Question about the debt limit

[MichaelB]

The public debt may be constitutionally valid, but the whole world knows we suppress interest rates and print money to pay the bill. Foreigners simply stopped buying our debts and invested their money elsewhere. China famously has sold most of their holdings and shifted to buying mines, ports, roads, and generally worldwide infrastructure projects instead. Since 2014, nada. Debt/GDP ratio this bad has only been fixed by inflating the money supply and impoverishing bond holders.

China has definitely not stopped buying US Treasuries. As an example, in the 4Q ‘22 they bought $40B. The same applies to other countries with positive trade balances , such as Germany, Japan, Netherlands, Taiwan, OPEC members. They have no choice but for their Central Banks to buy $US Treasuries. They all have chosen to repress domestic demand and not allow their currencies to appreciate, and the only way to do that is buying foreign currency with their trade surplus.

Also important to keep in mind that China buys and holds Treasuries through state owned banks and their parties in Europe, mostly Belgium, and also buys US mbs and agency debt, which has a different classification.

We were unable to convince anyone to buy our longer dated notes, so we have refinanced from long to short duration for 30 years.

A huge benefit to refi a TBill from the 80's at 17% or some such ridiculous rate down to 2%. Within a few more years the long duration notes and higher interest rate notes will be gone. Meaning a sudden spike in interest rates has an immediate effect on FICA and Medicaid and Military budgets.

The weighed average maturity of US Treasury debt is a bit over 6 years, has been in that range for a number of years. This is hardly short term.

Hindsight is usually 20/20, and the US Treasury may come to rue not adding more long term debt during the years when it was very cheap. Nonetheless, there are a fixed number of buyers of very long debt, mostly insurers, pension funds and Central Banks, and their needs are satisfied with the current volume. The growth in demand for Treasuries has been in money market, hedge funds and shadow banks, and they want shorter term paper that is more liquid and can be traded more easily.

California went from something like $100B surplus to $30B deficit in 9 months. Fedgov finances will have similar volatility.

Not sure what California has to do with a US debt level discussion and these numbers look exaggerated, but there are no reputable or serious projections of US federal spending and borrowing that approximate them.

 

[indiajust]

I mention California because most of their tax payments are tied to stock market/IPO activity that has extreme volatility. It is hard to balance accounts (with/without budget) when your income has such wild swings.

The shift of US debt shorter term combined with ever higher amounts leads to fed problem similar to CA, just spending volatility rather than income volatility. It is hard to manage if the numbers move this much this fast.

 

[donheff]

I thought the last actual budget was in the Clinton or early bush years, but don't recall. It's been a lifetime of "continuing resolutions". kicking the can is literally the default system response.
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The Clinton Administration was the last that balanced the budget. There have been a few actual budgets since then, albeit, unbalanced. I think Biden actually got one done but I might have that wrong.

Edit: if I read it right we got thru most of last year with CRs but finished with an Omnibus spending bill which is a step further along than a CR and sort of a budget resolution.

 

[pb4uski]

I mention California because most of their tax payments are tied to stock market/IPO activity that has extreme volatility. ...

I'm skeptical. Do you have a citation for this claim?

 

[Popeye]

Sorry, but I’m not buying into the supposed “crisis” . The boy has cried wolf too many times over the last couple of decades. This will get handled with zero detrimental effects, just like every other time. I heard were good until June and I don’t remember this blowing up in the news so far in advance the last few times. Seems like maybe it’s an attempt at distraction.

 

[Koolau]

Well, we used to at least pretend we cared about deficits and debt. All that seems out the window now with the only potential throttle on spending being the debt limit. It was put in place because it was understood that politicians, left to their own devices will spend other people's money to keep themselves in power. The debt limit supposedly gave them an excuse to put on the brakes.

Example:

Honorable Jane Shmoo, 2nd district congresswoman to Mr. Big shot, big donor constituent:

"Sorry, Mr. Big Shot, I can't build you that shiny new dam or Interstate to nowhere 'cause we've exceeded the debt limit. So, you should still vote for me. It's not my fault. It's that pesky debt limit."

Now, the constituents know that the debt limit can be over ridden and the law makers are smart enough to know that, if they can pass a law, they can pass another law which is what they have been doing.

If I sound pessimistic, it's because I'm one of our resident glass-half-empty kind of guys, so YMMV.

 

[pb4uski]

Sorry, but I’m not buying into the supposed “crisis” . The boy has cried wolf too many times over the last couple of decades. This will get handled with zero detrimental effects, just like every other time. I heard were good until June and I don’t remember this blowing up in the news so far in advance the last few times. Seems like maybe it’s an attempt at distraction.

Fair points... but I think the reason for the heightened concern this time is a small minority of radical right Congressmen in the House gumming up the works like they recently did with the election for Speaker of the House... but if push comes to shove McCarthy can just put a naked debt limit increase to the floor and I think it would easily pass.

I'm sure that McCarthy doesn't want to go down in the history books as the Speaker of the House when the United States failed to pay its maturing bonds. Besides the political sh!tshow that would result if SS recipients were not paid, military and other government employee salaries were not paid, etc.

 

[Texas Proud]

A handful of bonds defaulted under Nixon when the dollar unpegged from gold at the central bank level. I think that was the only default.


/snip/





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Had to look it up... interesting that there might be 5 defaults if you go by the terms of the bonds/dollars...


https://thehill.com/opinion/finance...ted-on-its-debt-except-the-four-times-it-did/

 

[pb4uski]

Yes, I found those interesting too. But many were obscure and I'm guessing small in the whole scheme of things. Other than this article were any of us aware of these technical defaults in 1968 or 1971? I wasn't.

PS I do have a bunch of silver certificates that I inherited from my great aunt.

 

[Texas Proud]

Yes, I found those interesting too. But many were obscure and I'm guessing small in the whole scheme of things. Other than this article were any of us aware of these technical defaults in 1968 or 1971? I wasn't.

PS I do have a bunch of silver certificates that I inherited from my great aunt.

Yes, agree... and the people were paid something.... just not exactly what they thought was due...

 

[rodi]

Thanks for the interesting discussion.