United States Debt and Fiscal Deficit

[W.G.Ewald]

This thread has gone way off topic (it was pointless to begin with) and I am attempting to divert current discussion here. Of course the title of this thread is much less sexy.

@pmaitra @panduranghari @Sakal Gharelu Ustad

 

[jalsa]

Sir,
Some people say US will default on the Chinese debt, what's your take on that?

 

[Damian]

IMHO the USA debt will be slowly payed by use of newly found huge reserves (north america have estimated reserves bigger than Russia, Saudi Arabia and few other countries togheter) natural resources like gas or oil in USA. It will be the same move as Russians done to pay their debts.

+ USA is reducing it's needs for oil, and the biggest consumer of oil become China. So it is logical that oil can be sold to Chine by USA, money are made, and some of them can be used to pay debts.

Additional costs saving for USA can come from the fact that due to largest oil and gas reserves, USA will not be dependant from others, so saved money can be used for other purposes than to actually purchase gas and oil from other producers.

So the real question is not if USA will pay it debts, but when and how fast.

 

[Sakal Gharelu Ustad]

In case of US it is not a big problem..It is the European countries which make this topic interesting.

National debt is not a big issue, if there is a high possibility of decent long run growth rate. With growing economy, the % of debt will eventually go down. When this does not seem very feasible, countries use inflation to melt the debt as in most cases debt is not tied to any kind of real asset. Also, since $ acts as a reserve currency, exchange rate depreciation itself will erode some debt if needed.

Also, what matters in such cases is who holds the debt. In case of US, foreigners hold approximately 32% of its public debt. So, reneging on debt will essentially mean reneging on its own public, because they hold a high % of the US debt.
Who holds the debt always matters because Japan has the highest public debt as % of its GDP, but most of it is domestically held. So, again, reneging on debt does not make much sense for Japan because it is their own citizens who will lose the money. So, foreigners can still buy their government bonds or invest in Japan because they know, Japan would not default.

But it is definitely an interesting topic!!

 

[W.G.Ewald]

Sir,
Some people say US will default on the Chinese debt, what's your take on that?

I have never heard any US political figure, right or left, suggest that we do that. It would be almost suicidal, financially speaking, I believe.

 

[W.G.Ewald]

IMHO the USA debt will be slowly payed by use of newly found huge reserves (north america have estimated reserves bigger than Russia, Saudi Arabia and few other countries togheter) natural resources like gas or oil in USA. It will be the same move as Russians done to pay their debts.

+ USA is reducing it's needs for oil, and the biggest consumer of oil become China. So it is logical that oil can be sold to Chine by USA, money are made, and some of them can be used to pay debts.

Additional costs saving for USA can come from the fact that due to largest oil and gas reserves, USA will not be dependant from others, so saved money can be used for other purposes than to actually purchase gas and oil from other producers.

So the real question is not if USA will pay it debts, but when and how fast.

I like the sound of that, but we have a president who is not friendly to domestic energy development.

 

[Damian]

I like the sound of that, but we have a president who is not friendly to domestic energy development.

Then he is idiot... oh we both know he IS idiot.

But hopefully congress and even VP or others close to POTUS, can force him to do the right thing. I am sure that there are reasonable people in both GOP and DP.

 

[W.G.Ewald]

Then he is idiot... oh we both know he IS idiot.

But hopefully congress and even VP or others close to POTUS, can force him to do the right thing. I am sure that there are reasonable people in both GOP and DP.

GOP still has majority in Congress and many state Governors are Republican. Once Obama realizes he does not have the mandate he thinks he has, progress may be made.

 

[Damian]

GOP still has majority in Congress and many state Governors are Republican. Once Obama realizes he does not have the mandate he thinks he has, progress may be made.

Hopefully it will be sooner than later. But hey, the world do not stay in one place forever, USA might have economic problems today, but Chinese also slowly starts to have them, and we should remember that there are such differences like how advanced is economy (US economy is far more advanced), the level of life for common citizens (again better for USA), how old is society (again, despite huge numbers, Chinese society is going to be older, and older due to idiotic policy of child births and even more idiotic habit to kill girls and favor only boys), as well as numbers of hungry mouths (USA have less citizens, but then again, their life standards are higher, economy is suited for that number, while in China people also want this standard of life, while economy is definetly not suited for such huge numbers, not to mention other issues, like how to feed all of them, especially when society is aging, who will be work then? What will be a percentage relation between old and young productive citizens).

So there is a lot of issues, but USA definetly is not in the worst position, there are countries that have much worser situation, that in some cases might be camouflaged thanks to some economic growth or just lack of transparency for the rest of the world.

 

[trackwhack]

IMHO the USA debt will be slowly payed by use of newly found huge reserves (north america have estimated reserves bigger than Russia, Saudi Arabia and few other countries togheter) natural resources like gas or oil in USA. It will be the same move as Russians done to pay their debts.

+ USA is reducing it's needs for oil, and the biggest consumer of oil become China. So it is logical that oil can be sold to Chine by USA, money are made, and some of them can be used to pay debts.

Additional costs saving for USA can come from the fact that due to largest oil and gas reserves, USA will not be dependant from others, so saved money can be used for other purposes than to actually purchase gas and oil from other producers.

So the real question is not if USA will pay it debts, but when and how fast.

Are you friggin kidding man? The US debt has reached a level thats several times the asset value of all that gas. No one's gonna buy 50 years worth of gas in one shot to make a dent in the debt. Please check the % that debt servicing or interest, costs the US every year as part of their budget. The only way the US can come out of this mess is a decade where unnecessary spending is cut.

 

[pmaitra]

In case of US it is not a big problem..It is the European countries which make this topic interesting.

National debt is not a big issue, if there is a high possibility of decent long run growth rate. With growing economy, the % of debt will eventually go down. When this does not seem very feasible, countries use inflation to melt the debt as in most cases debt is not tied to any kind of real asset. Also, since $ acts as a reserve currency, exchange rate depreciation itself will erode some debt if needed.

Also, what matters in such cases is who holds the debt. In case of US, foreigners hold approximately 32% of its public debt. So, reneging on debt will essentially mean reneging on its own public, because they hold a high % of the US debt.
Who holds the debt always matters because Japan has the highest public debt as % of its GDP, but most of it is domestically held. So, again, reneging on debt does not make much sense for Japan because it is their own citizens who will lose the money. So, foreigners can still buy their government bonds or invest in Japan because they know, Japan would not default.

But it is definitely an interesting topic!!

Good post.

Can you please tell us more how exchange rate system works, and how a country holding US$ as forex can redeem it?

 

[asianobserve]

Sir,
Some people say US will default on the Chinese debt, what's your take on that?

This would mean the end of "U.S.A."

 

[blank_quest]

I have some nice video explaining US debt Trend.. Will post it.

 

[pmaitra]

Are you friggin kidding man? The US debt has reached a level thats several times the asset value of all that gas. No one's gonna buy 50 years worth of gas in one shot to make a dent in the debt. Please check the % that debt servicing or interest, costs the US every year as part of their budget. The only way the US can come out of this mess is a decade where unnecessary spending is cut.

You might find this interesting: Greek bond buyback offer tops expectations | Reuters

These pen-pushers always have some trick up their sleeves. Why do you think they are running banks and dictating terms at governments? There is a reason they are so powerful and wealthy.

 

[blank_quest]

This would mean the end of "U.S.A."

That would also mean end of "China"

 

[blank_quest]

 

[asianobserve]

That would also mean end of "China"

Not really. Maybe the end of career of the Chinese leaders that approved the acquisition of US treasuries.

 

[Damian]

Are you friggin kidding man? The US debt has reached a level thats several times the asset value of all that gas. No one's gonna buy 50 years worth of gas in one shot to make a dent in the debt. Please check the % that debt servicing or interest, costs the US every year as part of their budget. The only way the US can come out of this mess is a decade where unnecessary spending is cut.

And where I said that debt would be payed in a one shot? And who said that with the natural resources exports, other solutions to decrease debt can't be used simultaneously?

Doh...

 

[Sakal Gharelu Ustad]

Good post.

Can you please tell us more how exchange rate system works, and how a country holding US$ as forex can redeem it?

Thanks.

It is a broad question, please be a bit specific.

For how to redeem the forex, there are enough free market operations for the central bank to do it. You can sell it off to buy commodities or other securities or financial instruments, pay back loans/debt denominated in $. But given that most international trade happens in USD so this exchange happens anyway. In case there is crisis with some other country, the exchange rate just plummets and the only way people can redeem foreign currency is by selling it for peanuts. But in most cases, forex reserves are traded through free market operations or unless some currency is pegged to specific commodity or currency and you can go to their central bank to redeem that specific commodity or currency. For eg, Argentinian peso was pegged to USD before their default on sovereign debt in 1999. So, people had the option to redeem peso for USD, but then they just removed the peg(essentially how they defaulted on their debt). So even if you redeem peso, it was not worth anything after the default.

On a side note, in the medieval period you will just send army to recollect your debt through taxation, but that does not seem feasible option for current times!!

 

[jalsa]

China currently holds over a billion dollar worth of American bonds and one fine day they decide to sell all those bonds, who will probably buy them?