2016 elections - because it's never too early

[Martinus]

I don't think you understand what you are talking about. These are considered some of the unsafest (if most profitable) debts.

Secondly, one does not invest in the shadow finance market - the shadow finance market entities are investors. And their job is to finance things that the regulated financial institutions cannot touch because they are too risky.

Most institutional investors are prohibited or heavily restricted against investing in such schemes, and most of them need to hold a certain percentage of their assets in government bonds.

That's not true to the best of my knowledge.  Banks have been holding sovereigns because they're counted at par when calculating cap/asset ratios, because of legislative and regulatory fiat.  If their counterparties start assessing risk using a formula that doesn't assess sovereigns at par, it won't matter what the people in Basel say.  They're not putting capital at risk.

My point is that they have to, and if the US economy tanks and Trump renegotiates the US debt causing the credit rating of US bonds to fall, I am willing to bet that the rest of the world is still in a worse shape, which means the US bonds have still the best rating and banks gobble them up.

Edit: It's not just Basel. For insurance companies government bonds are weighted most heavily under Solvency II as well.

[Admiral Yi]

Incidentally, Trump seems to have as usual been somewhat misreported - I saw the interview and he is talking about renegotiating the debt in the event the economy tanks and interest rates start to go through the roof where, as he said "we no longer have a country".

I think one should never debate Trump's words as reported by the written media...

That only makes what he said dumber.  Interest rates go through the roof because of monetary policy, not because we buy too many Chinese made smart phones or Syrian refugees commit too much rape.

[Martinus]

We all agree that the US is over-debted, right? And noone has managed to reduce that debt - whether through increasing the income or reducing the expenditure. So he is saying "fine, we can continue like this when our economy is doing well, but if it crashes, we may have to renegotiate the debt". What's the alternative? Deceiving yourself and kicking the can down the road, by taking on more debt?

I mean, I guess you can also massively devalue the dollar, but I am not sure if it is a better solution (and would probably cause more banks and financial institutions to go bust, as they hold a big part of their assets in US currency).

[Admiral Yi]

My point is that they have to, and if the US economy tanks and Trump renegotiates the US debt causing the credit rating of US bonds to fall, I am willing to bet that the rest of the world is still in a worse shape, which means the US bonds have still the best rating and banks gobble them up.

Edit: It's not just Basel. For insurance companies government bonds are weighted most heavily under Solvency II as well.

Why don't we make that bet now?  The US has a AA+ rating and a number of countries, Switzerland for sure, have a AAA.

Why would this relationship change if the US puked on its creditors?  You think that's going to make investors unload Swiss bonds and pile into Treasuries?

[Martinus]

My point is that they have to, and if the US economy tanks and Trump renegotiates the US debt causing the credit rating of US bonds to fall, I am willing to bet that the rest of the world is still in a worse shape, which means the US bonds have still the best rating and banks gobble them up.

Edit: It's not just Basel. For insurance companies government bonds are weighted most heavily under Solvency II as well.

Why don't we make that bet now?  The US has a AA+ rating and a number of countries, Switzerland for sure, have a AAA.

Why would this relationship change if the US puked on its creditors?  You think that's going to make investors unload Swiss bonds and pile into Treasuries?

There aren't enough Swiss bonds to go around.

Edit: Swiss national debt is US$100 billion, the US national debt is US$19 trillion. Good luck replacing US bonds with Swiss bonds.

[Zanza]

We all agree that the US is over-debted, right? And noone has managed to reduce that debt - whether through increasing the income or reducing the expenditure. So he is saying "fine, we can continue like this when our economy is doing well, but if it crashes, we may have to renegotiate the debt". What's the alternative? Deceiving yourself and kicking the can down the road, by taking on more debt?

The US decreased debt from about 1945 to the early 1980s and again during the 1990s. So it is not unheard of to decrease debt. So have lots of other states. But you usually don't do it by defaulting on it, but by growing your economy faster than your debt or by having revenues high enough to reduce it. 

I mean, I guess you can also massively devalue the dollar, but I am not sure if it is a better solution (and would probably cause more banks and financial institutions to go bust, as they hold a big part of their assets in US currency).

Devalue the dollar?  Do you mean creating inflation or trying to change the external value of the dollar? Both of which are stupid.

[Zanza]

My point is that they have to, and if the US economy tanks and Trump renegotiates the US debt causing the credit rating of US bonds to fall, I am willing to bet that the rest of the world is still in a worse shape, which means the US bonds have still the best rating and banks gobble them up.

Edit: It's not just Basel. For insurance companies government bonds are weighted most heavily under Solvency II as well.

Why don't we make that bet now?  The US has a AA+ rating and a number of countries, Switzerland for sure, have a AAA.

Why would this relationship change if the US puked on its creditors?  You think that's going to make investors unload Swiss bonds and pile into Treasuries?

There aren't enough Swiss bonds to go around.

All the other big sovereigns except Italy are rated AA or AAA (China, Japan, Germany, UK, France, Scandinavia, Canada, Australia etc.)

[Martinus]

Zanza, if both devaluing the dollar and renegotiating the debt would be "stupid" what should US do if its economy crashes and it is unable to service and roll its debt?

[Martinus]

Zanza, also you are assuming China or the Eurozone are going to stay hale and strong if the US economy crashes. That's just unreasonable.

[Zanza]

I don't expect it to crash, unless your "King of Debt" is elected. And as the US government debt is held in their own currency and they can basically borrow as much as they want from the Fed, it would be better to do that than to default on their debt.

That said, in my opinion, there is only one reasonable way for the US to close the gap between its revenue and expenditure and that's higher taxes and/or lower government spending. So exactly the opposite of what Trump wants.

[Admiral Yi]

There aren't enough Swiss bonds to go around.

Edit: Swiss national debt is US$100 billion, the US national debt is US$19 trillion. Good luck replacing US bonds with Swiss bonds.

Yeah, this is an excellent answer to the question "in the event of a US debt restructuring, will the pool of money invested in Treasuries all migrate to Swiss debt?"  Unfortunately for you, no one asked that question.

Rather, you posited the theory that in the event of a partial default, money would move *towards* Treasuries, because something something about shitty and small. We already see that size doesn't determine risk premium.  And if we leave that behind and consider shittiness, then you end up with an argument that tries to dissociate shittiness and likelihood of repayment.

Your original logical error Marty, was to internalize the aphorism "the US gets a discount because the dollar is a reserve currency"  without examining the underlying logic.  The dollar is a reserve currency because the dollar is very, very liquid, and, most importantly, because people expect the dollar to maintain it's value. 

[Martinus]

The definition of madness is doing the same thing and expecting a different result. The US have been trying to increase taxes and/or decrease spending for neary three decades and failed. So your idea is unreasonable.

[Zanza]

Zanza, also you are assuming China or the Eurozone are going to stay hale and strong if the US economy crashes. That's just unreasonable.

Why would I need to assume that? His plans don't assume that either.

[Zanza]

The definition of madness is doing the same thing and expecting a different result. The US have been trying to increase taxes and/or decrease spending for neary three decades and failed. So your idea is unreasonable.

Three decades and failed? It worked in the 1990s.

[Tamas]

Really? The candidate whose entire campaign is based on being as big an outrageous troll as possible made his insane destructive short comment of the day to meet his quota, and you are arguing about it as if it was at least a lengthy editorial in the Economist.

No wonder this guy won and will probably win the Presidency as well. The Onion article was spot on. You just can't look away