Do you think US treasuries are still safe?

[ziggy29]

I agree with the first part but how clear is the second. As has been continuously reported, if the debt ceiling is not raised the Treasury will not be able to make good on some obligations. That sounds like "default." It doesn't matter that we could avoid it if we don't. And everyone talks about a "brief" default as if that doesn't mean much of an impact. But, if there isn't much impact it won't be brief - why bother raising the ceiling in that case? On the other hand, if the doom predictions are correct and the economy is catapulted into a double dip no doubt Congress will raise the ceiling and the "temporary" default will end. But there is no guarantee that would undo the damage. It still amounts to a crap shoot with our financial well being.

This I don't understand. Seems like raising the debt ceiling and servicing the existing debt is (or should be) two separate issues. Just because I refuse to accept an increase in my credit limit doesn't mean I'll stop paying on what I've already charged. If these are somehow linked it would be an "only in Washington" moment.

 

[Nords]

Could be. But I don't recall fringe voices dominating the debate before.

You're not reading enough history books...

 

[antmary]

You're not reading enough history books...

Such as? I would very much appreciate one or two to start with, Nords.

 

[LARS]

Is it possible there could be a technical "default" for political reasons in the US? I suppose so. The level of political discourse is so screwed up in this country anything is possible.

BUT, and this is the key but, even if this does happen, the default WILL BE CURED! All interest will be paid.

So to have any discusion about payment of interest and repayment of principal on US govt. debt is crazy talk.

A discussion of hyper-inflation occuring in the US is a non-event as well.

On the other hand, the methodical, slow decline in "purchasing power" of the $ through "controlled inflation" is an entirely different matter. Indeed, this is a tried and true approach to US monetary policy.

 

[ziggy29]

Such as? I would very much appreciate one or two to start with, Nords.

Here's a hint: you can start with books about the Reconstruction after the Civil War, and that's far from the only era where radicalism ruled the day.

 

[ziggy29]

A discussion of hyper-inflation occuring in the US is a non-event as well.

Is it? It doesn't have to happen because of increased demand. It can also happen because of devaluation of the dollar. I don't see demand-based hyperinflation coming any time soon, but "inflating the debt away" and printing money to try to keep commerce moving is not out of the realm of possibility. And if that extra money supply has any velocity -- that is, if it actually gets injected into commerce instead of contributing to "hoarding cash" -- then it would definitely be inflationary. I'd contend that the primary reason the extra debt and liquidity the government has created in the last 2-3 years hasn't been inflationary is because that extra money supply has had very low velocity -- as often as not "extra cash" was used to put into savings or pay down debts, not to buy stuff that employs people.

 

[donheff]

This I don't understand. Seems like raising the debt ceiling and servicing the existing debt is (or should be) two separate issues. Just because I refuse to accept an increase in my credit limit doesn't mean I'll stop paying on what I've already charged. If these are somehow linked it would be an "only in Washington" moment.

Existing obligations are such that the debt is "scheduled" to go up significantly in future years. It isn't a matter of just stopping the purchases -- they have already been made in the form of obligations. The only way to avoid default while not raising the debt ceiling would be to immediately cut SS, Medicare and defense by a huge number. Of course, that would be a different kind of default.

 

[LARS]

... but "inflating the debt away" and printing money to try to keep commerce moving is not out of the realm of possibility.

As I said, this is possible; and, indeed, is a central plank of US monetary policy, BUT this is not hyper-inflation.

Now is hyper-inflation possible in theory? Absolutely. But my point is that the powers that be will not allow, nor is it in their interests to allow, a non-orderly highly rapid (i.e. hyper) deterioration in the value of the currency.

 

[haha]

But my point is that the powers that be will not allow, nor is it in their interests to allow, a non-orderly highly rapid (i.e. hyper) deterioration in the value of the currency.

Did the Weimar hyper-inflation occur because the German government decided to allow it?

I think you may be overestimating governmental power and wisdom.

Ha

 

[LARS]

Did the Weimar hyper-inflation occur because the German government decided to allow it?

I think you may be overestimating governmental power and wisdom.

Ha

Nope. Doen't think so at all. But feel free to worry about hyper-inflation in the US if you want to waste brain cells.

 

[ziggy29]

Nope. Doen't think so at all. But feel free to worry about hyper-inflation in the US if you want to waste brain cells.

I try not to worry about what I can't control -- I just try to consider that it might happen, and what countermeasures I can take that will help prevent me from being wiped out if it does. I'm not going to do something to protect against a 0.1% chance of a bad result if it means hurting myself 99.9% of the time, but if I can mount a prudent defense against a somewhat more likely (but still unlikely) result, why not?

 

[haha]

Nope. Doen't think so at all. But feel free to worry about hyper-inflation in the US if you want to waste brain cells.

I have plenty, so no problem.

But, perhaps you realize that you did not speak to my comment, which was only that I doubt governments must "allow" hyperinflation for it to happen. I said nothing about the likelihood of hyperinflation is the US. less still about my worry or lack thereof about this.
Always easier (and much less useful) to make fun of what someone did not say, than to try to address what they did. On the face of it, if you mean what you said “nope, don’t think so at all”, then it seems odd to think that the US government must allow hyperinflation for it to happen.

Ha

 

[LARS]

I try not to worry about what I can't control -- I just try to consider that it might happen, and what countermeasures I can take that will help prevent me from being wiped out if it does. I'm not going to do something to protect against a 0.1% chance of a bad result if it means hurting myself 99.9% of the time, but if I can mount a prudent defense against a somewhat more likely (but still unlikely) result, why not?

I agree 100% with this approach. Indeed, I spend way too much time analyzing outlier situations. Hyper-inflation and US default just are not worth spending much brain power on.

Full disclosure: I'm not a believer in gold as a currency alternative. To me it is the greater fool theory at work. So you might say I don't get it...

 

[LARS]

I have plenty, so no problem.

You obviously did not mis-spend your youth taking drugs or alcohol if you can make that statement with conviction!

 

[FIREd]

Clearly the bond market does not worry about the US defaulting on its debt. Bond yields have increased tremendously in Greece in response to a possible default. In the US, bond yields have come... down.

The way I see it, a default would be very damaging to a lot of generous political contributors. They will apply the right amount of pressure to make sure it doesn't happen.

 

[HFWR]

You obviously did not mis-spend your youth taking drugs or alcohol if you can make that statement with conviction!

Who said it was misspent?

 

[M Paquette]

Clearly the bond market does not worry about the US defaulting on its debt. Bond yields have increased tremendously in Greece in response to a possible default. In the US, bond yields have come... down.

The way I see it, a default would be very damaging to a lot of generous political contributors. They will apply the right amount of pressure to make sure it doesn't happen.

Bond rates won't reflect the broader market while we have QE and this sort of activity:

[FONT=&quot]New York Fed purchases $6.409 billion in Treasury coupons [/FONT]

Here they bought almost the entire issue of this note
912828QP8 T 01.750 05/31/16 5,955,000,000

Once the open market starts bidding on Treasuries we'll have a better picture.

Hey, maybe the Congresscritters just want to help out the widows and orphans with higher interest rates? It's hard to quantify crazy.

 

[GaryInCO]

it seems odd to think that the US government must allow hyperinflation for it to happen.

Exactly right, Ha. The govt didn't intend for the Great Depression to happen, or the Great Recession, or stagflation in the 70's, or any of a hundred other economic nasties. They just don't have any good way to control it -- especially when they're making idiotic policy decisions (e.g. massive deficit spending) that drive the economy in a bad direction.

The Weimar and Zimbabwe governments didn't intend for hyperinflation to happen, either. But when you try to paper over your bad policy decisions, when you try to print mountains of money to pay for your profligate spending, that's what tends to happen.

Clearly the bond market does not worry about the US defaulting on its debt. Bond yields have increased tremendously in Greece in response to a possible default. In the US, bond yields have come... down.

It's a "lesser evil" thing. While the US economy is in a bad way and heading in a seriously bad direction, it looks a whole lot better than Greece. People perceive US debt as a much safer risk than Greek debt. That doesn't mean it's safe.

 

[Independent]

The way I see it, a default would be very damaging to a lot of generous political contributors. They will apply the right amount of pressure to make sure it doesn't happen.

To a certain extent, this is my reason for being comfortable with Treasury debt.
It's not only the bonds they hold directly, but also the contagion effects on their other assets.

 

[antmary]

It's a "lesser evil" thing. While the US economy is in a bad way and heading in a seriously bad direction, it looks a whole lot better than Greece. People perceive US debt as a much safer risk than Greek debt. That doesn't mean it's safe.

Thanks for the comment, Gary,
Regarding your concerns, how would you diversify out of US treasuries?

 

[FIREd]

It's a "lesser evil" thing. While the US economy is in a bad way and heading in a seriously bad direction, it looks a whole lot better than Greece. People perceive US debt as a much safer risk than Greek debt. That doesn't mean it's safe.

Did I say treasuries were safe? That's funny, because I think they carry plenty of risks (TIPS represent less than 5% of my portfolio and I own no nominal treasuries). Impending default is not one of those risks, IMO. The US carries a very serviceable amount of debt at this juncture and defaulting in the near future would be absolutely ridiculous.

 

[DoraM]

I am strongly considering 100% TIPS in a laddered format if the real rate gets to 2.25%. I can save enough such that my SWR would be equal to the real rate and I could never have to look at firecalc or pretty much any market condition ever again (or at least for 30 years).

Ok, maybe 99.99% TIPS and 0.01% guns and ammo, as the latter would definately be needed in the case of a US default.

 

[haha]

Did I say treasuries were safe? That's funny, because I think they carry plenty of risks (TIPS represent less than 5% of my portfolio and I own no nominal treasuries). Impending default is not one of those risks, IMO. The US carries a very serviceable amount of debt at this juncture and defaulting in the near future would be absolutely ridiculous.

I believe people oversimplify this problem. Once the world comes to accept that what they will get back will be worth very much less than what they put in, both the dollar and the bond quotes will plunge. It could happen abruptly, or it may not happen at all if credible steps are taken.

It's not like everyhing is fine and dandy and all of a sudden Mr. Geithner says "Sorry folks, no interest this period".

Ha

 

[brewer12345]

Thanks for the comment, Gary,
Regarding your concerns, how would you diversify out of US treasuries?

Iraqi dinars.

 

[FIREd]

I believe people oversimplify this problem. Once the world comes to accept that what they will get back will be worth very much less than what they put in, both the dollar and the bond quotes will plunge. It could happen abruptly, or it may not happen at all if credible steps are taken.
Ha

This is indeed one of the risks I think treasuries carry. Treasuries have enjoyed very high investor confidence for decades, and playing games could easily undermine that confidence. And we have seen that, in the case of Greece, once investor confidence goes it's a death spiral.