Could the US government go into default?

[Smallc]

Sorry, smallc. But where does that AAA rating come from? Who decides it and how?

The still have the rating as per the three big ratings agencies. Yes, they are in trouble right now, but that doesn't change the fact. It has to be noted though, that the agencies have said that they are in danger of losing the rating, but being AA+ or Aa1 still puts them in a very good position.

[WIP]

So, msj. You think that it's better to tax me, and hire someone to dig a ditch instead. In your narrow world, the hired person reduces the unemployment rate and the ditch increases Canada's GDP.

In msj-World, Canada is out of a recession because unemployment is lower and GDP is higher.

In my world, I just paid for a ditch that I don't want or need.

If Harper wants to stimulate the economy, he can borrow money on international markets at 2% and cut my taxes. I'll use the money to pay down my 4% mortgage. Canada wins.

Since you started this thread on the subject of the U.S. debt crisis, focus on their needs -- for example, U.S. infrastructure is in such decrepit shape, especially in the rust belt and the Northeast, what are the odds that any infrastructure project is unnecessary? (a ditch that I don't want or need)

Under normal circumstances, dollars given to the consumer through tax cuts will have a greater multiplier effect than dollars spent on government projects -- but these aren't normal times! A lot of this recession is psychological...no one wants to spend or loan money, and the tax cut that you plan to use to pay down your mortgage is a prime example of money that will be used for savings instead of spending -- you might as well stuff it in your mattress! The only institution that can force the money to be spent, instead of being squirrelled away into savings or paying off debt, is the government. So, there doesn't seem to be any other option to a spending stimulus package.

I don't know how likely it is that this is going to work....there's not a very good track record for this sort of approach...but what are the alternatives! Since the size and impact of this recession depends so much on purely psychological factors like people's confidence in the future, hopefully, a few good economic indicators this Spring will get people feeling better about the future. I'm thinking that the best thing Barack Obama can do is just inspire a feeling of optimism -- and that will be more important than any nuts and bolts policy decisions coming out of the Whitehouse in the coming months.

[August1991]

Since you started this thread on the subject of the U.S. debt crisis, focus on their needs -- for example, U.S. infrastructure is in such decrepit shape, especially in the rust belt and the Northeast, what are the odds that any infrastructure project is unnecessary? (a ditch that I don't want or need)

Uh, you mean infrastructure like a bridge that goes nowhere?

Under normal circumstances, dollars given to the consumer through tax cuts will have a greater multiplier effect than dollars spent on government projects -- but these aren't normal times! A lot of this recession is psychological...no one wants to spend or loan money, and the tax cut that you plan to use to pay down your mortgage is a prime example of money that will be used for savings instead of spending -- you might as well stuff it in your mattress! The only institution that can force the money to be spent, instead of being squirrelled away into savings or paying off debt, is the government. So, there doesn't seem to be any other option to a spending stimulus package.

WIP, if the government hires someone to dig a ditch (or build a bridge to nowhere), then presumably we'll get a ditch and someone will get a salary.

Now, why would the ditchdigger be anymore likely to spend the money than I would? Maybe the ditchdigger will pay off his mortgage or put his salary under his mattress.

I say cut out the middleman (and the wasted effort digging ditches) and simply give me the money.

[bush_cheney2004]

....I say cut out the middleman (and the wasted effort digging ditches) and simply give me the money.

That's not how it works.....see FDR and the WPA. Building infrastructure is a "shovel ready" way to stimulate the entire supply chain, including labor's disposable income. It can be argued that the US interstate system (from Ike's experience in wartime Germany) was just a continuation.

Last year we built the replacement Interstate 35W bridge and lots of gov'mint money was spread around.

[August1991]

Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. Overseas resistance may hamper U.S. efforts to hold down home-loan rates and rebuild the nation’s largest mortgage-finance companies.

...

“Overseas investors are looking for the full-faith-and- credit clarification,” Goodman said. Such a pledge would essentially about double the U.S.’s debt, potentially boosting the country’s own borrowing costs.

Bloomberg

Geez. I'm starting to feel like a member of the Calculated Risk club.

[bush_cheney2004]

Bloomberg

Geez. I'm starting to feel like a member of the Calculated Risk club.

China looked around and has found nothing better than U.S. securities. Still the best game in town.

[eyeball]

China looked around and has found nothing better than U.S. securities. Still the best game in town.

You could say the same thing about a sinking ship with no lifeboats.

[GostHacked]

http://vimeo.com/3261363

Cool visual animation of the credit crisis. I don't understand economics at all, but this made things pretty easy to understand. Eventhough it generalizes things, it is pretty clear how things happened. I'd like to see it redone explaining how deregulation/government impacted this crisis.

[msj]

You're like punked above. I have a fair grasp of the changes in CPI, unemployment and GDP calculations over the past 40 or so years.

Frankly I don't believe you.

If you did then you would have realized how ridiculous it is to keep bringing up unemployment numbers from the 1930's when no one has made the claim that the current recession is going to be as bad as that depression.

The claim that some economists have made is that the current recession (in the US) is going to be worse than any recessions SINCE the depression.

A distinction you still seem incapable of grasping.

Since you can't make a distinction as simple as that I doubt that you can grasp the differences in methodology when it comes to statistics.

Who cares? If you try to convince me that unemployment in America in 2009 is like unemployment in America in 1933, everyone will just laugh. You'll sound like one of those people who claims that the Americans never landed on the moon or that the CIA organized 9/11.

I never tried to convince anyone that unemployment today is as bad as the 1930's.

In fact, you were the one to bring it up in the first place.

Once again you are incapable of grasping a very simple point - there is a difference between stating that this recession is worse than any recession since the depression and the statement that this recession is worse than (or even as bad as) the great depression.

No one made that claim so it is ridiculous to bring it up in the first place.

Yet you did and do - for which I responded and continue to respond to this tiring straw-man.

It's interesting that we in Canada don't properly account for future health care (including pharmaceutical costs) either.

Canadians provinces have no fund to cover future health care liabilities. Our public health (and pharmaceutical) insurance schemes are not funded at all - and in Canada, this is the bulk of the sector's future liabilities.

Here's another example of the the striking hypocrisy of most Canadians.

Hmmm, didn't see where I was in agreement with how Canadian governments show their financials.

Throw on the straw.

So, msj. You think that it's better to tax me, and hire someone to dig a ditch instead. In your narrow world, the hired person reduces the unemployment rate and the ditch increases Canada's GDP.

If the situation is bad enough, and in the US I think it is, then I think it is worthwhile for the government to spend money on infrastructure that will be a long term benefit to the citizens.

That is vastly different than paying someone to dig and fill in ditches.

It is also drastically different to borrow $100 today to stimulate the economy and repay it over 20 years than to borrow $100 today and tax the citizens $100 the next day. The timing issue is important and you simply ignore it.

In msj-World, Canada is out of a recession because unemployment is lower and GDP is higher.

Huh?

I have been the one who has claimed that Canada is in recession (or nearly in recession) in other threads.

Canada, however, does not have a NBER like the US so the intellectually lazy rely on such measures as two quarters of real GDP decline.

I would love to see a NBER in Canada where they look at real GDP/real income, unemployment, and other factors that go into determining when recession occurs.

Edited February 20, 2009 by msj

[Oleg Bach]

We will never have the very public soup lines of the 30s . Our homeless are not just the thousand or so pan handlers we see on the streets of Tononto..there are about 75 thousand couch serfers in the city. Times have changed and we have refined and re-defined poverty and have learned to hide it - but it still exists - what you do not see does not exist - Perfect!

[bush_cheney2004]

...I would love to see a NBER in Canada where they look at real GDP/real income, unemployment, and other factors that go into determining when recession occurs.

Sorry....no can do....would be too "Americun". But it doesn't cost ya nuthin' to watch from across the border.

[Oleg Bach]

Sorry....no can do....would be too "Americun". But it doesn't cost ya nuthin' to watch from across the border.

There may come a time when that boarder disappears and I will cross over and soak one of those stars and strippes ragettes and wring your skinny...ooops - must have been the beer...It's the cold weather- brain freezes and all we want to do is wage a lucrative war...but not being Americun, I'm just to lazy to go out and do the throttle and plunder thing.

[Oleg Bach]

There may come a time when that boarder disappears and I will cross over and soak one of those stars and strippes ragettes and wring your skinny...ooops - must have been the beer...It's the cold weather- brain freezes and all we want to do is wage a lucrative war...but not being Americun, I'm just to lazy to go out and do the throttle and plunder thing.

May as well make you comfortable and board water you in our own material - you could see stars... - am I getting out of hand?

[August1991]

If you did then you would have realized how ridiculous it is to keep bringing up unemployment numbers from the 1930's when no one has made the claim that the current recession is going to be as bad as that depression. The claim that some economists have made is that the current recession (in the US) is going to be worse than any recessions SINCE the depression.

A distinction you still seem incapable of grasping.

We have had bad recessions since the 1930s too. I think you are the one that argues that reported unemployment/inflation statistics are innacurate. My point was that what is happening now and the 1930s and even the 1970s are of different magnitudes.

Even Roubini is forecasting at most unemployment at 10%, below recessions since the 1930s.

Then again, October 1929 was the collapse of a typical financial bubble - and then the Fed and Congress utterly bungled the response, leading to the Great Depression. So far, I have not been impressed with the policy response in Washington. Obama had almost three months to prepare.

Canada, however, does not have a NBER like the US so the intellectually lazy rely on such measures as two quarters of real GDP decline.

I would love to see a NBER in Canada where they look at real GDP/real income, unemployment, and other factors that go into determining when recession occurs.

I don't really care how a recession is defined. These are statistical semantics.

What matters more in this context is trust: will people lend to the US government because they trust that it can collect taxes?

Common mortals view trust as black or white but in finance, it is coloured grey.

[punked]

We have had bad recessions since the 1930s too. I think you are the one that argues that reported unemployment/inflation statistics are innacurate. My point was that what is happening now and the 1930s and even the 1970s are of different magnitudes.

Even Roubini is forecasting at most unemployment at 10%, below recessions since the 1930s.

Then again, October 1929 was the collapse of a typical financial bubble - and then the Fed and Congress utterly bungled the response, leading to the Great Depression. So far, I have not been impressed with the policy response in Washington. Obama had almost three months to prepare.

You can not compare the two because Regan changed the way unemployment was measured to make himself look better.

[August1991]

You can not compare the two because Regan changed the way unemployment was measured to make himself look better.

It was in fact Thatcher who did that, and punked, you make my point. Margaret Thatcher may have used statistical means to reduce the unemployment rate, but not from from 30% to 7%.

Anybody who knows anything about this knows that there are various measures of "unemployment", "inflation" and for lack of a better phrase, "economic activity".

By and large though, I like the public, laymen terms. They are often simple and clear. When the Bank of Canada raises teh bank rate, people understand what that means. Interest rates go up. Everyone knows when the price of gasoline goes up, or down. The proof is in the pudding.

Sorry for the diversion.

Edited February 21, 2009 by August1991

[August1991]

http://vimeo.com/3261363

Cool visual animation of the credit crisis. I don't understand economics at all, but this made things pretty easy to understand. Eventhough it generalizes things, it is pretty clear how things happened. I'd like to see it redone explaining how deregulation/government impacted this crisis.

Sorry. Your video simplistically blames Greenspan (once again) and implies that Asian lenders are stupid.

[saracms]I prefer Nobel Prize Winner Krugman's explanation: Bush and the Republicans are to blame.[/sarcsam]

Or how about the Swedish model? [smart] They don't bail out GM's Saab.

Edited February 21, 2009 by August1991

[GostHacked]

Sorry. Your video simplistically blames Greenspan (once again) and implies that Asian lenders are stupid.

[saracms]I prefer Nobel Prize Winner Krugman's explanation: Bush and the Republicans are to blame.[/sarcsam]

Or how about the Swedish model? [smart] They don't bail out GM's Saab.

You missed the point. No where does the video mention Greenspan, or Asian lenders. It is a really good explanation on how this all happened. It is simplistic yes, but it is a complex issue, and it just did not happen over night.

[msj]

You missed the point. No where does the video mention Greenspan, or Asian lenders. It is a really good explanation on how this all happened. It is simplistic yes, but it is a complex issue, and it just did not happen over night.

The video does mention Greenspan and it does mention the easy money coming from Japan and China (and others).

The point that is being missed, however, is that the video was merely recounting the facts.

You're absolutely right - it is simplistic but does a good job of getting the basic facts correct.

Yes, Greenspan did lower interest rates to 1% and yes this did have an effect on risk taking on Wall Street and even Main Street.

How such facts lead to simplistic nonsense of Greenspan being blamed or to bring up Krugman that Republicans should be blamed can only be spun out amongst the straw gathered by August.

[GostHacked]

The video does mention Greenspan and it does mention the easy money coming from Japan and China (and others).

I sit corrected!! It does mention Greenspan and Asia .. my bad.

It is explained that after a .COM bust and 9/11, it was needed to lower the interest rate, but now I fail to understand why. The more I look into economics and money and debt, the less I understand it.

[August1991]

The U.S. budget deficit grew in February, pushing the year-to-date shortfall past $750 billion as tax revenue fell amid the recession.

The federal government posted a budget deficit of $192.78 billion in the fifth month of fiscal 2009.

February is typically a deficit month. In February 2008, the shortfall was $175.56 billion. A survey of economists by Dow Jones Newswires forecast a deficit in February 2009 of $202.5 billion.

For the first five months of fiscal 2009, the budget shortfall totaled $764.53 billion. There are seven months left in the fiscal year. In the first five months of fiscal 2008, the government ran a deficit of $264.54 billion. In all of fiscal 2008, the government ran a deficit of $454.80 billion, a record high.

WSJ

So, if I understand properly, this is "good" news because the February deficit was smaller than predicted by some economists and February deficits are big anyway. (Huh?) Nevertheless, the US federal budget deficit is on track to be around $1.5 trillion (give or take a few billion) or about 10% of GDP.

Does this mean that US could default? I doubt it. Japan has not defaulted and its debt is about 190% of GDP. IOW, the US federal government could run deficits like this well into Biden's first term and the US federal government would still be in better shape than Japan's government.

I'm suspicious of the news report though:

Other categories in the numbers-laden report included individual income-tax receipts, which totaled $8.72 billion in February. Net interest on the federal debt was $12.2 billion. Defense spending totaled $50.67 billion.

Surely income tax revenues are greater than $9 billion. I'll claim a capital loss this year but not that much.

----

That's not how it works.....see FDR and the WPA. Building infrastructure is a "shovel ready" way to stimulate the entire supply chain, including labor's disposable income. It can be argued that the US interstate system (from Ike's experience in wartime Germany) was just a continuation.

Last year we built the replacement Interstate 35W bridge and lots of gov'mint money was spread around.

I don't know why this idea has so little traction.

In the 1930s, at teh time of FDR and Keynes, the US governments bought (and taxed) about 5% of GDP. To cut taxes under such circumstances would have had little effect. Nowadays, US governments buy about 20% of GDP (and tax about 40% - the other half they redistribute). IOW, government is much bigger now than before. A cut in government taxes does not change the size of government.

Edited March 12, 2009 by August1991

[August1991]

These numbers are unbelieveable:

The Treasury Department estimated it would borrow $361 billion in marketable debt in the second quarter, a record for the period and more than double its previous projection.

...

In February, the Treasury had estimated it would borrow $165 billion of marketable debt in the April-through-June period and assumed a cash balance of $45 billion at the end of June.

In the January-March quarter, Treasury borrowed $481 billion of marketable debt and ended March with a cash balance of $269 billion, of which $200 billion was attributed to the SFP. In February, the Treasury said it expected to borrow $493 billion from January to March and would end with a cash balance of $225 billion.

The Treasury on Monday projected it would borrow $515 billion of marketable debt in the July-September quarter, targeting a cash balance at the end of September of $270 billion, which included $200 billion for the SFP.

WSJ

This puts the US federal deficit on track to be about $2 trillion or about 13% of GDP.

I think what is also noteworthy here is that the Treasury projections are so wrong.

-----

OTOH, tax revenues have have fallen off a cliff and the Fed is out buying up commercial paper. There is appetite for this US government debt. One wanders how they are going to unwind these positions in the future.

And to think that the Canadian federal governement ran a small surplus in February.

[Shady]

China cuts up Obama's credit card

Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.

With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States.

China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.

Link

And apparently, in 8 - 10 years, interest on the debt will reach over 1 trillion dollars per year.

[August1991]

China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.

This is old news but there are two consequences.

First, the US dollar will fall in value. Second, private American saving will absorb the US federal government borrowing. (Americans - and Canadians - have now stopped borrowing and they are saving, paying down debt and saving even in cash at a remarkable rate.)

----

The question of a US federal government default involves the size of US federal government debt, nominal interest rates and capacity to tax.

For the moment, the US debt is about 60% of GDP and even under the worst scenario, Obama would raise this to about 110% of GDP after four years. That's manageable (Japan's ratio of government debt to GDP is 190%). Nominal interest rates are problematic if inflationary expectations take hold. For the moment, nominal interest rates are negative or close to zero. The power of the US government to tax is great. It can tax many Americans and many foreigners.

IMV, the US government would never default simply because its power to tax is almost limitless. This means the US government can borrow almost without limit. Understandably, Obama is on a tax collection jag. Link

----

With all that said, present macroeconomic theories basically derive from Keynes and he wrote about a world where government took about 10% of GDP and transferred another 5% among citizens. In this modern world, governments now buy/take about 20% of GDP and then transfer another 20% among us.

The Keynesian model is based on a small government when private financial markets suffer a panic. Our world is different. We have large government and the collapse of a speculative bubble.

Edited May 5, 2009 by August1991