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The two theories that are competing right now are the: * Dollar "Milkshake" Theory: the dollar (and treasuries) are so in demand that it kind of doesn't matter
by scoofy 1y ago
The two theories that are competing right now are the:
* Dollar "Milkshake" Theory: the dollar (and treasuries) are so in demand that it kind of doesn't matter how far into debt we go, because the point is that treasuries are mostly used for financial collateral, not for earning interest payments. So whenever there is a crisis, there will be a rush to the dollar, not away from it.
* Traditional Fixed Income valuation: that fixed income buyers care about real returns, and will penalize nations that get themselves into situations where they must either default in actuality, by refusing to pay their debts, or by effectively defaulting (in real terms) by inflating their currencies to the point of writing off their debts.
I understand the argument from both perspectives, and I understand that politics can easily lead to defaults that don't technically need to happen. I still have no idea which of these two theories will prove more accurate going forward. I generally consider myself pretty fiscally conservative, so I tend to lean toward traditional theories of fixed income.
- disgruntledphd2 1y agoThe biggest thing supporting the US market (debt and securities) is that there is nowhere for that money to go, absent absurdly large changes. If this happens (50/50 I think over the next twenty years) then it will be slow, and then sudden. I suspect a lot of high income US citizens will start caring a lot more about Social Security at that point.
- scoofy 1y agoI mean, alternatives already exist to the SWIFT network: CIPS (China), SFMS (India), even the INSTEX (Europe) system is in place if a European system were needed quickly. Insofar as "where the money goes," the sovereign bond market is huge, and if the milkshake theory is to be believed, finding and alternative is just a coordination problem that could be effectively solved by a few large actors. If the traditional theory is to be believed, downgrades from ratings agencies should simply facilitate the movement of folks leaving treasuries as a risk-free rate. This does introduce currency risk (though it existed already), but we may simply move to baskets of securities of we don't end up on a single currency to carry bonds in general. There is also the "store of value" vs "transactional" aspects to currencies, and the dollar may become more and more transactional and less useful as a store of value and/or collateral. If that's the case, I wouldn't be surprised if there were not more "asset inflation" if that's even a useful term. I agree with you that it should be slowly and then all at once, because if the US is going to default or debase, nobody wants to be the greater fool.
- disgruntledphd2 1y ago> Insofar as "where the money goes," the sovereign bond market is huge, and if the milkshake theory is to be believed, finding and alternative is just a coordination problem that could be effectively solved by a few large actors. If I have trillions of Treasuries then it's gonna be hard for me to move them to basically any other sovereign bond market. The only one that even conceptually works is the euro, but that's split across multiple sovereigns.
- busyant 1y ago> then it will be slow, and then sudden "How did you go bankrupt?" Two ways. Gradually, then suddenly." ― Ernest Hemingway, The Sun Also Rises
- riffraff 1y ago> whenever there is a crisis, there will be a rush to the dollar, not away from it. And yet during the current crisis there was a rush away from the dollar.
- theptip 1y agoRemarkable how quickly they were able to break that historical invariant. Meanwhile Fox News posted that akshually Trump had a cunning plan to lower interest rates by tanking the stock market temporarily so that the bond refinance this year would be more affordable. This is “hold my beer” economics in action.