Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
For sovereign ratings, it is the federal debt that matters. FRED has both the absolute federal debt amounts and as % of GDP. At $31 trillion and 120% of GDP, it is high but not very high. The highest level reached was during the pandemic in 2020.
Total debt from all sources (federal, state/local, corporate, individual/household) looks very high but isn't that relevant.
@davidrmoran I don't quite get the debt-to-GDP fixation. To me, as a country matures as first a developing, then a developed nation, it makes sense that GDP slows and more of its citizens financial wherewithal is in assets like stocks, bonds and real estate as opposed to income from GDP production. Developed nations are starting from a high GDP production base--the law of large numbers applies to their growth--and they generally have older populations who are less productive as they retire. The older populations stem from better healthcare as well as the fact that education comes with development and women have less children as a result. Thus, the workforce ages and GDP growth slows. So, I don't understand why the debt-to-GDP ratio is so significant when the wealthiest Americans have so much accumulated non-GDP producing wealth that is largely untaxed or taxed at a much lower rate than income. In short, America needs a real wealth tax to pay down its debt. Yet there are obvious political problems with getting such a tax passed: https://npr.org/2021/11/13/1054711913/progressives-wealth-tax-super-rich-elon-musk-jeff-bezos What could work is some sort of tax treaty that bars any sort of tax shelters between trading partners globally so there can be no skipping town once a wealth tax is imposed.
Unfortunately, the "word on the street" in our nation's capital is that McCarthy is simply not...that...smart.
On the plus side, given the unprecedented legislative items passed over the past 2 years, once the debt ceiling item is taken care of by the adults in the room, we should be fairly good to go for the near term. My only concern is if/when a matter of utmost urgency presents itself, I have no idea how our Congress (House of Representatives) would be able to respond.
I don't understand why the Democrats didn't lift the debt ceiling last month when they still controlled all three branches of government? It takes a simple majority in both House and Senate and the signature of the President to do so.
They could have easily done it before December 31, 2022.
Not trying to be partisan, but were they playing politics and not thinking of what's good for the country? What am I missing?
I don't understand why the Democrats didn't lift the debt ceiling last month when they still controlled all three branches of government? It takes a simple majority in both House and Senate and the signature of the President to do so.
They could have easily done it before December 31, 2022.
Not trying to be partisan, but were they playing politics and not thinking of what's good for the country? What am I missing?
Hard to say in the House, but there never was a “simple majority” for Dems in the Senate with Manchin and Sinema. It was more appropriately termed a very complex difficult majority.
I don’t see chimps or lizards trading credit default swaps. The idea that capitalism or communism or any “ism” is natural and therefore unalterable or unimprovable like air or gravity is a toxic one. They are human inventions that were made during certain points in human history and they can be altered, improved upon or even unmade today. Historical context matters and economic and government systems that worked 100 years ago for humanity may not be ideal in 2023 or 2123.
What I find amusing about the $31 trillion in debt is who are the largest owners of that debt? The wealthy. Instead of taxing them appropriately for government services we are actually paying them interest to help them become wealthier. It makes sense they complain about the size of the debt as they worry we won’t be able to pay them back during a default or they’ll lose money because the inflation rate will exceed their debt’s interest rate. But we wouldn’t have to borrow so much in the first place if we taxed them appropriately, which, of course, they also don’t want and complain about.
The ideal situation for the wealthy is for the U.S. to cut government services while still paying them the interest on the debt that was originally issued to pay for those services. The borrowers of the debt—the American people—get less or, preferably, nothing in the form of services, while the creditors/investors still get paid. Keep their taxes low but the interest on their investments as secure as possible.
I should add that the above scenario is only ideal for the wealthy in the short-term but not the long. If you cut all government services, the ordinary folk start to get angry after a while about pesky problems like inequality, starvation and declining life expectancy. Then the torches and pitchforks come out. Enlightened rich folk believe in taxation and government services as a self-preservation measure. Dalio at least understands inequality is a problem. We need our bread and circuses.
Yes Capitalism always provides competitve advantage (and leverage) to size. Thats why large corporations always want to be #1 or #2 in their industry or they exit altogether.
You sound a lot like Karl Marx, not that he wasn't a genius!
The other issue is how rigged the system is ( Now I sound like TFG...UGH) in favor of big corporations and the uber wealthy. "Corporate Welfare" doesn't begin to cover the control they have over the government
@Sma3@shipwreckedandalone It wasn't just Karl Marx who worried about capitalism being rigged by monopolists and oligarchs. This is a quote from Adam Smith:
“A monopoly granted either to an individual or to a trading company, has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly understocked by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together."
The irony is what works best for society or, at least, consumers in the free-market system Smith envisioned is what works worst for most investors and money managers--brutal competition amongs the smallest players, thus bringing down prices for consumers and increasing production efficiency. Lower prices reduce profit margins.
Meanwhile, most money managers seek "companies with economic moats," and "high quality companies with barriers to entry for competitors," which are really euphemisms for monopolies that dominate their markets. Professional investors actually don't like capitalism the way Smith originally envisioned it, as it is less profitable for companies when they compete viciously over price and their products become commodities. Money managers prefer monopolies/oligopolies, not in spite of the fact that leads to higher prices for consumers and less innovation on the product end, but because it leads to higher prices and less competitive innovation. Nothing quite guarantees future profits like a successful and exclusive drug patent or a choice between only two or three operating systems and one search engine.
So if there is a natural tendency within a capitalist system for power to concentrate in the top one or two players as you mention, Shipwrecked, it is a tendency that is actually harmful to capitalism as a functioning system that brings benefits to society in the form of better or at least lower-priced products. A winner-takes-all system benefits the few at the expense of the many, functioning poorly even from a capitalist Adam Smithian perspective.
Important to remember the intent of why legislation forcing debt limits was created in the first place.
The intent was to give the Treasury more flexibility, not to constrain the Treasury or Congress.
As noted in the first line of Congressional Research Service's report The Debt Limit: History and Recent Increases, "Congress has always restricted federal debt." https://crsreports.congress.gov/product/pdf/RL/RL31967
For more than half of the United States' existence, Congress restricted the federal debt by allowing no borrowing except as explicitly authorized. For example, Congress authorized the issuing of three series of 50 year bonds (2% 1906, 2% 1908, 3% 1911) for the specific purpose of building the Panama Canal. https://www.theherbstmancollection.com/panama-canal-loan
Not only was borrowing restricted to explicitly authorized debt instruments, but usually the debt could not be rolled over. When Congress authorized the issuance of a bond, it did not authorize issuing a subsequent bond to pay for the first when it matured.
Over time, Congress gradually changed how the federal government borrowed money. It delegated micromanging of the debt to the Treasury. Instead of Congress deciding how many bonds would be issued at what rates and at what maturities, this task was handed over to the Treasury. Congress also transitioned from borrowing individual amounts for specific purposes to setting a single aggregate borrowing limit that among other things enabled the rolling over of debt.
In 1917, attached to the Second Liberty Bond Act, was a statement that read in part:
It is obvious that the orderly and economic management of the public debt requires that the Treasury should have complete freedom in determining the character of securities to be issued and should not be confronted with any arbitrary limitation.
Congress still set a limit on the amount that the Treasury could borrow, but gave the Treasury free rein on the terms of the debt instruments. At the time, Congress set separate limits on different types of securities. Finally, in 1939 Congress created a single debt ceiling, giving Treasury even greater flexibility in determining the form as well as the terms of debt instruments.
It’s true that U.S. debt is very large — $31 trillion .... But America is a big country, so almost every economic number is very large. A better way to think about debt is to ask whether interest payments are a major burden on the budget. In 2011 these payments were 1.47 percent of gross domestic product — half what they had been in the mid-1990s. In 2021 they were 1.51 percent. This number will rise as existing debt is rolled over at higher interest rates, but real net interest — interest payments adjusted for inflation — is likely to remain below 1 percent of G.D.P for the next decade.
This (delete) rhetoric goes back at least to the (delete) beginning 50s or 60s. Subscribed to (the then very excellent) U.S. News & World Report as a teen - always enjoying reading of current events. So, the “can’t run a household this way” refrain goes back at least (delete) to the 50s and 60s. Truth is … A nation that prints its own currency and backs it with full faith and credit is much different than a household. That’s not to say it doesn’t have to practice good financial policies - just to say the two situations are dissimilar.
Now, despite these dire warnings of economic doom (delete) over the past 60 years, the nation has done pretty well over those decades, whether measured by the strength of our corporations and financial giants, scientific achievements or numbers of less fortunate in other countries who would like to live and work here. And, the USD is still the envy of most any other nation that issues a currency. So, let’s cool the rhetoric and get on with governing.
(Delete) Getting back to the “household” analogy. Can households raise armies and go to war? Are they charged with building and maintaining public highways, bridges, airports, seaports and schools? Do they / can they provide subsistence level services for the poor and needy or render emergency relief unto those whose lives have been devastated by fire or flood? The differences are stark - and too numerous to even quantify.
I'm sticking my head in the sand deliberately: not watching the news as it happens, before this stuff is resolved. I'm just not interested in the machinations by one "Party" to politicize and put the country's credit rating at risk. Nevertheless, the debt is astronomical and should be reduced.
@hondo - I don’t know if you considered mine “political” in nature. But I’ve gone back and deleted 3 or 4 references to politicians or political affiliations. Also deleted one mild expletive (getting really good at this).
I agree with your protestation in spirit. But with a potential default on its obligations by the United States - loans which were tendered in good faith by investors like you and me - this is a really extreme circumstance. We commonly discuss municipal bond investments here without objections like yours. So I can’t see where one level of government debt can be discussed without objection but another forbidden.
@Fred495 - From your OP: “As the OP, I specifically asked: " Would, for example, FDIC insured CDs be a place to hide out from a US government default?”
Of course not. The FDIC is an agency of the Federal government. What makes you to think that a government that refuses to honor its direct debt obligations could be somehow counted on to honor those debt obligations it held indirectly? The Treasury Bond is receiving all the attention now because it could precipitate an immediate crisis as investors rush to redeem T-Bonds. However, should the banking system suffer another crisis similar to 2007-2008 (when the Treasury stepped in to back bank deposits) why would you believe that the same government that defaulted on its direct obligations would somehow honor those secondary obligations? Indeed, I don’t think enough attention (if any) has been paid to how a default might ripple over into the banking system. It’s not as if a big “pot” of federal money is sitting somewhere waiting to bail out every single bank at once. The FDIC works only because depositors trust the government to make them whole should their bank, or a small number of banks, fail.
If you were a lender, would you consider lending a consumer money to finance a new auto when you knew they were already in the process of foreclosure on their primary residence for failing to pay the mortgage? I chose this example because it’s about as non-political as you can get. But the process / ranking of debt I believe, would be the same for home and auto lenders as for governments / governmental agencies. The U.S. T-Bond has long been regarded as the most secure investment on earth. Insured CD’s rank high too, but not as high as direct government obligations.
You said “Let's discuss possible options”. Whew! First, I do not believe default will occur. And I plan to do absolutely nothing - maybe tweak my own investments by a hair. However, if you are that worried, one board member in another thread has suggested buying gold as a last resort. Never cared for the physical stuff. Difficult to store, secure and trade in bullion form. I might instead be inclined to suggest investing in Swiss francs or other stable currency in a country with a stable political system and high judicial / regulatory standards.
Didn’t mean to go on a tirade Fred. . Money markets? CDs? Possibly. But what do they invest in? U.S. Dollars. And a dollar bill isn’t worth the paper it’s printed on - or the ink so scribbled - except for the “full faith and credit” of The United States of America. Want have some fun? Watch the value of the USD skidding on the foreign exchanges the morning after a default.
The appeal of gold and Swiss francs (in your worst case scenario) stems from the fact they’re not dollar denominated. Not a recommendation. Just playing along with what seems to be your train of thought.
I just invested in another CD for a year, focusing on the highest rated banks, for consideration. I have confidence that strong banks, will do well in this period of political brinksmanship. I do have a CDs maturing in March and June, and will continue focusing on short term quality CDs and Money Market Funds.
As a retired and conservative investor, I currently have investments only in short term FDIC insured CDs by large national US banks and in Treasury only MM funds. As the CDs mature over the next several months, I will put the proceeds also into Treasury only MM funds until the hopefully unlikely US default crisis has past.
In the current market environment, preserving capital is more important to me than seeking return on capital.
I've been stepping into TAVFX, Third Ave Value fund and MOWNX, Moerus Worldwide funds...they own stocks of companies that deal in real assets...I'm thinking this is going to the wire meaning the debt limit and could get very wonky...US$ would go down bigly...do like the fund mgr comentary of TAVFX.."magical thinking the past 5 to 10 years, refers to SPACS, "private currency" dunno if he means shitcoins, trees growing to the sky US equities and transcending our physical world and reducing our dependcy of old economy activites like mining...I don't beleive any of those funds hold any Chinese company stocks as well which I consider a good thing, I don't care how they have doing lately etc. Also opened small position in SGGDX First Eagle Gold. To go along with strong bank, FDIC balance sheets CDs when my Tbills roll off. Still hold my PMEFX, PVCMX and HSAFX, Hussy which could hold up better than most during a debt limit crisis.
As far as all the politico comments, I'll just say I have an opposite viewpoint of most of what was written in this thread and will refrain from adding my comments as to not offend anyone and keep the focus on investing.
I also hope I am wrong but I can see the war in Ukraine spiraling out of control rapidly,,,my parents were in Europe during the War and the stories make me shiver....Mom saw folks chewing on the soles of their shoes and eating grass for nutrition....this has got to be de escelated. somehow someway, not pour more and more weapons in there.
The US budget was in surplus under Clinton for a short time. I'd say that's better than paying so much to so many, in order to continue to spending like a drunken sailor. Still, commitments already made must be honored. And the Poot-butt needs to be confronted, notappeased. Me? Growing bonds in baby steps (a la Lynn Bolin.) Trying to "wish my winners over the finish line." Which ones do I keep? Which ones to sell? A nice problem to have... PRWCX is still 37% of portfolio. Best performer among my single stocks = aluminum and energy company, Norsk Hydro ADR. (NHYDY.) We have some new okra sprouts coming up. Just planted marigold seeds.
Comments
federal debt amounts and as % of GDP. At $31 trillion and 120% of GDP, it is high but not very high. The highest level reached was during the pandemic in 2020.
Total debt from all sources (federal, state/local, corporate, individual/household) looks very high but isn't that relevant.
https://fred.stlouisfed.org/graph/?g=XdER
https://fred.stlouisfed.org/graph/?g=YcQu
They could have easily done it before December 31, 2022.
Not trying to be partisan, but were they playing politics and not thinking of what's good for the country? What am I missing?
Fred
What I find amusing about the $31 trillion in debt is who are the largest owners of that debt? The wealthy. Instead of taxing them appropriately for government services we are actually paying them interest to help them become wealthier. It makes sense they complain about the size of the debt as they worry we won’t be able to pay them back during a default or they’ll lose money because the inflation rate will exceed their debt’s interest rate. But we wouldn’t have to borrow so much in the first place if we taxed them appropriately, which, of course, they also don’t want and complain about.
The ideal situation for the wealthy is for the U.S. to cut government services while still paying them the interest on the debt that was originally issued to pay for those services. The borrowers of the debt—the American people—get less or, preferably, nothing in the form of services, while the creditors/investors still get paid. Keep their taxes low but the interest on their investments as secure as possible.
I should add that the above scenario is only ideal for the wealthy in the short-term but not the long. If you cut all government services, the ordinary folk start to get angry after a while about pesky problems like inequality, starvation and declining life expectancy. Then the torches and pitchforks come out. Enlightened rich folk believe in taxation and government services as a self-preservation measure. Dalio at least understands inequality is a problem. We need our bread and circuses.
You sound a lot like Karl Marx, not that he wasn't a genius!
The other issue is how rigged the system is ( Now I sound like TFG...UGH) in favor of big corporations and the uber wealthy. "Corporate Welfare" doesn't begin to cover the control they have over the government
Meanwhile, most money managers seek "companies with economic moats," and "high quality companies with barriers to entry for competitors," which are really euphemisms for monopolies that dominate their markets. Professional investors actually don't like capitalism the way Smith originally envisioned it, as it is less profitable for companies when they compete viciously over price and their products become commodities. Money managers prefer monopolies/oligopolies, not in spite of the fact that leads to higher prices for consumers and less innovation on the product end, but because it leads to higher prices and less competitive innovation. Nothing quite guarantees future profits like a successful and exclusive drug patent or a choice between only two or three operating systems and one search engine.
So if there is a natural tendency within a capitalist system for power to concentrate in the top one or two players as you mention, Shipwrecked, it is a tendency that is actually harmful to capitalism as a functioning system that brings benefits to society in the form of better or at least lower-priced products. A winner-takes-all system benefits the few at the expense of the many, functioning poorly even from a capitalist Adam Smithian perspective.
The intent was to give the Treasury more flexibility, not to constrain the Treasury or Congress.
As noted in the first line of Congressional Research Service's report The Debt Limit: History and Recent Increases, "Congress has always restricted federal debt."
https://crsreports.congress.gov/product/pdf/RL/RL31967
For more than half of the United States' existence, Congress restricted the federal debt by allowing no borrowing except as explicitly authorized. For example, Congress authorized the issuing of three series of 50 year bonds (2% 1906, 2% 1908, 3% 1911) for the specific purpose of building the Panama Canal.
https://www.theherbstmancollection.com/panama-canal-loan
Not only was borrowing restricted to explicitly authorized debt instruments, but usually the debt could not be rolled over. When Congress authorized the issuance of a bond, it did not authorize issuing a subsequent bond to pay for the first when it matured.
Over time, Congress gradually changed how the federal government borrowed money. It delegated micromanging of the debt to the Treasury. Instead of Congress deciding how many bonds would be issued at what rates and at what maturities, this task was handed over to the Treasury. Congress also transitioned from borrowing individual amounts for specific purposes to setting a single aggregate borrowing limit that among other things enabled the rolling over of debt.
In 1917, attached to the Second Liberty Bond Act, was a statement that read in part: https://www.finance.senate.gov/imo/media/doc/SRpt71-1836.pdf
Congress still set a limit on the amount that the Treasury could borrow, but gave the Treasury free rein on the terms of the debt instruments. At the time, Congress set separate limits on different types of securities. Finally, in 1939 Congress created a single debt ceiling, giving Treasury even greater flexibility in determining the form as well as the terms of debt instruments.
On debt before 1939, see:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5866584/ (easier, shorter)
https://www.nber.org/system/files/working_papers/w21799/w21799.pdf
https://www.imf.org/external/np/seminars/eng/2015/goode/pdf/sargentpaper.pdf
(by same authors, slightly different material)
It’s true that U.S. debt is very large — $31 trillion .... But America is a big country, so almost every economic number is very large. A better way to think about debt is to ask whether interest payments are a major burden on the budget. In 2011 these payments were 1.47 percent of gross domestic product — half what they had been in the mid-1990s. In 2021 they were 1.51 percent. This number will rise as existing debt is rolled over at higher interest rates, but real net interest — interest payments adjusted for inflation — is likely to remain below 1 percent of G.D.P for the next decade.
Now, despite these dire warnings of economic doom (delete) over the past 60 years, the nation has done pretty well over those decades, whether measured by the strength of our corporations and financial giants, scientific achievements or numbers of less fortunate in other countries who would like to live and work here. And, the USD is still the envy of most any other nation that issues a currency. So, let’s cool the rhetoric and get on with governing.
(Delete) Getting back to the “household” analogy. Can households raise armies and go to war? Are they charged with building and maintaining public highways, bridges, airports, seaports and schools? Do they / can they provide subsistence level services for the poor and needy or render emergency relief unto those whose lives have been devastated by fire or flood? The differences are stark - and too numerous to even quantify.
I agree with your protestation in spirit. But with a potential default on its obligations by the United States - loans which were tendered in good faith by investors like you and me - this is a really extreme circumstance. We commonly discuss municipal bond investments here without objections like yours. So I can’t see where one level of government debt can be discussed without objection but another forbidden.
Welcome to the board.
Fully agree with you, hondo.
As the OP, I specifically asked: " Would, for example, FDIC insured CDs be a place to hide out from a US government default?
Let's discuss possible options, especially in the area of money market funds. But, please keep politics out of it."
Thanks, again, for your comment. Much appreciated.
Fred
Of course not. The FDIC is an agency of the Federal government. What makes you to think that a government that refuses to honor its direct debt obligations could be somehow counted on to honor those debt obligations it held indirectly? The Treasury Bond is receiving all the attention now because it could precipitate an immediate crisis as investors rush to redeem T-Bonds. However, should the banking system suffer another crisis similar to 2007-2008 (when the Treasury stepped in to back bank deposits) why would you believe that the same government that defaulted on its direct obligations would somehow honor those secondary obligations? Indeed, I don’t think enough attention (if any) has been paid to how a default might ripple over into the banking system. It’s not as if a big “pot” of federal money is sitting somewhere waiting to bail out every single bank at once. The FDIC works only because depositors trust the government to make them whole should their bank, or a small number of banks, fail.
If you were a lender, would you consider lending a consumer money to finance a new auto when you knew they were already in the process of foreclosure on their primary residence for failing to pay the mortgage? I chose this example because it’s about as non-political as you can get. But the process / ranking of debt I believe, would be the same for home and auto lenders as for governments / governmental agencies. The U.S. T-Bond has long been regarded as the most secure investment on earth. Insured CD’s rank high too, but not as high as direct government obligations.
You said “Let's discuss possible options”. Whew! First, I do not believe default will occur. And I plan to do absolutely nothing - maybe tweak my own investments by a hair. However, if you are that worried, one board member in another thread has suggested buying gold as a last resort. Never cared for the physical stuff. Difficult to store, secure and trade in bullion form. I might instead be inclined to suggest investing in Swiss francs or other stable currency in a country with a stable political system and high judicial / regulatory standards.
But, please notice that I didn't recommend or support any action in my OP. On the contrary, I simply asked a question.
Here is my question again: "Would, for example, FDIC insured CDs be a place to hide out from a US government default?
Let's discuss possible options, especially in the area of money market funds."
Fred
The appeal of gold and Swiss francs (in your worst case scenario) stems from the fact they’re not dollar denominated. Not a recommendation. Just playing along with what seems to be your train of thought.
Regards.
In the current market environment, preserving capital is more important to me than seeking return on capital.
Fred
As far as all the politico comments, I'll just say I have an opposite viewpoint of most of what was written in this thread and will refrain from adding my comments as to not offend anyone and keep the focus on investing.
I also hope I am wrong but I can see the war in Ukraine spiraling out of control rapidly,,,my parents were in Europe during the War and the stories make me shiver....Mom saw folks chewing on the soles of their shoes and eating grass for nutrition....this has got to be de escelated. somehow someway, not pour more and more weapons in there.
Good Luck to All,
Baseball Fan