At what point will the national debt trigger a default?

[Hellestal]

@Trinopus

That is impressive.

It was just as impressive the first two times Corry El pointed out the same fact to you.

This happened in the US, too, but only briefly on the shortest duration T-bills. When the Treasury sells a bond to the public, they have a special type of auction. It doesn’t work quite like the fast-talking auctions of middle-America, but nevertheless, it’s a kind of auction.

Buyers bid on the opportunity to get paid back 1000 dollars in a certain time period, for example one month or one year. If buyers bid 500 dollars to get paid back 1000 in a year’s time, that would be a 100% annual interest rate. But as it happens in these auctions, buyers can and sometimes do keep bidding until they are literally paying more money in today than they will get back in one month’s time. If buyers pay 1001 dollars to get paid back 1000 in a month, then that is a negative nominal interest rate.

This has been a fairly regular occurrence since 2008. It doesn’t happen everywhere, but it does happen.

@Trinopus

But, once again, why the hell would anyone put money into one of those?

What is the alternative?

What can they do with their money otherwise?

Keep it in the bank? Banks fail. Deposit insurance only covers the first couple hundred thousand in the US, and is similarly limited in other countries. A bank deposit is nothing more than an IOU from the bank, to you, saying that they owe you money whenever you ask for it. But the bank has many other IOUs, to many other people, and if the bank fails, not everybody the bank owes money to is going to get paid back. If people have a few million in a deposit account at the bank, and the bank goes under, the FDIC is not going to cover the full loss. So you’re screwed.

Buy stock with it? Risky. Stocks can go up, but they also go down. For people who favor relative stability, rather than taking the risk of a big loss, stocks are not really a good option.

Start a new business with it? Again, risky. People don’t know what businesses will be successful in the future. If you have enough money, you can build a new widget factory, but there might not be enough demand for whatever kinds of widgets you decide to make that will allow you to break even, let alone earn a positive return on that factory.

Put it in a vault and swim in it like Scrooge McDuck? Expensive. If you withdraw the money from all risky financial institutions and just take the cash for yourself, then you’re not going to suffer a negative interest rate loss on that cash. But then you still have to protect the cash, transport it, account for it, make sure the same amount of money is there in the vault tomorrow that you put inside of the vault yesterday. Scrooge can do that quickly with his daily swim, but most other people cannot. Clever thieves have drilled out gold bars and replaced the innards with tungsten in order to fool the owners into believing it was pure gold through and through. Cash they might replace with lower denominations, and you won’t know the bundles are filled with Washingtons instead of Franklins until you unwrap them and check.

Or… you can lend money to the government, and they get to protect the cash for you. If lots and lots of people are afraid of every other place to put the money, then they will bid up the price at those auctions. Eventually, they can and do bid up the price so high that they’re paying more than 1000 euros today to get paid back 1000 in the future. The negative nominal interest is a warehouse fee. You are paying the government to protect your money, rather than risking it in a private enterprise that might go bankrupt. It’s not just bonds, either. Plenty of central banks charge private banks a sort of “warehouse fee” for holding cash at the central bank. (This includes the Swiss National Bank, the Bank of Japan, the Swedish Riksbank, the European Central Bank, and Danmarks Nationalbank.)

The principle is the same. The banks have cash. They “store” the cash on the central bank’s accounting computers, and pay a small percentage fee for doing so. If they thought they saw a safe storage place that yielded more, then they would use that instead. But they don’t. They’re scared of everywhere else, so they keep their cash instead of spending it, and pay the warehouse fee to the government’s bank for the service of doing so. (Private banks have to report all theircash reserves to the central bank, so I think they have to pay the same fee even if they store the cash in their own vault. This is the penalty they pay for holding cash instead of buying other assets, which would put the cash into circulation.)

[LSLGuy]

ETA: ninja’d to death by Hellestal’s fine post.

^This (ETA: meaning Snarky Kong).

During the time the US economy and stock market were in free fall when Lehman failed, people all over the world were transferring money into the US and into the US stock market. In the midst of our meltdown, the dollar was going up.

Why?

Because what matters is relative safety, not absolute safety. The tallest spot on a sinking ship is better than getting wet.

[Northern_Piper]

Just one point to add to Hellestal’s excellent post: some of those options (e.g. start a business) are not available to certain types of institutional investors, like trusts and pension funds. Their options are even more limited, because as fiduciaries, they have to place security of the principal over high rate of return.

US T-bills are safe, even at a slight negative interest rate, and therefore satisfy their fiduciary duty.

[Riemann]

@LSLGuy

…During the time the US economy and stock market were in free fall when Lehman failed, people all over the world were transferring money into the US and into the US stock market. In the midst of our meltdown, the dollar was going up…

Just to note the presumed typo in case of confusion - “stock” (bolded by me) should read bond.

[LSLGuy]

Good catch; thank you.

[Trinopus]

@Hellestal

It was just as impressive the first two times Corry El pointed out the same fact to you. . . .

Bullshit. He never actually answered the question. You just did, and thank you, but for the snark, no thanks at all.

[Ramira]

He did.
you did not understand the responses you were getting, as several persons have noted, but he did.

[RickJay]

@Northern_Piper

That was a wake-up call for the feds and they shifted to a major cut-backs and re-structuring programme. It worked. The federal government and the provinces both brought their spending under control, going from one of the worst over-spending countries in the G7 to the most disciplined.

There’s a few other key factors here of considerable interest to the comparison to the U.S. debt:

1. The debt became a serious risk when it did in part because of the very high interest rates of the 1980s, which were, for the most part, driven by a Bank of Canada decision to kill inflation like a bug. This worked, but the result was the debt became harder to service.

2. The decision to seriously cut costs was made by their federal government, not the provinces. The provinces were FORCED to re-examine their habits because federal transfers represented a huge portion of their income, and the Chretien government just stopped sending as much money as it used to.

The risk remains, of course, that the interest rate could increase, either due to internal decisions of external ones. The serviceability of the debt is proportional to the interest rate, which I think is obvious - my wife and I have no problems paying our mortgage, but if we had the same amount owing on a Mastercard we’d be in serious trouble.

[Corry_El]

@Trinopus

1. That, at least, is easy to answer. I thought I knew a fact. (Also…you just introduced a new term, “shorter,” that I had not seen in previous parts of this discussion.)

2. (re investing in negative rates of return, is that something like trading debts? I remember when people made millions of dollars buying and selling Brazilian debts. If I buy something from you for negative twenty dollars, and sell it to someone else for negative fourteen dollars, I guess I’ve “made” six dollars.)

3. Just saying, “You don’t know what you’re talking about” is a very poor form of argument here.

1. I don’t understand the first part. You thought you knew govt real bond returns were positive?

As to zero v negative, that distinction is not that relevant to whether your point holds water, it doesn’t in either case. But I’ve mentioned a couple of times that the average maturity of US debt approximately corresponds to the point on the yield curve where the real yield is approximately zero. You then said in effect ‘how could investors invest in negative real return bonds?, to which the answer is that in maturities shorter than around 5 yrs US treasury real yields are negative (past that they are slightly positive) so obviously they do for at least some bonds. And as I also mentioned, even the nominal yields of some other rich countries’ debt is negative out to substantial maturities, real yields can be negative all the way to as far out as they issue.

2. Attempting narrative explanations of market prices IMO can tend to cause as much confusion as elucidation. Various investors have different goals. I think for this discussion we just stick to observing that very low/zero/negative real yields are the rule now for rich country debt in general.

3. You’ve made a point strongly and repeatedly across threads when it’s apparent, with nothing personal, you don’t know what you’re talking about on this topic. There are many topics where I don’t know what I’m talking about, and perhaps ones where you do. I don’t see pointing that out in this situation as personal. I also don’t see why you stand for ‘we’ and ‘here’.

[Silver_lining]

@Lumpy

We’ve already reached the point where we can’t stop borrowing money; if government borrowing stopped tomorrow, the lack of funds would trigger chaos. But logically the national debt cannot rise forever- eventually at 30 or 50 or 100 trillion dollars the government’s entire tax revenue will equal interest payments on the debt. So when is Doomsday at the current rate?

Obama, who accumulated more debt than all the other presidents combined has badly damaged the USA. We can not recover anytime soon.

The straight dope is we own about 13.2 trillion, but there are less than 2 trillion dollars printed in circulation! You can look it up, its true, and one topic all media won’t dare mention on the air. Keep in mind a trillion is one thousand billion.

So you see there is not enough money backed by the USA government…AKA legal tender to pay off this debt. Print more? Hello off the charts inflation.

Doomsday happens when the creditors stop lending.

[Ruken]

@Trinopus

The lenders are not “most of us.” Lenders are often banks, and banks have stocks and shares, and the people who own those stocks and shares are not “most of us.” But all of us pay the taxes that go to pay those interest rates.

I’m quick to stomp most instances of “45% don’t pay taxes”, but it works here if we are just talking about federal debt service. And of the slim majority of households that do pay individual income taxes, keep in mind that an even smaller amount are paying above the mean per-household personal income tax ($12.4k in 2015).

[DrCube]

@Silver_lining

Obama, who accumulated more debt than all the other presidents combined has badly damaged the USA. We can not recover anytime soon.

The straight dope is we own about 13.2 trillion, but there are less than 2 trillion dollars printed in circulation! You can look it up, its true, and one topic all media won’t dare mention on the air. Keep in mind a trillion is one thousand billion.

So you see there is not enough money backed by the USA government…AKA legal tender to pay off this debt. Print more? Hello off the charts inflation.

Doomsday happens when the creditors stop lending.

Almost every president doubles the debt. That’s how exponential growth works. Obama did not damage the US. At least not in that way (by the way, you do know that Congress has the exclusive power of the purse? Not the president – all he does is say yes or no to spending authorized by Congress).

Finally, the amount of currency in circulation has nothing to do with the debt, deficit, or really, anything. It just tells you how many people still use cash. As you see, it’s a small fraction of our GDP.

[RickJay]

@Silver_lining

Obama, who accumulated more debt than all the other presidents combined has badly damaged the USA. We can not recover anytime soon.

The straight dope is we own about 13.2 trillion, but there are less than 2 trillion dollars printed in circulation!

There are in fact many, many times that many dollars in circulation. As you know full well, most money isn’t printed; it’s electronic.

[Northern_Piper]

@RickJay

2. The decision to seriously cut costs was made by their federal government, not the provinces. The provinces were FORCED to re-examine their habits because federal transfers represented a huge portion of their income, and the Chretien government just stopped sending as much money as it used to.

No, that’s not correct, at least for the Prairie provinces. Maybe Chrétien’s cuts were necessary to get Bob Rae in Ontario to start putting his fiscal house in order, but the three Prairie provinces were taking major steps to cut their spending even before Chrétien got elected in the fall of 1993.

• Alberta: Klein ran for the PC leadership in 1992, on a platform of cutting spending and a near-immediate balancing of the provincial books. He won the leadership in late 1992, and the provincial election in June, 1993. Once elected, he immediately implemented serious cost cutting measures, in the long-term goal of having Alberta debt-free in 10 years, which he achieved. See the wiki article on Klein for details.

• Saskatchewan: Romanow and the NDP won the election in the fall of 1991, running on a platform of good fiscal management. Once elected, they committed themselves to bringing the spending and the debt under control, introducing a major austerity budget in the spring of 1992, and continuing with a policy of closing rural hospitals and making other major unpopular cuts over the next two years. When Romanow retired as Premier in 2000, he was lauded by the Globe & Mail, no less, for his willingness to make the hard financial decisions necessary to solve the provincial finances: Unyielding fiscal policies are Romanow’s greatest legacy.

• Manitoba: similarly, in Manitoba, the government began implementing strict fiscal controls in 1993, including the famous “Filmon Fridays”, where the Government implemented unpaid days off on Fridays to save the province salaries.

Chrétien, on the other hand, was only elected in October 1993, and his first budget in 1994 was seen as only taking half-hearted steps to bring the ballooning deficit under control. It was only in 1995 that he and Martin finally bit the bullet and announced that their goal was zero deficits. Yes, as part of that, they cut transfer payments, but at least in the case of the three Prairie provinces, that was not the immediate cause of austerity. All three of them made that decision themselves, before Chrétien came to power.

Here, by the way, is the article about the “near-death” moment I mentioned, which then goes on to recount the federal Liberal government’s successful efforts to bring the deficit under control: “Jean Chréten: Lessons from Canada’s ‘basket case’ moment”

Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today’s Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and the Wall Street Journal calling Canada “an honorary member of the Third World,” helped the nation’s people and politicians understand how scary its budget problem was.

The first rough attempt at fiscal austerity was the 1994 federal budget, but the cuts really came through in the 1995 federal budget. By then, Romanow and Filmon were already winning re-election based on their own fiscal re-trenching.

[LSLGuy]

@Silver_lining

…
The straight dope is we own about 13.2 trillion, but there are less than 2 trillion dollars printed in circulation! You can look it up, its true, and one topic all media won’t dare mention on the air. Keep in mind a trillion is one thousand billion.

So you see there is not enough money backed by the USA government…AKA legal tender to pay off this debt. …

The mere fact you think the quantity of printed money has any significance to the debt demonstrates conclusively that you have exactly zero idea what you’re talking about.

You could learn a lot by reading the comments above where you posted. You’d also do well to read less from biased ignorant sources pushing biased ignorant propaganda onto the gullible for their fun and profit.

[Silver_lining]

@LSLGuy

The mere fact you think the quantity of printed money has any significance to the debt demonstrates conclusively that you have exactly zero idea what you’re talking about.

You could learn a lot by reading the comments above where you posted. You’d also do well to read less from biased ignorant sources pushing biased ignorant propaganda onto the gullible for their fun and profit.

Nothing I wrote was wrong on the debt. I was merely saying that the amount owned greatly exceeds the amount printed in circulation.

A true statement.

The debt accumulated under the Obama administration, more than all other presidents combined is also a fact, not fiction.

If you think this is " ignorant propaganda " I will quickly show you you are mistaken. Also how do you know what my sources are?

How the debt can be paid down, without draining the supply of money is a large problem.

I can use a good laugh, so now that my points were made, you can tell us.

[Silver_lining]

@RickJay

There are in fact many, many times that many dollars in circulation. As you know full well, most money isn’t printed; it’s electronic.

There was approximately $1.54 trillion in circulation as of April 5, 2017, of which $1.49 trillion was in Federal Reserve notes.

How much U.S. currency is in circulation?

How much electronic money is there? Are you saying there is enough to cover the debt?

And what happens is too many creditors want hard cash or e-currency at once?

[LSLGuy]

Your argument amounts to:
“The Moon is large. The Moon is above me. Therefore I’m going to be crushed.”

The first two statements are true. The conclusion is false.

I’ll accept your numbers as close enough for how much the total US federal debt is and how much currency is in circulation. Even if they’re wrong in detail, they’re close enough for argument’s sake. They’re both a moving target anyway.

What I’d like to see is some explanation of how the two are connected. Why do you think that the amount of physical cash (with or without considering electronic money) is somehow relevant to debt repayment?

What is the process you envision might happen that you think would go badly? How would that change if the Feds had less debt or the rest of us had more cash or whatever?

[Pantastic]

@Silver_lining

And what happens is too many creditors want hard cash or e-currency at once?

This is a really weird idea that people always bring up in debt threads. Creditors can’t just demand hard cash whenever they want, treasury bonds follow rules for maturity, and until the bonds mature you do get an interest payment but can’t cash the bond in. Anyone holding a treasury bond who wants cash ‘now’ has to find someone willing to buy the bond, if they demand that the US pays them early then they get told ‘that’s not what you agreed to, go away’. You can try it if you have $1000 - buy a treasury bond, then try to get the government to pay you before it matures.

It’s really unusual for anything but a person-to-person loan to work like ‘I’ll loan you this money, you pay me interest, and I can demand all of the money back anytime I feel like’. Car loans, house loans, personal loans from a bank, home equity loans, pawn shop loans, and most other legal loans cannot just be ‘called in’ at any time, and would be extremely dangerous if they could because most people taking out a loan don’t have the assets on hand to pay the loan off right now, if they did they wouldn’t need a loan in the first place.

[Little_Nemo]

@DrCube

Almost every president doubles the debt. That’s how exponential growth works. Obama did not damage the US.

@Silver_lining

The debt accumulated under the Obama administration, more than all other presidents combined is also a fact, not fiction.

I think the reality lies between these two extremes.

In the last hundred years, only four Presidents doubled the debt during their term in office; Woodrow Wilson, Franklin Roosevelt, Ronald Reagan, and George W. Bush.

I feel the most accurate way to compare Presidents on this issue is to see how large the debt grew during their administration in comparison to what it was when they took office.

Wilson: the debt grew 727%
Harding: the debt grew 7%
Coolidge: the debt grew 26%
Hoover: the debt grew 33%
Roosevelt: the debt grew 1048%
Truman: the debt grew 3%
Eisenhower: the debt grew 9%
Kennedy: the debt grew 8%
Johnson: the debt grew 13%
Nixon: the debt grew 34%
Ford: the debt grew 47%
Carter: the debt grew 43%
Reagan: the debt grew 186%
Bush: the debt grew 54%
Clinton: the debt grew 32%
Bush II: the debt grew 101%
Obama: the debt grew 68%