Are we fucked?
Watched a frontline documentary from 2009 about the U.S. debt burden and the tone was pretty "the end is near if we don't act soon." It got me thinking about our current B/S. The U.S. has only taken on a boat-load ton more debt since then and no one ever seems to address when / how that's going to begin to be tapered down. Are we ever going to raise taxes or cut spending? Is there another way to reduce the debt burden that I'm unfamiliar with? Obviously the whole COVID thing was unprecedented and required some FED intervention to restore some faith in the economy. But it kind of feels like the can keeps getting kicked down the road on this one. Even with bond yields having been the shitter forever people still lose their minds when they hear Jerome Heaters might be raising interest rates by 50 bps instead of 25. When the market acts like a poopy diaper baby over news like that, how would it react if there was more significant news like a tax hike? And what politician wants to take the heat for enacting such a widely unpopular economic policy and risk their chance of being re-elected? So rant aside, when, if it all does something need to be done about the FED's balance sheet? And when, if ever, will this shit hit the fan?
No idea how the interest rates trend over the next 12-24 months. Coming up with macro predictions is tough if not virtually impossible in my view. If you keep on saying there will be a recession or something soon, chances are you will proven right in a 5-7 year time frame given how economic cycles oscillate. So as it comes to investing, better to investing by focusing on the micro part IMO, meaning if you're looking to invest in a business' debt, identifying companies that operate in a stable / essential industry, have strong-enough free cash flow generation to pay off the instrument you're taking a position in and that you are adequately-secure in terms of priority (lien). If you're looking to invest across the equity side, you obviously care about protecting your downside too, but the focus there, in addition to the obvious things (at least a stable industry if not growing and ideally across economic cycles) is the business' ability to pass on these price increases / inflation to its customers, which again is a function of a few things (uniqueness of industry, competitive position and / or industry structure) and its capital structure (which very simply implies that the company can pay off the debt / liabilities without going under water so leaving zero upside for the equity)..coming up with an exhaustive list of reasons on what can go wrong from a macro perspective might be a futile exercise, no idea what will be the new economic theory that will take root...debt to GDP might be concerning, but Japan's debt to GDP is much higher than US', which has impacted the former's saving rate, and consequently the GDP growth, but Japanese foreign investment is high as a result of that, so all that is to say is maybe the new norm will be a lower GDP growth profile...tech will be the game changer though as tech / IP investing makes up a bigger part of the US economy than it did decades ago...
From a macro-economic perspective, neither the Fed nor the Government really “need” to reduce their (figurative) balance sheets,
For the Fed, their balance sheet is rally just chosen to be altered depending on how much liquidity they want in the market.
Government debt can just be permanently rolled over, with recent macro perspectives arguing that this is a good thing provided long term growth rates exceed real interest rates.
Pretty much all of government debt is financed by short term T-Bills. In this sense, it's almost like an adjustable rate mortgage. If the federal reserve ever brought interest rates to levels that would actually curb inflation (need at least 10% and maybe even 15%), the government interest payments on $30 trillion in debt would no longer be affordable, and they would default. There'd also most likely be a stock market and real estate crash, along with a complete financial crisis as debt bubbles collapse. Especially since the Fed would be unwinding its balance sheet in a contractionary policy and wouldn't be able to monetize debt at the same time (expansionary policy). Only way government is able to "pay its bills" (taking on more credit card debt to pay old credit cards isn't really paying your bills) is relying on the Fed to continue monetizing and rolling over debt. It is not sustainable. Do not rely on or believe retarded keynesian economists like Paul Krugman. Learn some real economics from the Austrian school or the Chicago school from Milton Friedman.
Hi! A different perspective for sure - personally in my opinion not quite as simple as Keynesian vs Austrian, think macro has progressed passed framing arguments like this anyway.
This paper has formed a lot of my thoughts on this subject (although obviously outdated in a new interest rate environment):
https://www.nber.org/system/files/working_papers/w25621/w25621.pdf
Regardless, not sure the credit card analogy works, government finances don’t function in any way like a household.
Not sure I agree that 10-15% interest rates will ever be reached (let alone needed) again, but regardless there is an aspect of fiscal dominance here: the situation you described is catastrophic and as such the Fed will always prioritise averting default through QE/looser rates and risking even highly damaging levels of inflation.
Of course always interested to see research/discussion papers that points the opposite way.
These debt Pollyanna's are wrong. Since government won’t fire themselves we are doomed to debased currency and increased taxes.
TLDR but yes we are fucked. Reserve currency status will likely be lost by 2025 and almost certainly by 2030. https://trader2trader.wordpress.com/2013/01/20/empires-reserve-currenci…
Longest a reserve currency has lasted is Spain for 110 years. Range is 80-110 years. Last holder was Britain for 105 years from 1815-1920. We're already at around 102 years. With the way the Fed and the federal government continues to be reckless with currency creation, I can't imagine the US having this privilege any longer. Especially when we threaten Russia with all this SWIFT shit and financial sanctions, why would any country want to hold US dollars? Russia has already divested of all dollars in its sovereign wealth fund. China sees what Russia is undergoing and let's say they want to invade Taiwan, do they want the threat of dollar lingering against them? Nope they'll probably continue to dump their Treasury holdings like they've been doing for years.
The dollar has gotten stronger since we instituted financial sanctions against Russia and their Central Bank, people are still putting their trust in the USD. There is too much political, economic and demographic risk in the yuan (more than the US dollar), the euro is trouble since the union doesn't have fiscal policy just monetary and can always risk breaking apart, and the UK/Japan/Switzerland don't dominate enough international trade to be a primary reserve currency. Plus most international trade is still denominated in dollars, and because of the fact that we've had such a large trade deficit for so long there are so many dollars floating around outside our borders; weaning the world off of the USD will take a lot longer than 3-8 years.
Agreed. The USD's saving grace is that there is no good replacement. Most (all?) governments with large enough economies to be structurally important have behaved inappropriately with debt.
Crypto, in theory, is a long-term (20+ year threat) but looks like governments have or will nip that threat in the bud through regulation and prohibitions.
That's why we will go back to a gold or silver backed currency. None of these fiat currencies can be trusted. The trade deficit you outlined is a major problem, not some saving grace. You know we topped $1 trillion in our trade goods deficit in 2021? What happens when all those dollars come back to shore and go to bidding up goods and services? The inflation will be through the fucking roof, and it's already bad right now. The US is able to dampen even worse inflation because we print dollars and send them around the world for actual stuff (imports). The supply of goods artificially increases this way and tempers down the price increases. If we weren't able to import as much as we did and all the printed money was chasing domestic goods, we'd be absolutely screwed.
Right now the dollar is the cleanest dirty shirt in the hamper. It's absolute trash, but compared to everything else, it's better. The US is going backwards 2 steps while other countries may be going backwards 4-10 steps. Still doesn't mean that the US is going forwards. I don't think it's going to continue to be the cleanest dirty shirt for the long term either. Eventually, foreigners could decide to stop sending goods to us and keep them for domestically. There's no value to China sending us their stuff for our useless paper. Their economy would still function perfectly fine if their citizens were able to enjoy that surplus of goods.
So yeah right now it still looks okay and I agree. I doubt that will be the case 5-10 years from now as we keep printing money out the wazoo to monetize surging budget deficits and keeping this phony economy afloat.
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"100% - the book was great
dalio is a shill for communist china. the epitome of a self loathing limousine liberal, no thanks.
You should try his book you will understand why. I also didn't understand his infatuation with china, since last year Chinese equities got hammered but now it makes sense. He has a long term bet that china will supersede the USA
I blame democrats, as with most problems
I blame George Bush, he doesn’t care about black people
wavy
You probably blame Biden for taxes going up for nearly everyone in the medium-term too, even though these are the result of Trump's tax policy.
I don't support either major party, but let's not pretend only one party is responsible for where we find ourselves as a nation.
Fwiw, I'd love to see the U.S. adopt more of a coalition government with multiple prominent parties.
The Republicans are just awful on spending and the deficit, but the inevitable catastrophe will be caused by the accrual of 100 years of Democrat policies with respect to social security, Medicare, and an endless belief in the power of government spending to grow an economy in the face of mountains of counter evidence. Also, a key issue the U.S. faces is that the tax system is so progressive right now (arguably the most progressive in the West) that there is little room to pick low hanging fruit. To materially increase tax receipts beyond economic growth will require flattening and expanding the tax base, which is politically unpopular. And the worst spending is ahead of us in nondiscretionary entitlement spending. Unless politicians are willing to expand the tax base, we are going to see long-term rate of inflation far higher than what we saw from about 1990 to 2020. The public will be taxed through the backdoor of inflation, which is good. The American public deserves to suffer for his greedy and entitled behavior.
Yes - we absolutely are. I posted about this in January - link below. You may find the dialogue insightful / interesting.
https://www.wallstreetoasis.com/forums/teetering-on-the-edge-of-catacly…
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