Isn't anyone leary of our government defaulting with our 8.5+ Trillion deficit?

[Cut-Throat]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

I believe the deficit has already been cut in half to about $250 billion from it's peak of $521 billion (FY2004). Still has a ways to go.

You make it sound like this is a good thing. The only reason it has been cut in half is that FY2004 was about 10 times too much! - So now, when it is only 5 times too much, we should celebrate it !

 

[d]

I am guessing that the problem is the promised social security and medicare benefits

we've been promised neither soc.sec. nor medicare benefits ... both are dependent only on the whims of congress. it is, of course, not likely that either would entirely disappear, but one should recognize both programs for what they are, not what one would like to think they are.

 

[WanderALot]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

You make it sound like this is a good thing. The only reason it has been cut in half is that FY2004 was about 10 times too much! - So now, when it is only 5 times too much, we should celebrate it !

I don't think it's a good thing, that's why I said: "Still a ways to go". Regardless of revenue increases, if the spending doesn't get under control, it won't matter. The same applies to CA's state government which started spending like crazy during the dotcom era.

I believe the deficit has already been cut in half to about $250 billion from it's peak of $521 billion (FY2004). Still has a ways to go. I don't expect to see fiscal restraint anytime soon from either party.

EDIT: Grammer

 

[sgeeeee]

we've been promised neither soc.sec. nor medicare benefits ... both are dependent only on the whims of congress. it is, of course, not likely that either would entirely disappear, but one should recognize both programs for what they are, not what one would like to think they are.

While any legislation can be changed at any time in theory, I suspect there are far more legislators who would want to distance themselves from such a statement than would be willing to embrace it. A 70 year history of Social Security paying benefits is considered a promise by most American voters.

But the real point about the tabulated debt-to-GDP ratio is more important. If people want to look at that table and conclude that there is no problem with our current deficit, they need to admit that they are implicitly saying that there is no problem as long as we are willing to screw future generations out of both Social Security and Medicare benefits. The support they get from American voters will drop signficantly when they add that proviso.

 

[justin]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

It depends on what they considered in that debt number. I am guessing that the problem is the promised social security and medicare benefits that are not included in debt.

SG,

I think the $8.x trillion dollar debt does include the amounts owed from the general fund to the SS and medicare trust funds.

The CIA world factbook I linked to states the US debt is $8.837 trillion (30 June 2005 est.). It further states the US GDP is $12.49 trillion (2005 est.). This gives me a debt-to-GDP ratio of 70%, but it's close enough for goverment work to 65% that they calculated.

The Bureau of the Public Debt (what happens if we pay off all our debts?!), a subentity of the US Treasury Dept. lists the "public debt" at $4.9 trillion (this includes bills, bonds, tips, savings bonds, etc). Intergovernmental holdings debt, at $3.7 trillion includes the SS and medicare trust fund debt. That totals to $8.6 trillion.

I have to go along with what other posters have said - accept the risk of default for what it is, and diversify into other asset classes to prevent against credit risk/default/slow devaluation. Buy unhedged foreign stock or bond mutual funds. Done.

 

[Running_Man]

Sure, US government bonds might default. So make sure not to put all your eggs in that one basket.

I would like to know what investment other than gold will hold up OK if US govermment bonds default. The stock market in that case will be down 75-80% and insurance companies will be unable to meet their annuity payments. Most other foreign governments holding the debt would be crippled as well, it would be extrodinarily ugly if this were to occur and other than gold/silver you will not be able to diversify away this risk. Of course that is what makes this occurence to be so unlikely to occur as goverments will do everything to avoid.

 

[samclem]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

As has been said in other areas--if things get that bad, gold may not be worth much, either. It might be more useful to have something you can eat, shoot, or that your car can use for fuel. It's not gonna get that bad.

 

[bpp]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

Sure, US government bonds might default. So make sure not to put all your eggs in that one basket.

I would like to know what investment other than gold will hold up OK if US govermment bonds default. The stock market in that case will be down 75-80% and insurance companies will be unable to meet their annuity payments. Most other foreign governments holding the debt would be crippled as well, it would be extrodinarily ugly if this were to occur and other than gold/silver you will not be able to diversify away this risk. Of course that is what makes this occurence to be so unlikely to occur as goverments will do everything to avoid.

There is always a scenario bad enough that you can't protect against it. On the other hand, I don't necessarily believe that if the US defaulted on its debts that the whole world would have to come to a stop. It would make a mess, sure, but I suspect that the rest of the world would recover soon enough. And remember, the goal is not to make a profit in this scenario, it is just to survive.

The real problem you might have is if your foreign assets are all held through US brokerages; if the US instituted Argentinian-style currency controls, you might not be able to access your foreign holdings even if they have retained some value, until well after the crisis had passed. This is when you might want some gold, guns, and a deep-freeze to store your self-hunted venison. Alternatively, the approach I use is to have brokerage accounts in two different countries, with minimal cross-holdings between the two. But this option is not readily available to most.

 

[bpp]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

I wrote:

This is when you might want some gold, guns, and a deep-freeze to store your self-hunted venison.

Actually, more soberly, one could look back at the numerous instances of default or hyperinflation in the past century to see what would really have been useful. I'm not sure guns and gold were called for in most instances, though foreign currency (in the form of cash bills) probably proved useful in most cases. Maybe a little stash of Euros in the back of the sock drawer would provide some cheap comfort?

 

[AltaRed]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

What surprised me about the chart was Canada. Canada's national debt is listed as 69% of GDP, slightly higher the US. I figured that Canadians have been paying down their debt since their economy has been doing really well?? Or is that just in Alberta?

I think the devil is in the details on what is included I imagine. I looked up Canada because I knew 60+% was way too high. This link Canada's Fiscal Progress states a number cited a lot more often at 38.7% of GDP in 2004-2005 and I believe it is under 35% now.

FWIW, Alberta paid off its net debt in 2005.

 

[JohnEyles]

I would like to know what investment other than gold will hold up OK if US govermment bonds default. The stock market in that case will be down 75-80% and insurance companies will be unable to meet their annuity payments. Most other foreign governments holding the debt would be crippled as well, it would be extrodinarily ugly if this were to occur and other than gold/silver you will not be able to diversify away this risk. Of course that is what makes this occurence to be so unlikely to occur as goverments will do everything to avoid.

If things were that bad, it's reasonable to ask if gold held in something like the
GLD ETF would be worth much. Maybe it'd need to be bullion in your well-fortified
house ?

 

[Craig]

Precious metals would do well in a default / dollar hyperinflation, by definition ... you would view them in terms of their dollar value per ounce. Of course, this would work great for paying off the mortgage and other debt ... fixed dollar obligations. Adequate for buying consumables ... but since every other tangible asset would be worth more in "dollars", you would roughly hold your own, not prosper per se. [A few gold and silver coins are easy to put away, though the timing is rough right now.]

I always get a kick out of those on this board who trivialize any investment in precious metals. I suppose they've never looked at a chart of VGPMX ...

Government debt and budget deficits are misunderstood so often. I have concerns, but it doesn't keep me up at night. The long term pandering to the AARP, etc. with SS, medicare and especially the recent prescription drug benefits concern me most. Eventually we may spend ourselves into an entitlement situation where we cannot pay for an adequate defense, and that could make for a very uncomfortable retirement.

All you can do is diversify / hedge, and speak your mind politically / vote.

 

[Delawaredave]

I would like to know what investment other than gold will hold up OK if US govermment bonds default. The stock market in that case will be down 75-80% ...

This would be a meltdown that you shouldn't try to cover yourself for - there's more risk to damaging your portfolio growth making radical changes guessing on meltdown.

However, I do like fairly aggressive diversifying into non-dollar based international funds.

I think the dollar is "more at a top than a bottom" - and stands to slide to rebalance the trade deficit.

But -- Warren Buffet has believed dollar demise for a bunch of years, took enormous Forex positions, and I don't think it has panned out so far...

 

[rmark]

There is no need for the U.S to default as long as the Treasury has printing presses. Hyperinflation and the resulting high interests rates indicate a government going bankrupt. If you are worried, hold a bag of old silver dimes as insurance.

 

[JJac]

For empires that have declined in the past, e.g. Rome, what debt to GDP ratio did they have before it all went to hell? How about the USSR?

 

[Nords]

But -- Warren Buffet has believed dollar demise for a bunch of years, took enormous Forex positions, and I don't think it has panned out so far...

He did well in 2004-5 and gave some of it back in 2005-6.

From page 18 of the 2005 annual report: "My views on America’s long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged. My conviction, however, cost Berkshire $955 million pre-tax in 2005. That amount is included in our earnings statement, a fact that illustrates the differing ways in which GAAP treats gains and losses. When we have a long-term position in stocks or bonds, year-to-year changes in value are reflected in our balance sheet but, as long as the asset is not sold, are rarely reflected in earnings.
For example, our Coca-Cola holdings went from $1 billion in value early on to $13.4 billion at yearend 1998 and have since declined to $8.1 billion – with none of these moves affecting our earnings statement. Long-term currency positions, however, are daily marked to market and therefore have an effect on earnings in every reporting period. From the date we first entered into currency contracts, we are $2.0 billion in the black.
We reduced our direct position in currencies somewhat during 2005. We partially offset this change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally. Charlie and I prefer this method of acquiring nondollar exposure. That’s largely because of changes in interest rates: As U.S. rates have risen relative to those of the rest of the world, holding most foreign currencies now involves a significant negative “carry.” The carry aspect of our direct currency position indeed cost us money in 2005 and is likely to do so again in 2006. In contrast, the ownership of foreign equities is likely, over time, to create a positive carry – perhaps a substantial one."

 

[bosco]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

the long term pandering to the AARP, etc. with SS, medicare and especially the recent prescription drug benefits concern me most. Eventually we may spend ourselves into an entitlement situation where we cannot pay for an adequate defense, and that could make for a very uncomfortable retirement.

All you can do is diversify / hedge, and speak your mind politically / vote.

the long term pandering to neocons and evangelicals, along with pork to defense contrators and government corruption concern me most. Eventually we may spend ourselves into a deficit situation where we cannot pay for social security and medicare, and that could make for a very uncomfortable retirement.

All you can do is diversify / hedge, and speak your mind polictically / vote.

 

[Craig]

Thank you, Nords.

 

[samclem]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

the long term pandering to neocons and evangelicals, along with pork to defense contrators and government corruption concern me most. Eventually we may spend ourselves into a deficit situation where we cannot pay for social security and medicare, and that could make for a very uncomfortable retirement.

All you can do is diversify / hedge, and speak your mind polictically / vote.

Which of the tasks below is specificaly mentioned as a role of the federal government in the US consitution:
a) National defense
b) Free health care
c) Assuring that citizens have a comfortable retirement

 

[bosco]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

Which of the tasks below is specificaly mentioned as a role of the federal government in the US consitution:
a) National defense
b) Free health care
c) Assuring that citizens have a comfortable retirement

d) Promote the general welfare

 

[Craig]

Yes, that's the one they always twist use, samclem ... :

 

[bosco]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

Yes, that's the one they always twist use, samclem ... :

because we know that's the one that bugs the neocons the most....of course the true general welfare can only be as the neocons interpret it. any other use is obviously twisting it.

 

[FinanceDude]

Maybe we just need a good description of what "promote the general welfare" means in today's society.

I think the Founding Father's idea of what encompassed that in the 1700's is a far cry from what we as Americans assume it to be today........

 

[Craig]

Ironically, true neoconservatives are usually described as accepting much more social spending / engineering than conservatives and libertarians, evidenced by the overspending of the Bush admin ...

 

[greg]

Re: Isn't anyone leary of our government defaulting with our 8.5+ Trillion defic

Maybe we just need a good description of what "promote the general welfare" means in today's society.

I think the Founding Father's idea of what encompassed that in the 1700's is a far cry from what we as Americans assume it to be today........

OK, I'll bite. I take 'promote the general welfare' very broadly (liberally?). I think that it means stability and orderliness for folks. By this, for example, I mean that we need a military or national defense force so that if some horrible event happens we are prepared to face it quickly and adequately. Therefore, national defense forces provide a form of stability (and a force to use if some disruption occurs somewhere that will affect us; it's good to have a force ready to act in emergencies). All laws in general and in particular promote the general welfare because they tell us in black and white : what behaviors are allowed and which ones aren't. This brings stability and orderliness to our lives. We know what will happen if we do or don't do certain things; they explain consequences. Does SS promote the general welfare? Yes and no. It acts as economic stability for a fairly large proportion of our citizens, those retired and those who need SSI. One doesn't have to worry quite so much if one dies and ones children are left alone in the world. Some little bit of money will be there for them. This is stabilizing for everyone to know SS is there and acts as a safety net. The current insecurity of SS is de-stabiliizing to many--as is $8.5 trillion national debt.

When I look at new laws and various activities of our leaders I always try to find out how they promote the general welfare first and how these laws and so forth act on individuals second. "Promote the general welfare" is in the Preamble for a reason. It should govern over all that follows.