Quote: (02-24-2016 02:22 PM)RIslander Wrote:
To the forum economic gurus... whats the maximum debt the US can sustain? What happens when we hit it?
There is no limit technically. The problem becomes when others no longer want U.S. Treasury Notes and U.S. Treasury Bonds in exchange for their goods and services. This is when the supporting platforms begin to buckle. It is the ESF buying the treasuries through the New York window at the Federal Reserve now that is the lynch pin of which the people are unconscious and keeps the jackals at bay (for now).
Here is the previous post in its entirety that was used as a link between why the value of the U.S. dollar is so high and geo-political issues. I have bolded the paragraph that more directly relates to your question.
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I am not a banker, bond trader, nor professional in the market. I was a student of warfare and a practitioner of warfare. All warfare has an economic basis and all warfare is based on deception.
A bond is a loan, it is an IOU. Literally it is something that binds. When money is loaned to a government or a company they commit to paying you back at a date in the future. In the meantime, they pay you interest (in the form of a ‘coupon’) on the loan. The interest rate (‘yield’) you desire will depend on a few things. It will depend on how much risk is there that they will not pay you back. If you believe the risk is smaller, you will more likely accept a lower yield. If you believe the risk is higher, you will ask for a higher yield. Secondly, how much yield do you need to make a ‘real’ (after-inflation) return?
Bonds are important because the bond market ultimately dictates the cost of borrowing in the economy. If an investor is expecting inflation to be low (or negative), the investor will normally accept lower yields on the bonds and they are willing pay more for them. If inflation is expected to rise or be higher, the investor will want higher yields and they will want to pay less for bonds.
Treasury bonds in general, refer to 3 specific sub categories depending on the maturity. Treasury Bills are less than one year, Treasury Notes are greater than one year, Treasury Bonds are 10 years and greater.
Governments issue bonds to fund their spending and their debts. Currency is created when the Department of the Treasury (DOT) creates a bond and gives it to the Federal Reserve (Fed). The Fed accepts the bond and in return creates an account and provides the currency (Federal Reserve Note or FRN) to the DOT account. The Fed also may create accounts for other customers as well.
To increase the currency supply, the Fed moves currency from bonds into cash. To decrease the currency supply, the Fed moves money from cash to bonds. The details are complex, but the basic idea is that each day, the Fed buys (or sells) billions of dollars in U.S. Treasury bonds from (or to) certain financial companies who act as dealers. Where does the Fed get this money? They just make it up.
The Fed purchases not only Treasuries but also other securities and debt instruments, SPV (Special Purpose Vehicles) are off balance-sheet trusts that issue short-term securities collateralized by loans or other receivables, a popular form of credit derivative is the credit default swap (CDS) it is a contractual agreement to transfer the default risk of one or more reference entities from one party to the other. IRS (Interest Rate Swaps) Interest rate swaps are similar to credit default swaps because their value similarly depends on a reference variable, in this case, interest rates. CDS´s and IRS´s are examples of over the counter market derivatives.
A derivative is simply an agreement transferring risk from one party to another; its value is dependent on an underlying price, rate, index, or financial instrument. The agreement (which is given value) is derived from the something else (considered to have value). A credit derivative is an agreement designed explicitly to shift credit risk between parties; its value is derived from the credit performance of one or more corporations, sovereign entities, or other debt issuers.
Other debt instruments include, CDO´s (Collateralized Debt Obligations) which is a financial instrument that entitles the purchaser to cash flows from a portfolio of fixed income (debt) assets, which may include bonds, loans, mortgage-backed securities, or other CDOs. A CDO is a type of Asset Backed Security (ABS). Another is the MBS (Mortgage Backed Securities) which is a tradable security that represent claims on the cash flows from underlying mortgage loans. An MBS investor owns an interest in a pool of mortgages, which serve as the source of cash flow for the security. These securities are a type of ABS.
The list of these instruments will continue to grow in the future.
Why does the bond auction not fail causing a solvency crisis? The bond auctions never fail because there are always buyers present. The auctions are oversubscribed and designed not to fail. The primary dealers are required to bid but that is never a problem as they act as intermediaries to sell the bonds to various clients. If the primary dealers cannot sell their inventories the Fed can step in and soak up the demand.
The Fed has been doing this and their balance sheet is increasing. The Fed can technically do this to infinity. As infinity is approached confidence is declining and a greater risk premium is desired. If a sufficient risk premium is not provided, investors exit. That is what is happening with nations now. They are selling their hoard of US Treasuries that have been accumulated. The Fed continues to purchase them. What if the Fed purchases all of them (hypothetically) from every country? Nothing, right up to the point where that sovereign country says, I no longer want your US Treasuries for my goods and services. Instead I want X. If the US does not have X, it will either do without the goods and services (shortages) or it will domestically produce them. Otherwise it will go obtain X and trade it with the other party (nation).
I suggest that under the guise of the AIIB and NDB such as system has been initialized and it is independent of the SWIFT financial system. X will be something like a gold back trade note. Not a currency or gold standard system. If you want one of these notes, transfer something (your independently audited gold) to location Y and you will receive the gold trade-notes and you can trade them between the participating countries (entities). The current system could then be circumvented. If the US wants to play, it will need to pay, but not with their current dollar. I suggest that they will then pay with another form of the dollar (to be initially backed by resources still in the ground) that will be created (and devalued) to be used only within the (domestic) US while the international dollar (current dollar) is revalued in comparison to X or on the basis of X.
If the US continues to run a deficit, who will accept the bonds to pay for the extra spending and how will the current debt be repaid? Not the foreign countries, they sold their bonds and now they want X. The Fed can accept the new bonds that the Treasury creates to pay for the deficits and the debt, but the Fed will not pay itself interest. The citizenry will pay the interest through the continuous devaluation of the new (domestic) currency and the people will become more impoverished.
Technically the bond system does not need to default, it is transformed and revalued.
We are getting around this now to maintain the confidence of the bondholders because the US Treasuries do not show up in US Fed accounts and a dichotomy is created. Global USD accounts are dropping and the dollar is getting stronger. If the fundamentals indicate that if the world is bailing on dollars, then the dollar cannot get stronger. Yet, the US dollar is getting stronger on the FOREX, therefore the world cannot be bailing on the dollars (this is the logical fallacy known as affirming the consequent.) The media is not telling the public that these bonds are being redeemed so that the illusion can be propagated.
The drop in the reserves does not support the narrative of a strong dollar. Therefore something has to be done to put reserves back into the system. The manner in which the US Federal Reserve puts it back into the system is through the Reverse Repo´s (repurchases) where they sell short term government securities to the dealers in exchange for cash and therefore reserve accounts are supported. These sales are not congruent with zero interest rates. These sales are congruent with Fed tightening, therefore you have the illusion of tightening to support the sales. It is about supporting a false narrative. The dollar is strong and the world is not abandoning the dollar. My understanding is these sales are over $200 billion per day. So why has a collapse not happened? It is because we are continually lied to and the confidence of people is maintained. The stories continue to change and new financial products (in addition to the ones previously mentioned) are invented to mask what is happening. I would put forth that the collapse is happening now and is a slow burn that is accelerating. Watch for signs in more and more countries, not just Venezuela and Argentina. Friends in Canada and many other countries are becoming concerned as the price of basic goods is increasing at an alarming rate. Canada is not Zimbabwe.
I am suggesting that to disguise the return of foreign treasures, the DOT under the aegis of the Exchange Stabilization Fund (ESF) is soaking up the bonds. Recall that the Fed creates an account and there is a level of transparency. With the ESF there is NO transparency. The bonds are purchased from what I will now term as a ´Dark Pool Account (DPA).´ The DPA is off the books. When the bond enters the DPA it appears as if debt just magically disappears. The problem becomes if all of the debt magically disappears and the US debt goes to zero, the former buyers of the treasuries will realize that the system does not function as they were led to believe and will lose confidence in the dollar. The ESF is operated at the discretion of the Secretary of the Treasury, it follows no laws and is accountable to no one. The original 1934 mandate of the ESF is to defend the value of the US Dollar. The Fed through the Federal Reserve Bank of New York is a front for the ESF.
Normal analysis is not sufficient when the puppet masters are engaging in sleight of hand. I am of the opinion that some of the puppet masters really believe that they can outsmart the market and I think the smartest of them understand that the time of reckoning is coming, they are simply experimenting with the system and will pass on whatever they learn from this manipulation down to the future generations of puppet masters to then be applied well into the future on that unsuspecting generations after you and I are have departed. Furthermore, they will use this opportunity for yet, another (greater) purpose (at least in their deluded minds).
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