6 ms·

The U.S. Debt Ceiling Expired on March 1 and Nobody Cared – But They Will

46 points by ohiovr 7y ago

mdorazio 7y ago
Why would markets/buyers of treasuries care? It's been shown multiple times over the last few years that there will be a bunch of political shenanigans, but ultimately the ceiling will be raised again and that T-bills will continue to be highly desirable and safe despite all the fuss.
- all2 7y ago
  I don't want this to happen. But I think it will. Debt is not a good thing, especially when it is ignored.
  - jmchuster 7y ago
    You can easily find many articles explaining why the national debt is very different from how we think about personal debt (e.g. http://money.com/money/4293910/national-debt-investors/ http://money.com/money/4293910/national-debt-investors/). And then even in the personal finance space, "debt is not a good thing" is just an incorrect statement, because it always makes perfect sense to borrow money at a lower interest rate than you can make via investments.
    - mehrdadn 7y ago
      > You can easily find many articles explaining why the national debt is very different from how we think about personal debt (e.g. http://money.com/money/4293910/national-debt-investors/ http://money.com/money/4293910/national-debt-investors/). Article: "Things aren’t at a boiling point — yet." Well I am now definitely comforted...
      - ianai 7y ago
        Chris Hayes did a podcast that helps explain the difference. Basically, the government is the sole source of money. If it were to balance its books it would mean the entire economy was zero sum. The government being in debt means its leaving value out in the economy. There’s a surplus of money on the not-government balance sheet. Source: https://www.nbcnews.com/think/opinion/debunking-deficit-hysteria-stephanie-kelton-podcast-transcript-ncna1003301 https://www.nbcnews.com/think/opinion/debunking-deficit-hyst...
        mehrdadn 7y ago
        Glancing through it I can't find any mention of what's supposed to happen when the country ends up with so much debt that most of the government's income ends up going toward interest... leaving little/no funds for all its other expenses. Or for the rest of the interest it'll accumulate the following year. Is the idea that you just print money and the problem goes away ("what could possibly go wrong?")?
        User23 7y ago
        The most likely outcome is that interest rates will asymptotically approach zero as debt increases and the theoretical claim that the natural rate of interest is zero will be proven. And obviously a zero interest treasury security is essentially the exact same thing as a normal currency note. Keep in mind that a 0% federal funds rate doesn't mean commercial banks won't charge interest. Which, by the way, leads to another important point. Something like 90% of the money in use isn't even created by the government, rather it's created from thin air by licensed banks. This is why a banking license is a huge deal. It is, subject to some restrictions, an actual license to create new money.
        mehrdadn 7y ago
        Sorry, I don't follow. Zero interest? Are we talking about the same interest? We're paying hundreds of billions of dollars to China in interest. In what world is China going to let the US keep its money and lower the interest it receives in return to zero?
    - maxxxxx 7y ago
      "it always makes perfect sense to borrow money at a lower interest rate than you can make via investments." Only if you actually invest and the returns are guaranteed.
      - jmchuster 7y ago
        Right, I think that's where the idea of "debt is bad" comes from, only thinking about money as "i can only use money to pay for expenses" as opposed to "i can use this to make more money", and then of course you always have to consider inflation as well.
    - User23 7y ago
      Sovereign currency issuers don't have debt the way non-sovereign entities do (or sovereign entities that use a currency they don't issue). The federal government can always coin money to pay its debts if it needs to. So the likely outcome of the democratic House trying to force a default is Trump ordering Mnuchin to mint a $1 trillion platinum coin with Trump's profile on the obverse and depositing it at the Fed. Which will then be enjoined by a 9th circuit district judge because Trump did it, even though back in the Obama years the exact same thing was acknowledged as entirely legal. Remember the funds are already legally appropriated! So minting a coin isn't the executive violating separation of powers. It's just an accounting gimmick. The resulting funds can still only be spent as authorized by congress. Another factor is that the Fed might just let Treasury overdraw it's account. Even normal commercial banks can allow demand account holders to spend into the negative as a courtesy. I imagine extremely wealthy private individuals with a private banking relationship can overdraw into the millions. The Treasury is obviously an extremely wealthy "person," not just because it can create money (by coining, I'm not sure if Treasury can still print US Notes, but I do know it doesn't), but also because of its taxing power, vast real estate holdings, and other assets.
- steveeq1 7y ago
  Until the day that it doesn't.
astazangasta 7y ago
It's worth noting that the debt ceiling is not a brake on spending, which continues apace. It is a brake on paying back debt. The analogy to personal finance that debt hawks love would be to rack up a bunch of debt on your credit card, and then balk when the bill comes due.
- User23 7y ago
  It's actually even more ridiculous than that. All the expenditures debt issuance "funds" have already been appropriated by congress, which is to say the agreement to pay has already been made. The debt ceiling is just an accounting gimmick based on the legal theory that the US Treasury's demand account at the Federal Reserve can't overdraw. Treasury could very much just write the checks (and probably is legally obligated to!) and then it would be up to the Fed to clear or bounce them. I don't see any Federal Reserve Chairman personally signing off on forcing a government default.
j7ake 7y ago
Debt is worth it if you think your economy is going to grow in the future. It multiplies growth of an economy. Unfortunately, this multiplier is a double edged sword, during times of shrinkage. Most modern economies have done well with debt since WW2 because the economy has been growing on average. During times of economic expansion, countries who don't put on more debt get left behind during the boom. The bust hurts those who took more risks, but it seems like on average it has worked out well for the debt takers in the last few generations.
- mac01021 7y ago
  Debt that must be repaid by a future generation (or just by other people under a different administration) will _always_ be worth it to the borrower. This truth can lead to frivolous borrowing that does not in the least benefit those who must pay back the debt. At least in theory. In practice, I guess things seem to be pretty ok for Japan in spite of their mountain of debt and shrinking population?
  - atq2119 7y ago
    The thinking about debt being repaid by a future generation is deeply misleading because government debt is an asset to the private sector and those treasury bills are largely owned by US citizens (directly or indirectly, e.g. via pension funds). So it's not that the debt has to be repaid by a future generation. Rather, the debt causes the government to indirectly cause transfer payments among the future generation, from those who don't own US treasuries to those who do. Put differently, the debt is a vehicle for perpetuating the current social stratification (who's rich and who's poor) into future generations. If you're genuinely and honestly worried about the effect that the debt has on future generations, then your answer has to be some combination of (a) wealth tax and (b) moving the country's pension systems away from asset-backed pensions towards pay-as-you-go / transfer systems. (Though presumably combining this with a socially owned social wealth fund would work as well.)
    - mac01021 7y ago
      Thank you for this. I don't think you've told the whole story here - for example, when it comes time for the government to pay the future debt they can do it by raising taxes on one part of the population or the other, or simply by printing money (leading to inflation) and not all of those solutions work out the same way for any given person. Even so, you've shown me a more sophisticated way to think about this issue and I'll surely end up having different, better founded opinions as a result.
User23 7y ago
From the article: "Interest rates, already one of the fastest rising costs in the federal budget, will rise as the political crisis builds, because foreign borrowers will demand an additional risk premium." Wrong. Interest rates will rise if the Federal Reserve raises interest rates. They will not if it does not. The Fed controls 100% of overnight rates and virtually all of the rest of the yield curve[1]: "as we went out on the curve the correlations remained very tight (FFR at 100%, 3 month at 97%, 1 year at 96%, 5 year at 91%, 10 year at 86%, 30 year at 87%). Even at the longest duration there is an 87% correlation between the movements of the Fed Funds Rate and the 30 year bond. In other words, the bond market is the Fed’s whipping boy. Not the other way around." What the Fed does not control is the US dollar's foreign exchange rate. So it's entirely possible that debt ceiling worries will cause a weaker dollar. Paradoxically though, they might cause a stronger dollar since the government not issuing debt actually constrains the dollar supply. Sovereign finances are deeply weird, and global reserve currencies are too. [1] https://www.pragcap.com/i-want-to-come-back-as-the-federal-reserve-you-can-intimidate-everybody/ https://www.pragcap.com/i-want-to-come-back-as-the-federal-r...
- ohiovr 7y ago
  My theory is the fed isn't all powerful with interest rates. They have target rates they wish to achieve and one way is to buy and sell treasuries on the open market. Treasury prices are still up to the results of an auction process. But there is usually a secondary market you can buy from from treasuries that have already been awarded to someone. The debt itself is not fearful. Being unable to sell treasuries at low costs will be a big change. The fear is that todays political climate could indeed be too messed up to act in time so that congress has the authority to spend. Missed payments are going to be a problem if it happens. But I'm not a finance expert.
  - dfrage 7y ago
    Your theory proved correct in the 1970s, things got so messed up "everything" rose, both unemployment and inflation driving a stake into the heart of the Phillips Curve, and what people demanded to buy private or Federal debt. The latter got so bad "Carter bonds" were created, denominated in West German Marks or Swiss Francs: https://en.wikipedia.org/wiki/Carter_bonds https://en.wikipedia.org/wiki/Carter_bonds
an4rchy 7y ago
It's interesting that there's no legal consequences, for the politicians, to raise the debt ceiling. Is this the same in other countries as well?
- Someone 7y ago
  Are there other countries with a US-like debt ceiling? Australia had one between 2007 and 2013 (https://en.wikipedia.org/wiki/Australian_government_debt#Debt_ceiling https://en.wikipedia.org/wiki/Australian_government_debt#Deb...) and the EU stability and growth pact (https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact) limits debt to 60% of GDP, but its measures are a lot drastic than what the US does, and its limit was softened in 2005 (https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Reform_2005 https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Refo...)
username90 7y ago
Am I wrong or do USA have an extreme discrepancy between government spending and tax revenue? Isn't it strange that the American Government is spending 38% of gdp, but only collecting 27% of gdp in taxes? Compare Japan with USA Japan tax pressure: 35.9%. USA tax pressure: 27.1% Japan gov spending: 38.9% USA gov spending: 38.0% As you can see to a naive person it might look like Japan has a much bigger government than USA, but they are actually very similar. https://tradingeconomics.com/united-states/government-spending-to-gdp https://tradingeconomics.com/united-states/government-spendi... https://tradingeconomics.com/japan/government-spending-to-gdp https://tradingeconomics.com/japan/government-spending-to-gd... https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_to_GDP_ratio https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven... https://ourworldindata.org/grapher/historical-gov-spending-gdp?time=1880..2011&country=DEU+JPN+SWE+CHE+GBR+USA https://ourworldindata.org/grapher/historical-gov-spending-g...

46 points by ohiovr 7y ago

Why would markets/buyers of treasuries care? It's been shown multiple times over the last few years that there will be a bunch of political shenanigans, but ultimately the ceiling will be raised again and that T-bills will continue to be highly desirable and safe despite all the fuss.

all2 7y ago
I don't want this to happen. But I think it will. Debt is not a good thing, especially when it is ignored.
- jmchuster 7y ago
  You can easily find many articles explaining why the national debt is very different from how we think about personal debt (e.g. http://money.com/money/4293910/national-debt-investors/ http://money.com/money/4293910/national-debt-investors/). And then even in the personal finance space, "debt is not a good thing" is just an incorrect statement, because it always makes perfect sense to borrow money at a lower interest rate than you can make via investments.
  - mehrdadn 7y ago
    > You can easily find many articles explaining why the national debt is very different from how we think about personal debt (e.g. http://money.com/money/4293910/national-debt-investors/ http://money.com/money/4293910/national-debt-investors/). Article: "Things aren’t at a boiling point — yet." Well I am now definitely comforted...
    - ianai 7y ago
      Chris Hayes did a podcast that helps explain the difference. Basically, the government is the sole source of money. If it were to balance its books it would mean the entire economy was zero sum. The government being in debt means its leaving value out in the economy. There’s a surplus of money on the not-government balance sheet. Source: https://www.nbcnews.com/think/opinion/debunking-deficit-hysteria-stephanie-kelton-podcast-transcript-ncna1003301 https://www.nbcnews.com/think/opinion/debunking-deficit-hyst...
      - mehrdadn 7y ago
        Glancing through it I can't find any mention of what's supposed to happen when the country ends up with so much debt that most of the government's income ends up going toward interest... leaving little/no funds for all its other expenses. Or for the rest of the interest it'll accumulate the following year. Is the idea that you just print money and the problem goes away ("what could possibly go wrong?")?
        User23 7y ago
        The most likely outcome is that interest rates will asymptotically approach zero as debt increases and the theoretical claim that the natural rate of interest is zero will be proven. And obviously a zero interest treasury security is essentially the exact same thing as a normal currency note. Keep in mind that a 0% federal funds rate doesn't mean commercial banks won't charge interest. Which, by the way, leads to another important point. Something like 90% of the money in use isn't even created by the government, rather it's created from thin air by licensed banks. This is why a banking license is a huge deal. It is, subject to some restrictions, an actual license to create new money.
        mehrdadn 7y ago
        Sorry, I don't follow. Zero interest? Are we talking about the same interest? We're paying hundreds of billions of dollars to China in interest. In what world is China going to let the US keep its money and lower the interest it receives in return to zero?
  - maxxxxx 7y ago
    "it always makes perfect sense to borrow money at a lower interest rate than you can make via investments." Only if you actually invest and the returns are guaranteed.
    - jmchuster 7y ago
      Right, I think that's where the idea of "debt is bad" comes from, only thinking about money as "i can only use money to pay for expenses" as opposed to "i can use this to make more money", and then of course you always have to consider inflation as well.
  - User23 7y ago
    Sovereign currency issuers don't have debt the way non-sovereign entities do (or sovereign entities that use a currency they don't issue). The federal government can always coin money to pay its debts if it needs to. So the likely outcome of the democratic House trying to force a default is Trump ordering Mnuchin to mint a $1 trillion platinum coin with Trump's profile on the obverse and depositing it at the Fed. Which will then be enjoined by a 9th circuit district judge because Trump did it, even though back in the Obama years the exact same thing was acknowledged as entirely legal. Remember the funds are already legally appropriated! So minting a coin isn't the executive violating separation of powers. It's just an accounting gimmick. The resulting funds can still only be spent as authorized by congress. Another factor is that the Fed might just let Treasury overdraw it's account. Even normal commercial banks can allow demand account holders to spend into the negative as a courtesy. I imagine extremely wealthy private individuals with a private banking relationship can overdraw into the millions. The Treasury is obviously an extremely wealthy "person," not just because it can create money (by coining, I'm not sure if Treasury can still print US Notes, but I do know it doesn't), but also because of its taxing power, vast real estate holdings, and other assets.
steveeq1 7y ago
Until the day that it doesn't.

astazangasta 7y ago

It's worth noting that the debt ceiling is not a brake on spending, which continues apace. It is a brake on paying back debt. The analogy to personal finance that debt hawks love would be to rack up a bunch of debt on your credit card, and then balk when the bill comes due.

User23 7y ago
It's actually even more ridiculous than that. All the expenditures debt issuance "funds" have already been appropriated by congress, which is to say the agreement to pay has already been made. The debt ceiling is just an accounting gimmick based on the legal theory that the US Treasury's demand account at the Federal Reserve can't overdraw. Treasury could very much just write the checks (and probably is legally obligated to!) and then it would be up to the Fed to clear or bounce them. I don't see any Federal Reserve Chairman personally signing off on forcing a government default.

j7ake 7y ago

Debt is worth it if you think your economy is going to grow in the future. It multiplies growth of an economy. Unfortunately, this multiplier is a double edged sword, during times of shrinkage. Most modern economies have done well with debt since WW2 because the economy has been growing on average. During times of economic expansion, countries who don't put on more debt get left behind during the boom. The bust hurts those who took more risks, but it seems like on average it has worked out well for the debt takers in the last few generations.

mac01021 7y ago
Debt that must be repaid by a future generation (or just by other people under a different administration) will _always_ be worth it to the borrower. This truth can lead to frivolous borrowing that does not in the least benefit those who must pay back the debt. At least in theory. In practice, I guess things seem to be pretty ok for Japan in spite of their mountain of debt and shrinking population?
- atq2119 7y ago
  The thinking about debt being repaid by a future generation is deeply misleading because government debt is an asset to the private sector and those treasury bills are largely owned by US citizens (directly or indirectly, e.g. via pension funds). So it's not that the debt has to be repaid by a future generation. Rather, the debt causes the government to indirectly cause transfer payments among the future generation, from those who don't own US treasuries to those who do. Put differently, the debt is a vehicle for perpetuating the current social stratification (who's rich and who's poor) into future generations. If you're genuinely and honestly worried about the effect that the debt has on future generations, then your answer has to be some combination of (a) wealth tax and (b) moving the country's pension systems away from asset-backed pensions towards pay-as-you-go / transfer systems. (Though presumably combining this with a socially owned social wealth fund would work as well.)
  - mac01021 7y ago
    Thank you for this. I don't think you've told the whole story here - for example, when it comes time for the government to pay the future debt they can do it by raising taxes on one part of the population or the other, or simply by printing money (leading to inflation) and not all of those solutions work out the same way for any given person. Even so, you've shown me a more sophisticated way to think about this issue and I'll surely end up having different, better founded opinions as a result.

User23 7y ago

From the article: "Interest rates, already one of the fastest rising costs in the federal budget, will rise as the political crisis builds, because foreign borrowers will demand an additional risk premium." Wrong. Interest rates will rise if the Federal Reserve raises interest rates. They will not if it does not. The Fed controls 100% of overnight rates and virtually all of the rest of the yield curve[1]: "as we went out on the curve the correlations remained very tight (FFR at 100%, 3 month at 97%, 1 year at 96%, 5 year at 91%, 10 year at 86%, 30 year at 87%). Even at the longest duration there is an 87% correlation between the movements of the Fed Funds Rate and the 30 year bond. In other words, the bond market is the Fed’s whipping boy. Not the other way around." What the Fed does not control is the US dollar's foreign exchange rate. So it's entirely possible that debt ceiling worries will cause a weaker dollar. Paradoxically though, they might cause a stronger dollar since the government not issuing debt actually constrains the dollar supply. Sovereign finances are deeply weird, and global reserve currencies are too. [1] https://www.pragcap.com/i-want-to-come-back-as-the-federal-reserve-you-can-intimidate-everybody/ https://www.pragcap.com/i-want-to-come-back-as-the-federal-r...

ohiovr 7y ago
My theory is the fed isn't all powerful with interest rates. They have target rates they wish to achieve and one way is to buy and sell treasuries on the open market. Treasury prices are still up to the results of an auction process. But there is usually a secondary market you can buy from from treasuries that have already been awarded to someone. The debt itself is not fearful. Being unable to sell treasuries at low costs will be a big change. The fear is that todays political climate could indeed be too messed up to act in time so that congress has the authority to spend. Missed payments are going to be a problem if it happens. But I'm not a finance expert.
- dfrage 7y ago
  Your theory proved correct in the 1970s, things got so messed up "everything" rose, both unemployment and inflation driving a stake into the heart of the Phillips Curve, and what people demanded to buy private or Federal debt. The latter got so bad "Carter bonds" were created, denominated in West German Marks or Swiss Francs: https://en.wikipedia.org/wiki/Carter_bonds https://en.wikipedia.org/wiki/Carter_bonds

an4rchy 7y ago

It's interesting that there's no legal consequences, for the politicians, to raise the debt ceiling. Is this the same in other countries as well?

Someone 7y ago
Are there other countries with a US-like debt ceiling? Australia had one between 2007 and 2013 (https://en.wikipedia.org/wiki/Australian_government_debt#Debt_ceiling https://en.wikipedia.org/wiki/Australian_government_debt#Deb...) and the EU stability and growth pact (https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact) limits debt to 60% of GDP, but its measures are a lot drastic than what the US does, and its limit was softened in 2005 (https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Reform_2005 https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Refo...)

username90 7y ago

Am I wrong or do USA have an extreme discrepancy between government spending and tax revenue? Isn't it strange that the American Government is spending 38% of gdp, but only collecting 27% of gdp in taxes? Compare Japan with USA Japan tax pressure: 35.9%. USA tax pressure: 27.1% Japan gov spending: 38.9% USA gov spending: 38.0% As you can see to a naive person it might look like Japan has a much bigger government than USA, but they are actually very similar. https://tradingeconomics.com/united-states/government-spending-to-gdp https://tradingeconomics.com/united-states/government-spendi... https://tradingeconomics.com/japan/government-spending-to-gdp https://tradingeconomics.com/japan/government-spending-to-gd... https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_to_GDP_ratio https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven... https://ourworldindata.org/grapher/historical-gov-spending-gdp?time=1880..2011&country=DEU+JPN+SWE+CHE+GBR+USA https://ourworldindata.org/grapher/historical-gov-spending-g...