16 Comments

As you noted, there is no political will in the US to balance our books, and truly no incentive because austerity costs you votes. So the only way this debt trajectory changes is with a crisis in which markets challenge solvency (think interest rate spike). But I don't think that leads to default. Rather, this will progress in the same way it has with every other bankrupt nation - money will be printed. The only thing preventing this from happening now is the relative discipline of the Fed. So the key in my mind will be watching for political pressure that undermines Fed independence and facilitates the inflationary end game.

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author

Makes sense.. but I am trying to think like a US politician (hard to do).... I could easily see them say lets stop paying interest to the Chinese?!? It would be a default - but a politically popular one.

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Russell for once I do not agree with you. It depends on what you call default. Real default would stop people buying treasuries for years after. that would stop politicians spending and I think that is a NoNo. I think the only way foreward is to keep doing what they have been doing for the last 10 years. Interest rates have been below Inflation. That will continue for 20 years to inflate away the debt or financial repression. However I am often wrong, lets see.

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Thats probably right... but I have seen too many "impossible" things lately. Russia cutting off the gas, China killing its tech companies, Russia cut off from foreign reserves. War and peace are different times

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Russell, if that is the case - is there an argument to be made that long-duration debt of Apple or Alphabet is the benchmark USD risk-free rate?

What other asset can fill this role, Gold?

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Good question. Everything is political. If governments go after corporates then everything changes. Just at the moment - US corporates look untouchable. Gold should be getting destroyed... that is not is interesting... will write something soon

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Cheer up, my taxes are lower because of Apple which pays the sub which pays your U.K. tax bill - capital flowing back to you.

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author

Amazingly even ireland has huge debt levels....

Travelling around Europe - I do wonder where UK taxes go. We certainly dont get the same infrastructure that you would expect with European levels of taxation....

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Route cause for the U.K. might be that London was the sole and central focus. No infrastructural issues there. Elizabeth Line is unreal. Appeared to be booming when I was there last week.

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*root

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author

Could be true. The roads are better up North!

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We decimated our own fisheries industry for European funded roads. 🤷‍♂️. Always swings and roundabouts.

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Other than negative real yields as far as the eye can see, do you worry about any other form of default?

And I hope you don't mind the direct question - do you not hold even T-Bills personally?

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I do hold T-bills - which is why I was thinking about them. Debt default fears had no effect on corporate borrowing costs or value of the dollar is a big surprise to me. I will not be rolling over the t-bills....

And I can see the US defaulting... but only on foreign held treasuries perhaps?

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How do you see such default impacting the Eurodollar market? Other way or asking the question - would you stay in USD at all, or convert to other currencies?

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I don't know. I had just assumed rising wages and rising interest rates would get debt levels down. Now I can see government choosing not to pay.... i need to think about it more

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