Why Default on U.S. Treasuries is Likely

[Master Shake]

Almost everyone is aware that federal government spending in the United States is scheduled to skyrocket, primarily because of Social Security, Medicare, and Medicaid. Recent "stimulus" packages have accelerated the process. Only the naively optimistic actually believe that politicians will fully resolve this looming fiscal crisis with some judicious combination of tax hikes and program cuts. Many predict that, instead, the government will inflate its way out of this future bind, using Federal Reserve monetary expansion to fill the shortfall between outlays and receipts. But I believe, in contrast, that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating part of the principal.

Rest here.

http://www.econlib.org/library/Colum...meltbills.html#

[ThePythonicCow]

Re: Why Default on U.S. Treasuries is Likely

What the heck -- this article reads like some sort of class exercise for an Econ 101 course, with the assignment being to identify all the incorrect statements it contains.

[cjppjc]

Re: Why Default on U.S. Treasuries is Likely

What the heck -- this article reads like some sort of class exercise for an Econ 101 course, with the assignment being to identify all the incorrect statements it contains.

I enjoyed reading it. Thanks for posting it Shake. The long term tax revenue 20% of GDP was interesting. I've always thought the U.S. will just default. What other choices are there?

How about the Federal Reserve buys up tons, and tons more of the debt and the U.S. defaults on the Fed? They take the bullet for the country.

[jtabeb]

Re: Why Default on U.S. Treasuries is Likely

How about the Federal Reserve buys up tons, and tons more of the debt and the U.S. defaults on the Fed? They take the bullet for the country.

I think that is PRECISELY what is going to happen.

[ThePythonicCow]

Re: Why Default on U.S. Treasuries is Likely

How about the Federal Reserve buys up tons, and tons more of the debt and the U.S. defaults on the Fed? They take the bullet for the country.

I think that is PRECISELY what is going to happen.

Double what the heck? Having some small time college econ professor write an article that seems seriously flawed to me doesn't surprise me in the slightest.

But now jtabeb is doing it too ?!? Something is not right. I must be missing a clue.

Are you suggesting, jtabeb, that the Fed would monetize trillions of dollars of treasuries, buying them up with freshly key-stroked fiat dollars? Then with a substantial portion of outstanding treasuries sitting on the Fed's books rather than on the books of other central banks (Japan, China, Saudi Arabia, ...), the U.S. Treasury would inflict some sort of major defaulting or devaluing action on those treasuries?

Why bother at that point? If the outstanding treasuries have already been monetized, this essentially means that the N trillions of circulating dollars plus M trillions of outstanding treasuries were replaced by N+M trillions of circulating dollars. The dollar would collapse, and the Fed's monopoly to produce U.S. currency would become worthless. Bye bye Fed. The re-election rate of Congress critters would also fall dramatically, given the serious economic impact of such folly.

Currently we get conservative investors of trillions (other central banks) to invest in dollars by providing them some inflation protection on those dollars, via treasuries. Replacing more or less all outstanding treasuries with dollars (by having the Fed buy back the treasuries with newly printed dollars) essentially removes that incentive to hold American currency. Bye bye the dollars exclusive reserve currency status.

Sure the Fed has been and will continue to some extent monetizing debt, adding both treasuries and already known toxic paper to its balance sheet in return for continued funding for major banks and other favored FIRE corporations, and in order to keep interest rates on treasuries from spiking too high. But I can only presume that they are doing as little of this as they have to, in a holding action to keep the U.S. and world economy from blowing up, at least long enough for the military-industrial-intelligence complex to gin up another major war or some other miracle or horror to occur.

Anyhow, if they did monetize most outstanding treasuries, then what need would there be to default on or devalue them? By that point outstanding treasury values would have collapsed because the insane money printing would drive up fears of a weaker dollar and drive down the value of treasuries.

De Beers might be able to jack up the price of diamonds by buying up most of the floating stock, but the U.S. Treasury or Fed cannot do jack up the price of treasuries by monetizing them. Seriously attempting to do that would kill both the dollar and treasuries.

[doom&gloom]

Re: Why Default on U.S. Treasuries is Likely

if you are gonna take your country down, why bail out the other guy?
take them down with you and make YOUR future that much brighter thru
less debt and hollowing out the other guy's reserves. MAN would that be
dumb if we were to buy up our debt and THEN revalue...

[cjppjc]

Re: Why Default on U.S. Treasuries is Likely

Well in any event I will stick with the default prediction. It would just be better (for the entire world) if the Fed was the biggest holder. The individuals at the Fed would be taken care of I'm sure.

[blazespinnaker]

Re: Why Default on U.S. Treasuries is Likely

If by default you mean a drop in the USD versus the rest of the world, yes. Otherwise.. no.

[blazespinnaker]

Re: Why Default on U.S. Treasuries is Likely

How about the Federal Reserve buys up tons, and tons more of the debt and the U.S. defaults on the Fed? They take the bullet for the country.

I think that is PRECISELY what is going to happen.

Yeah, I wonder what would happen if the Fed started to forgive some debt. HEHEH.

[tacito]

Re: Why Default on U.S. Treasuries is Likely

Yeah, I wonder what would happen if the Fed started to forgive some debt. HEHEH.

The MBS the Fed has from TARP will default. This is forgiven debt, isn't it?