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To raise or not to raise the debt ceiling; that is the question: Whether tis nobler to suffer the slump and arrows of default today or in some distant future. Oh, bards of Washington, give us your answer.
This Shakespearean financial dilemma hangs in the balance between now and a somewhat theoretical Aug, 2, but I can tell you what an unbiased investment manager thinks: Dont mess with the debt ceiling. Raise it unencumbered if necessary. I say unbiased because my credentials have become very public over the past several months. Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008. ...
The answer to our modern-day Hamlets question then, is that there should be no question at all. The debt ceiling must be raised and not be held hostage by budget negotiations. Dont mess with the debt ceiling, Washington. Bond and currency vigilantes will make you pay.
Thursday July 14, 2011, 5:19 pm EDT
NEW YORK (AP) -- The CEO of a big bank says a U.S. default could be catastrophic for the economy. The head of the Federal Reserve warns of chaos. And a credit rating agency threatens to take away the country's coveted triple-A status.
The response on Wall Street: So what?
In Washington, the fight over whether to raise the federal debt limit has grown uglier by the day. The White House says the limit must be raised by Aug. 2 or the government won't be able to pay its bills, possibly including U.S. bonds held around the world.
But as the deadline nears, stocks and bonds have barely flinched.
The Dow Jones industrial average fell just 54 points Thursday and stands about where it did at the start of the month. The yield on the 10-year Treasury bond, which usually rises when investors see it as a riskier bet, is considerably lower than earlier this year.
It may seem an odd, even reckless, reaction by investors. But it isn't completely crazy.
Take the ho-hum reaction from the bond market. In theory, investors in U.S. Treasury bonds should demand higher interest payments when there's a greater risk they won't get their money back -- in this case, in the event of a default next month.
Instead, the yield on the 10-year Treasury note rose only slightly Thursday, to 2.95 percent. In February, when the U.S. economic recovery seemed stronger and the debt limit was a distant threat, it was 3.74 percent.
But in this market, as in the schoolyard, size wins. The U.S. has $14 trillion in outstanding Treasury bonds. That dwarfs government bonds of any other nation. U.S. debt is held more widely and traded more often than any other government's IOU.
That matters because pensions, private investment funds and central banks the world over want to know that they can buy and sell these holdings fast -- what investors call liquidity. During the credit crisis of 2008, investors bought U.S. Treasurys because they were perceived as not only safe but liquid.
"It's very nice that Switzerland is a safe place," says Avi Tiomkin, a hedge fund consultant who holds Treasurys. "But if you're the Russian or Chinese central bank, it's just too small."
Steve Ricchiuto, chief economist at Mizuho Securities, points to another reason the markets are calm: The U.S. may seem a more dangerous place to park your money given its rising debt, but much of the rest of the world isn't faring well, either.
He notes that Europe is trying to contain a debt crisis. Yields on bonds of various countries there have gone up recently. "The U.S. is the best in a bad world," he says, so people have no choice but to invest here.
As for stocks, there's plenty of news -- some very good -- to distract investors from Washington's problems. U.S. companies are issuing their financial results for the latest quarter, and they're expected to post big profits -- up 15 percent, according to a survey by data provider FactSet.
Well, that's it then. Business owners are also saying the same thing.
The Republicans are going to be outcasts if they piss off their funders.
See: The most likely outcome if we hit August 2 without a deal is that the Treasury finds some way to prioritize payments: Shut down most of the government, and continue making coupon payments, which it can theoretically do easily, because incoming revenue more than covers interest.
So not only will bondholders likely get paid, the bracing, instant austerity will slow the economy, causing a rush out of stocks and yep... into Treasuries! So not only will an economic slowdown boost Treasuries (prices, not yields), the lack of Treasury issuance post-Aug 2 means there will be a special scarcity value for the most liquid safe-haven asset in the world!
Unless we actually got to the point of default-default (where the government was running out of enough revenue to cover interest) -- something that wouldn't happen for a long time, and something that's likely never to happen since the economic weakness of a shutdown would likely force debt ceiling action -- there's no good reason to sell Treasuries, and actually a very good reason to buy them.
And even then...
If the US government defaulted on its debt, it would probably create the mother of all panics in every market, and there just isn't enough gold or Swiss Franc of Singapore Dollars to satisfy the panicked asset dumpers, and it's conceivable that even then Treasuries would rally like they always do in a mega-panic.
That would be ironic, to say the least.
Pimco...that sounds vaguely familiar...hmmm I wonder why?
oh,right
http://www.usmessageboard.com/econo...d-company-pimco-sold-all-of-its-us-bonds.html
By Republicans?Well, that's it then. Business owners are also saying the same thing.
The Republicans are going to be outcasts if they piss off their funders.
Oh, so now Pimpco and businessmen are to be heeded? I see....
Other reasons why Treasury securities have risen in price;
- The market doesn't believe that the US will default.
- Everyone is worried about Italy right now. The debt ceiling is three weeks away.
- And this
See: The most likely outcome if we hit August 2 without a deal is that the Treasury finds some way to prioritize payments: Shut down most of the government, and continue making coupon payments, which it can theoretically do easily, because incoming revenue more than covers interest.
So not only will bondholders likely get paid, the bracing, instant austerity will slow the economy, causing a rush out of stocks and yep... into Treasuries! So not only will an economic slowdown boost Treasuries (prices, not yields), the lack of Treasury issuance post-Aug 2 means there will be a special scarcity value for the most liquid safe-haven asset in the world!
Unless we actually got to the point of default-default (where the government was running out of enough revenue to cover interest) -- something that wouldn't happen for a long time, and something that's likely never to happen since the economic weakness of a shutdown would likely force debt ceiling action -- there's no good reason to sell Treasuries, and actually a very good reason to buy them.
And even then...
If the US government defaulted on its debt, it would probably create the mother of all panics in every market, and there just isn't enough gold or Swiss Franc of Singapore Dollars to satisfy the panicked asset dumpers, and it's conceivable that even then Treasuries would rally like they always do in a mega-panic.
That would be ironic, to say the least.
The Real Reason The Treasury Market Isn't Freaking Out Over The Debt Ceiling
IOW, a default will create a tremendous panic in the financial markets and a slowing of the economy, neither of which could be construed as a "good" thing. This will cause a rush to buy Treasuries.
Maybe. I'm not so sure. The question we have been pondering is "What happens when riskless assets become risky?" We don't know the answer to that question. In the meantime, gold will go through the roof. Hooray for me!
Pimco...that sounds vaguely familiar...hmmm I wonder why?
oh,right
http://www.usmessageboard.com/econo...d-company-pimco-sold-all-of-its-us-bonds.html
You've got it backwards Frank, kind of like the "Hoover caused the Depression by being a statist" thing.
Pimco would be talking their book if they owned a lot of Treasury bonds that defaulted. If Treasury bonds default, they will outperform the market relative to their peers, causing an outflow from their competitors and inflows into Pimco, making them even richer. That's the way the world works, Frankie!
Well...actually, the Hooverites also wanted to cut federal spending in a downward spiral and look where that got the US.Pimco...that sounds vaguely familiar...hmmm I wonder why?
oh,right
http://www.usmessageboard.com/econo...d-company-pimco-sold-all-of-its-us-bonds.html
You've got it backwards Frank, kind of like the "Hoover caused the Depression by being a statist" thing.
Pimco would be talking their book if they owned a lot of Treasury bonds that defaulted. If Treasury bonds default, they will outperform the market relative to their peers, causing an outflow from their competitors and inflows into Pimco, making them even richer. That's the way the world works, Frankie!
I have some passing familiarity with how things work. I find it laughable that suddenly PIMCO should be listened to EF Hutton like. I know a foolish consistency is a hobgoblin, but geez louise, which is it, do we listen to PIMCO only when is Obamaficial?
Hoover was a Statist, you need to throw out your 6th grade history book that has FDR saving the country from Hoover's embrace of the free market
Well, that's it then. Business owners are also saying the same thing.
The Republicans are going to be outcasts if they piss off their funders.
Oh, so now Pimpco and businessmen are to be heeded? I see....
I have some passing familiarity with how things work. I find it laughable that suddenly PIMCO should be listened to EF Hutton like. I know a foolish consistency is a hobgoblin, but geez louise, which is it, do we listen to PIMCO only when is Obamaficial?
Well...actually, the Hooverites also wanted to cut federal spending in a downward spiral and look where that got the US.You've got it backwards Frank, kind of like the "Hoover caused the Depression by being a statist" thing.
Pimco would be talking their book if they owned a lot of Treasury bonds that defaulted. If Treasury bonds default, they will outperform the market relative to their peers, causing an outflow from their competitors and inflows into Pimco, making them even richer. That's the way the world works, Frankie!
I have some passing familiarity with how things work. I find it laughable that suddenly PIMCO should be listened to EF Hutton like. I know a foolish consistency is a hobgoblin, but geez louise, which is it, do we listen to PIMCO only when is Obamaficial?
Hoover was a Statist, you need to throw out your 6th grade history book that has FDR saving the country from Hoover's embrace of the free market
I have some passing familiarity with how things work. I find it laughable that suddenly PIMCO should be listened to EF Hutton like. I know a foolish consistency is a hobgoblin, but geez louise, which is it, do we listen to PIMCO only when is Obamaficial?
Frankie
Pimco is just saying what I am hearing when I talk to guys in the debt market.
Everyone agrees that we have to get our spending under control, but not like this.
Well...actually, the Hooverites also wanted to cut federal spending in a downward spiral and look where that got the US.I have some passing familiarity with how things work. I find it laughable that suddenly PIMCO should be listened to EF Hutton like. I know a foolish consistency is a hobgoblin, but geez louise, which is it, do we listen to PIMCO only when is Obamaficial?
Hoover was a Statist, you need to throw out your 6th grade history book that has FDR saving the country from Hoover's embrace of the free market
You're confused again, Dear. In 1920, Harding cut spending and, in the same time since Obama took office, unemployment dropped from 12% to under 4%.
Can you imagine that? Unemployment would now be under 5%
Well...actually, the Hooverites also wanted to cut federal spending in a downward spiral and look where that got the US.I have some passing familiarity with how things work. I find it laughable that suddenly PIMCO should be listened to EF Hutton like. I know a foolish consistency is a hobgoblin, but geez louise, which is it, do we listen to PIMCO only when is Obamaficial?
Hoover was a Statist, you need to throw out your 6th grade history book that has FDR saving the country from Hoover's embrace of the free market
You're confused again, Dear. In 1920, Harding cut spending and, in the same time since Obama took office, unemployment dropped from 12% to under 4%.
Can you imagine that? Unemployment would now be under 5%
Depression of 1920The recession of 192021 was characterized by extreme deflation the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression (adding all the years of the Great Depression together, however, yields more severe deflation). The deflation of 192021 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.[2]
Unemployment rose sharply during the recession. Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. Both agree that unemployment quickly fell after the recession, and by 1923 had returned to a level consistent with full employment.[8]
Well...actually, the Hooverites also wanted to cut federal spending in a downward spiral and look where that got the US.
You're confused again, Dear. In 1920, Harding cut spending and, in the same time since Obama took office, unemployment dropped from 12% to under 4%.
Can you imagine that? Unemployment would now be under 5%
I think you might be mistaken. There was a recession 1920-1921
Depression of 1920The recession of 1920–21 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression (adding all the years of the Great Depression together, however, yields more severe deflation). The deflation of 1920–21 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.[2]
Unemployment rose sharply during the recession. Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. Both agree that unemployment quickly fell after the recession, and by 1923 had returned to a level consistent with full employment.[8]
While I am quite sure that you will make fun of my using the wiki, I am also supplying the link to their source.
http://minneapolisfed.org/Research/events/1985_10-24/Romer_UnemploymentData.pdf
