[MonteQuest]

In theory, I can see nothing wrong with it- after all, we could just vote for austerity and pay it down or off.

Europe, especially Greece, tried that. Didn't work out too well. The debt is unrepayable. Write that down.

[MonteQuest]

Or is this just a tragedy of the commons (and the weakness of democracy)?

It's reaching the limits to growth. GDP growth since the early 1970's has been largely fueled by deficit spending, both in the public and private sector. This situation has been exacerbated by having a monetary system that is based upon infinite growth in a finite world.

[Tanada]

Basically the US government will not be in a default situation as long as we can pay the interest on the debt.

Or, more realistically, the US government will not be in default as long as we can borrow more money to pay the interest on the money we already owe.

But, at some point, don't the lending nations realize that the amount of money they are loaning (the principle) is in danger of not being given back? At that point I would think they would be more concerned about the principle- this is a much larger sum of money than the interest. I would think they would either:

1. demand shorter term loans
2. scale back on principle loaned
3. demand the principle back

At some point- a lender becomes fearful of losing the principle and this fear overcomes the greed of making money on the interest- am I wrong? What happens then?

China already did that. China was for a decade one of the biggest purchasers of US Treasuries. Then several years ago they told the USA in very certain terminology "don't disrespect our trust". Unfortunately the Federal Reserve then proceeded with QE 3-infinity. China responded by stopping their purchases and moved to buying gold and other commodities that have intrinsic value.

Oct. 7, 2015 1:34 a.m. ET

Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.

Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.

While central banks have been selling, a large swath of other buyers has stepped in, including U.S. and foreign firms. That buying, driven in large part by worries about the world’s economic outlook, has helped keep bond yields at low levels from a historical standpoint.

But many investors say the reversal in central-bank Treasury purchases stands to increase price swings in the long run. It could also pave the way for higher yields when the global economy is on firmer footing, they say.

http://www.wsj.com/articles/once-the-bi ... 1444196065

[MonteQuest]

I am still not satisfied with the explanation of who is owed this money to whom. If you follow the debt, it seems like it leads to an actor that itself is holding just as much debt, like China who (according to Monte) owes over 300% GDP. It seems to me that if everyone called in their debts simulataneously that you'd probably just cancel everything out without any clear winners or losers.

Probably wouldn't work out that way for US securities holders like the general public, SS, and retirement funds.

[MonteQuest]

Or, more realistically, the US government will not be in default as long as we can borrow more money to pay the interest on the money we already owe.

Or how long we can still sell savings bonds that people think will have value. That's how the US govt borrows money.

[MonteQuest]

But, at some point, don't the lending nations realize that the amount of money they are loaning (the principle) is in danger of not being given back? At that point I would think they would be more concerned about the principle- this is a much larger sum of money than the interest. I would think they would either:

1. demand shorter term loans
2. scale back on principle loaned
3. demand the principle back

At some point- a lender becomes fearful of losing the principle and this fear overcomes the greed of making money on the interest- am I wrong? What happens then?

Yes, but you left out one very critical element on your list: 4. demand a higher return on their risk( interest )

Demanding the principle back would entail repurchasing the bond. If they can't pay the interest, they can't pay the principle.

[MonteQuest]

Unfortunately the Federal Reserve then proceeded with QE 3-infinity.

Yes, and many of those govt securities were purchases of bad debt in the form of Fannie Mae MBS's sitting on the banks balance sheets, essentially hiding the unrepayable debt on the FED's balance sheet.

[yellowcanoe]

But, at some point, don't the lending nations realize that the amount of money they are loaning (the principle) is in danger of not being given back? At that point I would think they would be more concerned about the principle- this is a much larger sum of money than the interest. I would think they would either:

1. demand shorter term loans
2. scale back on principle loaned
3. demand the principle back

At some point- a lender becomes fearful of losing the principle and this fear overcomes the greed of making money on the interest- am I wrong? What happens then?

The experience of the PIIGS is that when lenders started to get nervous it was necessary to offer a higher rate of interest to sell new bonds. Since most governments are trying to minimize the cost of servicing their debt by financing a large part of it with short term, low interest bonds a jump in interest rates will very quickly lead to a substantial increase in the cost of servicing the debt. People who advocate for more deficit spending don't seem to realize that an amount of debt that seems manageable today can very quickly become a trap if interest rates rise. The PIIGS were lucky that wealthier countries in the European community were able to help them out and interest rates dropped back down to a more manageable level. There is no country in the world that would be able to help the US in similar circumstances.

I'm dreading what will happen here in Ontario, Canada. Ontario has a debt of over $300 billion which makes it the most indebted non-sovereign government in the entire world. If one of the smaller provinces in Canada got into a debt trap there is no question that the Canadian government would come to their aid. Ontario, which has roughly 40% of the population of Canada might be too big for the federal government to bail out.

[MonteQuest]

There is no country in the world that would be able to help the US in similar circumstances.

We have drunk the water we use to prime the pump. The Fed's balance sheet expressed as a % of GDP is at 25%. The last time this happened, was in response to the Great Depression. Normally, it is around 5%.

[frankthetank]

There is no solution. It can't be repaid. Do the math..its a huge amt of money per every man/woman/child. I say let it go..borrow, put digits in the money computer and print print print... if other countries want to take our dollars for goods/services...that is their problem..and if they don't...they are terrorists and need to be invaded

I hear people say...your kids kids are going to be paying for this...no they aren't...the debt will just be deleted and someone holding it is going to be SOL.

[MonteQuest]

I hear people say...your kids kids are going to be paying for this...no they aren't...the debt will just be deleted and someone holding it is going to be SOL.

Do you realize that is everybody that holds dollar denominated assets either in cash or otherwise?

Delete all debt and you delete all money. Money=debt.

[PrestonSturges]

Right now our annual deficit is pretty close to historical averages.

If we collected all the taxes that are owed, the annual deficit would nearly vanish.

But hey folks, this is the cost of having a global empire. As I always tell folks that want to invade a different random country every week, they should be prepared to surrender their standard of living and be subject to WW2 or Soviet-style rationing and work double shifts in a defense plant.

[MonteQuest]

Right now our annual deficit is pretty close to historical averages.

As a percentage of GDP, yes. But to put it in proper perspective, our yearly deficit in 2016 will be $544 billion dollars, $244 billion dollars higher than our total national debt in 1971. The 2015 interest alone is $402 billion. $102 billion higher than the national debt in 1971.

[PrestonSturges]

The GOP candidates are promising a massive defense buildup. tax cuts, and probably a couple new wars (maybe we'll attack another planet or something). As usual, they intend to put it on the credit card.

[C8]

So is the USA too big to fail? Does the world need us so much to fuel growth and maintain the world monetary system that we can force the world to eat our debt? Where else would they invest? Who else would they sell to? If we are bad- but everybody else is even more risky- do we win by default?

[MonteQuest]

So is the USA too big to fail? Does the world need us so much to fuel growth and maintain the world monetary system that we can force the world to eat our debt? Where else would they invest? Who else would they sell to? If we are bad- but everybody else is even more risky- do we win by default?

No, and neither is the world as a whole. Remember the Great Depression.

Investors will go where the ROI is the greatest and the risk is least. Then fear and greed take over.

[Outcast_Searcher]

Since most governments are trying to minimize the cost of servicing their debt by financing a large part of it with short term, low interest bonds a jump in interest rates will very quickly lead to a substantial increase in the cost of servicing the debt.

At least for the US, that seems to be one thing they are doing relatively well -- pushing out the average maturity of federal debt to near record levels, as of 2/15 (the date of the linked article).

http://www.bloomberg.com/news/articles/ ... maturities

Thus, the dangers this article is discussing are for the bond holders if interest rates rise, not for the US re interest expense.

The share of bills, due in one year or less, is approaching the least since the 1950s.
That’s given the U.S. more time to repay its obligations. The average maturity has reached 68.7 months, or two months short of its high in 2001. With the U.S. budget deficit falling to a six-year low, the government is in better shape to finance its record debt burden when interest rates do rise.

So this is relatively good news for the US, where an unending sea of debt is generally bad news. Given how cheap long term treasury bond rates are, it's too bad they don't extend the average maturity far more, but the borrowers choose the maturities they want to buy.

Treasuries due three years or less make up 48 percent of the market for U.S. debt, versus 58 percent six years ago.

I'm pretty sure they're going to have a tough time, for example, convincing holders of short term t-bills and t-notes to purchase long term treasury bonds and accept all that interest rate risk when US debt interest rates have been generally declining for over three decades now.

Speaking for myself, given the lack of serious action by the US to balance its budget, I wouldn't buy long term treasuries with someone ELSE's money, much less mine. It's hard for me to imagine a realistic situation that would change my mind on that (including a return to 15%ish long US treasury interest rates).

[C8]

Since most governments are trying to minimize the cost of servicing their debt by financing a large part of it with short term, low interest bonds a jump in interest rates will very quickly lead to a substantial increase in the cost of servicing the debt.

At least for the US, that seems to be one thing they are doing relatively well -- pushing out the average maturity of federal debt to near record levels, as of 2/15 (the date of the linked article).

http://www.bloomberg.com/news/articles/ ... maturities

Thus, the dangers this article is discussing are for the bond holders if interest rates rise, not for the US re interest expense.

The share of bills, due in one year or less, is approaching the least since the 1950s.
That’s given the U.S. more time to repay its obligations. The average maturity has reached 68.7 months, or two months short of its high in 2001. With the U.S. budget deficit falling to a six-year low, the government is in better shape to finance its record debt burden when interest rates do rise.

So this is relatively good news for the US, where an unending sea of debt is generally bad news. Given how cheap long term treasury bond rates are, it's too bad they don't extend the average maturity far more, but the borrowers choose the maturities they want to buy.

Treasuries due three years or less make up 48 percent of the market for U.S. debt, versus 58 percent six years ago.

I'm pretty sure they're going to have a tough time, for example, convincing holders of short term t-bills and t-notes to purchase long term treasury bonds and accept all that interest rate risk when US debt interest rates have been generally declining for over three decades now.

Speaking for myself, given the lack of serious action by the US to balance its budget, I wouldn't buy long term treasuries with someone ELSE's money, much less mine. It's hard for me to imagine a realistic situation that would change my mind on that (including a return to 15%ish long US treasury interest rates).

This makes me wonder if another game is afoot. The US may have a huge debt in the future but other nations may be worse off- so investors will park their money in the US because it is a safe place to park money and get it back. IOW- the goal may become money security rather than ROI.

[Outcast_Searcher]

Right now our annual deficit is pretty close to historical averages.

If we collected all the taxes that are owed, the annual deficit would nearly vanish.

But hey folks, this is the cost of having a global empire. As I always tell folks that want to invade a different random country every week, they should be prepared to surrender their standard of living and be subject to WW2 or Soviet-style rationing and work double shifts in a defense plant.

reakelly li
That's a good point, and the primary thing that I really liked about Ross Perot. He felt (and stated on the campaign trail) that if there were to be ANY sort of military action on the scale of a war, that BEFORE it started there should be a significant bump in the income tax rate to pay for it.

That way, we'd not automatically run up a bunch of debt for a military action, and more importantly, politicians would know that to get us involved in something via significant military commitment, that they would need to justify to the folks that elect them why that action is seriously needed, since it will already be impacting civilians, not just the troops in harm's way.

[copious.abundance]

Not this again ...

It Is Impossible For The US To Default

With so many economic, political, and social problems facing us today, there is little point in focusing attention on something that is not one. The false fear of which I speak is the chance of US debt default. There is no need to speculate on what that likelihood is, I can give you the exact number:

There is 0% chance that the US will be forced to default on the debt.

We could choose to do so, just as a person trapped in a warehouse full of food could choose to starve, but we could never be forced to. This is not a theory or conjecture, it is cold, hard fact. The reason the US could never be forced to default is that every single bit of the debt is owed in the currency that we and only we can issue: dollars. Unlike Greece, we don’t have to try to earn foreign exchange via exports or beg for better terms. There is simply no level of debt we could not repay with a keystroke.

[...]