Comments on: Counterparties: When debt becomes a problem A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Kaleberg Sat, 16 Mar 2013 01:22:34 +0000 If Japan is any indication, the US can probably go over 200% debt to GDP before the markets start to worry. Right now, the shortage is in a lack of safe harbor investments. As far as the free market is concerned the US just isn’t issuing enough IOUs.

By: Publius Fri, 15 Mar 2013 15:08:41 +0000 The problem with leverage is that it reduces the margin of error. Highly-levered companies go bankrupt more often because they have to pay the contractual debt service even if business conditions deteriorate. If global debt increases, the probability of a debt-deflation also increase. It is reasonable to be concerned about debt, at some point.

My problem with these analyses of US debt has to do with its measurement. According to Bloomberg, debt held by the public is $11.4 trillion, or 75% of GDP. There is no justification for counting “bonds” held by the Social Security Administration–whose liabilities are subject to statutory revision–as equivalent to those held by 82 year-old Aunt May. If our debt/GDP ratio is only 75%, we aren’t anywhere close to the “precipice.”

By: TFF Fri, 15 Mar 2013 15:06:13 +0000 @KenG, if you’ll pardon the pun, all of modern economics is a confidence game. We trade paper and electronic chits that have no intrinsic value, and count ourselves “wealthy” when we accumulate large quantities of these in our electronic accounts. Yet this system is more than a scam, because people have confidence in it. If people lose confidence in the currency, in the artificial measure of wealthy, then it will begin to fall apart. And if people see it beginning to fall apart, that will feed the mass hysteria. No particular reason you can’t have a “bank run” on a currency, and that doesn’t require a viable alternative.

My guess is that we aren’t terribly near the “debt precipice”, but it will take at least a decade to turn this battleship around. As others have noted, attempts to abruptly cure deficits can (at least initially) worsen the situation rather than improving it.

I’m actually quite pleased that Obama got overridden on the sequester. That is only a small step towards fiscal sanity, but small steps are BETTER than large steps in this case. Combine that with a little job growth (as we are presently seeing) and we might not be as far from sustainability as it initially appeared we would be.

Now, can we prevent Congress from immediately giving back these gains?

By: KenG_CA Thu, 14 Mar 2013 23:31:38 +0000 So if the US has a lot of debt, and the EU has a lot of debt, and Britain has a lot of debt, and Japan has a lot of debt, and China (which probably has a lot of debt) doesn’t float its currency, how will any of those economies drive the value of the dollar down?

We’ve had huge budget deficits ever since W cut taxes and started wars, and the dollar only really started to lose value when the world became aware of just how little attention the reluctant regulators paid to borrowers’ ability to pay off loans, and were worried the US finance system was going to collapse. And ever since then, even with bigger deficits that were designed to help the economy recover from the credit crisis, the dollar has been on a steady, if bumpy, rise (the euro was worth about $1.55 five years ago; now it’s $1.30).

So really, if everybody else with a viable currency is borrowing, what problems does US borrowing cause now?