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When Will the U.S. Go Bankrupt?

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July 11, 2010 – Comments (15)

This is a very meaningful quote by Felix Salmon, and is backed up by a good body of evidence:

"The best predictor of future default is simply past default: credit ratios tell you almost nothing. The UK managed to get through debt-to-GDP levels of 240% without defaulting or even inflating the debt away in the early 19th Century, while Russia defaulted in 1998 with a debt-to-GDP ratio of just 12.5%." 

15 Comments – Post Your Own

#1) On July 11, 2010 at 11:20 PM, alstry (35.05) wrote:

It won't....you will.

That is what happened when we bailed out Wall Street and The Federal Government and not citizens.....you and every Fool should have understood this from a practical and legal standpoint.

Now that they are bailed out and cutting off credit to the private economy, Wall Street and The Federal Government can foreclose on everything in America.....

America went broke on 9.09...when the FDIC, Pension Guaranty, Fannie Mae, and Freddie Mac were all technically insolvent...but were bailed out.....

What do you think happens when citizens and/or private businesses are insolvent?

Guess who will be the only ones left standing?

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#2) On July 12, 2010 at 12:14 AM, SockMarket (60.32) wrote:

we will hyper-inflate before any potential defualt happens. That leaves the elderly and China holding the bag, but people dont seem to care much about either group so I don't think they will stop to examine the issue.

JMO.

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#3) On July 12, 2010 at 12:58 AM, 1315623493 wrote:

alstry, they are cutting off credit to those who don't deserve it. What do you expect them to do? Continue sub-prime mortgage lending?

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#4) On July 12, 2010 at 1:35 AM, alstry (35.05) wrote:

The Federal Government is now borrowing over $1.5 Trillion dollars per year against declining collapsing tax receipts?

DOES IT DESERVE IT?

We loaned Trillions dollars at essentially no interest to insolvent banks?

DID THEY DERERVE IT?

We loaned billions to insolvent public homebuilders with collapsing revenues?

DID THOSE IDIOTS DESERVE IT?

THE PROBLEM IS EVERYONE AND EVERYTHING IS SUBPRIME......IT IS ONLY THOSE WITH ACCESS TO CREDIT THAT SURVIVE....FOR NOW.

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#5) On July 12, 2010 at 2:25 AM, 1315623493 wrote:

Credit markets can decide whenever they want to stop buying US government debt. The bond market is the key holder. And apparently, the US government is not sub-prime as you say, otherwise, the 10Y T-bill yield should not be at 3%, but more like 10%. It's not. 

We had no choice but to shore up the balance sheet of the largest banks. I'm surprised there are still people who think we could have let Bank of America or Citigroup fail. Everyone agrees they didn't deserve, but every mainstream economist agrees that there wasn't a choice.  

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#6) On July 12, 2010 at 2:39 AM, alstry (35.05) wrote:

There is no "credit" markets you Fool......

There is not $1.5 Trillion to lend to America anywhere in the world.......

China's TOTAL ownership of American debt accumulated over decades is less than $2 trillion.....

The entire market has become a Fraud.........

Havn't you figured that out by now?

Wow...I must have done a terrible job or you can't read.

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#7) On July 12, 2010 at 6:50 AM, dbjella (< 20) wrote:

BetapegLLC 

How much Gov't debt do you think is "purchased" by the Federal Reserve, other central banks or banks for access to the Fed discount window?

The reason I ask is that with countries all over the world in debt it seems very hard for me to imagine that there is enough private money out there to buy it.  Recently, I watched a History channel show about WW2 and there was a piece on how the gov't needed private money to buy war bonds to fund the war.  Today, we don't see any commercials to buy Treasuries.  Maybe the US as a nation was less sophisticated in terms of Capital Markets back then, but I don't know anyone who buys Treasuries....maybe I don't know the right people ;) 

I don't think you are a fool :) 

 

 

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#8) On July 12, 2010 at 7:31 AM, rd80 (98.55) wrote:

There is not $1.5 Trillion to lend to America anywhere in the world.......

Yes there is.  It's coming off the Federal Reserve printing presses.

@dbjella - I believe the Fed is purchasing a big chunk of US Treasury debt, both directly and indirectly.  Indirectly is by holding short term rates low which lets banks borrow from the Fed window for next to nothing, then buy Treasuries and make money on the spreads. 

Not much quality retail or commercial demand for bank credit?  No problem, just set 'em up to make free money off a Fed / Treasury arbitrage.  As an added bonus, all those Treasuries are great for the bank balance sheets.

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#9) On July 12, 2010 at 9:13 AM, russiangambit (29.45) wrote:

Techinically, US is already bankrupt because its liabilities seem to be higher than the value of its assets. But of course, in reality, US can never go bankrupt as long as it has debt in its own currency . In most other cases, the countries have debt in foregin currency and they ahve to tax their population to repay it and that really hurts the economy. US doesn't even have to tax , it ca just print it and the pain is shared by all its foreign creditors, not just its own population. Actually, US population is mostly debtors so that is even good for them, because it deflates their debt.

This is why as long as US has the reserve currency it is almost immune to the debt problems. But as with everything in life there is no free lunch, Notrmally, at this elvel of spending the other countries would've been forced to stop wasting their wealth and become more efficient. US will be able to continue wasting its wealth for so much longer, until there is nothing left.

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#10) On July 12, 2010 at 11:00 AM, jesusfreakinco (29.08) wrote:

Is The Fed Funding The Treasury Through The Banks?

Good ZH article...

http://caps.fool.com/Blogs/is-the-fed-funding-the/418554

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#11) On July 12, 2010 at 11:36 AM, Schmacko (75.14) wrote:

"we will hyper-inflate before any potential defualt happens. That leaves the elderly and China holding the bag, but people dont seem to care much about either group so I don't think they will stop to examine the issue."

Social Security and Medicare/aid are inflation adjusted so without a law change the elderly won't be left holding the bag.  Since those obligations are also the biggest components of the US budget, hyperinflation won't really solve much.  We'd still be running a defecit at the almost the same ratios just at an astronomically larger number.  We'll also kill all interest in the US debt market which is how we fund our defecit.  I'd argue the chances of the US purposefully trying to hyper-inflate their way out of debt are slim to none.  

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#12) On July 12, 2010 at 5:34 PM, leohaas (35.01) wrote:

Bankruptcy is a cash-flow problem. As long as the US keeps on printing money, it will not go bankrupt.

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#13) On July 12, 2010 at 5:37 PM, 1315623493 wrote:

ALSTRY,

Apparently, you don't know what the bond market is. If there wasn't money to buy treasury bonds, then treasury bonds wouldn't sell, would they? It's simple math. The Treasury Department has bonds for sale. Those bonds get sold. If the bond market doesn't want treasury bonds anymore, they won't buy anymore. I wonder why that simple concept is so hard for you to understand.

dbjella,

Why is the fact that the central bank buys Treasury bonds inherently bad to you? 

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#14) On July 12, 2010 at 5:43 PM, whereaminow (40.93) wrote:

#12) On July 12, 2010 at 5:34 PM, leohaas (98.38) wrote:

Bankruptcy is a cash-flow problem. As long as the US keeps on printing money, it will not go bankrupt.

That's technically true if by "US" you mean "the government of the United States", but it would mean that all the people of the United States would be bankrupt.  I don't necessarily see that as a solution.

David in Qatar

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#15) On July 12, 2010 at 8:06 PM, rd80 (98.55) wrote:

Social Security and Medicare/aid are inflation adjusted

True.  But, remember, the inflation rate is calculated by the same gov't that's doing the spending.

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