patrick.net

Here is a question that none of the "our debt to gdp level is fine" crowd can answer. How will the US pay its debt when interest rates rise and how will it oay its unfunded liabilities? http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/10/18_Billionaire_Sprott_Asks_How_Will_People_Survive_Whats_Coming.html

smaulgld says

How will the US pay its debt when interest rates rise and how will it oay its
unfunded liabilities?

You never stop with the fear mongering and paranoia, do you? The government will pay it's debt the exact same way that it does now, or at any other time in the past.

Unfunded liabilities? That's the fear-mongering phrase that doom and gloomers use to imply that future payments/obligations aren't paid for, or budgeted for. Actually both are somewhat true because the budget for sometime in the future(5-20 years) and the revenue THEN hasn;t been recieved yet, along with the payment for the liabilities.

The "unfunded liabilities" nonsense is equal to saying that you missed your March 2018 house payment.

Hi upisdown and welcome back
Upisdown says:

I'm done with ya. Best of luck selling gold, I hope it works out for ya, and at least it's a legit way to make a living, even if the tactics are the predator-prey relationship type.

I guess the chinese are bluffing
http://www.dailymail.co.uk/news/article-2463136/US-debt-limit-default-mocked-China.html

Upisdown says
The "unfunded liabilities" nonsense is equal to saying that you missed your March 2018 house payment.

Not really - i don't count on paying my 2018 house payment by counterfeiting money and borrowing from the chinese

smaulgld says

I guess the chinese are bluffing

So what, their ownership of t-bonds will fall just as soon as the dollar flows and stockpiles diminish from us buying their junk. What else are they going to do with all the excess dollars?

Are the t-bond dealers required to paticipate in the bond auctions? Those t-bonds will be absorbed by others that buy them.

smaulgld says

Not really - i don't count on paying my 2018 house payment by counterfeiting
money and borrowing from the chinese

Really, counterfeiting? I think that the dollar and federal reserve are both legally and congressionally mandated part of our monetary system. Our monetary system is credit-based(and private banks/market dominated)and the Chineses choose to save in our currency(like numerous other nations)with the same opportinities as anybody else.

You claim that they aren't legal? And why would you want to go back to the 'golden rule' type of monetary system, whereas the people with all the gold rule, or make all the rules?

Upisdown says:What else are they going to do with all the excess dollars?

What they have been doing- diversifying OUT of the dollar and into gold and other currencies like I wrote in the original blog post

"Last week China entered into a $60 billion swap agreement with the European Central Bank with the intent of internationalizing THEIR currency."

"The dysfunctional monetary and fiscal policies of the United States are making its foreign creditors less comfortable lending money to it. China has been making arrangements to diversify its reserve assets away from the dollar. China recently has stepped up its acquisition of gold as either a hedge against its U.S. dollar reserves and/or to ultimately back its own currency by gold."
http://smaulgld.com/what-the-budget-deal-means-for-the-economy-real-estate-gold-and-silver/

Upisdown says Really, counterfeiting? I think that the dollar and federal reserve are both legal

I didnt say what the Fed does is illegal
What I wrote was in response to your analogy re the US unfunded liaility worry being like about how one might pay a future obligation, like a mortgage.
The way the US plans on paying future liabilities is by printing and borrowing
As an individual to pay my mortgage I cant print money as it would be counterfeiting and I dont have a credit line with the Chinese

smaulgld says

How will the US pay its debt when interest rates rise and how will it oay its
unfunded liabilities?

How did the government do it in the 1980's?

1970 to 2020: Interest Rates on National Debt

upisdown says

Really, counterfeiting? I think that the dollar and federal reserve are both legally and congressionally mandated part of our monetary system.

Why can't I have a printing press? I am legal as well and the credit I inject with my increased personal spending is only going to benefit the economy!

smaulgld says

What they have been doing- diversifying OUT of the dollar and into gold and
other currencies like I wrote in the original blog post

Again, so what. The Chinese are doing whatever is good for China, for whatever reason, of which nobody in the USA knows, but makes assumptions.

Nice chart
What happens to the cost of US interest payments when rates rise because the demand for treasuries drops and the fed had to print more money to buy what the chinese dont buy?

Upisdown says
Again, so what. The Chinese are doing whatever is good for China, for whatever reason, of which nobody in the USA knows, but makes assumptions.

Agree I wouldnt care except they fund 25 percent of all US spending
If they stop lending where do we get the money?

smaulgld says

The way the US plans on paying future liabilities is by printing and
borrowing
As an individual to pay my mortgage I cant print money as it would
be counterfeiting and I dont have a credit line with the Chinese

Yes, the Fed Res advances credit, and the government sells t-bonds to finace that credit, of which the private dealers get paid for their part of the transaction, and private parties get a VERY secure(at least until recently because of the teabag morons) albeit low rewarding(because of the very low risk)asset.

You just admitted that you can't run your personal finances like the federal government can, so why do you want the federal government to run their daily/monthly/yearly operations like you and be totally constrained by incoming revenue only????

smaulgld says

As an individual to pay my mortgage I cant print money as it would be
counterfeiting and I dont have a credit line with the Chinese

And you don't pay interest for that credit either, or would you? Not to mention the high risk for you versus the government.

smaulgld says

What happens to the cost of US interest payments when rates rise because the
demand for treasuries drops and the fed had to print more money to buy what the
chinese dont buy?

Again, what happened in the 1980's? The treasuries will succumb to market prices, and that whole mandatory participation thingy by member banks too.

Upisdown says "You just admitted that you can't run your personal finances like the federal government can, so why do you want the federal government to run their daily/monthly/yearly operations like you and be totally constrained by incoming revenue only????"

Because I dont believe in a fantasy world where a government can print and borrow as much as they wish without adverse consequences

smaulgld says

Agree I wouldnt care except they fund 25 percent of all US spending
If
they stop lending where so we get the money?

The last I saw was that the Chinese was the biggest foreign holder of treas., and it was about 11% of the total. Show me something more up to date if you have it, please.

Where did the money come from for the other 75% of the treas., Ronald McDonald?

Ill pull full chinese bond holdings later for you
Right now the chinese hold $1.3 trillion in US treasuries which is larger than the US annual budget

smaulgld says

Because I dont believe in a fantasy world where a government can print and
borrow as much as they wish without adverse consequences

Fantasy? You explain that to the MILLIONS of people and entities that buy TRILLIONS of dollars of treasuries daily/weekly/monthly.

They are ALL wrong and you, and only you, are right?

There is no way to down play the significance of china (and Japan) as creditors
Without their buying, holding and rolling over their US bonds the US faces much higher borrowing costs- most of which will go to pay off the exisiting chinese and Japanese bonds

smaulgld says

Ill pull full chinese bond holdings later for you
Right now the chinese
hold $1.3 trillion in US treasuries which is larger than the US annual
budget

Thanks, but the total dollar amount and proportion to the budget is immaterial, as to the total %age of all the treas.

Upisdown says "Fantasy? You explain that to the MILLIONS of people and entities that buy TRILLIONS of dollars of treasuries daily/weekly/monthly."

I take no comfort in the safety in numbers argument
Thousands got on the titanic believing the ship was unsinkable

smaulgld says

There is no way to down play the significance of china (and Japan) as
creditors
Without their buying, holding and rolling over their US bonds the
US faces much higher borrowing costs- most of which will go to pay off the
exisiting chinese and Japanese bonds

Are they truly the creditors, or are they buying an asset?

What do you call it if I or Goldman Sachs(or any hedge fund, pension fund, or 401ks) buys treas., is it still loaning money to the government?

Upisdown says
"Are they truly the creditors, or are they buying an asset?
What do you call it if I or Goldman Sachs(or any hedge fund, pension fund, or 401ks) buys treas.?"
Excellent question
Let's say the a creditor who lends money and gets a bond in return is both creditor and owner of an asset.

Owning an asset doesn't take his creditor status away
So lets say the bond is an asset. As an asset it must be valued.
If the par value of a bond is $1000 and it pays 1pct interest its easy to value the asset on one's balance sheet as being worth $1000+

If however the issuer becomes impaired and the repayment of interest in a timely fashion is called into question, or worse the repayment of principal, the value of the "asset" drops

When a credit asset becomes impaired the creditor/asset holder becomes far more of a creditor as he seeks to receive at least some portion of his money back

smaulgld says

Let's say the a creditor who lends money and gets a bond in return is both
creditor and owner of an asset.

But is the federal government really a creditor? The government is selling a marketable asset. Yes, in normal debt(asset) sales the issuer is a creditor, but does not have the ability to endlessly finance(sell treas) their operations because of the limited assets, but the government does.

Upisdown says
But is the federal government really a creditor? The government is selling a marketable asset. Yes, in normal debt(asset) sales the issuer is a creditor, but does not have the ability to endlessly finance(sell treas) their operations because of the limited assets, but the government does.

Yes they are a creditor and if you like they are selling an asset whose value is based on their ability to repay principal and interest

T-bonds unlike corporate bonds are not backed by anything other than the government's promise. If a corporation defaults you get a decent place in the bankruptcy line (unless you were a GM bond holder) to try and get some of your money back

If a government defaults you have no claim on its assets. You are 100 % out of luck. Just like the people who owned dollars and bonds issued by the confederacy- they lost 100pct

Treasury Nears End of Era, Redeems Highest Rate Bonds (Update2)
By Daniel Kruger and Vincent Del Giudice - January 15, 2009 16:04 EST

Jan. 15 (Bloomberg) -- The Treasury Department, with U.S. government bond yields near all-time lows, is close to lowering the curtain on an era when it paid the highest interest rates on record to borrow.

The Treasury is redeeming $4.5 billion of 13.25 percent bonds due May 15, 2014. That leaves only two issues from the series of callable bonds it sold beginning in the late 1970s, said Steven Meyerhardt, a spokesman at the Bureau of Public Debt in Washington. The early retirement of the 13.25 percent bond will save about $2 billion in interest.

The government began selling callable debt in response to yields that reached as high as 15.21 percent on the 30-year bond in October 1981, said William O’Donnell, U.S. government bond strategist at UBS Securities in Stamford, Connecticut, one of 17 primary dealers that trade with the Federal Reserve.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alUfiz5tqqew

So other than a huge gift to Wall Street, why did the govenrnment even begin selling treas(which led to astronomical spending by Reagan shortly thereafter)?

smaulgld says

Just like the people who owned dollars and bonds issued by the confederacy-
they lost 100pct

At least that affected the benefactors of the slavery/free labor. Screw 'em, for not fighting in a war for that, like those who did and had to compete against the slavery/free labor.

Upisdown says

"At least that affected the benefactors of the slavery/free labor. Screw 'em, for not fighting in a war for that, like those who did and had to compete against the slavery/free labor."

Yes but the real point was that when sovereigns dont pay the bond holder has no recourse
The result would have been the same with Lincolns greenbacks and war bonds had the union dissolved - they would have become worthless

Upisdown says

"So other than a huge gift to Wall Street, why did the govenrnment even begin selling treas(which led to astronomical spending by Reagan shortly thereafter)?"

Deficit spending made possible by issuing bonds didnt start with the obama adminstration or the Reagan one.
Not sure what you are asking or if you are making a point that I might have missed
Please clarify

smaulgld says

Deficit spending made possible by issuing bonds didnt start with the obama
adminstration or the Reagan one.
Not sure what you are asking or if you are
making a point that I might have missed
Please clarify

From the article above that I linked to it started in 1977.Why? It has just led to excessive and stupid spending, and apparently wasn't needed to help fund the government prior to that point.

smaulgld says

Yes buy the real point was that when sovereigns dont pay the bond holder has
no recourse
The result would have been the same with Lincolns greenbacks and
war bonds had the union dissolved - they would have become worthless

True, but the greenbacks were the legal money of the time, and things were complicated by counterfeiting, lack of monetary/policy controls.

These kind of blow the hyper-inflation argument out of the water, no?

Topic 6: Inflation and Interest Rates: Some Evidence

It is now time to take a look at the interest rate and inflation experience of a number of countries to see if the empirical evidence is consistent with the ideas developed in this lesson. Let us begin with the United States. Figure 1a plots the year-over-year rate of inflation (of the CPI), calculated on a monthly basis, and the corresponding annual yield or effective nominal interest rate on U.S. Government long-term bonds. Figure 1b plots the the realized real interest rate calculated by subtracting the actual inflation rate from the long-term bond yield.

http://www.economics.utoronto.ca/jfloyd/modules/evin.html

and:

Budget Deficits and Interest Rates: What Is the Link?

Two recent studies have measured the influence of budget deficits on interest rates. The first of these studies, by Thomas Laubach, finds a "statistically and economically significant" relationship between higher deficit projections and future long-term interest rates. According to Laubach's estimates, when the projected deficit to GDP ratio increases by one percentage point, long-term interest rates increase by roughly 25 basis points. A more recent working paper, by Eric Engen and R. Glenn Hubbard, found that when government debt increased by 1 percent of GDP, interest rates would increase by about two basis points.

The Laubach study implies that moving to a balanced budget would tend to reduce interest rates by about one percentage point; however, the Engen and Hubbard study suggests that interest rates would only fall by roughly a tenth of that amount. While recent research confirms there is a significant relationship between budget deficits and interest rates, just how much deficits affect interest rates is still being debated.

http://www.stlouisfed.org/publications/cb/articles/?id=874

upisdown says

From the article above that I linked to it started in 1977.Why? It has just led to excessive and stupid spending, and apparently wasn't needed to help fund the government prior to that point.

The issuing of bonds didn't start in 1977. Issuing treasury bonds has been a permanent feature of US finances.

What the article was pointing out was that during that time period the US had very high interest rates even on the 30 year note. The article was pointing out that the last of those bonds is being paid off.

The lower the rate of borrowing the more spending a private individual will make. Higher rates discourage spending and encourage saving.

upisdown says

True, but the greenbacks were the legal money of the time, and things were complicated by counterfeiting, lack of monetary/policy controls.

Legal or not if the union dissolved those green backs and government bonds would have become worthless.
The confederate money was legal during its period of existence but once they were defeated they "went out of business" and their money became worth nothing.

I think you understand the point I was making without confusing the union and the confederacy, that money and debt obligations are backed by nothing other than the full faith and credit of the issuer and have no intrinsic value.

Compared to corporate bonds(esp secured bonds) that are backed by the assets of the company, or gold or silver which have intrinsic commodity value.

upisdown says

just how much deficits affect interest rates is still being debated.

True
I don't purport to know the answer to that one.
The point of the original blog post above (did you read it?) was that the unnecessary threat of default made by the President, the treasury secretary, the democrats and the Republicans unsettled our largest creditors the Japanese and Chinese.

This is not good for the prestige of the US and the value of the dollar.

Keep in mind in our entire discussion above-that is all the US has going for it-the dollar and the treasuries are backed by NOTHING other than the ability and promise to pay.

In the last three weeks, the President, the Treasury Secretary and the heads of the Republican and Democratic parties made it clear that maybe we don't have that ability.

smaulgld says

that money and debt obligations are backed by nothing other than the full faith
and credit of the issuer and have no intrinsic value.

The US is what gives them the value, with a $16+ trillion economy. That's not peanuts. If that wasn't the case NOBODY or NO ENTITY would buy them.

smaulgld says

Compared to corporate bonds(esp secured bonds) that are backed by the assets of
the company,

The USA government doesn't have assets, along with the economic activity? That $16+ trillion GDP is what helps secure repayment of the government's debt, not magic dust or wishful thinking.

smaulgld says

Keep in mind in our entire discussion above-that is all the US has going for
it-the dollar and the treasuries are backed by NOTHING other than the ability
and promise to pay.

See my remark about the GDP, and congressionally mandated taxes.

smaulgld says

In the last three weeks, the President, the Treasury Secretary and the heads
of the Republican and Democratic parties made it clear that maybe we don't have
that ability.

No, after 42 attempts by the republican party to repeal a law without going through the normal legislative process, the republican party again tried to subvert the legislative process by throwing a temper tantrum and trying to tie the ability to pay the government debts and the accompanying process of paying for the already mandated operations of the government, together. It has nothing to do with ability, or even what, because of their own prior approvals of spending.

Stupid move by the republicans? YES, and they were willing to sink not only a big part of the economy, but the government as a whole as well. The republicans are 0-43 on their endeavors.