If needs their Treasury investments back…it would seem that the will have to print more money….true?
What is the affect on our recovery and devaluation of our currency?
The effect is terrible.
If you read history about large debt burdened societies, it rarely if ever follows through that future generations pay for the debts ran up by their forefathers. Nations usually always default or rescind / repudiate on their obligations. I imagine that some day in the future all these debt burdened nations will stand to claim that for the goodwill of the world that creditors should forgive huge gov’t debts in order to alleviate countries of their shackles. And to support this claim would be that the resulting goodwill will enable more future productivity and more wealth generation from/for all nations- which is better for all nations.
China will never get paid back by the US. If they felt they would ever need their treasury investments back then they should not have bought our bonds. The US gov’t is insolvent. The only thing it can do is roll over the debt into new bonds, while we even borrow more money by creating even more bonds.
Eventually the current run the US dollar is having will come to an end. Either the Fed will stop printing money to buy the bonds, allowing interest rates to rise, or they will continue to print money and destroy the dollar. Either Or. One or the other will happen.
For the next 4 years there will be no tax collecting surplus to pay any previously incurred debt. We only borrow more. Therefore today we, the people, are not paying any of the previously incurred debts of our forefathers. We haven’t been paying down this debt for 30 years. We have only been adding to this debt. Now Obama’s budget is the biggest spending budget on record, incurring yet again another huge amount of additional borrowing. The US gov’t is basically on a road heading towards a brick wall. Rather than slow down or pull over they have instead decided to speed up and aim for the wall.
That seems to be true. The greatest governmental debts I now of were never paid. The famous hyper inflation in Germany after WW1 was an attempt to do it, but that desperate action was taken only because they were under direct threat of total occupation if they didn’t try it. The Lend & Lease between US and UK turned into Give & Forget after WW2. The reconstruction debt of the DDR were canceled after riots. The huge debts of l’ancient regime in France probably were never paid after the revolution. And many dirt poor third world countries seem to have defaulted on their debts, which are huge for them. (Still, many text books call government bonds “risk free”!)
The US paid its WW2 debt though, and many countries, like Italy, have managed to hold their public debt rather constant at about 100% av GDP since decades now. Couldn’t Obama raise taxes with 12% of GDP (the size of the deficit now) during his term and have the debt flatten out at just over 100% of GDP in a few years, which has been the norm of Western Europe for decades? Huckabee’s 30% sales tax should do the trick (while of course keeping the income tax)![8o|]
Governments seem to have other motives with lending than to actually get paid back with interest. China has bought dollar in order to keep its currency exchange rate low, haven’t they? That has made them a competitive production country, while the purchasing power of Chinese workers has been kept low. They did it to industrialize. But if their phony savings in dollars collaps in value and their phony exchange rate is surrendered, I wonder how China will fare. I doubt there is any grand plan for the future of this. And the US has borrowed in order to make voters consume and be happy until next election (there’s always a next election). Politicians and special interests likes it as long as it holds. They will make their exits just before the stuff hits the fan.
And wouldn’t that make the debt even more unpayable and then they’d default like you described?
Which I suppose means hyper inflation, that the dollar looses so much value that it is no longer useful as money. People would even prefer barter.
So the debt will be written off or become worthless?
Since China’s currency is tied to the dollar, their government can inflate more if the US government inflates more. China isn’t really worried about getting repaid as it is about being able to inflate and dominate its own economy. Its purchase of US bonds may be entirely an inducement to get the US to inflate to pay off the debt.
It’s important to realize that the People’s Bank of China is basically the ONLY bank, both a central bank and commercial bank.
Not right now. To pay back China, the U.S. can just issue more bonds. It can keep offering them at a higher coupon rate until people buy them. However, the U.S. government will eventually exhaust all the world’s savings. At that point, no matter what coupon rate it offers, it will not be able to get anyone to buy the bonds, because no one will have any money left to buy them. At this point, the only way the U.S. government can pay its outstanding debt will be to start printing money. And it will do this, because if it does not, then it will not be able to get people to buy its bonds in the future.
So, eventually, yes, the U.S. government will have to start printing money to pay off the Chinese debt.
The effect will be hyper-inflation, food shortages, and price controls the world over, just like we have in Zimbabwe now.
It will probably also mean that the U.S. will have to start closing bases, bringing the troops home, and easing up on drug laws.
Lastly, it will hopefully mean an end to Keynesian economics and the idea that deficit spending is stimulating to an economy.
As far as I know, the problem with the T-Bonds will occur before they want their investments back. If the Chinese merely stop buying new T-Bonds, the yields will rise, this will correspondingly devalue their existing bond holding. At the moment, they are still buying albeit reluctantly.
I think the Chinese are still buying US gov’t bonds to buy some time. If they don’t buy them then the confidence in bonds could fall. Bond prices could fall and that would hurt their investment in bonds. Also, it would drive interest rates up for Americans and that would make our ability to borrow to consume Chinese products more difficult. Also, the US dollar could collapse and that means China could get fewer oil companies or mining companies with their US dollar. They see the US as very fragile right now and they need to nurse us long enough for them to find an exit. If they didn’t, their production economy wouldn’t have enough customers. They would collapse and the Chinese citizens could revolt & overthrow the gov’t.
Americans paying the Asians back by new printed money is a debt default. If an Asian goes to their field and takes their commodity, adds labor value to it, and then sends it to America for purchase then Americans can offer the Asian some form of exchange to secure the Asian wealth. The American should be producing some form of wealth in exchange. If the American borrows Asian money then consumes the Asian goods then the American needs to produce something of value to reimburse the Asian. Just printing money out of thin air and giving it to the Asian is not payment. No wealth has been created in the economy for the Asian to purchase with that new US dollar. To pay back the Asian the American needs to produce beyond his own consumption needs, take the surplus production and give it to the Asian to extinguish the debt owed to the Asian. American’s aren’t producing excess that the Asians can benefit from. American’s aren’t even producing enough to satisfy themselves. We need to borrow the wealth produced by others in order to be satisfied. To not default on our debts we need to Save (which = consuming less) and Produce more and sell it back to the Asians. Earn back our US dollars we’ve already exchanged to the Asians and then use that to pay back our debt.
As for raising taxes to extinguish the American debts… that would kill our economy. Raising taxes only further burdens the productive sectors/people of the economy and stunts or stagnates growth. When you tax the mechanisms that create savings (investment capital that can be used to grow businesses and production) you swipe the legs from economic growth. What we need is more than a 50% reduction in gov’t, a balanced gov’t budget, a major reduction in taxes and allowance for interest rates to rise to their natural level based on people’s time preference. This will get the American economy to start saving and investing in production and growth. Obama’s plan is unfortunately the exact opposite.
Would anyone here lend the government money for 10 years when the yield is 2.8%? Sooner or later, you would think that the bond yields will rise / the Chinese will stop buying (currently they are bailing their own economy out - investing in infrastructure etc. - the Chinese, I believe, have $2T just in savings), sure the Chinese will feel pain if/when the T-bonds devalue, but this could provide them with a massive opportunity to bail the US out - and at a huge cost i.e. not bonds or dollars, but strategic assests such as technology etc. Could this be worth more to the Chinese than restoring the manufacturing machine that made US consumer goods?
I will not buy any US t-bonds now. I stopped buying them in my 401k. Is this not patriotic? I’m taxed to pay the incurring debt without asking for any of it back. Bond holders are ancitipating at least some of it back. Who’s patriotic?
As for the Chinese bailing us out, it is in their worst interest to throw their good money after our bad. It’s not about the quantity of investment but the quality. They’re giving their wealth to us for us to squander to build bridges we don’t need, to digitize medical records we’ve always made due without, to go back to Afganistan and to invest in economic sectors dictated by our central planners - not the free market economy. None of this will lead to efficient productivity that a free market would do.
The Chinese would be better off investing their US dollars in natural resources, their own infrastructure and their own technology. Meanwhile allowing their currency to appreciate against the US dollar so their citizens can afford the products that their factories are producing.
When a nation borrows from itself (its own citizens), like say the Chinese, then it’s only a redistribution of the wealth and resources within that nation when the debts are paid back. When a nation like the US borrows from abroad its resources/wealth must flow out of the country in repaying that debt back. Just as the Asian wealth flowed out of their country into the US when they lent to us. American investment capital & resources flowing back to Asia will only impoverish Americans while they’re trying to get back to a sound ecomonic footing. It will only strengthen the already strong Asian bank accounts. Another reason I don’t forsee us paying them back.
When the debt bubble popped in the US in 2008-2009 the deflation in the money supply is a correction in the apparent fanthom wealth of the nation. It was all wealth based on debt - wealth based on a future promise someone else will pay (or create that wealth). With debt default comes wealth destruction. The Federal Reserve responds to reflate the money supply - but new money doesn’t create products or resources. It doesn’t replace the lost wealth. It only creates inflation. The Asians holding US dollars allows them to take part in our wealth destruction. As long as they keep buying our bonds they are sharing in our debt default and destruction of promisary wealth.
I would like to extend a thank you to the community for all of the informative answers.
Spideynw or anyone else for that matter… could you shed some additional light on this bit?
What Spideynw is talking about here is how bonds work as an investment and what determines the rate of return. When bonds are first issued they are done at an auction. People bid up the purchase price of the bond. Take something simple like a 3-month T-bill. Say the Treasury says it will pay any bond holder $100 at the end of the 3-month period to buy back the bonds. During the auction the bond purchase price may get bid up to $90/each. Therefore, the treasury only gets $90 for each bond but they have to pay back $100. The difference can be considered my rate of return. On my $90 I earn ($10/$90)*100% = 11%. Such a scenario would mean that short term interest rates are around 11%. When the Fed wants to artificially set the interest rates they will be a bidder in the market. They help bid up the price of bonds and actively buy the bonds like other bidders. In comparison, today the short term interest rates are less than 1%.
Once the bonds are issued to people the people can hold them until the maturity date (where they get paid back the $100) or they can sell them to anyone who wants to buy the bond from them. If interest rates fall because the Fed has said they are going to lower them, if bond prices get bid up to $95 then I can sell my bond and earn $95-$90 = $5 today instead of waiting for the US Treasury to buy it from me in 3 months.
As for the coupon rate, bonds with longer maturity dates pay you periodically like every 6 months. So you could have a yield of say 3% per year in payments for 20 years. If you bought a $100 bond then every 6 months you would get paid $1.50 for a total of $3 per year. That are your coupon payments. But again, those bonds are initially auctioned off and then actively traded on the secondary credit market so you can sell your bond at any time to someone else if you want.
If everyone wants to get rid of their bonds then they will likely sell them for prices lower than what they bought them at. Say I think the bonds are in a speculative bubble. Bond prices could fall and I see that the 3-month t-bonds are now trading at $85. If I had to sell my bond now I would loose money. I’m best off holding it for the entire term of 3-months. However, interest rates are now 100%x($100-$85)/$85=17.5%. This may drive demand for the bonds. If the gov’t issues new bonds then people will likely only bid the price up to $85 for the new bonds… but if no one has any savings to buy the bonds then the bond auction will fail because no buyers showed up.
On the same note, right now the long therm bonds (30 year bond) are only at like 3% interest return. This is below the rate of inflation and people who own these won’t want to hold them for 30 years. Some day when prices start to rise and the CPI index suggests price inflation is going up then people will start to sell their bonds for higher yielding investments. People will have to dump their bonds and people who bought bonds at only 3% yield will suffer a loss on their investment. Of course, they could hold it for 30 years but who wants to loan the gov’t their money for 30 years while earning a negative real rate of return when factoring in the rate of inflation.
I am not sure exactly which part you are referring to, so I will try my best. Bonds have coupon rates, not interest rates. But the coupon rate is pretty much just like an interest rate. I cannot remember the specific differences. My point is simply, the government can always offer a better rate of return on their bonds, than the stock market can ever hope to offer on its stocks. It can take money from people to pay its debt or just print the money. Companies have to earn their money. There is no way for them to compete with government bonds. When I say it is going to exhaust the world’s savings, I should say it will eventually exhaust the world’s savings as it pertains to what the world is willing to lend to the government. Eventually an equilibrium will be found where people will find just as good of rates of return on investments in commodities, foreign stocks, and cash holdings. Once this point is reached, where the government cannot find any buyers for its bonds, then it has to decide whether to default on its debt, which will make it even harder for it to get money. Or it can print the money to pay off its debt, which will lead to hyper-inflation. It can raise taxes, which will lead to revolution. Or it can cut spending. But politicians fear they will lose their jobs if they do that. My guess is they will choose to print money.
Is this what you were looking for?
The part that I found to be rather ambiguous concerned the proposed situation where the overall pool of world’s savings dried up leaving no investors for government issued bonds.
Spideynw, I am having a bit of difficulty reconciling these two statements:
The German government was obliged to pay its reparations in Gold marks, so inflating will not have allowed it to effectively forgo these, while it may have led to increased government control of society, and an increased (short term) ability to pay. The reason they printed was to allow the workers in the Ruhr to passively resist while not starving - i.e. they printed the money to pay for the survival of those passively resisting the Franco-Belgian-occupied Ruhr.
This got worse and worse, of course.
My point is that most investors are probably not foolish enough to put all their eggs in one basket, no matter what the promised rate of return. I could be wrong. The world may give the U.S. government all their savings. One way or another, we will get to a point where no one will lend the government anymore money. Either they will not have anymore to give them or they will just refuse to give them anymore.
I don’t think the world will “run out of money” and no longer be able to loan the US gov’t money. Money goes around and around in a circle. The debt just tallies up on the US gov’ts balance sheet. Eventually confidence is lost in the gov’ts ability to pay back the debt. As a result, the redistribution of wealth to the debtor never gets paid back to the creditor.
If Tim Geitner borrows $100 from Jones and gives it to a construction company to build a bridge, the money gets spent on concrete or steel. The construction worker or concrete company may decide to take their $100 received and buy a gov’t bond with it as an investment. Then the gov’t takes the same $100 (borrowed again) and gives it to the health care industry. The health care workers get paid with that money and they may buy gov’t bonds as part of their 401k portfolio. Then the gov’t takes the money again and gives it to someone else… But eventually people see how much debt the gov’t is racking up and they know the gov’t has to pay it all back. Gov’t has to raise this money by taxing. Only a healthy productive economy can afford such taxes, and taxing a unhealthy economy only prevents it from being able to grow and pay back such debts. Creditors (bond holders) start to get the feeling the gov’t can only pay back the debts by printing money. This will increase inflation and weaken the future purchasing power of the dollar. Interest rates will rise. Bond holders will be forced to either hold their bonds to maturity, where the inflation reduces their real rate of return, or they can sell the bonds before maturity at a price perhaps below purchase price, and take the loss immediately. This would make investors to just stay away from bonds all together and to instead invest in assets that may do well in an inflationary environment. No one wants to be a creditor (bond holder) if they expect inflation will increase, unless the return on the bond is sufficient to compensate for the reduced purchasing power of the future money due to the inflation. If people start to loose faith in the gov’ts ability to repay the debt and believe gov’t will resort to money printing then bond buyers will only buy bonds if the yield (rate of return) is sufficient to compensate for the expected rate of inflation. If they believe there will be hyper-inflation then I don’t see anyone wanting to buy any gov’t bonds, unless the yield (and therefore interest rates) are in the double or triple digits.
But isn’t that limit rather far away for the US gov, considering how countries such as Italy and Belgium for so long have carried a very much greater debt as share of their GDP, and that with drastically much higher taxes, than the US does even today? Isn’t the administration just “making use” of the large hitherto unused potential for increased public debt which they’ve inherited? Why would a public debt to GDP ratio of say 120% and a tax to GDP ratio of over 40% be worse for the US today, than it has been for several Western European countries throughout post WW2 history? Why couldn’t the US stay the current course of huge deficit, ever increasing monetary inflation, endless tax hikes and increased regulations for another decade or so, without more disaster for the dollar, than there have been disasters for francs and liras whose issuing states have done nothing but exactly that for many decades in a row?
Isn’t the US simply starting to conform to the since long established static Western European economic norm of unpayably large public debts, very high taxes and regulations beyond imagination?
And thanks to all who took their time to corrected my earlier misunderstandings here!
Wrong. It is about whether or not the rate of return is better than everything else one could invest the money into.
As to your explanation that money is circular, that is wrong as well. You are only looking at one side of the equation. Tim may borrow from Jones to help a construction company build a bridge, but the construction company has to pay off its debt so that Tim can pay off his debt. If all it does is build a bridge, but it is known that there is no income from it, then Tim would never lend the money to the construction company which means Jones would never have lent the money to Tim.
Which is what I predict the government will do. And all the money being given to the government is money that is not being invested in the private sector, where there is real wealth creation.
“But there is also a darker side to the current boom. It is to a high degree driven by the cheap-money policy of the Federal Reserve. And it is not just the American economy which rests on this shaky foundation. Most other economies in the world are also dependent upon the cheap money policies of the Fed. This is partly because the rest of the world has grown increasingly dependent upon the rising trade surplus with America created by the excess demand in America spawned by Fed policy and partly this is because the downward pressure on the dollar created by the low interest rates has made other central banks emulate the cheap money policy of the Fed in order to prevent their currencies from rising too rapidly in value against the dollar.”
My guess, is that their economies have survived because of the U.S. economy.
I could be wrong. But I believe both Peter Schiff and Ron Paul are predicting hyper-inflation, and my reasons given previously is why I think they are saying this.
Tim may borrow from Jones to help a construction company build a bridge, but the construction company has to pay off its debt so that Tim can pay off his debt. If all it does is build a bridge, but it is known that there is no income from it, then Tim would never lend the money to the construction company which means Jones would never have lent the money to Tim.
You’re assuming that Tim has determined building a new bridge to nowhere is what is in demand by the economy, and that borrowing to finance his endevor is something he sees as a profitable. My argument is that Obama has dictated that he wants a bridge built to nowhere (to create jobs) and it is gov’t borrowed money that is paid to Tim for this new bridge. This “stimulus” is the money spent by gov’t for the new bridge. Therefore Tim doesn’t have any debt to repay. He only receives the stimulus money to build the bridge.