Debt Limit

Here’s the latest…

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

A couple things here…this is actually just another warning. Albeit one from someone we should listen to.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said.

[full story]

This is actually more of the same lament from China. They have their currency pegged to ours (mostly) so when we do some “quanitative easing” for our currency, so do they, whether they like it or not. China, of course, does have the option of letting the yuan appreciate on its own and quit hiding behind the dollar, but my guess is that they’ll wait until after the collapse to try and claim they already did that.

The article then continues with something that has become a political truth, but is a real-world fiction.

The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion — but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

That part I bolded in not technically accurate. The U.S. has already hit our debt limit. We did so over a month ago. What the Treasury Secretary did was make the mistake of telling folks he could keep things going until a drop-dead date, August 2nd. He’s doing this by shifitng money around. In the real world, this is the “Pawn Shop” step. Yes, it might work and keep you afloat, but it’s going to cost you quit a bit more just to stay even because of the nature of the transcations. This is what Treasury is doing now, by raiding pension funds to keep the lights on and the troops fed. We’ll have to pay more to pay that back.

Now, you may think it’s not a big deal that China is saying we are defaulting. You may think that, because you are not be aware of this…

China is by far the top holder of US debt and has in the past raised worries that the massive US stimulus effort launched to revive the economy would lead to mushrooming debt that erodes the value of the dollar and its Treasury holdings.

Beijing cut its holdings of US Treasury securities for the fifth month in a row to $1.145 trillion in March, down $9.2 billion from February and 2.6 percent less than October’s peak of $1.175 trillion, US data showed last month.

Now…think about it from the creditors perspective. You have some extra money. You give it to your buddy across the way. You notice he’s been going on hunting expeditions (wars), giving lavish bonuses to favored friends (tax cuts), had puts paying you back well down on the list. You can’t really *force* that guy to pay you back, after all, he goes on LOTS of hunting expeditions, but you can make it more difficult for him to borrow from other people.

This is what China just did.

The Republicans requiring Medicare to be sacrificed on the altar of debt before they sign off on the debt limit increase is having real and serious consequences to the U.S. (and world) economy. They think this is going to benefit them in the long run, but I’m afraid that’s not how it’s going to work, no matter how many Fox’s sell that version of history.

UPDATE: Near the end of the video I mention the Republican 2012 Presidential campaign strategy (alleged). It seems to be working…

Unless shares rally, they are on track for a sixth straight weekly loss — longest losing streak since the fall of 2002. The market’s last seven-week stretch of losses began in May 2001, as the dot-com bubble deflated.

Stocks have suffered this month after a raft of weak economic news dampened hopes for a speedy recovery. Traders fear that weaker hiring, industrial output, and a moribund housing market are reversing a bull market that lifted the Dow Jones industrial average 20% the past year.

The Dow is down 5% since June began.

Shares bounced back Thursday after a report that U.S. exports unexpectedly hit a record in April.

[full story]

It’s almost like there’s some underlying “uncertainty” in the market about whether or not the U.S. will default on its loans that is causing everyone do do weird things just in case. For example…

Treasuries are considered the safest and most liquid, investments in the world. The U.S. is the world’s biggest debt issuer. It has $14.2 trillion of debt outstanding, while marketable Treasuries total $9.7 trillion. Central banks and other overseas investors own $4.48 trillion, or 46 percent of marketable debt.

The negative position reflected trades that would profit from a decline in Treasuries. Cash and equivalents, the largest component of the Total Return Fund, rose to 37 percent from 35 percent in April, under the revised categories.

Gross has been betting against U.S. debt through short sales, in which the Total Return Fund would borrow and then sell government bonds, hoping to profit by repurchasing the securities at a lower price in the future. The fund’s annual report showed that, as of March 31, it had sold short about $2.2 billion of Treasuries that mature in about 10 years and $5.8 billion of agency debt that comes due in 2041.

[full story]

That’s a whole lot of technical finance talk, but what it amounts to is this…

While the swaps are costly for the fund, given that it must pay out more than it takes in under the contracts, Gross would reap profits from the trades should long-term rates rise, causing Treasuries to tumble. Conversely, a decline in long-term rates would punish the fund’s returns.

The bet here is that there is very little chance long term rates will fall. An unattractive dollar has to have higher rates to be more attractive…this is especially true when there is an open question about default (and a goodly portion of the people tasked with answering that question don’t seem to understand it). These kinds of bets, and positions, are how a small crack in a dam becomes a total failure. They are essentially acting as a lever, just watching for an opening to stick in, and break the whole thing wide open.

Of course, simple and responsible lawmaking would make bets like this complete folly…but if you haven’t noticed lately, simple and responsible lawmaking is not very high on certain folks agendas.

UPDATE2: Quick reminder of what happened…

And what happened the next day...

Imagine the firestorm that would be raging on Republican propaganda outlets right now if the stock market had dropped 2.2 percent within 24 hours after Democrats had voted unanimously not to raise the nation’s debt ceiling.

The entire right-wing noise machine — from Fox & Friends to Limbaugh, from Hannity to O’Reilly — would be singing the same refrain: The stock market has sent a clear message of disapproval over the Democrats’ irresponsible vote. Whether that assertion was true would not matter. They would make it true simply by unanimously agreeing that it was.

But because it was Republicans who voted irresponsibly, right-wing media sees no relationship between the vote and market drop.