The Music Goes on and on

http://www.bloomberg.com/news/2014-02-12...ature.html

Senate Clears U.S. Debt-Limit Boost for Obama’s Signature
he Senate cleared a measure suspending the U.S. debt limit for President Barack Obama’s signature after Republicans dropped demands for policy conditions that in past years risked a potential default.

Today’s 55-43 party-line vote will allow the U.S. to meet its obligations until at least March 15, 2015, more than four months after the November congressional election. The House of Representatives passed the legislation 221-201 yesterday.

“It appears that the things that used to be routine may be routine again,” Senator Richard Durbin of Illinois, the chamber’s second-ranking Democrat, said today in an interview at the Capitol before the vote. Republicans “seem to want to be on their best behavior in an election year,” he said.

Obama, saying he was “pleased” by the action, added: “The full faith and credit of the United States is too important to use as leverage or a tool for extortion.”

He also said, in a statement released tonight by the White House, that “hopefully, this puts an end to politics by brinksmanship.”

The legislation’s passage marks a victory for Obama and Democrats who refused to consider Republican demands to combine a debt-limit increase with measures such as curbing Obamacare, approving the Keystone XL pipeline or cutting federal spending.
Business Stability

“We welcome the news that Congress has acted to meet its responsibility” by lifting the debt limit, Treasury Secretary Jacob J. Lew said in a statement. He said the action “will provide certainty and stability to businesses and financial markets.”

Senate Republicans struggled to round up support needed to advance the bill to the final vote until their top two leaders - - both of whom face Tea Party-backed primary election challenges -- stepped forward to vote “yes.”

After Minority Leader Mitch McConnell of Kentucky and Whip John Cornyn of Texas voted to advance the measure, other senior Republicans followed, including third-ranking leader John Thune of South Dakota, Orrin Hatch of Utah and John McCain of Arizona. Twelve Republicans joined all 55 Democrats in the 67-31 procedural vote.

Several Republican senators criticized Texas Republican Ted Cruz for insisting on a 60-vote threshold, saying it put those colleagues in a tough position.
‘Responsible Way’

“McConnell and Cornyn voted in a responsible way under the circumstances,” Senator Bob Corker, a Tennessee Republican, said in an interview. He said he hoped people would understand that McConnell, in “the toughest Republican race in the country, had the courage to vote the way the vast majority of everybody understood the vote needed to occur.”

Corker questioned Cruz’s decision to force the Senate to require 60 votes, saying that there was “no stated, clear” point in blocking the measure after it passed the House.

Cruz defended his position, telling reporters that “it should have been a very easy vote.”

Senate Republicans should have stood together and and said “we will not go along with raising the debt ceiling while doing nothing to fix the underlying, out-of-control spending problem,” Cruz said. Asked whether McConnell should be replaced as Senate Republican leader, he said that was a decision “for the voters of Kentucky to make.”

McConnell’s opponent in the state’s May 20 primary, Louisville businessman Matt Bevin, sent an e-mail within minutes criticizing McConnell for voting to advance the debt limit increase.
Internet Ad

An Internet ad released today accused McConnell of voting “like a Democrat” on fiscal issues. The ad by the Senate Conservatives Fund, a political action committee founded by former South Carolina Republican Senator Jim DeMint that has helped elect Tea Party-backed senators, pictured McConnell along with Obama, Vice President Joe Biden and Senate Majority Leader Harry Reid.

Senator Orrin Hatch, a Utah Republican, told reporters he voted to advance the bill because he “saw politics being played” with the issue and he “didn’t want it to be a political game.”

Although they voted to advance the bill, Cornyn and McConnell opposed final passage.

“Now is hardly the time to give the president carte blanche to continue his spending spree,” Cornyn said in a statement.
Past Confrontations

Since Republicans took control of the House in 2011, raising the debt ceiling led to eleventh-hour showdowns that raised concerns that the government could default on its obligations. In August 2011, January 2012 and last October, the U.S. came within days of a potential lapse in its borrowing authority before Congress acted.

This time, lawmakers are sending a bill to Obama with about two weeks to spare.

House Speaker John Boehner of Ohio and members of his leadership team were among the 28 Republicans in that chamber voting to suspend the borrowing cap. The speaker’s decision to allow the vote drew ire from groups aligned with the small-government, Tea-Party wing of Republicans.

Reid praised Boehner earlier today, saying the speaker has “one of the most difficult jobs in Washington, especially when you look at the caucus that he has to deal with.”

Republicans’ divisions on spending helped provoke a 16-day partial government shutdown in October. The divide weakened Boehner’s negotiating position with Obama and Reid, who stuck to their refusal to consider conditions for raising the debt limit.

A suspension of the U.S. debt limit enacted by Congress in October expired Feb. 7. Lew said last week that borrowing authority may not last past Feb. 27.
Treasury Bills

Rates tumbled on Treasury bills due on March 6, maturing after the Feb. 27 date on which Lew said the U.S. would exhaust extraordinary measures to keep under the debt limit. The rate fell almost five basis points to 0.005 percent.

Senate passage of the debt-limit suspension delays the need for another increase until mid-2015 because income tax payments will postpone the date when the government exhausts its borrowing authority.

Barring significant economic or fiscal policy changes, a debt-ceiling increase wouldn’t be needed for “at least a few months” after the March 15 date, said Shai Akabas, associate director of economic policy at the Bipartisan Policy Center in Washington.

Happy days continue with the stimulus. Now only possible black swan event left is the property bubble in china.

The US is still good for it. The US government has better credit than most of home owners with mortgage.

For FY2013, US government actual revenue of 2.77 trillion. So total debt of 17 trillion isn't really too much. Unlike household, which income only lasts around 30 - 40 years, theoretically, the US government's income can continue forever. So US government is good for infinite amount of debt in theory.

US government is good for infinite amount of USD debt in theory

Until people lose faith in the USD, or have other alternatives

There isn't a reason for the public sector which is the US government to issue foreign currency denominated debt. The US government can only issue USD, why would it consider giving away it's fiscal policy power?

(13-02-2014, 08:46 AM)BlueKelah Wrote: Happy days continue with the stimulus. Now only possible black swan event left is the property bubble in china.

Isn't the point of a black swan event is that it is completely unexpected, and take everybody by surprise?

So I don't think property bubble in China can be considered black swan, since everybody knows about it and expect it to burst on way or another. Nor is it the "only possible" black swan.

(13-02-2014, 03:50 PM)freedom Wrote: There isn't a reason for the public sector which is the US government to issue foreign currency denominated debt. The US government can only issue USD, why would it consider giving away it's fiscal policy power?

Many emerging country fiscal crisis was due to issuance of USD debt, including AFC. Why do you think they gave away their fiscal policy power?

Even Temasek issues USD bonds and Japan government guaranteed USD bonds

USD is the main global reserve now so US is able to keep up the debt issuance. This will not continue forever not unlike the perception of the mighty pound, though unlikely to happen in next decade.

Only countries with foreign reserves should consider to issue foreign currencies denominated debt as they have the foreign reserves against it(public sectors only, not private sectors. private sectors can take whatever risk they would like and issue whatever debt pleasing them). Any other attempt would only diminish the sovereignty of such countries as they give up part of their own fiscal control.

Temasek, though wholly owned by the government, is still much a private company. I doubt that if Temesek is to fall, the Singapore government is willing or has the means to save it. Investors of Temasek can take their own loss.

Why would the US government ever care whether the foreigners are going to buy the US government debt? US government and the Fed implements their policies with Americans in their mind, not the world. The rest of the world can buy or not buy one cent of the debt of the US government. Honestly, the US government or the Fed does not give a damn. Foreign buyers depresses the yield of US treasuries, thus the interest the US government is paying, but foreign buyers are not necessary.

And for the rest of the world, if they are smart enough, they would always issue debt in their own currency. You can never bankrupt if you can print unlimited amount of your own currency. Sadly, for a lot of emerging countries, they highly depend on foreign investments. One day, they would also face the same problem what China is facing now. It holds a lot of USD, but lacks of means to spend it. In the meantime, its central bank loses part of its power of issuing its own currency(PBOC backs its RMB issuance with its foreign reserve, which damages its own ability to manage its monetary policies-the freedom to print whatever amount of RMB). China and PBOC will happily convert its vast foreign reserve into real assets or oversea RMB if they can.

Firstly I assume you have not gone through the AFC, ie felt the impact personally (not that you are not born yet per se) Foreign reserves is highly related to trade balance, and when it comes to trade, there is a lot of reasons why access to foreign capital is important. In the AFC it was compounded by the fact that THB and IDR was pegged and corporates were borrowing heavily overseas to "arbitrage" the difference, but the government had to pay the bill. When crap hits the fan, there is little difference between private and govt foreign debt because it all gets netted off in the foreign reserves. Look at Argentina now and historically

And when enitities get too big to fail, the impact tends to be socialised because the bankruptcy itself will have a social impact ANYWAY. You may not believe this but there is NO DIFFERENCE between Temasek and Singapore govt; if Temasek defaults, you expect Temasek to sell Singtel majority to a 3rd party? The subtle difference to privatise Temasek does give it extra leverage on hair-cut negotiations. It's the same mentality of US govt and the GSEs... and doing pref shares in essence guranteeing the debt holders.

You can mess with the equity guys but not with the debt guys, unless u run out of choices.

As per my previous posts, there is great leverage on US$ being the trade currency and hence the de facto reserve currency. The US does care that foreigners buy their debt to keep as reserves, becuase US$ is the basis of the fiat cross currency system. Kissinger cared enough to effectively invent the LIBOR market for petro$ cycling

Since US$ is the defacto trade currency, China has no problem spending it. They would have a big problem if they say hold bitcoins since it is not legal tender everywhere If possible they would like to pay use up their USD to buy up commodities assets, which are usually priced in USD anyway, if not for the fact that other governments are aware of their national interest as well.

And RMB is a soft peg and not a currency board hard peg like HKD. Their issuance of RMB is not backed by reserves, just as SGD is soft peg to the NEER. The issue with their US$3tr reserve is that they are aware that USD over the long run has to depreciate to maintain a global inflationary stance as it is the currency of the global system. A 10% depreciation would be a loss of $300b.

While you are right that "countries cannot default on their local debt" per se, it is of little consequence if you hold Zimbabwe debt. Like the many economist joke, one would be technically right but of little consequence.

I do enjoy discussing issues with you when you are rational, and if you are not in the industry I think your knowledge is quite respectable. But IMHO you tend to compartmentalise your thinking and would encourage you to look at it multi-faceted as Munger called multi-disciplinary approach. In reality politics & family, econs & social, foreign & domestic, rich & poor, socialism and capitalism, etc are all intertwined and not standalone islands.

AFC is a private sector crisis, not a public sector crisis, even after the governments tried to save everybody, especially, the financial institutions, of which quite some were insolvent at that time. If the governments never stepped in, today, we would have the large parts of the financial system in ASEAN owned by foreign institutions. Still the currency would be depreciated greatly as it should be and the crisis would still happen as the private sector made huge loss. But the governments were still solvent. They could hardly borrow from the international financial market, but they didn't have to. They had their print press and currency depreciation to save those failed institutions.

As whether Singapore government would save Temasek, that's a debate for the elites in the government. I doubt that a Temasek default would have too different an impact from the government's rescue of Temasek. So what the vast Temasek's domestic investments goes to foreigners if it is only Temasek is insolvent, not SIA/Keppel/Semb Corp/SP Power etc. There is no point to socialize the loss of Temasek and it's plain robbery of common Singaporean. Even if Singapore government saved Temasek by socializing the loss, would the international market be open to Singapore? Unlikely. Just see AFC. Indonesian government saved most of its banks, could the government of Indonesia or its banks access the international financial market for anything at that time?

As per my explanation above, the foreigners are depressing the yield of US Treasuries, why would they not like it as everybody loves cheap money. But how to make the foreigners keep USD? To make it more valuable. That's what they want, but do they need it? That's a complete different question.

I disagree that "Since US$ is the defacto trade currency, China has no problem spending it." China is trying its best to spend its vast USD reserve, but no avail. It can't spend too much without distorting the price and that will harm the interest of China before harming the US. Of course, if you are talking about tens of billions of USD, it is easy to spend, not when you have trillions of it. There is only one market for Chinese foreign reserve, that is the US treasuries whether the Chinese likes it or not.

I don't know whether you have examined the balance sheet of PBOC. But I have. The majority of the assets of PBOC is its foreign reserves and the majority of its liabilities of course, the bank reserves it created. And for every cent of foreign reserve PBOC assumed, it creates equivalent amount of liability in its banks reserve(RMB) or its bills. And how do you justify that RMB is not backed by its reserve?

So what the country will be in hyperinflation when the government monetizes its debt? That's the only reasonable consequence when the government is so incompetent that it can't create the minimum wealth required to pay its debt.