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Aug 01 2011

Disaster Capitalism Kabuki

Investors also piled into Treasurys, driving down the yield on the benchmark 10-year note sharply to 2.804%, its lowest close since last November. Yields, which fall as prices rise, cratered as investors searched for a safe haven ahead of the Aug. 2 debt-ceiling deadline.

All three major credit-rating firms have warned they could lower the top-notch rating of U.S. debt if the borrowing limit isn’t raised.

From the Rich White Motherfucker Journal.

So let me see if I’ve got this straight. We’ve got to slash spending immediately because (1) if we don’t, the debt ceiling can’t be raised, and if the debt ceiling isn’t raised, then the US will default on its Treasury bonds, and (2) if we don’t cut spending then the rating agencies will downgrade Treasury bonds, thus instantly making them worth less. And because of all this, investors “piling into Treasurys”, because they perceive them as a “safe haven”.

20 comments

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  1. 1
    'smee

    Relatively safe, CPP… relatively safe!

    because if the US defaulted, the stock market would tank even faster… since everyone knows that the markets really exist in a government supported bubble, and if the govt defaults at all, then “market supports” will be some of the first things to go!

    ergo – treasuries (even downgraded treasuries) will be the best game in town.

    and if the govt does not default – then treasuries are still better than money!

    See… it all makes perfect sense if you are a cynical bastard.

  2. 2
    Zachary Pruckowski

    The really crazy thing about a 2.8% rate of return is that the unofficial-official US inflation target is 2%, which means 10-year Treasury bonds are paying less than a 1% real rate of return.

    Also, Physioprof, I think the main explanation is that Wall Streeters and political junkies had very different estimations of the risk of default. Political junkies might have thought the chance of default was in the 10% range, while Wall Streeters considered it to be like a hundred times less likely.

  3. 3
    Nate

    I’m not entirely sure if you grasp the economics, or even the politics. The US was facing a government shutdown a few months ago. That’s the worst of not raising the debt ceiling, the government cant afford to operate.

    Interest being some 10% of what the government absorbs every month in taxes, we can afford to pay for that, veterans compensation, Social Security, Medicare/Caid, military pay and probably have a little left over for a decent party. At worst everything but the interest would have to be scaled back a bit or postponed.

    The real danger to both parties is that most of the government shuts down… and no one notices.

    There isn’t, and never was, any risk of an actual default, where the country can’t afford to pay the interest on it’s debt.

    I’m just saying.

  4. 4
    Nate

    Zach has it right on, I meant to say that.

    Tony is on the right track, that there is a bubble, but that bubble is capital that has been invested in the government. Should the government default, be unable to pay the interest AND individuals with matured bonds be unable to redeem the principle, that would be catastrophic.

    The main reason being that’s some 7 trillion in $ that would just evaporate from the US economy (present and future). (or at least part of it.)(and that’s domestically held debt, it’s somewhere near there.)

  5. 5
    Reginald Selkirk

    We’ve got to slash spending immediately because (1) if we don’t, the debt ceiling can’t be raised

    An artificial and arbitrary condition imposed by the Tea Partiers.

    As is the notion that every dollar of rise in the ceiling must be accompanied by a dollar of deficit reduction.

    As is the notion that all of that deficit reduction must be in program cuts, not revenue increases.

    The only immediate imperative was the debt ceiling raise, which could theoretically have been done with no extortive conditions attached.

  6. 6
    Nate

    Very true, however completely irrelevant. What you are describing is the cost of some peoples votes, nothing more nothing less.

    Were I in congress, I wouldn’t have voted for an increase under any circumstances, thats as arbitrary as demanding tax increases instead of spending cuts.

    Do you not think there is tremendous government waste? Do you not think that tax increases have costs? Do you thing 25 cents for every dollar earned in the US is a bit high of a level for the government to be spending?

    Yes taxes were a little higher on the wealthy under Clinton, liberals tend to overlook that the burden of government spending was only 18% of GDP, not nearing 25% like now.

    Dropping the party line speech would behoove you.

  7. 7
    Andrew G.

    See Bill Mitchell’s take on it here:

    http://bilbo.economicoutlook.net/blog/?p=15490

  8. 8
    Nate

    It’s an interesting take, but he misses one key point.
    Money invested in the governments debt is not invested in the economy. Were that debt to be drawn down somehow, or stabilized at the least, the money that would have been invested in government debt, would be invested in more productive economic areas.

    In other words, he assumes that government debt spending has a net positive effect, when there is little or no evidence of any such thing.

  9. 9
    Eric Atkinson

    Right.

  10. 10
    Andrew G.

    You’re completely missing the point, I think.

    A government deficit is inevitable if there is a private sector surplus (saving exceeds investment spending) and an external current account deficit. This isn’t a matter of economic theory but of accountancy – those three quantities are related by the sectoral balances equation (see below).

    Since the US is not likely to become a net exporter any time soon, that means that if the government budget is balanced, the private sector will be in deficit, which is clearly unsustainable. (A government deficit, on the other hand, can be maintained indefinitely since the government is the one in control of the currency.)

    If the government tries to balance the budget by simply slashing expenditure, then that limits the private sector’s ability to save or import. If there is no accompanying increase in exports or private investment via borrowing (and these factors are clearly outside the government’s control), then that means that the result is a large decrease in GDP.

    Does anyone think that is a desirable outcome?

    (Remember, too, that the government budget is not like a household budget; it is more like the exact inverse of one.)

    A quick introduction to the sectoral balances equation:

    (T – G) + (S – I) = (X – M)

    where (T – G) is the government balance (tax revenue minus govt. spending), (S – I) is the private sector balance (savings minus investment spending), (X – M) is the current account balance (exports minus imports).

  11. 11
    Comradde PhysioProffe

    Dude, it is *you* who are missing the point, which is that these greedy selfish pigges don’t give a single flying fucke about the GDP. They just can’t bear the sight of niggers and spics on cell phones.

  12. 12
    Nate

    And with that disgusting comment I won’t be replying to the intelligent one above. You work on your spelling and when you grow up, let me know and I’ll be back.

    Dude.

  13. 13
    BinJabreel

    @Nate:

    Wow, you really are that dense, aren’t you?

    Here’s what he was referring to, that same ruckus where people were angry that 98% of households below the poverty line could keep food from spoiling:

    http://www.nytimes.com/2011/04/21/us/21wireless.html?_r=1

    And the spelling is obviously a conscious choice. Dumbass.

  14. 14
    Nate

    I know the spelling is an obvious choice. So is pissing your pants at 8, but kids still do it.

    If the good professor wishes to be childish, never make a solid argument and run to ad hom attacks like a wino to the bottle, that is indeed his business, but I don’t have waste my time reading it.

  15. 15
    ericatkinson

    physioprof, you suck even more than Myers. And understand economics even less.

  16. 16
    Tideliar

    “I know the spelling is an obvious choice. So is pissing your pants at 8, but kids still do it.”

    Are you talking about your kid? Or your childhood? Hopefully the former.

    anyway, +1 internet point for the dumbest fucking thing I’ve read on the internet since I read your first post. And FYI knob end, learn what ad hominem attackes are. This is one you utterly disingenuous GOP apologist. When you go bankrupt sucking your party teet I hope we end up in the same soup kitchen, cos then can you explain to my face why your bullshit gamesmanship and utter disregard for real life is a justifiable political position.

    Sorry your 8 year old kid is still deliberately pissing hir pants, must cost a fortune in diapers, pride and psychotherapy.

  17. 17
    Nate

    I Don’t have any kids, thank God, and what makes you think I was specifically talking about this post and his comments here? I think I am free to use whatever ridiculous analogies I desire.

    Another question, how do you know anything about my politics? I don’t know that I’ve said anything political here. The GOP is no more in line with my beliefs than the Democrats are. You may be a political hack of some kind, but that doesn’t mean we all are.

  18. 18
    DrugMonkey

    Hahhaahaha, that makes you either a Green, a Libertarian, a Nazi or a Commie. Your post and presence at Freethoughtblogs makes you for a Libertarian, dollars to doughnuts. Which pretty much just makes you a Repub. Tiddles nails it.

  19. 19
    Comradde PhysioProffe

    Dear Nate, you gibbering bagge of fucke:

    (1) Learn what the fucke ad hominem means. Mocking you mercilessly for being a ridiculous infantile smeggeflaske is not ad hominem per se. And you are sadly mistaken if you think I am “arguing”.

    (2) For someone who doesn’t want to “waste time reading” this blogge, you certainly are showing your pimply face a lot. Now run along, child.

  20. 20
    Andrew G.

    Quoth Nate:

    And with that disgusting comment I won’t be replying to the intelligent one above.

    Wow, how incredibly lame.

    If you’ve got a response to my comment then bring it on, rather than whine about people using TEH BAD WORDZ. sheesh.

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