US Federal Debt

[ERICOPOLY]

 

That's great, but to complete the circle, the money borrowed has to be repaid, either by return on investment (that's why it's stimulative to invest in infrastructure as opposed to handouts) or by taking the stimulus back (taxes). If the circle completes and the loan is repaid by wealth created ...its stimulative and non inflationary, if the loan is repaid by dilluting the currency, inflation results. If the unpaid debt is allowed to accumulate the result inevitably is credit impairment, delevering and eventual bankruptcy.

 

If an amount of money was at period 1 was being spent and invested, but now in period 2 is being held in cash, then that's severely deflationary.  You could borrow that money and distribute it, for free, and even finance it by printing currency, and it still wouldn't be very inflationary, as it is just taking domestic product to a level previously achieved.

 

 

 

 

This makes sense, you have a balancing scale where on one side you have deflationary forces and on the other side inflationary forces.

 

It is said that there has been a permanent "reset" in spending, that prior levels were sustained by debt and that people aren't going to (and can't) return to those habits anytime soon.  In that sense, a certain degree of money printing is safe because their spending isn't coming back to prior levels.

[scorpioncapital]

In today's interview, Buffet said we will never see deflation in our lifetimes. Pretty strong words. If this is true, than the mis-understanding of the market on this issue creates amazing investment opportunities whenever there is another "scare" and prices drop.

[treasurehunt]

I might be missing something, but Eric Sprott's argument seems weak. Consider his initial claim: "Each of the debt buyers presented will have to buy three times the debt that they bought last year, by September 2009, in order to balance the accounts of the United States Government." It is very easy to see that this is mathematically false. It is only true that together the debt buyers have to buy about three times as much as they bought last year; each buyer does not have to buy three times the debt they bought last year. For example, since some of these buyers were actually net sellers last year, it is possible for the entire group to buy three times as much if some of the net buyers buy twice as much as they did last year and the sellers sell a little less this year. Maybe Sprott thinks even this is impossible, but his analysis certainly focused on whether each net buyer could buy three times as much as last year, which is misleading.

 

Also, Sprott says that Foreign and International Holders are on pace to buy 465*2 = 930 billion of US debt this year compared to 564 billion last year. He concludes the article by saying "Bond investors are running for the exits...". I guess someone forgot to send the memo to foreign and international holders.

 

Sprott may well be right that the US is in deep trouble, but this article sure didn't convince me.

[SharperDingaan]

 

The bail-outs essentially did 2 things.

(1) XYZ industry's write-downs got converted into equity (leaving their equity where it was & not materially lower), & (2) Fed leverage increased as the dung came onto the feds books (TARP assets, etc.).

 

But the overall system leverage decreased ... because the feds leverage is substantially lower than XYZ industry's.

Exactly what we pay the fed to do.

 

To get rid of that dung the fed can either write it off (& simultaneously print currency to offset the amount of the actual write-off) or it can try to 'grow' out it by improving business conditions (similar to Japan attempts in the 1990's) to incease its value. Both are structural changes - & the choice is either inflation & devaluation, or an extended period of stagflation. 

 

Lot of bankers suddenly talking about pulling back stimulus ....

 

SD

 

[Guest Broxburnboy]

"If an amount of money was at period 1 was being spent and invested, but now in period 2 is being held in cash, then that's severely deflationary.  You could borrow that money and distribute it, for free, and even finance it by printing currency, and it still wouldn't be very inflationary, as it is just taking domestic product to a level previously achieved."

 

This would be true if the cash was stuffed in a mattress or "frozen" as a troubled asset, but if held by the Federal Reserve, it is the ultimate backstop of value (theoretically) for the monetary system and as such ultimately backstops every loan in the country. It is levered at about 10 to 1 (or thereabouts) and supports the international exchange rate and purchasing power of the US dollar.

If this money is taken out of circulation and held as reserves, the dollar theoretically strengthens and interest rates will rise (demand for new loans being steady) as the supply of dollars is curtailed. If the money is recirculated at a lower interest rate it has an inflationary and relevering effect. This is called monetary policy and is the source of the Fed's power.