9 ms·

I find it interesting that you would put "US debt default" in the category of things likely to happen in the next decade or two. The reason that the US is able

by btmorex 16y ago

I find it interesting that you would put "US debt default" in the category of things likely to happen in the next decade or two. The reason that the US is able to borrow money for practically nothing is that it has never defaulted on debt. Now, clearly there is a possibility that at some point in the future the US will default, but I don't how you would determine that is likely in the next couple decades. Remember we had a significantly higher level of debt as a percentage of GDP following World War II than we do now. We didn't default then.

bd_at_rivenhill 16y ago
Depends on your definition of default. Since the dollar is a fiat currency there is essentially no chance of the US government skipping an interest or principal payment. However, it seems highly likely that they will attempt to orchestrate some steady devaluation of the dollar to reduce the value of the debt in real terms. The high impact event would be if they mismanage the devaluation and accidentally introduce high (or hyper) inflation for some period of time before they can get things under control. Check out the history of inflation and interest rates in the 1970's to see what this might look like.
- nradov 16y ago
  That's what everyone thought about Russia before 1998. But they chose to default on ruble denominated debt rather than hyperinflating the currency.
  - bd_at_rivenhill 16y ago
    Hopefully the Fed is smarter than the Russians, an actual US Treasury default would be a cataclysmic event that would drive all risk premiums everywhere through the roof. I suspect that they will choose riding the inflation tiger and trying to terrify the politicians into some semblance of fiscal rectitude over seeing them just plain crap out on the debt. I also don't suspect that the Russians have anything approaching the political neutrality of the Fed anywhere in their government, nor have they ever.
randombit 16y ago
Treasury rates are almost absurdly low right now, so we can clearly agree that there is very little perception of risk that the US will default. That's why it makes a great example of this phenomenon; people will look back and see all the (in retrospect) obvious signs of a coming default and wonder why it wasn't obvious now. I would hope the structural differences between the US situation in 1945 and now would be obvious - exporter vs importer, young vs old, short term debt (the war) vs long term (SS and Medicare, plus maintaining an ongoing worldwide military presence). And we don't currently have the advantage that every possible economic competitor of ours was recently carpet bombed and utterly drained by years of total war, which certainly didn't hurt our exports. Adding for clarity: I don't currently believe either a default or major coastal flooding is inevitable or unstoppable, I just think there is substantially more risk associated with it than is generally perceived. Ironically, the perception of little risk can help make such events more likely, because after all there is little point wasting lots of effort trying to prevent something that probably won't happen, right?
- jessriedel 16y ago
  I think then your claim is that the true risk and the perception of risk are very different, not that default is necessarily likely (i.e. > 50%). If you were really confident that default was likely within 20 years, you could make an awful lot of money shorting T-bonds (or something).
  - randombit 16y ago
    You can buy credit default swaps in T-bills, so if the US defaulted you could make a nice return - if you think you can find a counterparty in the form of a large insurance company or bank who would actually survive a US default, which seems unlikely. An article in the Economist (IIRC) made the comment that these CDS's had best be denominated in Kalashnikovs and cans of spam.
btilly 16y ago
The USA may have never defaulted on debt, but twice we altered repayment terms. The lesser example was in 1970 when the USA decided to delay paying interest by 10 years. The nastier example was in 1933 when the USA devalued the US dollar against gold by 40% and unilaterally rendered null and void all contract terms where the USA had agreed to pay back debt in the borrower's choice of dollars or gold. Technically not quite a default, but it was a pretty subtle distinction for lenders who got paid back what was effectively 60 cents on the promised dollar. The last time that the government came close to failing to pay as promised was in 1995. Under Newt Gingrich, Congress refused to do any business, it brought government to a standstill and the government was unable to make payments. Luckily the deadlock was resolved just before the government would have been forced to not make bond payments. When it comes to the current debt, I would again not expect an outright default. But I'd expect another fudge where some owed debt does not get repaid. And the prime candidate for how that will be done is that the US government will restructure Social Security so that the government won't have to pay back bonds owed to Social Security. (Bush tried to do this, but didn't manage to push it through.) Here is that story. In past years Social Security has brought in more money than it has paid out, and the difference was invested in government bonds. Now that the government is facing Social Security paying out more that it takes in, the government is supposed to pay those bonds back but doesn't want to. Structurally, on paper, Social Security is fine for decades to come. However that depends on the US government paying back a lot of this owed debt, which nobody in government wants to do. Hence all of the talk about Social Security being broken. And the one feature that any "fix" is guaranteed to have is that the US government won't be paying back all of the money that was "lent" to the government from Social Security funds.

by btmorex 16y ago

bd_at_rivenhill 16y ago

Depends on your definition of default. Since the dollar is a fiat currency there is essentially no chance of the US government skipping an interest or principal payment. However, it seems highly likely that they will attempt to orchestrate some steady devaluation of the dollar to reduce the value of the debt in real terms. The high impact event would be if they mismanage the devaluation and accidentally introduce high (or hyper) inflation for some period of time before they can get things under control. Check out the history of inflation and interest rates in the 1970's to see what this might look like.

nradov 16y ago
That's what everyone thought about Russia before 1998. But they chose to default on ruble denominated debt rather than hyperinflating the currency.
- bd_at_rivenhill 16y ago
  Hopefully the Fed is smarter than the Russians, an actual US Treasury default would be a cataclysmic event that would drive all risk premiums everywhere through the roof. I suspect that they will choose riding the inflation tiger and trying to terrify the politicians into some semblance of fiscal rectitude over seeing them just plain crap out on the debt. I also don't suspect that the Russians have anything approaching the political neutrality of the Fed anywhere in their government, nor have they ever.

randombit 16y ago

Treasury rates are almost absurdly low right now, so we can clearly agree that there is very little perception of risk that the US will default. That's why it makes a great example of this phenomenon; people will look back and see all the (in retrospect) obvious signs of a coming default and wonder why it wasn't obvious now. I would hope the structural differences between the US situation in 1945 and now would be obvious - exporter vs importer, young vs old, short term debt (the war) vs long term (SS and Medicare, plus maintaining an ongoing worldwide military presence). And we don't currently have the advantage that every possible economic competitor of ours was recently carpet bombed and utterly drained by years of total war, which certainly didn't hurt our exports. Adding for clarity: I don't currently believe either a default or major coastal flooding is inevitable or unstoppable, I just think there is substantially more risk associated with it than is generally perceived. Ironically, the perception of little risk can help make such events more likely, because after all there is little point wasting lots of effort trying to prevent something that probably won't happen, right?

jessriedel 16y ago
I think then your claim is that the true risk and the perception of risk are very different, not that default is necessarily likely (i.e. > 50%). If you were really confident that default was likely within 20 years, you could make an awful lot of money shorting T-bonds (or something).
- randombit 16y ago
  You can buy credit default swaps in T-bills, so if the US defaulted you could make a nice return - if you think you can find a counterparty in the form of a large insurance company or bank who would actually survive a US default, which seems unlikely. An article in the Economist (IIRC) made the comment that these CDS's had best be denominated in Kalashnikovs and cans of spam.

btilly 16y ago

The USA may have never defaulted on debt, but twice we altered repayment terms. The lesser example was in 1970 when the USA decided to delay paying interest by 10 years. The nastier example was in 1933 when the USA devalued the US dollar against gold by 40% and unilaterally rendered null and void all contract terms where the USA had agreed to pay back debt in the borrower's choice of dollars or gold. Technically not quite a default, but it was a pretty subtle distinction for lenders who got paid back what was effectively 60 cents on the promised dollar. The last time that the government came close to failing to pay as promised was in 1995. Under Newt Gingrich, Congress refused to do any business, it brought government to a standstill and the government was unable to make payments. Luckily the deadlock was resolved just before the government would have been forced to not make bond payments. When it comes to the current debt, I would again not expect an outright default. But I'd expect another fudge where some owed debt does not get repaid. And the prime candidate for how that will be done is that the US government will restructure Social Security so that the government won't have to pay back bonds owed to Social Security. (Bush tried to do this, but didn't manage to push it through.) Here is that story. In past years Social Security has brought in more money than it has paid out, and the difference was invested in government bonds. Now that the government is facing Social Security paying out more that it takes in, the government is supposed to pay those bonds back but doesn't want to. Structurally, on paper, Social Security is fine for decades to come. However that depends on the US government paying back a lot of this owed debt, which nobody in government wants to do. Hence all of the talk about Social Security being broken. And the one feature that any "fix" is guaranteed to have is that the US government won't be paying back all of the money that was "lent" to the government from Social Security funds.