The US is Bankrupt

[bobandsherry]

Interesting links for debt and GDP.

Who got us in debt? U.S. Debt by President by Dollar and Percent

US GDP by Year Compared to Recessions and Events (also shows "real" GDP which adjusts for inflation, a bit enlightening): US GDP by Year Compared to Recessions and Events

 

[DEC-1982]

Interesting links for debt and GDP.

Who got us in debt? U.S. Debt by President by Dollar and Percent

US GDP by Year Compared to Recessions and Events (also shows "real" GDP which adjusts for inflation, a bit enlightening): US GDP by Year Compared to Recessions and Events

I liked reading "who got us in debt". Just about everybody, some more than others.

 

[bobandsherry]

I liked reading "who got us in debt". Just about everybody, some more than others.

The last "good" period was Harding/Coolidge, $8 billion reduction in the 8 years. Every other sucka since then has just piled onto the fire.

 

[Spock]

Bankruptcy is a mismatch between income, assets and liabilities. If assets and projected income streams are sufficient to meet current + future obligations but current liabilities cannot be funded, a debt restructuring is required. Debt holders will be paid, probably not when originally expected, and possibly not the contracted interest rates. If assets and projected income is insufficient to meet liabilities, insolvency is declared, and debt holders lose. In the case of US public debt, neither of these situations appear to be the case.

Any discussion of bankruptcy must, by definition, consider assets. State and Federal government own vast, highly valuable assets. To name a few, land, mineral rights, buildings, and airports. Here’s a Wikipedia page that summarizes the US financial position as of 2016. It is eye-opening. https://en.wikipedia.org/wiki/Financial_position_of_the_United_States
[FONT=&quot]This is not to say our public debt is not a problem, nor does it mean our deficits are smart spending. It is, and they aren’t. It is indisputable, though, that we have all benefited, and continue to benefit, in many different ways.
[/FONT]

That assumes the value of a distressed sellers assets remain at full value while the disparate seller is liquidating.

Imagine the reaction when the US is selling its aircraft carriers to China to pay off IOUs.

 

[MichaelB]

The US public debt is a true paradox. Those that hold it consider it risk free - the safest repository of value the world. They don’t want it repaid for exactly that reason, and will roll it over forever.

On the other hand, if those same bond-holders were to conclude those bonds were no longer a safe store of funds they would demand immediate repayment, which would lead to real global financial chaos. It is telling, though, that the bond holders so not think this debt is a problem.

Despite the hand-wringing and outrage, debt repayment is not the problem. The real concern (IMHO) is the US economy has an increasing reliance on debt for growth, while the marginal utility of the debt is declining. In other words, to grow we need more debt , but each additional $ of debt buys less growth. This becomes a self feeding vicious cycle. We’re not the only country with that problem, and it is worse elsewhere.

As long as nominal economic growth rates are greater than interest rates this can continue - for decades or centuries. When growth rates drop or interest rates rise it will become very difficult to manage. If (or when) that happens, it will self-correct in a way that will probably be quick, and certainly painful.

 

[Running_Man]

https://www.nytimes.com/2018/09/11/opinion/on-the-debt-non-spiral.html

SO Krugman is stating basically the same thing as MichaelB and myself were saying as to why the debt is not a problem yet - because interest rates keep falling. Where I disagree is where Krugman believes that low interest rates can be predicted therefore people against debt are killing infrastructure projects that could otherwise be borrowed for. Reverse the chart he shows and Krugman will be posting about the unavoidable risks of deficit spending. LOL

 

[MichaelB]

https://www.nytimes.com/2018/09/11/opinion/on-the-debt-non-spiral.html

SO Krugman is stating basically the same thing as MichaelB and myself were saying as to why the debt is not a problem yet - because interest rates keep falling. Where I disagree is where Krugman believes that low interest rates can be predicted therefore people against debt are killing infrastructure projects that could otherwise be borrowed for. Reverse the chart he shows and Krugman will be posting about the unavoidable risks of deficit spending. LOL

I hadn't seen that, thanks for the link. Spending on infrastructure is a good idea. I'm not sure we need more debt for that, or better to shift some spending from another category, or - gasp - raise some taxes. He's a brilliant economist, but like so many of his profession, he chooses to see the world using partisan eyeglasses, and as a result his eyesight is flawed. I tend to tune them all out when that happens.

 

[Beststash]

The US debt load is only important when it comes to justifying a political position. I know that sound simplistic but look at our history.

 

[pb4uski]

.... On the other hand, if those same bond-holders were to conclude those bonds were no longer a safe store of funds they would demand immediate repayment, which would lead to real global financial chaos. ....

To pick a nit, this isn't true... a bondholder has no right to call the bond and demand immediate repayment just because they are uncomfortable... the most that they can do is to either sell it or wait until the debt matures.

There are a small minority of US debt that the Treasury has the right to call but none that are callable by the holders.

 

[audreyh1]

To pick a nit, this isn't true... a bondholder has no right to call the bond and demand immediate repayment just because they are uncomfortable... the most that they can do is to either sell it or wait until the debt matures.

There are a small minority of US debt that the Treasury has the right to call but none that are callable by the holders.

This is indeed a critical point. It is not at all like a run on a bank. The only thing a bond holder can do other than sell it, is choose not to buy again (reloan) once the bond matures. If folks become reluctant to buy US bonds, interest rates on US Govt bonds go up to entice buyers. And this has to be taken in a global relative context - who else is competing for bond buyers?

 

[MichaelB]

To pick a nit, this isn't true... a bondholder has no right to call the bond and demand immediate repayment just because they are uncomfortable... the most that they can do is to either sell it or wait until the debt matures.

There are a small minority of US debt that the Treasury has the right to call but none that are callable by the holders.

Bond holders can sell anytime, and US Treasuries (gov’t debt) is considered the most liquid market in the world. Still, if for fear of loss they all attempted to sell their holdings, it would have the same effect as described - global financial chaos. The point (despite the nit) is the amount of debt is not an issue and the holders do not expect or even want repayment. If they did, they wouldn’t be able to get it. The trust underlying this is enormous, perhaps even unrivaled.

 

[pb4uski]

Totally agree on the trust part. Also agree that if there was a lot of confidence and a lot of selling it would create chaos and higher interest cost on new issues for the U.S. government but there would be no need for the government to redeem the bonds until they mature.

It is just that one of my pet peeves is any notion that China (or holders in general) can somehow demand immediate payment... that part just isn't true but I see it claimed all the time.

 

[MichaelB]

It is just that one of my pet peeves is any notion that China (or holders in general) can somehow demand immediate payment... that part just isn't true but I see it claimed all the time.

I have never expressed that view and do not subscribe to it. If anything, just the opposite. The bond holders here have the clear disadvantage. They have a surplus of capital, mostly in $US, they don’t want but have no options other than US Treasuries.

 

[Jerry1]

This has been an interesting discussion. Unfortunately, it was more weighted to a discussion about whether or not the situation is as bad as the article and others believes it to be.

Let’s assume it is bad and that some day the “chickens will come to roost”. Which I personally do believe. That’s how one feels when you’re born at the end of the baby boom and you watch pensions disappear, employee benefits diminish and are staring at a 25% reduction in SS. Politically I’m glad it was pointed out how both parties brought us to this point. So with that assumption, what would you do, should you do, to protect yourself? 25% gold in you portfolio? Be prepared to cut your living standard in half? Ignore it and hope the worst of it hits after you’re gone with the belief that you’ll still be better off than most because you’ve saved and know how to LBYM”s? WWYD?

 

[Huston55]

This has been an interesting discussion. Unfortunately, it was more weighted to a discussion about whether or not the situation is as bad as the article and others believes it to be.

Let’s assume it is bad and that some day the “chickens will come to roost”. Which I personally do believe. That’s how one feels when you’re born at the end of the baby boom and you watch pensions disappear, employee benefits diminish and are staring at a 25% reduction in SS. Politically I’m glad it was pointed out how both parties brought us to this point. So with that assumption, what would you do, should you do, to protect yourself? 25% gold in you portfolio? Be prepared to cut your living standard in half? Ignore it and hope the worst of it hits after you’re gone with the belief that you’ll still be better off than most because you’ve saved and know how to LBYM”s? WWYD?

First, get past being a young boomer. You knew that going in & it is what it is. Besides, you’ve LBYM, saved, planned & FIREd based on that knowledge so, give yourself some credit.

Second, put yourself & DW into a situation that makes you less anxious about potential futures. There are lots of options; you just need to decide what’s right for you & DW. But, honestly, it’s just more of what you’ve done successfully thusfar. FWIW, here are our ‘backup’ plans.

BackUp Plans

A. Use cash buffer: We keep 3-5 yrs in CD/bond ladder
B. Cut expenses: We have three budgets - optimum, median & bare bones
C. Do consulting work: An option for me for a few more years
D. Sell rental house: Essentially trading current income for a big chunk of cash
E. Take SS earlier: We currently plan to defer to 70.
F. SPIA: Buy a single premium fixed annuity (SPIA) to help cover "essential" expenses. Use Fullmer's "annuitization hurdle" concept or Otar's "zone" concept to guide any annuity purchases.

 

[audreyh1]

First, get past being a young boomer. You knew that going in & it is what it is. Besides, you’ve LBYM, saved, planned & FIREd based on that knowledge so, give yourself some credit.

Second, put yourself & DW into a situation that makes you less anxious about potential futures. There are lots of options; you just need to decide what’s right for you & DW. But, honestly, it’s just more of what you’ve done successfully thusfar. FWIW, here are our ‘backup’ plans.

BackUp Plans

A. Use cash buffer: We keep 3-5 yrs in CD/bond ladder
B. Cut expenses: We have three budgets - optimum, median & bare bones
C. Do consulting work: An option for me for a few more years
D. Sell rental house: Essentially trading current income for a big chunk of cash
E. Take SS earlier: We currently plan to defer to 70.
F. SPIA: Buy a single premium fixed annuity (SPIA) to help cover "essential" expenses. Use Fullmer's "annuitization hurdle" concept or Otar's "zone" concept to guide any annuity purchases.

That’s really good. All any one of us can do is determine how we might survive tougher economic times for any reason. And if tough time hit you, they are going to hit others less well off even harder (something my husband has to occasionally remind me).

It does no good otherwise to agonize over big problems like the national debt. Inform yourself to vote well and have some contingencies in mind.

That’s a good list.