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Author Topic: Is American Debt default really possible??  (Read 2925 times)
netrin
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September 21, 2011, 02:20:04 AM
 #21

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

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September 22, 2011, 09:02:37 AM
 #22

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.
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September 22, 2011, 11:11:35 AM
 #23

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%?

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September 22, 2011, 12:20:08 PM
 #24

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

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September 22, 2011, 02:13:02 PM
 #25

Quote from: netrin
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.

 Learn how modern money really works.  (http://alturl.com/e4hu5) Ctrl-F : 1. What is Money?

How can a State(Country) that creates its own currency run out of Money?? It can't.
netrin
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September 22, 2011, 02:58:36 PM
 #26

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.


Quote from: netrin
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.

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September 23, 2011, 08:52:57 AM
 #27

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

Iseree22
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September 26, 2011, 05:54:17 PM
 #28

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 Smiley. 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.

Quote from: netrin
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.

 Learn how modern money really works.  (http://alturl.com/e4hu5) Ctrl-F : 1. What is Money?

How can a State(Country) that creates its own currency run out of Money?? It can't.
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September 27, 2011, 02:13:20 AM
 #29

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!

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September 27, 2011, 07:44:50 AM
 #30

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" Wink

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September 27, 2011, 11:23:04 AM
 #31

they will just print more money..
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October 02, 2011, 12:54:30 AM
 #32

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.
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October 02, 2011, 06:42:05 PM
 #33

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.
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October 02, 2011, 07:03:27 PM
 #34

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.

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October 04, 2011, 06:31:49 AM
 #35

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

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October 04, 2011, 01:10:46 PM
 #36

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.

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October 04, 2011, 04:42:03 PM
 #37

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

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October 04, 2011, 08:38:34 PM
 #38

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.

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October 04, 2011, 08:50:33 PM
 #39

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?

 Learn how modern money really works.  (http://alturl.com/e4hu5) Ctrl-F : 1. What is Money?

How can a State(Country) that creates its own currency run out of Money?? It can't.
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October 04, 2011, 10:20:38 PM
 #40

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.

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