The Next Big Crash - Are You Prepared?

[specuvestor]

The highlighted one is one of the most populist ideas I have ever read. And you think you are not a populist?

Nothing good will ever come out from the idea you described. The US government knows it, so does the Japanese government. Plus, the US government does not have the right to print money. The US government has the right to print US dollar bills, but it can only sell it to the Fed. Only if the Fed agrees to buy those newly printed US dollar bills by issuing liability of its own, which is the real money commonly accepted by all other banks in US, it is called money then.

This is the fiat system and structure. i am neither agreeing nor disagreeing. Merely stating a fact that you are callously jumping on.

It is called monetisation. I think my econs understanding is adequate but since we're on it and you seemed keen on nomenclatures, the US government doesn't print money. It issues debt.

You are making me laugh too much. If the US government has such power, why would there be a debt ceiling issue? Just print and print, no need debt.

On your debt argument. US debt is not money. US debt is an asset that other people buy with money. But itself is not money.

maybe you need refresh your econ theories. Money is the liabilities of the Fed or the commercial banks. not the US government.

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do you want another example? I also can issue my debt to the bank in exchange for money(I issued IOU(my debt) in favor to the bank, the bank pays me the money and I use it to buy a house). Does that mean that I am printing money?

This is my last response to you on this matter because I sense you think the rest of us are "either stupid or lazy". I have stated previously that you should stick to stocks analysis and leave econs alone. I stand by that.

You yourself said US will never default only because of the politician. And like you say, debt ceiling is a legislative structure that prevents the current admin from overspending. The reason is under fiat it can never default because under the fiat system people keep their reserves in US$ and not gold. Hence US can print indefinitely until people loses faith in the US$, which is the MAIN reason why UST cannot go default because it affects that faith/ confidence. I cannot understand your flip flopping logic and not even sure if you understood what you are saying. You seem to understand but cannot piece them together. My guess is you are early thirties.

Being a reserve currency is so powerful that Euro wanted to have some of that and definitely RMB will be next.

The US is both government and independent fed and as a whole they can print and monetise. The US debt is government liabilities and US money is Fed liabilities. But effectively there are separated yet related like a parent and the subsidiary.

If you are opening a sweat shop and issue your own IOU to be used internally, that is money. If the banks accept your IOU that is money, but I doubt it. Money is a VERY SHORT TERM DEBT as a medium of exchange. Your safra vouchers is money as long as people accepts it. Dollarised Argentina issued their own IOUs previously as well.

If you are unable to keep up with the discussion but resort to demeaning remarks to the forumers, and not just towards 1 or 2 forumers, maybe majority wisdom is wisodm afterall.

[freedom]

A better explanation about government shutdown and default from Wikipedia.

Under US law, an administration can spend only if it has sufficient funds to pay for it. These funds can come either from tax receipts or from borrowing by the United States Department of the Treasury. Congress has set a debt ceiling, beyond which the Treasury cannot borrow (this is similar to a credit limit on a credit card). The debt limit does not restrict Congress’s ability to enact spending and revenue legislation that affects the level of debt or otherwise constrains fiscal policy; it restricts Treasury’s authority to borrow to finance the decisions already enacted by Congress and the President. Congress also usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect.[6] In the absence of sufficient revenue, a failure to raise the debt ceiling would result in the administration being unable to fund all the spending which it is required to do by prior acts of Congress. At that point, the government must cancel or delay some spending, a situation sometimes referred to as a partial government shut down.

It also helps to answer earlier question about whether US government not paying its obligations other than debt is a default. Apparently, it is called government shutdown.

Good day Freedom,

Fair enough, i do not wish to devote any more time to research the legalities and as such am willing to concede the point. So, is this your proposed solution to the US situation? Fail to honour entitlements when they come due and only pay bondholders?

Actually, I was researching what happened in the debt ceiling crisis of US in 2011.

It was mentioned that "On January 25, 2011, Senator Toomey introduced The Full Faith And Credit Act bill [S.163[58]] that would require the Treasury to prioritize payments to service the national debt over other obligations.[59] (The bill was cleared by its committee for consideration the next day and added to the Senate "calendar of business", but no further action had occurred by mid-August 2011.[60])" I quote from Wikipedia.

It was much more serious in 2011 than today as the revenue of US government was significantly lower than today(the estimated revenue was 2.6 trillion against expenditures of 3.7 trillion). The gap was so huge that it required significant reduction of spending. quote from Wikipedia, "Geithner responded that prioritizing debt would require "cutting roughly 40 percent of all government payments"". 40% of cut of all government payments is huge. The economy was not rosy with the European debt crisis at the height.

But today, it is quite different a picture. The economy is better with unemployment much lower. The requested budget is 3.77 trillion and the estimated revenue is 3.03 trillion. To have a sense about government expenditures, pre-crisis, in 2008, it was 2.9 trillion.

So if the government really wants to have balanced budget in this stage, it can remove certain extraordinary measures introduced during the crisis.

It's quite clear that the Republicans are not asking for removal of entitlements totally, but to reduce it to pre-crisis level, a more sustainable level. Of course, you probably will not get the full picture in the mainstream media.

[Clement]

Our differences with regards to entitlements are now primarily related to amounts. I believe, as the US is a democracy, we should let the people decide what is the minimum necessary. I do agree that populism is dangerous which is why democracy requires an educated middle class to function and cannot work in all situations around the world. I just don't think the policies have crossed the line into pure populism yet.

In the end, i think the current race to the bottom style of economics driven by globalization has produced several unintended consequences and the US is struggling as a country to come to terms with it. I am not sure that the traditional shift of a primarily manufacturing economy into a services economy can succeed in an economy of that size.

[swakoo]

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.”

Guess who said this , floor speech in the Senate, March 16, 2006

[freedom]

Our differences with regards to entitlements are now primarily related to amounts. I believe, as the US is a democracy, we should let the people decide what is the minimum necessary. I do agree that populism is dangerous which is why democracy requires an educated middle class to function and cannot work in all situations around the world. I just don't think the policies have crossed the line into pure populism yet.

In the end, i think the current race to the bottom style of economics driven by globalization has produced several unintended consequences and the US is struggling as a country to come to terms with it. I am not sure that the traditional shift of a primarily manufacturing economy into a services economy can succeed in an economy of that size.

It is always about the amount and the execution. There are people like to choose certain extreme to prove a point, which is never the point.

In terms of budget deficit, globalization is not necessary the culprit here. If we are talking about current account deficit, yes, it is important. Here, we are talking about budget deficit. Globalization is not removing any revenue from the US government, but adding more through foreign profit tax and dividends to the US corporates/individuals.

[gautam]

What i observe in the forum are a few very educated n well read people discussing this topic.
Maybe i as an individual investor is too focused on my own portfolio. Maybe i am ignorant.
But i dun see how the outcome of the US debate will lead to a global disaster. Its man made n there are solutions to it.
Can it lead to collapse of super internationalised companies like MCD, Pitzer etc?
Can its shockwaves if any lead to collapse of dbs, ocbc, cdl etc.

No offence to anyone.

[Clement]

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.”

Guess who said this , floor speech in the Senate, March 16, 2006

If you are trying to say he is a hypocrite, i agree. I hate obstructionist politics and would apply the same standard to both parties.

I believe context is important. In 2006, the US was in a different economic situation from today. Keynesian economics promotes saving during good times and spending during bad times. More importantly, Obama was unable to prevent the debt limit from being raised either, as at that time, the people have spoken that they prefer republican policies and would like the government to execute on them.

Today, the people have spoken that they like Mr Obama's policies and would like the government to execute on them. It's now the republican's turn to play obstructionist politics. My position is and always has been that in a democracy, the will of the people must prevail. We don't come out of every business meeting with a consensus that is to our liking but that does not mean we can try to sabotage or derail the plans that were agreed upon. The government is accountable to all it's citizens, not just the ones who pay taxes or voted for them.

[freedom]

This is my last response to you on this matter because I sense you think the rest of us are "either stupid or lazy". I have stated previously that you should stick to stocks analysis and leave econs alone. I stand by that.

You yourself said US will never default only because of the politician. And like you say, debt ceiling is a legislative structure that prevents the current admin from overspending. The reason is under fiat it can never default because under the fiat system people keep their reserves in US$ and not gold. Hence US can print indefinitely until people loses faith in the US$, which is the MAIN reason why UST cannot go default because it affects that faith/ confidence. I cannot understand your flip flopping logic and not even sure if you understood what you are saying. You seem to understand but cannot piece them together. My guess is you are early thirties.

Being a reserve currency is so powerful that Euro wanted to have some of that and definitely RMB will be next.

The US is both government and independent fed and as a whole they can print and monetise. The US debt is government liabilities and US money is Fed liabilities. But effectively there are separated yet related like a parent and the subsidiary.

If you are opening a sweat shop and issue your own IOU to be used internally, that is money. If the banks accept your IOU that is money, but I doubt it. Money is a VERY SHORT TERM DEBT as a medium of exchange. Your safra vouchers is money as long as people accepts it. Dollarised Argentina issued their own IOUs previously as well.

If you are unable to keep up with the discussion but resort to demeaning remarks to the forumers, and not just towards 1 or 2 forumers, maybe majority wisdom is wisodm afterall.

If you have such sense "I sense you think the rest of us are "either stupid or lazy"", I can only say that you are so full of yourself, that you think any other different opinion is an attack rather than an argument.

Let's examine my rebuttal to your point that US government can print unlimited amount of money. I said "If the US government has such power, why would there be a debt ceiling issue? Just print and print, no need debt."

Firstly, issuing debt of US government is not printing money. Apparently, you still don't get the idea of it. If we can't agree on this, there is no point to further argument. We need establish the fundamental first. Since you are not responding any more, there is no point any more.

We are fundamentally different on what's money. So agree to disagree?

Some people think that gold is money. Sorry, unless you live a few hundred years ago. In modern period, gold, just like any other valuable thing, is an asset other people are willing to pay for with money. In United States, the only money is the US dollar, bill or electronic. Bill are issued by federal reserve(Federal Reserve Notes, but printed by US government and bought by the Fed). Electronic money is issued by commercial banks(not the Fed, but regulated by the Fed) in the form of deposit. Money in US only exists in these two forms and can be exchanged in these two forms(you can withdraw your deposit in Chase bank in the form of cash from the counters or ATMs or you can deposit your notes into Chase bank and get a deposit). Other than these two forms, it is not money. At most, it is something of value.

[Clement]

What i observe in the forum are a few very educated n well read people discussing this topic.
Maybe i as an individual investor is too focused on my own portfolio. Maybe i am ignorant.
But i dun see how the outcome of the US debate will lead to a global disaster. Its man made n there are solutions to it.
Can it lead to collapse of super internationalised companies like MCD, Pitzer etc?
Can its shockwaves if any lead to collapse of dbs, ocbc, cdl etc.

No offence to anyone.

To your question, all financial institutions bear counter party risk and therefore will be affected as the US financial institutions are affected. Our local banks will probably not collapse but their fund raising needs might dilute current shareholders. Besides obvious revenue shrinkage and financial asset impairments, large global companies will be impacted heavily only if they have liquidity issues, ie need to borrow for payroll or purchases. Microsoft for example hummed along just fine during the 2008/2009 crisis. A financial collapse will make life terribly inconvenient but will probably not cause a total economic collapse.

[freedom]

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.”

Guess who said this , floor speech in the Senate, March 16, 2006

If you are trying to say he is a hypocrite, i agree. I hate obstructionist politics and would apply the same standard to both parties.

I believe context is important. In 2006, the US was in a different economic situation from today. Keynesian economics promotes saving during good times and spending during bad times. More importantly, Obama was unable to prevent the debt limit from being raised either, as at that time, the people have spoken that they prefer republican policies and would like the government to execute on them.

Today, the people have spoken that they like Mr Obama's policies and would like the government to execute on them. It's now the republican's turn to play obstructionist politics. My position is and always has been that in a democracy, the will of the people must prevail. We don't come out of every business meeting with a consensus that is to our liking but that does not mean we can try to sabotage or derail the plans that were agreed upon. The government is accountable to all it's citizens, not just the ones who pay taxes or voted for them.

May I suggest to look at it in another way? The people do not know what's right or what they like, they just put their faith into the politicians and let them decide. Whoever wins, it is the people's wish?