Economics question

[honest_delboy]

I was on holiday at the start of the year and a US guy in our chalet was saying in year or so America won't be able to service the interest on its debt let alone pay off the capital. I kind of scoffed thinking he must've got his figures wrong but this article seems to support his view.

http://www.guardian.co.uk/business/2013/jun/09/eur...

How can this possibly be unwound? Those numbers look scarily big to me.

[jeff m2]

That's because he was staying in a chalet and not a hotel.

Debt service is the only bit paid, capital is just refinanced to those not yet conceived.

[ringram]

The guy is clearly a fool.

With the central bank willing and able to purchase all govt debt where is the issue!?

[Burrow01]

ringram said:

The guy is clearly a fool.

With the central bank willing and able to purchase all govt debt where is the issue!?

Massive inflation?

[P-Jay]

Money and debt, is just numbers on a page when you really look at it. There's very few tangibles to back it all up.

The US will never become bankrupt, no other country that matters can afford them too, and the nukes will fly looong before the US middle class starts suffering too much.

[Terminator X]

How the hell do such countries end up in such a bad state?! Out of interest what would happen if they simply said fk it I'm not paying that debt interest or indeed the capital any more?

TX.

[TwigtheWonderkid]

Terminator X said:

How the hell do such countries end up in such a bad state?! Out of interest what would happen if they simply said fk it I'm not paying that debt interest or indeed the capital any more?

TX.

It can be argued that America is rennaging on its debts now, by paying them off with a currency that's worth far less than when the debt was taken on. It's a far more insidious form of short payment.

[P-Jay]

Terminator X said:

How the hell do such countries end up in such a bad state?! Out of interest what would happen if they simply said fk it I'm not paying that debt interest or indeed the capital any more?

TX.

Every case is slightly different, but there's a universal truth that when things are rosy, no body asks questions, doesn't matter which side of 'the house' they're sat on. Take us in the UK. In 2005 Michael Howard campaigned on Immigration, Reducing Crime and Improving Hospitals, didn't question why with a massively booming economy we should have a national debt that was 40% of GDP and if he had mentioned any sort of spending cuts unless as a means of reducing taxation and Labour certainly weren't going to.

Successive governments ether spend more , or tax less to try to improve the lives of the population hoping that in return they'll be given another term in office, it takes a monumental shock to the system for people to start caring about national debt.

In regards to defaulting it depends on the debtor, if you're a country like Greece and it's inconvenient for your neighbours and debtors for you to default a deal will always be made, if you're an economic minnow like some African state you're screwed your access to borrowing is cut off, your currency goes through the floor and you if you can't grow food inside your boarders your people are going to starve.

The US though is completely different, if their economy fails, everyone's economy fails, Wars have been fought for far, far less. I read once that even the most developed countries are only 2 hungry days away from chaos, with the US it's far less than that.

[jeff m2]

TwigtheWonderkid said:

Terminator X said:

How the hell do such countries end up in such a bad state?! Out of interest what would happen if they simply said fk it I'm not paying that debt interest or indeed the capital any more?

TX.

It can be argued that America is rennaging on its debts now, by paying them off with a currency that's worth far less than when the debt was taken on. It's a far more insidious form of short payment.

True,
Certainly the best way to reduce Sov Debt (in real terms)

Although you may want to take a look at Sterling since Breton Woods.

[longone]

P-Jay said:

Money and debt, is just numbers on a page when you really look at it. There's very few tangibles to back it all up.

The US will never become bankrupt, no other country that matters can afford them too, and the nukes will fly looong before the US middle class starts suffering too much.

I agree, the US will not become bankrupt but its currency has begun, and will continue, to fall to zero. Any countries debt is demominated in its currency, and so defaults deliberate or otherwise are currency events only. No western economy can pay back what they currently owe but none of those situations make the country backrupt, only their respective currency eventually worthless. For a country to be bankrupt it would need to have lost all means of operating an economy or have been invaded and occupied.
Think of any recorded hyperinflationary event and ask was the country involved still operating an ecomnomy afterwards? Argentina is a repeat offender.
The end game will not be nukes, you are right, or at least not over debt, but will be the accepted collapse of the US$.
A master reset will come into play and at that point and the game will start again. The real question is, when the game restarts, will the western players be in different relative positions of economic productivity? Will the UK be the new Poland?

[jeff m2]

longone said:

P-Jay said:

Money and debt, is just numbers on a page when you really look at it. There's very few tangibles to back it all up.

The US will never become bankrupt, no other country that matters can afford them too, and the nukes will fly looong before the US middle class starts suffering too much.

I agree, the US will not become bankrupt but its currency has begun, and will continue, to fall to zero. Any countries debt is demominated in its currency, and so defaults deliberate or otherwise are currency events only. No western economy can pay back what they currently owe but none of those situations make the country backrupt, only their respective currency eventually worthless. For a country to be bankrupt it would need to have lost all means of operating an economy or have been invaded and occupied.
Think of any recorded hyperinflationary event and ask was the country involved still operating an ecomnomy afterwards? Argentina is a repeat offender.
The end game will not be nukes, you are right, or at least not over debt, but will be the accepted collapse of the US$.
A master reset will come into play and at that point and the game will start again. The real question is, when the game restarts, will the western players be in different relative positions of economic productivity? Will the UK be the new Poland?

The current position of the US is not that bad, despite the int rates being very low there is virtually no inflation so the need to raise rates to quell inflation is zip. It appears they (Bernanke & co) will be able to maintain the low rates in the hope that growth will pick up.
Once growth improves there will be moderate inflation which can them be controlled with a couple of half percent raises, ensuring of course the growth is not stifled.

I may of course regret that as they currently have a Fed two day meeting.

The UK is in a slightly different position. Low rates, worse growth and some unwanted inflation.
Far fewer options. Less able to use int rates.

[Birkin1932]

So if your sitting on a load of dollars, what should you be changing them to?

[ringram]

Burrow01 said:

Massive inflation?

Not evident. Ask Japan to identify inflation due to their massive purchases of bonds.

Its a risk, but at present that risk is near zero. So its in effect irrelevant.

[TwigtheWonderkid]

Birkin1932 said:

So if your sitting on a load of dollars, what should you be changing them to?

Gold?

It goes up and it goes down, but over the last 10K years it's never been worth nothing.

[jeff m2]

TwigtheWonderkid said:

Birkin1932 said:

So if your sitting on a load of dollars, what should you be changing them to?

Gold?

It goes up and it goes down, but over the last 10K years it's never been worth nothing.

Nor has my 1990 Nissan Sentra.

Since gold became a speculative commodity it has ceased to be a safe haven. While people are in it for a quick buck it will bring volatility not stability.

Dollars for a Sterling investor is a hold at 1.5375, if the rate goes down maybe worth converting back.

For those not in the market, this is the time to get in. We see lots of threads when the markets are climbing but this is the time to look at regions and sectors that have been hit most.
Emerging market stock has just been creamed, that could be a good three year punt.

This may not of course be "the bottom" there could be further adjustments, but this should be thought of as an opportunity.
Time to buy value at a discount.

[TwigtheWonderkid]

jeff m2 said:

TwigtheWonderkid said:

Birkin1932 said:

So if your sitting on a load of dollars, what should you be changing them to?

Gold?

It goes up and it goes down, but over the last 10K years it's never been worth nothing.

Nor has my 1990 Nissan Sentra.

But that's only 23 yrs old. I can confidently predict that at some point in the future, and not even 10k yrs in the future, but in the foreseeable future, your 1990 Nissan Sentra will be worth the square root of fk all. In fact, you'll probably have to pay someone to scrap it.

[Condi]

TwigtheWonderkid said:

Gold?

It goes up and it goes down, but over the last 10K years it's never been worth nothing.

Well, no, but in the last 18 months, 2 years, you could have lost 50% of your investment!

Not worth nothing, but worth significantly less than it was. Stocks and shares have fared much better over that time period.

[longone]

TwigtheWonderkid said:

Birkin1932 said:

So if your sitting on a load of dollars, what should you be changing them to?

Gold?

It goes up and it goes down, but over the last 10K years it's never been worth nothing.

That is very possibly the best bit of free advice you will ever get. Right now PMs are so low there is literally no case to say these prices can persist for much longer. That is assuming the manipulators are not intent on bankrupting every primary PM mine on the planet, and even if they were, where would the price go then?

[AJS-]

Most western countries are facing a big debt problem and the idea of their being unable to pay down the principle in the near future is very real. The idea of them being unable to service it is not that far fetched.

The time frame of 1 year seems quite arbitrary though.

Also as others have noted, since the US debts are denominated in US$ there's always the possibility of massive inflation eroding the real value of these debts to some degree, and making the situation more manageable in the medium term.

I think the more likely scenario is some unforeseen event pushing things over the edge to the point that a government can't borrow enough to meet it's spending obligations and service it's current debts.

As I understand it the US is far from the worst western country in this regard anyway. Plenty of other candidates for a debt crisis.

[marky1]

jeff m2 said:

Dollars for a Sterling investor is a hold at 1.5375, if the rate goes down maybe worth converting back.

Were you saying the same thing when it got to 2.10 or were you saying then that you should be in GBP because the USD will collapse?