTC Treasuries. Therefore Quantitative easing is a waste of time. Instead more BTC Treasuries should have been created, and the money from the sales of BTC Treasuries could be used to employ more citizens. This could be potentially dangerous because if too many BTC Treasuries are created then inflation would occur.

Accidentally, some miners find a way to create more BTC Treasuries than what is usually allowed. They use the cash from the sale of the BTC Treasuries to purchase goods and services from the economy. When criticized by other Bitcoiners, they respond by arguing that they are 'stimulating the BTC economy'. Unknowingly these hackers are actually reinflating the BTC money supply and is helping to offset the deflationary effect of the BTC banking crisis.

It just so happens that there is a debate on the Bitcoin forums about the BTC debt ceiling. Many say that the BTC Central Bank has reinflated the BTC money supply, but the BTC Central bank has only had a minor effect upon the BTC economy. Rather it has been the deficit spending by the clever miners that has had the most effect upon the BTC economy. The sale of the additional Treasuries has added to the deficit, but provided the additional money to stimulate the BTC economy.

As Bitcoiners grapple with trying to understand this economic problem, will they realize that to decrease unemployment and return the BTC economy to its previous glory they must create more treasuries to purchase more goods and services from the BTC economy until core inflation becomes an issue?


The U.S Fed could commence another round of quantitative easing, maybe three times bigger, and it would have little effect upon the economy. Because all the FED does is swap one form of money for another.

[netrin]

I'm sorry sir/madam, I have read your post twice and I can not follow your analogy with BTC. Bitcoins have a relatively fixed quantity. You seem to be arguing that USD are also a fixed quantity to which any economist would object. But you certainly can not use BTC as a metaphor to back up your argument. To help me better understand your argument, when you refer to money, could you please specify whether you are discussing BASE, M2, M3 or higher aggregates? Would you please read what Ben Bernanke had to say in 2002 about money creation and tell us all how the chairman of the US Federal Reserve is mistaken.

If you're talking about core CPI, then you are correct, the Fed has not increased non-food non-energy price inflation above pre-2008 levels. If on the other hand, you discuss its countering effect, then the Fed massively reflated the base money supply as higher aggregates collapsed. Do you believe the Fed can claim 'mission accomplished' and perform no more conversion of "one form of money(U.S Debt) for another form(U.S Dollar)"? If not, what effects will further Fed manipulation have on the economy? But if so...?

The Federal Reserve only exchanges one form of money for another. It can't create 'new' money. Sure it can create new cash and purchase treasuries or other forms of government debt, but all forms of government debt function as a form of money. So when the Fed 'massively'(not!) reflated the money supply, all it did was print a whole heap of money and purchase U.S Treasuries. The net effect is very close to zero and has little if any effect on inflation. I'll repeat what I said before:

If a higher aggregate is collapsing and another party creates lower aggregates which had not previously existed to purchase the sold higher aggregates, that party has effectively prevented deflation of the higher aggregates while inflating the supply of the lower aggregate. If done with perfect finesse, there may be no net decrease in the higher aggregate. Since the higher aggregate represents the majority of total aggregates, one may say that the total money supply has not changed. However, if the party had not created liquidity there would have been massive deflation of the higher aggregates and appreciation of the value of the lower aggregates.

The amount of cash created by the FED in the U.S has increased by a factor of 3.8 but serious inflation has not occurred.

The cash (BASE, M0) is the result of selling off M3. If the Fed had not increased liquidity, the earth would likely have experienced the greatest deflation of the past century. I continue to claim that the RE-flation was an monetary inflationary measure to counteract deflationary deleveraging. Core CPI is a few percent while real CPI is in the teens. Food prices are inflating, energy is all over the chart, housing and finance are deflating. In general there is just a lot of volatility, but price inflation is not the issue of this thread. We are discussing monetary inflation versus debt default.

This is the equivalent of the BTC Central bank purchasing more BTC Treasuries in exchange for newly minted BTC Dollars.

I honestly can not follow any of your BTC analogy as either the premise is unsound/false, too sophisticated, or too abstract. Anyone could create BTC Treasuries but no one can quantitatively ease the base supply of BTC.

And the base money supply was reflated by the massive deficit spending done via the stimulus package, and the bailing out of the banks. Although it would have been more effective to nationalize the banks like Sweden has done and given more cash to households.

So are you agreeing with me? I have no comment about nationalizing the banks. But I think we are making progress.

Suppose I have a bicycle tire with a hole in it. If I add more air to the tire every few meters, then on balance I have kept the pressure constant. Though in detail the pressure is going up and down after each stimulus of air.

In my analogy, high pressure air is M3 which is trying to escape. The Fed (until this week) was the desperate cyclist reinflating the economy. The air that he pumped in was M0. But this can certainly not be called a zero-sum game.

[Tonka Branded Truck]

imho, well, no... not a possible thing

[Iseree22]

I'm sorry sir/madam, I have read your post twice and I can not follow your analogy with BTC. Bitcoins have a relatively fixed quantity. You seem to be arguing that USD are also a fixed quantity to which any economist would object. But you certainly can not use BTC as a metaphor to back up your argument. To help me better understand your argument, when you refer to money, could you please specify whether you are discussing BASE, M2, M3 or higher aggregates? Would you please read what Ben Bernanke had to say in 2002 about money creation and tell us all how the chairman of the US Federal Reserve is mistaken.

Thanks for reading it twice . I should have clarified in the OP and pointed out that the bitcoin 'debt-ceiling' is a self-imposed limit, implying that the number of bitcoins could become infinite. This is achieved by creating an infinite number of BTC Treasuries. Correspondingly, the BTC Central Bank purchases BTC Treasuries in exchange for BTC cash. Since the number of BTC Treasuries the BTC Central bank can purchase is infinite, then the amount BTC cash is also infinite. This relationship is dependent upon the 'debt-ceiling' being continually raised.

If you're talking about core CPI, then you are correct, the Fed has not increased non-food non-energy price inflation above pre-2008 levels. If on the other hand, you discuss its countering effect, then the Fed massively reflated the base money supply as higher aggregates collapsed. Do you believe the Fed can claim 'mission accomplished' and perform no more conversion of "one form of money(U.S Debt) for another form(U.S Dollar)"? If not, what effects will further Fed manipulation have on the economy? But if so...?

The Federal Reserve only exchanges one form of money for another. It can't create 'new' money. Sure it can create new cash and purchase treasuries or other forms of government debt, but all forms of government debt function as a form of money. So when the Fed 'massively'(not!) reflated the money supply, all it did was print a whole heap of money and purchase U.S Treasuries. The net effect is very close to zero and has little if any effect on inflation. I'll repeat what I said before:

If a higher aggregate is collapsing and another party creates lower aggregates which had not previously existed to purchase the sold higher aggregates, that party has effectively prevented deflation of the higher aggregates while inflating the supply of the lower aggregate. If done with perfect finesse, there may be no net decrease in the higher aggregate. Since the higher aggregate represents the majority of total aggregates, one may say that the total money supply has not changed. However, if the party had not created liquidity there would have been massive deflation of the higher aggregates and appreciation of the value of the lower aggregates.

Your right. During QE 1 the FED exchanged mortgage backed securities in exchange for dollars, which is inflationary. This results in the exchange of credit money(M3) in exchange for real money(M0-M2). However QE 2 was a simple swap of one form of money, Treasuries(M2) for cash(M1) which has no net effect upon inflation.

[hmongotaku]

Just imagine that 700 billion dollars we bailout... well around that time of year our trade deficit with china was 700 billion. So akin to Monopoly where we all agree to give everybody 700 billion monopoly money to walk across boardwalk this year. As for the banks and cars industry we basically admit we are just doing each other's laundry. In 1980s it was the S&L scandal, increase that money today and it's 700 Billion. So basically every 22 years we agree to give ourselves a BAILOUT! That's capitalism for ya!

[mikethebodacious]

Just imagine that 700 billion dollars we bailout... well around that time of year our trade deficit with china was 700 billion. So akin to Monopoly where we all agree to give everybody 700 billion monopoly money to walk across boardwalk this year. As for the banks and cars industry we basically admit we are just doing each other's laundry. In 1980s it was the S&L scandal, increase that money today and it's 700 Billion. So basically every 22 years we agree to give ourselves a BAILOUT! That's capitalism for ya!

Socialize losses and privatize profits, gotta love "capitalism"

[nosuchthing]

they will just print more money..

[soptik]

Until FED don't stop printing huge amount of new money and China don't stop buying US obligations there won't be big problem.

[qxzn]

Of course it's possible. All that is necessary is for the government to be unable to pay the next bill, and the federal reserve is unwilling to bail the government out.

I'm not saying that's how it would go down, but the question is whether or not it's possible.

With increasing political pressure to "Audit the fed" or "end the fed" in the US, it's a real possibility that the fed could be under too much political pressure (or be shutdown, replaced, etc.) to bail out the treasury.

It's always a good idea to be realistic about what is possible. Don't think that just because a thing has never happened before that it somehow will not follow the laws of physics. It can happen.

[netrin]

At nearly 0% interest, UST's are free money for the US gov. When interest rates are forced to rise, I think defaulting on UST would be a fascinating play. By the time that might be considered, investors the world over won't know which direction is up.

[hmongotaku]

shortest answer: http://www.brillig.com/debt_clock/

[mikethebodacious]

I think debt default is on it's way.  This Zerohedge article really puts things into perspective:

http://www.zerohedge.com/news/us-closes-2010-2011-fiscal-year-1479034032855715-debt-95-billion-jump-day-12-trillion-increase-

At the rate our government is spending money every month, we are going to reach a 100% debt-to-GDP ratio in another month or so.  Once countries hit that point it's a sinking ship.  The only way to sustain that ratio is to manipulate markets and force your citizens and banks to buy more debt like Japan (forgot the technial term for forced buying of bonds).  Sure we can print more money but since it's debt-based it will just accelerate the crash even faster.  The only solution is for our government to stop spending more money than it takes in, and I just don't see that happening.  We are headed for a financial/monetary crash the world has never seen the likes of.

[netrin]

There's nothing holy about 100% debt/GDP, it's only psychological, because debt is in absolute terms while GDP is annual. I would suggest rate of change of deficit/GDP as a more telling statistic. But even that is misleading because as GDP goes down so does tax revenue, all else being equal, deficits will necessarily go up. What should scare the shit out of Americans and all major economies is that the ratio of welfare recipients (old people) to welfare payers (young people) is rapidly expanding and will continue to do so for at least a generation. US budgets:

2011 revenue:$2.17    expen:$3.82    deficit:$1.65 trillion

2010 revenue:$2.381    expen:$3.552    deficit:$1.171 trillion

2009 revenue:$2.7    expen:$3.107    deficit:$1.4 trillion

2008 revenue:$2.7    expen:$2.9    deficit:$0.4548 trillion

2007 revenue:$2.57    expen:$2.73    deficit:$0.161 trillion

2006 revenue:$2.41    expen:$2.66    deficit:$0.2482 trillion



Source Wikipedia and http://www.heritage.org/research/reports/2010/03/the-2009-index-of-dependence-on-government

[hmongotaku]

good picture, that's why we raised the debt ceiling. I mean just give our country a fat credit card right... sorta like financing newer house every 10 years. Except that house is a few trillion dollars per years and never repaid. If we run out of money we can always refinance or mortgage off something to pay if the debt.

[Iseree22]

All you debt ceiling Nazis, why hasn't Japan defaulted with a debt of 198% of GDP ??

Does your country create its own money? Basically out of thin air right?
Then how can it run out of money?

[netrin]

All you debt ceiling Nazis, why hasn't Japan defaulted with a debt of 198% of GDP ??

Simple. Because the vast majority of Japanese debt is held by the Japanese people.

The US could immediately and surprisingly default on its foreign held debt, bail out the US banks, insurance companies, monetize social security, and probably still come out of it with a stronger US dollar.

[netrin]

that's why we raised the debt ceiling. I mean just give our country a fat credit card right... sorta like financing newer house every 10 years.

Todays testimony and interrogation today: http://www.c-span.org/Events/Fed-Chairman-Updates-Congress-on-Economic-Outlook/10737424526-1/

[Iseree22]

All you debt ceiling Nazis, why hasn't Japan defaulted with a debt of 198% of GDP ??

Simple. Because the vast majority of Japanese debt is held by the Japanese people.

The US could immediately and surprisingly default on its foreign held debt, bail out the US banks, insurance companies, monetize social security, and probably still come out of it with a stronger US dollar.

That is silly. By that logic, we could issue more debt and sell it only to Americans, and the problem is fixed. Also what % does it become a problem??

http://upload.wikimedia.org/wikipedia/commons/1/17/Estimated_ownership_of_treasury_securities_by_year.gif

The amount of owned by foreigners has barely moved over the last 15 years, why hasn't it been an issue before?


Then there is Canada, with 16.5% of total public debt held by Non-Residents. Canada has a public debt ratio of 84% of GDP, compared with America's 62% of GDP. Wouldn't Canada be in more of a debt crisis than America???

http://www.fin.gc.ca/dtman/2009-2010/DMR2010_ENG.pdf (Pg 23.)

[netrin]

I am in no way suggesting the United States defaults. I am only pointing out that comparison to Japan is absurd. If the Japanese government defaulted on its debt the entire nation would implode. It can also sustain huge debt with no inflation because the debt is held almost exclusively by a homogeneous nationalistic culture.

I think however that you can compare Japan of the past decade or two with the entire world today, but not any one nation, and most certainly not the United States.

Your graph proves my point. The debt is around $15 trillion. The US tax revenues are $2-4 trillion annually. If the Fed and foreign holdings evaporated, a portion of the remaining 25% could be monetized, and the US debt burden would be lower than high tax oil producing Scandinavia.

I do however believe it is a possibility that national debt defaults (and war) will become the norm during our generation. In this environment, the United States could join the shit party and come out of cleaner than ever.

[Iseree22]

I am in no way suggesting the United States defaults. I am only pointing out that comparison to Japan is absurd. If the Japanese government defaulted on its debt the entire nation would implode. It can also sustain huge debt with no inflation because the debt is held almost exclusively by a homogeneous nationalistic culture.

I think however that you can compare Japan of the past decade or two with the entire world today, but not any one nation, and most certainly not the United States.

What about Canada then?

With 16.5% of total public debt held by Non-Residents. Canada has a public debt ratio of 84% of GDP, compared with America's 62% of GDP. Wouldn't Canada be in more of a debt crisis than America???

http://www.fin.gc.ca/dtman/2009-2010/DMR2010_ENG.pdf (Pg 23.)

[kingkong12345678]

no way in hell
its all a public joke anyway
in reality the national treasure could pay off are debt 4000 fold.
Its just that some things are secret in America
Kong

[netrin]

What about Canada then?

With 16.5% of total public debt held by Non-Residents. Canada has a public debt ratio of 84% of GDP, compared with America's 62% [100+%] of GDP. Wouldn't Canada be in more of a debt crisis than America???

I don't see the comparison. Citizens holding debt doesn't cause crisis, it means that the nation can sustain a higher debt, and is less likely to default. Foreign money can flee much more easily than the citizens.

Look if you borrow and loan money within your own family, it takes a much greater pressure for you all to implode, but when you do everyone suffers. However, if outsiders, neighbors, or people you don't even know are giving you loans, they'll be quick to demand higher interest rates and drop you at the slightest hint of insolvency. The analogy applies fairly well to national debt.

And whose numbers are you quoting? Certainly not the IMF. I'm guessing your 62% figure excludes intra-government, namely Medicare and Social Security. US debt is accelerating. Canada has no deficit.

Code:

debt/GDP          2009     2010     2011
Canada          81.599   81.703   80.481
Japan          217.604  225.853  234.127
United States   84.259   92.715   99.324

Source: http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx

FYI: This is how Obama and Congress via the wars and populist hand-outs are fucking the American population harder than Bush:

[EvryIntl]

It's going to default one way or the other - directly or via inflation javascript:void(0);

The math just doesn't work.  However, for political reasons, default via inflation is more palpable - unless the populace catches on.  The very act of educating the populace about the inflation risk may, indeed, change the outcome.  Just look at current sentiment.  Everyone is anti-Fed.  This is very "deflationary" (as an Austrian, I use the term more in the vernacular).  At this rate, though I never would have thought it originally, Prechter may end up being right.

[netrin]

Deflationary because everyone is afraid to spend and afraid of bubbles. But I would not say that everyone is anti-Fed. Again, I submit http://www.c-span.org/Events/Fed-Chairman-Updates-Congress-on-Economic-Outlook/10737424526-1/ it's worth a listen. The only guy who was unappoligeticaly critical of Bernanke without acknowledging the short comings of Congress was Vermont geezer Bernie Sanders. If anyone is anti-Fed, it's for the wrong reasons. Traders complain that Ben is not injecting q easing. Most everyone else is in incoherent la la land.

[EvryIntl]

Deflationary because everyone is afraid to spend and afraid of bubbles. But I would not say that everyone is anti-Fed. Again, I submit http://www.c-span.org/Events/Fed-Chairman-Updates-Congress-on-Economic-Outlook/10737424526-1/ it's worth a listen. The only guy who was unappoligeticaly critical of Bernanke without acknowledging the short comings of Congress was Vermont geezer Bernie Sanders. If anyone is anti-Fed, it's for the wrong reasons. Traders complain that Ben is not injecting q easing. Most everyone else is in incoherent la la land.

I watched that update live...

I still subscribe to the notion that once everyone feels enough pain from asset prices cratering, businesses laying people off, homes dropping, bank runs occurring, etc that the Bernank - or his successor - will print.  They have no choice.  No politician will be left alive if all of the stops aren't pulled out and the money printed like no tomorrow.  There's a reason nations print.  The BIS playbook has been followed to a tee thus far.  I suspect we'll see some other form of QE (by whatever name) before the end of this year.  The alternative is to let the wealthiest, most influential people in the world get hung out to dry for the benefit of the unwashed masses.  It's never really happened before - I don't think this time is different.

[netrin]

I believe you are correct regarding politicians' weaknesses. However, what does make this time different (than say Weimar, Zimbabwe, Argentina, and thousands of others through history) is that USD supply is not actually paper. Debt can evaporate, but paper can not. Despite tripling M0 over the past three years, paper is still scarce while M3 contracts rapidly. But you could be right. If the flow of money stops, banks stop lending, unemployment doubles, M0=M3, yes, I am afraid the printing press will crank out paper.

[EvryIntl]

I believe you are correct regarding politicians' weaknesses. However, what does make this time different (than say Weimar, Zimbabwe, Argentina, and thousands of others through history) is that USD supply is not actually paper. Debt can evaporate, but paper can not. Despite tripling M0 over the past three years, paper is still scarce while M3 contracts rapidly. But you could be right. If the flow of money stops, banks stop lending, unemployment doubles, M0=M3, yes, I am afraid the printing press will crank out paper.

I agree with that - in theory.  But in reality, all currencies are a confidence game.  Loss of confidence implies a desire to move out of money, and that starts the velocity.  90% of dollars are outside of the US.  There will be no end to the money creation because banks are insolvent (not only illiquid).  We have seen some of the first signs this year and last as we see that the dollar hasn't rallied even with European debt problems.  If this truly is the big one, why is the dollar at sub-80 and falling from resistance?

This is BTC's opportunity.  People are moving away from dollars and looking for something else - look at the Swissie, commodities, etc.  At some stage, there will be a run for the exits.  IMO, the deflationist viewpoint doesn't really take into account human nature.  CBs will print - they have no choice.  Govts will spend - they have no choice.

[gewure]

without reading anything  i would suggest: NO.

but this NO equals another persons YES cause my NO means: the federal reserve will print money as much as needed to avoid the default, which will led to a super-high inflation, which will again make the currency less worth and again lead the federal reserve to print more money and so on.

the economy will like it, thought: EXPORTS EXPORT EXPORTS!

my conclusion:

default in classical sense: NO
default in sense of hyperinflation: YES

[gewure]

This is BTC's opportunity.  People are moving away from dollars and looking for something else - look at the Swissie, commodities, etc.  At some stage, there will be a run for the exits.  IMO, the deflationist viewpoint doesn't really take into account human nature.  CBs will print - they have no choice.  Govts will spend - they have no choice.

nice and true words, dear friend!

..one main reason, why i start to invest most of my spare money into BTC at the moment. (thought that equals less than 500€)
i simply consider it more secure than nearly anything else, since inflation is getting higher and higher, since gold+silber and stuff is to high to buy, since stockmarkets are out of money, bound to intransparent regulation and hardcore speculation from heavyweight to-big-to-loose banks..
to much volatility in every market.
to much inflation in every currency.
to much lobbying from lobbies iam simply not part of.

--> bitcoins can't be regulated. they represent the very first free market on earth. welcome in participating in it.

btw, captain obvious saves you: offcourse i am BULLish at this BTC prizes!!