This is the difference between "accepting austerity to pay back the debts" and a default. As claw hammer says, default and the people that lent the money (the bond holders) get burned and life goes on for the country's people. When the IMF comes in, they represent the interests of the bond holders and push additional loans (stolen from foreign tax payers) onto the otherwise defaulting country to use to pay out their bond holders (banks and their cronies), while forcing the citizens of the defaulting country to accept "austerity measures". A euphemism for lower working conditions, higher taxes, the sale of public assets and reduced public services while channeling all the country's wealth to pay back the IMF loan. As more debt is never the answer to too much debt, typically countries working under the IMF imposed conditions end up defaulting anyway, but not before being thoroughly raped.
Actually that is not correct. The US has pretty much ALL of it's debt denominated in US dollars. That is a very very advantageous position to be in. While it is technically the same thing all the US has to do is print the money to pay the debt off as there is now nothing backing the US dollar. China will get it's 3trillion dollars it will take about a week to print and be put on a boat. What that does to the US' ability to borrow again is another story. What I can't understand is: with the fed buying up all treasuries since QE2 started how has china and other countries managed to NOT significantly reduce their holdings of US debt? If the Fed is buying it all up cheap(giving next to no yield for other buyers) how is it that other countries treasury holdings haven't nose dived(allowing them to change that cash for gold or other hard assets)???????? We need an expert bond trader on the forum.
Great post Gino, however re my post above if the US can not get more debt they have 2 choices. 1 = austerity 2= Zimbabwe. I think they are slowly taking option 2. Stack stack stack stack!!!!!!!!!!!!!!
They can't dump the US debt all at once at least, they've stopped buying and started reducing their exposure though. If they dump all once the price will be crushed by excessive supply so yeah they're slowly and surely removing their exposure and buying up US infrastructure, Gold, other assets instead of US debt. They used to be net buyers, now they're net sellers of US debt (if that's the correct term to use). Foreign countries no longer buy US debt as of 2010, except for T-Bills which have a quick maturity, not the 30 year bonds (I believe anyway, 99% sure)
There is of course a third option, which is what many believe is the strategy of the US Treasury and its (?) Federal Reserve Bank at the moment. And that is to pay back your debts, but with a currency of reduced value . . . this is the money printing strategy and you can find many references to it if you search on the Weimar Republic of Germany. In summary, its effort to pay back "reparations" imposed on it from WWI by France and England, Germany saturated its economy with fiat currency (as opposed to real money) to reduce the relative value of its debt so it could afford to repay it. However, this destroyed the family savings and established such terrible povety and social unrest that when Hitler came along, people were willing to follow him. Source: http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic This is what many people point to when we hear the term "Quantitative Easing", which is the US loaning newly printed money at effectively negative interest rates (literally giving it away), buying up bad assets with newly printed money from crony insiders . . . er . . companies that are too big to fail, and using that newly printed money to buy the debt of their own government that no one else is willing or able to buy because they are also broke! Basically, print, print, print until the value of the dollar is zero. Which is just what has been happening with inflation anyway, but sped up to a much faster printing pace. Source: http://dollardaze.org As lovey80 said . . . Zimbabwe 2.0
but that only works when there are other currencies that have high purchasing power to flee to. Zimbabwe, Germany etc all had neighbouring countries and currencies they could devalue against. The USD is the central reserve currency, there is nowhere to run to. They will effectively devalue all currencies around the world and induce global poverty and social unrest. It's going to be a lot different to Zimbabwe 2.0.
Well sort of Blockhead, they will only devalue those currencies that manipulate their currency in order to remain industrially competitive. China is a perfect example of this. In effect with other countries following suit the US pretty much exports the inflation. Those countries that fail to follow suit and devalue their currencies along with the USD have the side effect of their currency getting so strong that their exports suffer. So in effect the US is devaluing against ALL currencies unless they follow suit. Australia is in that position now (except for resources) where our exports are suffering. Because our costs of living have gone up so fast in recent history(inflation) even when the AUD hit parity the cost of anything in Australia was so much more expensive than anywhere else. For a Yank to come on holidays in Australia when we were at parity would have had their head explode when they saw the price of anything in Australia. The large reason for the steep return in pretty much all commodity prices post GFC is because of the US inflating the money supply. Oil from below $30 to back over $100 wasn't supply and demand and a little hick up in Libya. The USD was just losing value against those commodities.
Yeh I get that part of it. It would be suicide for China and others to "dump" US debt. My query is though, if the Fed has been eating up over $150 Billion in Treasuries per month since QE2 started, surely this isn't ALL new debt to the Obama administration? Surely as treasuries matured a large part of QE2 was rolling over US debt that had expired just at a cheaper interest rate than what the administration would have been able to get on the open market? Or am I wrong and QE2 was plain and simple buying new US treasuries?
I think QE2 was 'printing money' and buying up treasuries, in a simple summary. It was more like the US bonds weren't selling so the buyer of last resort (Fed) had to step in and buy the crap so that Obama could keep spending lol. These are like 30 year or 10 year bonds, they don't mature yet so is that what you were asking? And yes it is new debt, hence the 14.3 trillion debt ceiling being reached? Sorry just woke up not too focused so can't be sure if I'm answering your Q properly.
I believe the additional debt is two-fold and compounded: 1) The US FED loans the money into existence to the US Treasury in the first instance as per normal inflation; then 2) The US FED purchases US Treasury Bonds with the newly created money (from investment banks at a margin) against which the US Treasury then has to pay the ongoing interest on the bonds . . . from new money that it has to borrow from the US FED and any other bond buyer. The result of this insanity? The population becomes responsible for the debt so created, the investment banks make money on the trading of treasuries and everyone else rushes into commodities before the whole mess implodes, rising the input cost for everything across the world including the cost of living.
Hang on, 1) when the US Fed "loans" the money (after creating it) to the US treasury in the first place, it is purchasing a US Treasury bond at a very low interest rate and therefore other countries and investment banks don't get any yield and move their cash to other "assets" that have the yield they desire and the US treasury gets to sell debt at a low interest rate. There is no need for that extra step. Yes the population becomes responsible for the debt but the investment banks aren't making the big cash on the treasuries any more (because the yield is so low it's not worth their time) so they push their cash along the risk curve pushing others along it further and eventually cash finds it's way into commodities and small caps driving the price of everything up commodities and shares included = inflation. Fish ball thanks for that, I just assumed that QE2 was so big it wasn't all new debt and was partly allowing the US treasury to roll over maturing debt to the Fed at a cheap rate instead of the treasury having to up the rate to roll over the debt.
Yes of course you are right, they only buy the treasuries once. However, I understand that when doing so under open market operations and their QE programs they purchase via the primary dealers who sell the bonds on margin.
