Redstate

The credit rating of every nation invested in the US would also fall in sinonomy. That would force the money back into the US, which would restore at least a portion of our credit rating.

"If this ain't a mess, it'll do until one shows up." -Sheriff Bell, No Country For Old Men

Nice to know there is someone here that has common sense. US Credit Rating isn't going to fall as long as we have a strong Military.

People all over the country dump money here because they know its safe. They know the Government isn't going to grab it. The only other place they will put large sums of money is in switzerland.

Watched it regularly, but I can only remember one call to the show. Somebody called in asking how they could profit from a U.S. Treasury default,

Its amazing how much off the wall stuff is out there.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Find someone who believes that such a thing is possible, and sell him a credit swap or put option that would pay off if it happened. The marvelous thing is, he'd think he was being smart.

These days, you can find a counterparty to buy or sell almost any kind of risk.

;-)

With an investment in can goods.

Thanks that made me laugh.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Safest investment you will ever make. You can also sell them the Golden Gate bridge. :o)

Just like the Ron Paul Survival Letter no doubt suggests.

"If this ain't a mess, it'll do until one shows up." -Sheriff Bell, No Country For Old Men

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

On the side we could sell catastrophic destruction of all life on earth insurance. With huge, guaranteed payouts.

"People all over the country dump money here because they know its safe. They know the Government isn't going to grab it."

The trend towards bigger government makes me wonder how long that will last.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

Would it not also increase the interest rates that the treasury has to payout?

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

...Financial Times that quoted someone from the Moody's bond rating agency as saying that US debt could be downgraded from its current top rating perhaps ten years from now. Correct?

I never found out where that story really came from or if Moody's was quoted correctly.

They know as well as anyone that US Treasury debt is free of what the market calls "credit risk" (meaning, the risk that the coupons, the principal, or both may not be repaid).

The Treasury backs its debt issues with the "full faith and credit of the US Government." This often-misunderstood term of art specifically means that the government will print money, if necessary, to pay its obligations.

Now of course, Treasury debt is subject to what is called "market risk." That's the risk that prevailing interest rates will rise, which reduces the value of already-outstanding debt.

That doesn't affect the "credit rating" of the United States, if such a term has any meaning at all. If rates do rise in the future, one expects that the Treasury will respond by issuing less total debt, shifting what it does issue leftward on the yield curve, and informing the President that it's time to raise taxes.

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When Gingrich and Rubin were playing chicken, I think in 95, I recall a scare that the legislature was going to force the government to default (or at least was using the Debt ceiling bill to remove some of Treasury's methods for avoiding default)and Gignrich shrugged it off saying something like the market would view a default as just another part of the give and take between Congress and the President.

I think it was S&P that time that warned they would ahve to lower the credit rating if the government defaulted.

"Treasury will respond by issuing less total debt, shifting what it does issue leftward on the yield curve, and informing the President that it's time to raise taxes."

Please correct me if I am wrong, but the treasury can only do that by printing money, which will create inflationary pressures (possibly massive ones). Ultimately, it is Congress that runs the deficits, and creates the debt. Moreover, I have seen nothing fromn Congress that indicates that it is interested in fiscal responsibility.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

I'm not entirely sure what you're asking here. To me, "deficit" in the Federal budget context simply means the difference between what the government spends and what it takes in, in any given year. The Treasury funds these shortfalls with debt issuances of various kinds. It's probably a more straightforward calculation than it would be with a business because the government basically does its accounting on a cash basis.

You're absolutely right when you point out that what is considered "debt" (a liability) by the government is considered an asset by the government's creditors. And of course they lend to the government for good reasons of their own.

Debt issuance is just a mode of finance. You do it when you have a reasonable expectation that you can earn a higher rate of return than the rate of interest you will pay.

This always gets me in trouble when it comes to public finance, because the government spends borrowed money on things that don't have easily-measurable rates of return. (National security and transfer payments to retirees, for example). I never feel sure that we're getting what we pay for.

On the other hand, there is another important point that I'm sure you're aware of. Modern portfolio theory, which guides essentially all investment activity around the world, requires as a mathematical necessity that there be a large and liquid source of risk-free debt.

That's the key role that US Treasury debt plays in global finance. (Other asset classes, such as top-rated corporate debt, can partially fulfill this function.) This is why (and I'm oversimplifying somewhat) there must always be a Federal budget deficit to some form.

You say "there must always be a Federal budget deficit to some form" but there hasn't always been a deficit. Didn't we have a surplus in 99/00? Also, even without the Treasury debt you still have LIBOR as a risk-free rate and that's what was taught to me as the risk-free rate in portfolio theory - we never used any tbill rates although I agree they could be used.

Also, upthread, you mentioned the various risks that could downgrade the US treasury credit rating and you didn't mention currency risk. Is all US treasury debt denominated in dollars? If so foreign lenders are exposed to currency risk.

We had a surplus running from somewhere in 1998 till somewhere in 2000. The reversion to deficit first appeared in tax collections in spring of 2001, which ran far below projections.

At that time, the big concern among policymakers was that the surpluses would cause the government to end up owning too many private assets. Since the government axiomatically creates no economic value (except indirectly through military power, if you care to stretch the point), surpluses sustained over time would have a strong negative effect on economic growth.

For a brief period (2001 till 2003 if memory serves), the Treasury stopped issuing the 30-year bond. That's the benchmark credit. LIBOR is a short-term interest rate, not an asset class. You can plug LIBOR into the portfolio equations, but to work in real life, you have to have a large, real asset behind it.

During the period when there was no on-the-run 30-year bond, investors generally substituted a basket of long-duration corporate credits.

You're right about the currency risk faced by foreign buyers of US debt. Years ago, there was talk of issuing Treasury debt denominated in yen but I'm not aware anything ever came of it. The Chinese essentially buy US debt in their own money since renminbi is near-pegged to the dollar. And the Treasury does issue "TIPS" bonds, which are inflation-indexed, much like the "gilts" you can get from the Bank of England.

If you're a foreign investor in US debt, then declines in the value of the dollar definitely erode the purchasing power of your coupon payments. On the other hand, a lower dollar could easily correlate with an increase in the market value of your debt.

That's because the biggest factor affecting the dollar's value is relative short-term interest rates. (Yes, I know that the rest of the yield curve doesn't necessarily rise and fall with short rates.)

This always gets me in trouble when it comes to public finance, because the government spends borrowed money on things that don't have easily-measurable rates of return. (National security and transfer payments to retirees, for example). I never feel sure that we're getting what we pay for.

I'm sure two dozen people could do doctoral theses on this subject, but my own quick-and-dirty review of the federal budget surprised me because it looked like the Congress actually paid attention to this issue. If you go through the various agencies looking for things that could arguably be called "investments" (capital projects like bridges, roads, etc.; human capital like education;) you'll find that their annual total closely approximates the average federal deficit over the last decade. Since money is fungible, it is not possible to say that any particular borrowed dollar was used to pay transfer payments or to buy an ambulance for Detroit. But it does look like an amount equal to the annual deficit is invested in things that could reasonably be said to pay a return.

Drink Good Coffee. You can sleep when you're dead.

You do it when you have a reasonable expectation that you can earn a higher rate of return than the rate of interest you will pay.

You can also do it when you have the expectation of future income unrelated to your use of the money, and you value the present consumption more. That's why it often makes sense for the young to borrow even if they're not using it for investment purposes.

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so it doesn't distort the data very much.

Here are the same figures deflated to 1990 dollars using the CPI annual averages:

1990 3.23
1991 3.52
1992 3.79
1993 3.99
1994 4.14
1995 4.27
1996 4.35
1997 4.41
1998 4.43
1999 4.44
2000 4.31

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the debt increased by one trillion in inflation-adjusted dollars even!

Note that most of the increase occurred during the height of Dem power, 1990-1995, with a compromising GHWB, Dem Congress and tax-signing Bill.

Poor GHWB- the voodoo economics were his!

Note on CPI- am not sure this is the correct deflator. The government doesn't eat. Corrodes, yes, but not eat. :>)

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In a strict sense, social security is not a liability beyond teh current year. The decicion to discontinue social security payments cna be made by teh legislature without violating any contractual obligations - only political promises.

We certainly need to reexamine our social security system and I would start by raising age limits and means testing payments (as politically unappealing as it will be) but when we talk about our future debt obligations we need to be honest and differnetiate between the debt we are obligated to pay and the funding decisions congress can choose to fix.