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What If the U.S. Treasury Defaults?

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  • What If the U.S. Treasury Defaults?

    http://online.wsj.com/article/SB1000...ostpop_emailed

    We're there. I don't know whether the markets give us three years or four years or five years, but we're there. We're not going to be having this conversation in 16 years. We're either going to solve it or we're going to find ourselves being Greece somewhere down the road.

  • #2
    Re: What If the U.S. Treasury Defaults?

    It sounds like the last hand of this poker game will be delayed until early August.

    Or even indefinitely. Spending cuts? Tax hikes for the rich? Why settle this before the election when it's what you're planning to run on?

    Galbraith's comments May 5th...

    http://prospect.org/cs/articles?arti...ir_money_back#

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    • #3
      Re: What If the U.S. Treasury Defaults?

      The Druckenmiller interview seems to be part of the supporting cast for entitlement spending cuts.

      The reality is that the US never has to technically default - since it can print its own money, there is no need whatsoever to 'delay interest payments' or 'failure to produce dollars in return for Treasury paper'.

      It doesn't even have to do this illegally: the Fed, not officially part of government, can (and has) printed money to buy Treasuries outright. The Fed balance sheet isn't part of the 'federal debt limit'.

      Greece doesn't have this luxury: as part of the euro zone, it cannot easily create massive quantities of euros in order to drown its debts in cheap paper.

      Nor are Greek significant debts officially owned by the ECB as Ireland's are.

      As for Galbraith - everything he says is technically correct.

      The Chinese aren't going to sell their Treasuries though - it is the best way for them to nullify a 'War on Terror' campaign against them.

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      • #4
        Re: What If the U.S. Treasury Defaults?

        sounds like the treasury is taking a page out of the illinois play book, by not funding their pension obligations.

        One thing about the fed printing money to solve the problem bothers me. Dollars are the fed's product. They would
        be cheapening their product. That's what all their member banks have in the their vaults, (both paper and electronic).
        If you blow up the dollar don't you blow up the banks holding them?

        Or maybe... a resulting high inflation, means that the banks can foreclose on their loans, and thus take possesion of
        real assets.

        Seems like a no win situation. I don't know what the tipping point of when the dollar would go into free fall caused by more
        QE/ZIRP? Additionally because of the treasury decreasing their duration, and many expenses tied to inflation adjusted items, such as ss, and medicare benifits, material purchases, etc. A jump in inflation means a jump in spending by uncle sam. Would this lead to an inflationary spiral? The Volker option of raising rates to the teens is not an option with the current gvt debt load and short duration. Maybe gvt spending is the new new wage / inflation spiral. After all
        fed/state/local spending is now roughly 50% of GDP.

        The market is not taking any of this default new seriously. T rates moving down again today.

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        • #5
          Re: What If the U.S. Treasury Defaults?

          Originally posted by c1ue View Post
          The Chinese aren't going to sell their Treasuries though - it is the best way for them to nullify a 'War on Terror' campaign against them.
          Maybe, but the value of the bills they hold diminishes every time the Fed/Treasury prints more money. After a period of time the Treasuries they hold will have little real value left. I would think the Chinese would be smarter than to sit on a depreciating asset until its value falls to almost nothing....

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          • #6
            Re: What If the U.S. Treasury Defaults?

            Originally posted by brent217
            Maybe, but the value of the bills they hold diminishes every time the Fed/Treasury prints more money. After a period of time the Treasuries they hold will have little real value left. I would think the Chinese would be smarter than to sit on a depreciating asset until its value falls to almost nothing....
            You're missing the point.

            If all China gets by holding $1T or so of Treasuries is nullifying the US military - it is cheap at the price.

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