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Morgan Stanley: Government Defaults 'Inevitable'

cpwill

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“Governments will impose a loss on some of their stakeholders,” Arnaud Mares in the firm’s London office wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” he wrote.

Rather than miss principal and interest payments, governments may choose a “soft” default in which they pay back debts with devalued currencies resulting from faster inflation or force creditors to take lower returns, Mares said in an interview....

Population trends may be a better predictor of the ability to meet obligations rather than debt as a percentage of gross domestic product, which doesn’t reflect governments’ available revenue and is “backward-looking,” Mares wrote.

While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Italy has one of the highest debt-to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said....

Mares, who didn’t identify which nations may default, once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investor concern that the U.S. may fall back into recession has grown in recent weeks as data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009....

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.




hmmm..... :thinking: maybe we should just try to borrow our way out of it?

you know what would fix this? spending millions to study the possibilities of robot bees, or maybe building an overpass no one wants and naming it after a congresscritter?
 
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washunut

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“Governments will impose a loss on some of their stakeholders,” Arnaud Mares in the firm’s London office wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” he wrote.

Rather than miss principal and interest payments, governments may choose a “soft” default in which they pay back debts with devalued currencies resulting from faster inflation or force creditors to take lower returns, Mares said in an interview....

Population trends may be a better predictor of the ability to meet obligations rather than debt as a percentage of gross domestic product, which doesn’t reflect governments’ available revenue and is “backward-looking,” Mares wrote.

While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Italy has one of the highest debt-to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said....

Mares, who didn’t identify which nations may default, once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investor concern that the U.S. may fall back into recession has grown in recent weeks as data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009....

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.




hmmm..... :thinking: maybe we should just try to borrow our way out of it?

you know what would fix this? spending millions to study the possibilities of robot bees, or maybe building an overpass no one wants and naming it after a congresscritter?
I agree with the analysis. We see helicopter Ben buying treasuries, monitrizing the Federal debt. So the analyst is correct my sense is that there will be the soft default mentioned with a devalued dollar and inflation. Retirees will be the most adversely effected.

Just shows how disfunctional our political parties are. Instead of worrying about Obama's religion or where to put a mosque, they do not spend time explaining to retirees ( who vote) just what the Fed is doing to interest rates and what upcoming inflation will mean to their income which is largely fixed.
 

Gipper

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Have we really gotten to the stage where we have to emulate China? Bad news indeed.
 

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The article has some factual errors in it, that tarnishes it credibility. For one the US debt vs GDP is far higher than 53%.

Consequences of U.S. debt | The Japan Times Online

The figures for the U.S. are staggering. Public debt includes not only the federal government's current $13.2 trillion, but another $3 trillion owed by America's states, counties, and cities. In addition, there is the $3.9 trillion in debt owed by America's government-backed housing- finance agencies (Fannie Mae, Freddie Mac, and others), which currently underwrite more than 90 percent of all U.S. mortgages. As a result, America's public debt has reached roughly 140 percent of GDP.
 

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Defaults, or inflation? Which is the better path?
 

Lord Tammerlain

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Defaults, or inflation? Which is the better path?
Depends on what you prefer


Short term and intense pain but with a quicker recovery from a low base

Or long term chronic pain with a very delayed recovery from a mid level base
 

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Depends on what you prefer


Short term and intense pain but with a quicker recovery from a low base

Or long term chronic pain with a very delayed recovery from a mid level base
Would a default be short, intense pain? How would the countries that we borrowed from react?
 

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by going nuts.


frankly, i think we ought to subtly pick a fight with the Chinese so that we have an excuse to Respond To Their Aggression Against Taiwan/whatever/etc by declaring their bonds to be null and void.

mind you, we would have to wean ourselves off of deficit spending first; but that is coming one way or the other.
 

Lord Tammerlain

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Would a default be short, intense pain? How would the countries that we borrowed from react?
A default would be short but intense


See Argentina in the late 90s for an example of what a default would be like on the general population.

Generally far more disruptive to society then periods of high inflation


You can view plenty of high inflation examples throughout the world during the 80's and 90's (Mexico, Turkey, etc)
 

Lord Tammerlain

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by going nuts.


frankly, i think we ought to subtly pick a fight with the Chinese so that we have an excuse to Respond To Their Aggression Against Taiwan/whatever/etc by declaring their bonds to be null and void.

mind you, we would have to wean ourselves off of deficit spending first; but that is coming one way or the other.
Such a show of responsibility

I guess honoring ones debts is not a virtue in your world?
 

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The article has some factual errors in it, that tarnishes it credibility. For one the US debt vs GDP is far higher than 53%.

Consequences of U.S. debt | The Japan Times Online
It actually currently stands a 61% (rounded up). GDP according to the BEA is $14,597.7 billion and debt held by the public as of 8/25/2010 was $8,834,183,612,860.18 according to the US treasury. US Government debt refers to the explicit debts of the US federal government.

Debt to the Penny (Daily History Search Application)
News Release: Gross Domestic Product
 
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Lord Tammerlain

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I just can't see the government paying back these loans honorably (that is, without inflation).
The US government can with higher taxes and cuts in spending, it is not the easy thing to do politically though, higher inflation is the easiest thing politically.
 

washunut

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The US government can with higher taxes and cuts in spending, it is not the easy thing to do politically though, higher inflation is the easiest thing politically.
I hope we elect a government that is willing to do both. Sadly not sure where they would come from. Neither Reps or Dems seem willing.

If we do in some way cheat the folks who lent us the money just from a practical viewpoint we would be hardpressed to get the money we will need in the future.
 

phattonez

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The US government can with higher taxes and cuts in spending, it is not the easy thing to do politically though, higher inflation is the easiest thing politically.
First off we don't even know if higher taxes would bring in more revenue, and secondly even if you got optimal tax rates and minimum spending how long would it take to pay back that debt?
 

Lord Tammerlain

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First off we don't even know if higher taxes would bring in more revenue, and secondly even if you got optimal tax rates and minimum spending how long would it take to pay back that debt?
A few decades at least to pay it all off. Which is of course unlikely to occur in any event. The most likely scenario is to pay off a portion of it and let growth rates reduce it as a % OF gdp
 

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It actually currently stands a 61% (rounded up). GDP according to the BEA is $14,597.7 billion and debt held by the public as of 8/25/2010 was $8,834,183,612,860.18 according to the US treasury. US Government debt refers to the explicit debts of the US federal government.

Debt to the Penny (Daily History Search Application)
News Release: Gross Domestic Product
You forgetting state debt, and other liabilities that are not counted in the debt held by the public. It is especially the state debt that the Feds ultimately will have to pay, and that should be added.
 

washunut

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You forgetting state debt, and other liabilities that are not counted in the debt held by the public. It is especially the state debt that the Feds ultimately will have to pay, and that should be added.
It also does not include the debt owed the people who paid into social security. Seems like they are getting ready to steal this money from seniors.
 

cpwill

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Such a show of responsibility

I guess honoring ones debts is not a virtue in your world?
i have to screw somebody; better to screw a regime such as china; and if it made our debt more expensive in the future - all the better; it will keep us hopefully from getting into this situation again.
 

cpwill

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It also does not include the debt owed the people who paid into social security. Seems like they are getting ready to steal this money from seniors.
there is no "debt owed" to them. the program has always paid directly out from revenues.
 

Lord Tammerlain

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i have to screw somebody; better to screw a regime such as china; and if it made our debt more expensive in the future - all the better; it will keep us hopefully from getting into this situation again.
You dont have to screw anyone

Just pay your debt, like a responsible person
 
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