Full Faith and Credit
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Full Faith and Credit
I have a question about the concept of "Full Faith and Credit." Sorry if it is too simplistic.
But how exactly does this work? How can a government absolutely ensure they can pay you back? Do they structure themselves in a way where this is a guarantee? What happens if they can't? Have they ever been in a position where the full faith and credit clause has failed?
But how exactly does this work? How can a government absolutely ensure they can pay you back? Do they structure themselves in a way where this is a guarantee? What happens if they can't? Have they ever been in a position where the full faith and credit clause has failed?
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Re: Full Faith and Credit
No. Theoretically US Gov obligations are backed by the faith that Congress will do the "Right Thing" in funding the laws that they passed by consensuses vote and approved by the President.
We may have another episode at the end of Feb, if Congress doesn't fund HomeLand Security; Forcing PBO to reconfigure current budget.
I am wary of USTreasury Bonds, although I hold a small amount thru general Indexes and bond specific USTreas. index.
Politics is an odd creature.
We may have another episode at the end of Feb, if Congress doesn't fund HomeLand Security; Forcing PBO to reconfigure current budget.
I am wary of USTreasury Bonds, although I hold a small amount thru general Indexes and bond specific USTreas. index.
Politics is an odd creature.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
Re: Full Faith and Credit
It's a simple question, but there is not a simple answer.
Not all governments can pay everything back. It depends on the banking and government structures.
Some, like the USA can, because they control a certain portion of the money supply used in the US (but not all of it, by far). So they have the option of creating money "from thin air" if and when they desire to do so. They also have the ability to tax and demand payment in dollars.
However, there is no guarantee that the money returned will have the same value, or purchasing power, as it did when the promise was made.
Not all governments can pay everything back. It depends on the banking and government structures.
Some, like the USA can, because they control a certain portion of the money supply used in the US (but not all of it, by far). So they have the option of creating money "from thin air" if and when they desire to do so. They also have the ability to tax and demand payment in dollars.
However, there is no guarantee that the money returned will have the same value, or purchasing power, as it did when the promise was made.
Time is what we want most, but what we use worst. William Penn
Re: Full Faith and Credit
I don't worry about the US in particular defaulting on its debt, but no government can absolutely ensure that.
Re: Full Faith and Credit
Yes... There was a time that it was popular to have bonds backed with a 'gold clause', essentially as insurance against inflation. By the 1930's the U.S. had rolled a significant amount of debt into Libery Bonds which included a gold clause. The government made good on the payment of dollars, but defaulted on the terms of the bond that was payable in gold. There were many court cases, and the Supreme Court ruled that the terms of the contract were violated, but said that it was within the rights of the government to do what was essential to maintain the currency and the bond holders had no recourse.NeutrinoPerson wrote:....Have they ever been in a position where the full faith and credit clause has failed?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Full Faith and Credit
Maybe not,msi wrote:I don't worry about the US in particular defaulting on its debt, but no government can absolutely ensure that.
But I am holding USTreas long bonds (TLT) as a speculation bet and not an investment in US Government endeavors.
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Re: Full Faith and Credit
NeutrinoPerson wrote:I have a question about the concept of "Full Faith and Credit." Sorry if it is too simplistic.
But how exactly does this work? How can a government absolutely ensure they can pay you back? Do they structure themselves in a way where this is a guarantee? What happens if they can't? Have they ever been in a position where the full faith and credit clause has failed?
I take the phrase to mean that if my money isn't safe with the government, I've got much bigger problems to worry about, e.g., armed rioting in the streets, overthrow of the government, roundup and imprisonment of citizens. Not really worried about that in the US.
Re: Full Faith and Credit
While we're on the subject of speculation, Felix Zulauf recommended doing exactly that in Barron's Roundtable this year. Dunno if you have a subscription, the video summary is free http://www.wsj.com/video/felix-zulauf-d ... 52B52.htmlitstoomuch wrote:Maybe not,msi wrote:I don't worry about the US in particular defaulting on its debt, but no government can absolutely ensure that.
But I am holding USTreas long bonds (TLT) as a speculation bet and not an investment in US Government endeavors.
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Re: Full Faith and Credit
Whenever questions about "full faith and credit" come up, just for fun, it's interesting to check the market's opinion of the chances of government bond defaults by looking at sovereign debt default swaps (found here). These are today's prices on the open market of insurance against default :
- United States…...…..$15.50
Germany……..…..….$17.84
France………......……$44.34
Japan………..…..….…$49.45
Spain………….....….$104.34
Italy…………….....…$123.76
China……….….….…$138.00
Egypt...……….....…..$312.46
Greece………....….$1,900.64
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Re: Full Faith and Credit
@msi
Great minds, we are.
GL
Great minds, we are.
GL
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Re: Full Faith and Credit
What is the payout of these swaps?Simplegift wrote:Whenever questions about "full faith and credit" come up, just for fun, it's interesting to check the market's opinion of the chances of government bond defaults by looking at sovereign debt default swaps (found here). These are today's prices on the open market of insurance against default :
Despite "full faith and credit," the market never seems to price the chances of default by the U.S. Treasury at $0.00.
- United States…...…..$15.50
Germany……..…..….$17.84
France………......……$44.34
Japan………..…..….…$49.45
Spain………….....….$104.34
Italy…………….....…$123.76
China……….….….…$138.00
Egypt...……….....…..$312.46
Greece………....….$1,900.64
Re: Full Faith and Credit
Thread locked for moderator review.
Update: See below.
Update: See below.
Re: Full Faith and Credit
Upon further review, this thread is now unlocked.
Please avoid opinions of the political process.
Please avoid opinions of the political process.
Re: Full Faith and Credit
I lost lots of money in the 80s and 90s following the advice of Felix Zulauf and the other Barron's Roundtable talk-a-lots.
I'm quite surprised anybody still reads Barron's.
I'm quite surprised anybody still reads Barron's.
"have more than thou showest, |
speak less than thou knowest" -- The Fool in King Lear
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Re: Full Faith and Credit
I'm using Barrons' as the fall guy for my losing position.
I can also say that
I'm just trying to get a more balanced, age-in, conservative 85/10/5 portfolio from my previous 90/0/10
'm only trying to get a 90/10 portfolio.
I can also say that
I'm just trying to get a more balanced, age-in, conservative 85/10/5 portfolio from my previous 90/0/10
'm only trying to get a 90/10 portfolio.
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Re: Full Faith and Credit
"Full faith and credit" means that the issuer accepts full responsibility, and thus the bond is as good as the issuer.
An important distinction is between GNMA and FNMA bonds. GNMA is an arm of the US Government, and its full faith and credit stands behind these bonds; even if mortgage holders default, GNMA bonds will still be paid. FNMA is a private corporation; there were extensive discussions during the financial crisis whether the US Government would cover losses on FNMA bonds. (It did cover the bonds, but this was a choice, not required by law.)
The distinction is more important with municipal bonds. If you buy a Pennsylvania state bond, it is backed by the full faith and credit of the state, so its value depends on how much investors trust the state to repay its bonds. If you buy a Pittsburgh city bond, it is backed by the full faith and credit of the city, but not by the state, so it may have a different value. If you buy a Pennsylvania Turnpike Authority bond, it is not backed by the full faith and credit of the state, only by the turnpike authority; if the authority is unable to pay the bonds, the state does not need to pay.
An important distinction is between GNMA and FNMA bonds. GNMA is an arm of the US Government, and its full faith and credit stands behind these bonds; even if mortgage holders default, GNMA bonds will still be paid. FNMA is a private corporation; there were extensive discussions during the financial crisis whether the US Government would cover losses on FNMA bonds. (It did cover the bonds, but this was a choice, not required by law.)
The distinction is more important with municipal bonds. If you buy a Pennsylvania state bond, it is backed by the full faith and credit of the state, so its value depends on how much investors trust the state to repay its bonds. If you buy a Pittsburgh city bond, it is backed by the full faith and credit of the city, but not by the state, so it may have a different value. If you buy a Pennsylvania Turnpike Authority bond, it is not backed by the full faith and credit of the state, only by the turnpike authority; if the authority is unable to pay the bonds, the state does not need to pay.
Re: Full Faith and Credit
The political process will determine the long run credit worthiness of US govt debt like that of every other country. Virtually no country ever *can't* pay their debts in the same sense as an insolvent corporation. Even Greece's total assets are far above its total debts (see good article in today's WSJ). Countries force creditors to take haircuts when that becomes the political path of least resistance and/or simply paying in full becomes impossible politically, and especially when debt service payments to foreigners exceed a certain threshold (an estimate 2% of GDP debt service to foreigners in that article). It's not determined by the technical tools available to appointed central bankers. Greece's (again as example, but no implied comparison to the US at present) situation is complicated by being part of a large currency union, but that's not the determining factor. Russia in 1998 forced a restructuring on Ruble bondholders, though in theory it could have 'run the printing presses', didn't default on its hard currency external debt. Nor is sovereign creditworthiness entirely determined by legalities: democracies elect representatives to write and change laws according to what's possible politically. The issue is whether or when the path of least resistance for the political process becomes a restructuring, and that tends to depend mostly on prior political policies over an extended period.
Therefore it's pointless to have a discussion of long term US credit worthiness, hence the practical meaning of 'full faith and credit', if you have to avoid any reference to, or walk on eggshells when referring to, the political process.
Therefore it's pointless to have a discussion of long term US credit worthiness, hence the practical meaning of 'full faith and credit', if you have to avoid any reference to, or walk on eggshells when referring to, the political process.
Last edited by Johno on Fri Feb 20, 2015 9:38 pm, edited 2 times in total.
Re: Full Faith and Credit
1. Such a "full faith and credit" guarantee/backing is only as good as the particular government issuing it. I don't know if these words were used, but such backing by the Confederate States of America would not hel you much (based on what happend to the CSA).NeutrinoPerson wrote:I have a question about the concept of "Full Faith and Credit." Sorry if it is too simplistic.
But how exactly does this work? How can a government absolutely ensure they can pay you back? Do they structure themselves in a way where this is a guarantee? What happens if they can't? Have they ever been in a position where the full faith and credit clause has failed?
2. In the U.S., this phrase is used for the backing of bank and credit union depositsby FDIC and NCUA, respectively. Such wording is required by law at federally insured banks and credit unions. Not one penny of such insured deposits has ever been lost at any such bank or credit union.
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Re: Full Faith and Credit
Standard CDS contracts include a 40% recovery assumption, I believe, but investors' eventual recovery isn't decided until the auction at default. As you can see below, there is quite a lot of variation in recovery rates from specific country default events:Aish wrote:What is the payout of these swaps?
Source: Financial Times
Re: Full Faith and Credit
http://www.bogleheads.org/forum/viewtop ... 1#p2157851dm200 wrote:1. Such a "full faith and credit" guarantee/backing is only as good as the particular government issuing it. I don't know if these words were used, but such backing by the Confederate States of America would not hel you much (based on what happend to the CSA).NeutrinoPerson wrote:I have a question about the concept of "Full Faith and Credit." Sorry if it is too simplistic.
But how exactly does this work? How can a government absolutely ensure they can pay you back? Do they structure themselves in a way where this is a guarantee? What happens if they can't? Have they ever been in a position where the full faith and credit clause has failed?
2. In the U.S., this phrase is used for the backing of bank and credit union depositsby FDIC and NCUA, respectively. Such wording is required by law at federally insured banks and credit unions. Not one penny of such insured deposits has ever been lost at any such bank or credit union.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Full Faith and Credit
The US cannot default unless it wants to. I don't know how much comfort you take in that, but to me it means the US will never default.
In other words, it always has the ability (but the remote possibility that it won't out of I-don't-know-what) to pay its due bills. They do this by changing numbers in a computer.
The way to think about treasury securities is that they are savings accounts with the federal govt. To pay off the bond or to pay interest, they change the number in your checking account.
They will never run out of numbers.
In other words, it always has the ability (but the remote possibility that it won't out of I-don't-know-what) to pay its due bills. They do this by changing numbers in a computer.
The way to think about treasury securities is that they are savings accounts with the federal govt. To pay off the bond or to pay interest, they change the number in your checking account.
They will never run out of numbers.
Re: Full Faith and Credit
Are you going to ignore that the US already HAS, in the past, defaulted on it's obligations (see Liberty Bonds)?bberris wrote:The US cannot default unless it wants to. I don't know how much comfort you take in that, but to me it means the US will never default.
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Re: Full Faith and Credit
My understanding is the bond issuer (i.e. U.S. Government) accepts full responsibility for the obligation.
Best.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Full Faith and Credit
Past US defaults have been due to lack of ability to redeem US dollars for specie due to insufficient gold reserves. Since current US dollars are not redeemable this type of default is not in the cards. One can argue whether or not monetizing the debt would be an effective default however legally probably not.dnaumov wrote:Are you going to ignore that the US already HAS, in the past, defaulted on it's obligations (see Liberty Bonds)?bberris wrote:The US cannot default unless it wants to. I don't know how much comfort you take in that, but to me it means the US will never default.
In my opinion the biggest potential risk of US default would be if the US have non-dollar denominated debts.
At present it doesn't.
Re: Full Faith and Credit
So you all believe FF&C has no real meaning. I tend to agree at this point. But I have been told by a normally reliable source that the original meaning of the term was quite strong.
Originally, it was more accurate to say that FF&C debt was backed by the full faith and credit of the United States (for example), as opposed to the U.S. Government. The debt was backed by the government and the American people. That is, if the U.S. defaulted on FF&C debt owed to the Chinese (again, just an example), the Chinese would have the right to confiscate assets from American companies, and even American citizens, located in China. For that matter, Americans anywhere would be on the hook, although there would presumably be some difficulty in collecting from American corporations on U.S. soil. The point is that the United States was on the hook for that debt if it wasn't paid as according to the agreed-upon terms. That's why "full faith and credit" is traditionally considered a strong promise.
Nowadays, it doesn't amount to much. The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S. What does that mean? That if the bank defaults, we can confiscate the money from ourselves? The definition has been watered down the point where the term is kinda useless.
Originally, it was more accurate to say that FF&C debt was backed by the full faith and credit of the United States (for example), as opposed to the U.S. Government. The debt was backed by the government and the American people. That is, if the U.S. defaulted on FF&C debt owed to the Chinese (again, just an example), the Chinese would have the right to confiscate assets from American companies, and even American citizens, located in China. For that matter, Americans anywhere would be on the hook, although there would presumably be some difficulty in collecting from American corporations on U.S. soil. The point is that the United States was on the hook for that debt if it wasn't paid as according to the agreed-upon terms. That's why "full faith and credit" is traditionally considered a strong promise.
Nowadays, it doesn't amount to much. The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S. What does that mean? That if the bank defaults, we can confiscate the money from ourselves? The definition has been watered down the point where the term is kinda useless.
Darin
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Re: Full Faith and Credit
That is very interesting. Thank you for sharing.Drain wrote:So you all believe FF&C has no real meaning. I tend to agree at this point. But I have been told by a normally reliable source that the original meaning of the term was quite strong.
Originally, it was more accurate to say that FF&C debt was backed by the full faith and credit of the United States (for example), as opposed to the U.S. Government. The debt was backed by the government and the American people. That is, if the U.S. defaulted on FF&C debt owed to the Chinese (again, just an example), the Chinese would have the right to confiscate assets from American companies, and even American citizens, located in China. For that matter, Americans anywhere would be on the hook, although there would presumably be some difficulty in collecting from American corporations on U.S. soil. The point is that the United States was on the hook for that debt if it wasn't paid as according to the agreed-upon terms. That's why "full faith and credit" is traditionally considered a strong promise.
Nowadays, it doesn't amount to much. The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S. What does that mean? That if the bank defaults, we can confiscate the money from ourselves? The definition has been watered down the point where the term is kinda useless.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Full Faith and Credit
I strongly disagree with your discounting or downplaying the full faith and credit statements of the US Government and citing of the Full faith and Credit by federally insured banks and credit unions.Drain wrote:So you all believe FF&C has no real meaning. I tend to agree at this point. But I have been told by a normally reliable source that the original meaning of the term was quite strong.
Originally, it was more accurate to say that FF&C debt was backed by the full faith and credit of the United States (for example), as opposed to the U.S. Government. The debt was backed by the government and the American people. That is, if the U.S. defaulted on FF&C debt owed to the Chinese (again, just an example), the Chinese would have the right to confiscate assets from American companies, and even American citizens, located in China. For that matter, Americans anywhere would be on the hook, although there would presumably be some difficulty in collecting from American corporations on U.S. soil. The point is that the United States was on the hook for that debt if it wasn't paid as according to the agreed-upon terms. That's why "full faith and credit" is traditionally considered a strong promise.
Nowadays, it doesn't amount to much. The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S. What does that mean? That if the bank defaults, we can confiscate the money from ourselves? The definition has been watered down the point where the term is kinda useless.
Your statement,
is also incorrect. it is not "encouraged"; it is REQUIRED.The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S.
Re: Full Faith and Credit
Fine. So what does it mean? How is it different from non-FF&C federal debt?dm200 wrote:I strongly disagree with your discounting or downplaying the full faith and credit statements of the US Government and citing of the Full faith and Credit by federally insured banks and credit unions.Drain wrote:So you all believe FF&C has no real meaning. I tend to agree at this point. But I have been told by a normally reliable source that the original meaning of the term was quite strong.
Originally, it was more accurate to say that FF&C debt was backed by the full faith and credit of the United States (for example), as opposed to the U.S. Government. The debt was backed by the government and the American people. That is, if the U.S. defaulted on FF&C debt owed to the Chinese (again, just an example), the Chinese would have the right to confiscate assets from American companies, and even American citizens, located in China. For that matter, Americans anywhere would be on the hook, although there would presumably be some difficulty in collecting from American corporations on U.S. soil. The point is that the United States was on the hook for that debt if it wasn't paid as according to the agreed-upon terms. That's why "full faith and credit" is traditionally considered a strong promise.
Nowadays, it doesn't amount to much. The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S. What does that mean? That if the bank defaults, we can confiscate the money from ourselves? The definition has been watered down the point where the term is kinda useless.
Your statement,is also incorrect. it is not "encouraged"; it is REQUIRED.The U.S. government even encourages banks to state that their debt is backed by the FF&C of the U.S.
What I'm saying is that, if my story is more or less correct, there was a clear distinction between what was FF&C debt was and what non-FF&C debt was. What is the distinction now?
Darin
Re: Full Faith and Credit
Fellow Marylander has good explanation, nicely summing it up.grabiner wrote:"Full faith and credit" means that the issuer accepts full responsibility, and thus the bond is as good as the issuer....An important distinction is between GNMA and FNMA bonds.
What does it mean to me? It means that I eschew FDIC-Government- type insurance on a low six-figure taxable account by putting it in GinnieMae mutual fund shares. Instead of super-safe bank CD with crappy yield.
Still sleep well at night.
Re: Full Faith and Credit
Does grabiner's explanation really make a distinction between FF&C and non-FF&C? To me, he's just saying that some lenders are more credit-worthy than others. The comparison shouldn't be between federal FF&C and Pennsylvania FF&C, or betwen federal and Faanie Mae. It should be between, say, Pennsylvania FF&C and Pennsylvania non-FF&C.
I'm not saying he's wrong, by the way. I'm questioning whether there's truly a meaningful distinction.
I'm not saying he's wrong, by the way. I'm questioning whether there's truly a meaningful distinction.
Darin
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Re: Full Faith and Credit
Can the government simply print more money to make up what it owes, at the expense of inflation?
FF&C = "We will guarantee that you get paid back unless inflation eats us alive"?
FF&C = "We will guarantee that you get paid back unless inflation eats us alive"?
Re: Full Faith and Credit
Yes, but that's a separate issue, I think. And more political.NeutrinoPerson wrote:Can the government simply print more money to make up what it owes, at the expense of inflation?
FF&C = "We will guarantee that you get paid back unless inflation eats us alive"?
Darin
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Re: Full Faith and Credit
In what sense?Drain wrote:Yes, but that's a separate issue, I think. And more political.NeutrinoPerson wrote:Can the government simply print more money to make up what it owes, at the expense of inflation?
FF&C = "We will guarantee that you get paid back unless inflation eats us alive"?
Personally I am just having a hard time understanding how something can be backed in "full faith and credit" by an entity, as a way of saying "we're always good for it." I don't see how one can guarantee this unless conditions prevent them from doing so. And even then, it makes me wonder if they would ever sacrifice something that could put this at risk.
Re: Full Faith and Credit
I'm not sure what direction you're going with this, but the difference I see is that it's not written into law or something that congress appropriates money for. So some government entities are able to go around creating liabilities, under what is interpreted as a backing of the government, but congress doesn't have to budget for it or carry the liability on their balance sheet. The somewhat undefined nature of the backing might make some uneasy about it - but if it was subject to the political wrangling that a lot of the budget gets it might make someone even less settled.
https://www.fdic.gov/regulations/laws/r ... -2660.html
...While any final conclusion on this matter rests with the Attorney General of the United States and ultimately with the courts, it is our opinion that Title IX of CEBA merely represents an expression of the intent of Congress to support the FDIC's deposit insurance fund should the need arise. Title IX does not change any existing underlying law. It does not amend the Federal Deposit Insurance Act, nor does it or any other provision of CEBA alter the method by which the FDIC is funded. The FDIC continues to receive no government appropriations, and its funding continues to consist entirely of its income obtained from insurance assessments and from the return on investments made in government securities.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Full Faith and Credit
Think of the definition I'm stating used to be the one understood internationally. (Again, just pulling countries out of the air to use as examples....) If the United States lends money to China under FF&C, and then decides to default on that debt for whatever reason, China has the right to take over whatever American assets it can get its hands on. It's not just the U.S. government that's on the hook, it's the American people. Furthermore, France, Germany, and Japan agree that China has the right to do so, because the money was lent with the full faith and credit of the United States. Sure, the U.S. could try to do whatever it wanted, but the entire rest of the world would agree that it was in the wrong and that China was in the right. That has to be worth something in the form of sanctions or whatever.NeutrinoPerson wrote:Personally I am just having a hard time understanding how something can be backed in "full faith and credit" by an entity, as a way of saying "we're always good for it." I don't see how one can guarantee this unless conditions prevent them from doing so. And even then, it makes me wonder if they would ever sacrifice something that could put this at risk.
Darin
Re: Full Faith and Credit
Before we get into disagreements on economic policy (off-topic), here's a helpful tutorial in the hope it will answer some fundamental questions on inflation and "printing money."
This video has been mentioned before in this forum. Here it is again: How The Economic Machine Works by Ray Dalio
This video has been mentioned before in this forum. Here it is again: How The Economic Machine Works by Ray Dalio
Re: Full Faith and Credit
Is this just thought experiment or your actual idea of the rights of creditors of treasuries? The US govt does not 'borrow money from China' (you said 'US lends' but it seems your example actually meant 'US borrows'). It sells treasury instruments to 'the public'. The treasury has no direct record of the final owners of those instruments, only the US financial institution account in which they were settled. Foreign holdings of US treasury instruments are estimates based on surveys. The point being, US treasury obligations give the same rights to any holder (in any scenario where a semblance of the rule of law still applies). It's obviously unworkable if US holders of US treasuries can make claims against US individuals to remedy a default by the govt (against themselves?), and China holds the same treasuries.Drain wrote:Think of the definition I'm stating used to be the one understood internationally. (Again, just pulling countries out of the air to use as examples....) If the United States lends money to China under FF&C, and then decides to default on that debt for whatever reason, China has the right to take over whatever American assets it can get its hands on. It's not just the U.S. government that's on the hook, it's the American people. Furthermore, France, Germany, and Japan agree that China has the right to do so...NeutrinoPerson wrote:Personally I am just having a hard time understanding how something can be backed in "full faith and credit" by an entity, as a way of saying "we're always good for it." I don't see how one can guarantee this unless conditions prevent them from doing so. And even then, it makes me wonder if they would ever sacrifice something that could put this at risk.
So assuming we all agree that a US default or restructuring would not open avenues of remedy by foreign entities against US companies or individuals (again under a semblance of rule of law), is it possible for the US *govt* to default? I would say yes. The argument that it's impossible just because US treasuries promise USD's (not foreign currencies) is clearly wrong. Russia effectively defaulted on its Ruble debt less than 20 years ago, forced holders of the debt to exchange it for longer term lower rate bonds clearly worth less. The major rating agencies deemed this a default. Russia actually didn't default on its foreign currency debt. 'Running the printing presses' to avoid a debt crunch *is* an extra option that sovereign issuers in own-currency have which sovereign issuers in other people's currencies (or a currency union) don't have. But it doesn't mean 'printing' is necessarily the least painful course of action when debt burdens get far enough out of line. The inflation accompanying runaway monetization may do more harm than simply admitting the debt can't be repaid. Also if the debt is fairly short term, there isn't much gained by 'printing it away' if the bond market will simply raise the rates (more than) correspondingly when it has to be rolled over soon.
There are also particular legalities in any given country. A US debt restructuring, for example, would have to deal with the wording of the 14th Amendment "the validity of the public debt...shall not be questioned' as it relates to the US Bankruptcy code.
However I would reiterate the long term creditworthiness of any country, not only but including the US, is overwhelmingly a function of long term fiscal, monetary and growth policies, however those might be determined in a venue where they might be debated, as well as exogenous factors which affect them. Issuing in own currency gives an extra menu option to delay a day of reckoning, or give better policies more time to avoid one, but doesn't short circuit the whole issue. Likewise the legal thicket created by the 14th A is an additional incentive for US policy makers to find solutions other than restructuring. But there is no cosmic law saying the US or any other country issuing in its own fiat currency *can't* default. It won't unless 'it wants to', but virtually no country ever has defaulted for any other reason than 'wanting to'. The assets to pay the debt existed somewhere within almost every sovereign defaulter ever. Default happens when the polity can no longer find a way to make and distribute the sacrifices necessary to avoid default, then it 'wants to' default.
Anyway rational investors in nominal bonds should not strictly prefer currency debasing non default policies to a straight forward hair cut in a restructuring. Their preference should depend on how big a real power purchasing hit they take.
This anthology presents varying views on the issue, as it relates to the US:
http://finance.wharton.upenn.edu/FIC/FI ... usdebt.pdf
Re: Full Faith and Credit
This is half right. Russia didn't default on any foreign currency debt issued by Russia, but did default on foreign currency debt issued by the USSR. When the USSR broke apart, Russia assumed all the external debt of the USSR, which it did default on or negotiate a restructuring for multiple times including 1998-1999.Johno wrote:Russia effectively defaulted on its Ruble debt less than 20 years ago, forced holders of the debt to exchange it for longer term lower rate bonds clearly worth less. The major rating agencies deemed this a default. Russia actually didn't default on its foreign currency debt.