lithgowk

What Will We Do with All That Debt?

Isn't there a big difference between sovereign and private debt? The article seems to lump the two together.
Private debt has credit risk; sovereign debt has the risk of currency debasement via the printing press. Private debt is subject to the dangers described in alt 2. Private debt is more often paid; public debt is more often not paid, it's simply refinanced. Private debt is is seldom perpetual; public debt is mostly perpetual. If we required all public debt to have sinking funds in the same manner as some municipal debt and all old fashinoned self liquidating mortgages, then our debt problem would be of a different magnitude. Since sinking funds would have to be funded from current income, the amount of debt would be seriously curtailed. Even our elected legislators might see the light: It would make no sense to issue debt to pay current expenses. Our present system banks on our inflating away the cost of amortizing the debt: at a 3% annual inflation rate, which has been the Fed target for many years, the perpetual debt of the government eventually gets reduced to a smaller fraction of GDP (GDP expands with inflation while the old debt remains fixed). Our problem is we continue to borrow at increasing rates of GDP and so are headed into the abyss.
The propensity of the Asian economies to fund our debt is seriously erroding by the shrinkage in trade, a trend accelerated by the shrinkage of trade finance as well as the disappearance of the demand in the US for imports. I think there is a real question as to who is going to buy the additional US debt and at what price. If interest rates move to where long term treasuries become interesting, the drain on our resources will diminish our ability to spend on domestic programs, meaning less stimulus. Instead of getting cheap goods in exchange for our dollars, we will get our current debt carried. Argentina, not Japan, may be our model.




On Feb 20 10:37 AM Consider_this wrote:

> I agree that if long term trade doesn't resume, then there's no way
> for export economies to continue the funding, since they'll be running
> down their own ability to prop things up. I agree that there's still
> a point of exhaustion.
>
> But my point is that, if you take that as the end point of Fed's
> power, suddenly you can see that we're quite a ways from that. The
> Fed's debt binge exhaustion limit is much, much further than "imminent"
> which everyone's betting on. In this new picture, suddenly the Fed/Govt
> not only have all the resource of their own, but also the collective
> will and resource of all the export oriented central banks and govt.
>
>
> It all comes back to faith in future recovery, or in a way, faith
> in Fed to eventually able to unjam the frozen economy.
>
> In your counter example, where there's no "current" demand for ink.
> It doesn't mean the factories shut down immediately, or you stop
> selling printers right away. Doing so equals immediate shutdown and
> instant defeat with no hope.
>
> You continue to operate, at a loss, hoping that your excess printer
> supply will eventually prop up enough demand to make ink sales go
> up.
>
> You do that until your will runs out, or your reserve ability to
> produce said printer runs out.
>
> Like I said, we're quite a ways away from chewing through a significant
> fraction of the 30 to 50 years of Asian Economic growth as backstop.
>
>
> Now the question to ask is, is it enough? I don't know. In isolation
> scenario #1 and #2, it would seem Fed if fighting a losing war. In
> scenario #3, losing is NOT guaranteed, and there's a chance to come
> out a winner.
>
> On Feb 20 10:23 AM morph366 wrote: