[Debt ceiling discussion mega-thread]

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H-Town
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Re: [Debt ceiling discussion mega-thread]

Post by H-Town »

Marseille07 wrote: Tue Jan 24, 2023 7:32 pm
H-Town wrote: Tue Jan 24, 2023 7:30 pm Everyone is happy only if everyone can still trust the value of U.S. dollar. Once that trust is broken, that bill comes due. Not every American can cough up $96,000 at once.

We will see what happens when the U.S. defaults for the first time in history. I'm interested to see it plays out.
There is nothing to cough up though. You already lent money to the government upfront. Now, you might not be paid back the principal; but that's just risk that must be understood before buying US government debt, or any kinds of debt for that matter.
Those T-bills were already sold to the investors: 1.3 trillion by Japan, 1 trillion by China, 650 billion by UK, 334 billion by Ireland, 326 billion by Luxembourg, and so on. What happens if the U.S. cannot pay back those treasury bonds as the debt limit is capped by the Congress? Guess what, guys? The U.S. treasury bonds is no longer the safe heaven investment assets as it's used to be. Not saying the T-bills are worthless as the U.S. is still mighty and whatnots. But that will change the dynamic of T-bills and how investors examine risks for different asset classes going forward.
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H-Town
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Re: [Debt ceiling discussion mega-thread]

Post by H-Town »

km91 wrote: Tue Jan 24, 2023 7:33 pm
H-Town wrote: Tue Jan 24, 2023 7:30 pm Everyone is happy only if everyone can still trust the value of U.S. dollar. Once that trust is broken, that bill comes due. Not every American can cough up $96,000 at once.
The government is the borrower, we are the lender. Why would the lender need to repay anything?
I think of all of us Americans are the borrowers. The U.S. government acts on behalf of the People. We, the People, are on the hook for 31 trillion, thanks to those who were or are in charge. Some of the People can be the lender as well, if they buy and hold the treasury bonds.
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Marseille07
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Re: [Debt ceiling discussion mega-thread]

Post by Marseille07 »

H-Town wrote: Tue Jan 24, 2023 7:41 pm Those T-bills were already sold to the investors: 1.3 trillion by Japan, 1 trillion by China, 650 billion by UK, 334 billion by Ireland, 326 billion by Luxembourg, and so on. What happens if the U.S. cannot pay back those treasury bonds as the debt limit is capped by the Congress? Guess what, guys? The U.S. treasury bonds is no longer the safe heaven investment assets as it's used to be. Not saying the T-bills are worthless as the U.S. is still mighty and whatnots. But that will change the dynamic of T-bills and how investors examine risks for different asset classes going forward.
I agree with this take. Bondholders should absolutely be careful here.
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Northern Flicker
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Re: [Debt ceiling discussion mega-thread]

Post by Northern Flicker »

km91 wrote: Tue Jan 24, 2023 7:33 pm
H-Town wrote: Tue Jan 24, 2023 7:30 pm Everyone is happy only if everyone can still trust the value of U.S. dollar. Once that trust is broken, that bill comes due. Not every American can cough up $96,000 at once.
The government is the borrower, we are the lender. Why would the lender need to repay anything?
Maybe something to do with the govt's authority to levy taxes to pay its bills?

The main issue in play is the credit worthiness of the US Treasury. If that is tarnished, interest rates will rise, not just for treasuries, but anything priced as a risk premium on top of treasuries.

The cost of servicing the nat'l debt would rise.
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km91
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Re: [Debt ceiling discussion mega-thread]

Post by km91 »

Northern Flicker wrote: Tue Jan 24, 2023 7:48 pm
Maybe something to do with the govt's authority to levy taxes to pay its bills?

The main issue in play is the credit worthiness of the US Treasury. If that is tarnished, interest rates will rise, not just for treasuries, but anything priced as a risk premium on top of treasuries.

The cost of servicing the nat'l debt would rise.
If we are in aggregate the borrower and the lender, repayment of the debt simply amounts to a redistribution of wealth. But yes, the underlying mechanism of how the government funds itself is largely irrelevant, what matters is the govt's perceived credit worthiness and it's overall level of spending, which includes debt servicing costs. The government implicitly promises us stable purchasing power and standard of living. That is what full faith and credit of the US Government really means. If the market perceives that the government will be unable to fulfill this obligation then the currency or sovereign debt could lose value. The size of the debt may contribute to this perception, but I think many underestimate a government's capacity to finance it's debts. $31T is certainly a large number, but in the context of the entire US economy and wealth base maybe it's not that large
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Re: [Debt ceiling discussion mega-thread]

Post by LadyGeek »

An interchange regarding general economic policy (not related to investments) has been removed.

Please stay focused on the debt ceiling limit as it relates to investments.
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Northern Flicker
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Re: [Debt ceiling discussion mega-thread]

Post by Northern Flicker »

km91 wrote: If we are in aggregate the borrower and the lender, repayment of the debt simply amounts to a redistribution of wealth.
But we are not that in aggregate.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Tom_T
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Re: [Debt ceiling discussion mega-thread]

Post by Tom_T »

Marseille07 wrote: Tue Jan 24, 2023 7:46 pm
H-Town wrote: Tue Jan 24, 2023 7:41 pm Those T-bills were already sold to the investors: 1.3 trillion by Japan, 1 trillion by China, 650 billion by UK, 334 billion by Ireland, 326 billion by Luxembourg, and so on. What happens if the U.S. cannot pay back those treasury bonds as the debt limit is capped by the Congress? Guess what, guys? The U.S. treasury bonds is no longer the safe heaven investment assets as it's used to be. Not saying the T-bills are worthless as the U.S. is still mighty and whatnots. But that will change the dynamic of T-bills and how investors examine risks for different asset classes going forward.
I agree with this take. Bondholders should absolutely be careful here.
But what exactly does that mean? Treasury holders should sell now? Not buy any more? Sell half? Because if they wait for the first whiff of an "uh-oh" news, the market will move in a blink of an eye.
H-Town
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Re: [Debt ceiling discussion mega-thread]

Post by H-Town »

Tom_T wrote: Tue Jan 24, 2023 9:38 pm
Marseille07 wrote: Tue Jan 24, 2023 7:46 pm
H-Town wrote: Tue Jan 24, 2023 7:41 pm Those T-bills were already sold to the investors: 1.3 trillion by Japan, 1 trillion by China, 650 billion by UK, 334 billion by Ireland, 326 billion by Luxembourg, and so on. What happens if the U.S. cannot pay back those treasury bonds as the debt limit is capped by the Congress? Guess what, guys? The U.S. treasury bonds is no longer the safe heaven investment assets as it's used to be. Not saying the T-bills are worthless as the U.S. is still mighty and whatnots. But that will change the dynamic of T-bills and how investors examine risks for different asset classes going forward.
I agree with this take. Bondholders should absolutely be careful here.
But what exactly does that mean? Treasury holders should sell now? Not buy any more? Sell half? Because if they wait for the first whiff of an "uh-oh" news, the market will move in a blink of an eye.
My reading is that the market as a whole does not think the U.S. will default. Whatever political brinkmanship, someone will blink. The stake is too high. Of course the market’s thinking can change in a heartbeat.

My personal take is that my stake is too small in relative to billionaires and institutional investors. They will do the dirty work and influence lawmakers on my behalf. I can afford to lose half of my portfolio and still sleep well at night.
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MichRoots
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Re: [Debt ceiling discussion mega-thread]

Post by MichRoots »

H-Town wrote: Tue Jan 24, 2023 7:30 pm
Marseille07 wrote: Tue Jan 24, 2023 7:19 pm
GRP wrote: Tue Jan 24, 2023 7:15 pm For the record, a 31 trillion dollar tax levied on the economy is approximately $96,000 for every man, woman, and child in the nation.

There’s no good way out of this hole, and denying the problem of the debt doesn’t help. The best course of action is to buy alternative storeholds of wealth to protect you and your family.
So the US government issues bonds, you purchase $96,000 worth of bonds. The government is happy, you're happy. Where exactly is the issue?
Everyone is happy only if everyone can still trust the value of U.S. dollar. Once that trust is broken, that bill comes due. Not every American can cough up $96,000 at once.

We will see what happens when the U.S. defaults for the first time in history. I'm interested to see it plays out.
I just googled the average net worth per household in the USA and it was $748,000 in 2021. So there is still enough wealth to pay off 96k per person. Of course I'm not saying it will be easy, just saying there are alot of rich folk who skew the average net worth higher.
km91
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Re: [Debt ceiling discussion mega-thread]

Post by km91 »

Northern Flicker wrote: Tue Jan 24, 2023 9:36 pm But we are not that in aggregate.
In what ways aren't we? The government borrows on behalf of us, for our benefit. It has no wealth of it's own, paying down the debt necessitates redistributing wealth from some portion of the economy to debtholders
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Re: [Debt ceiling discussion mega-thread]

Post by alex_686 »

MichRoots wrote: Tue Jan 24, 2023 9:59 pm
H-Town wrote: Tue Jan 24, 2023 7:30 pm
Marseille07 wrote: Tue Jan 24, 2023 7:19 pm
GRP wrote: Tue Jan 24, 2023 7:15 pm For the record, a 31 trillion dollar tax levied on the economy is approximately $96,000 for every man, woman, and child in the nation.

There’s no good way out of this hole, and denying the problem of the debt doesn’t help. The best course of action is to buy alternative storeholds of wealth to protect you and your family.
So the US government issues bonds, you purchase $96,000 worth of bonds. The government is happy, you're happy. Where exactly is the issue?
Everyone is happy only if everyone can still trust the value of U.S. dollar. Once that trust is broken, that bill comes due. Not every American can cough up $96,000 at once.

We will see what happens when the U.S. defaults for the first time in history. I'm interested to see it plays out.
I just googled the average net worth per household in the USA and it was $748,000 in 2021. So there is still enough wealth to pay off 96k per person. Of course I'm not saying it will be easy, just saying there are alot of rich folk who skew the average net worth higher.
2 notes. The 748k is the mean (not medium) per family (so not per person). So as a rough estimate we would need to liquidate about half of our nation’s wealth to pay off that debt. Now who has the cash for that?
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Northern Flicker
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Re: [Debt ceiling discussion mega-thread]

Post by Northern Flicker »

km91 wrote: Tue Jan 24, 2023 10:04 pm
Northern Flicker wrote: Tue Jan 24, 2023 9:36 pm But we are not that in aggregate.
In what ways aren't we?
There is US debt held by foreign entities and there are US citizens and entities that do not hold US debt.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
strummer6969
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Re: [Debt ceiling discussion mega-thread]

Post by strummer6969 »

MichRoots wrote: Tue Jan 24, 2023 9:59 pm
H-Town wrote: Tue Jan 24, 2023 7:30 pm
Marseille07 wrote: Tue Jan 24, 2023 7:19 pm
GRP wrote: Tue Jan 24, 2023 7:15 pm For the record, a 31 trillion dollar tax levied on the economy is approximately $96,000 for every man, woman, and child in the nation.

There’s no good way out of this hole, and denying the problem of the debt doesn’t help. The best course of action is to buy alternative storeholds of wealth to protect you and your family.
So the US government issues bonds, you purchase $96,000 worth of bonds. The government is happy, you're happy. Where exactly is the issue?
Everyone is happy only if everyone can still trust the value of U.S. dollar. Once that trust is broken, that bill comes due. Not every American can cough up $96,000 at once.

We will see what happens when the U.S. defaults for the first time in history. I'm interested to see it plays out.
I just googled the average net worth per household in the USA and it was $748,000 in 2021. So there is still enough wealth to pay off 96k per person. Of course I'm not saying it will be easy, just saying there are alot of rich folk who skew the average net worth higher.
It seems like maybe a long-term plan would work if we could somehow stick with it. Hike taxes a little, let inflation run a little, cut spending a little.
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Re: [Debt ceiling discussion mega-thread]

Post by Marseille07 »

Tom_T wrote: Tue Jan 24, 2023 9:38 pm But what exactly does that mean? Treasury holders should sell now? Not buy any more? Sell half? Because if they wait for the first whiff of an "uh-oh" news, the market will move in a blink of an eye.
That's the million dollar question. I think it depends on how severe you think the damage is going to be. If you think nothing happens then you should do nothing. If you think bonds blow up then you should sell before June 5th, though the timing is tricky since the yields may rise quickly as we approach the date.
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km91
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Re: [Debt ceiling discussion mega-thread]

Post by km91 »

Northern Flicker wrote: Tue Jan 24, 2023 10:17 pm There is US debt held by foreign entities and there are US citizens and entities that do not hold US debt.
This is more of a "we" as in "We the people". Not all US citizens hold US Treasuries. And not all US Treasuries are held by US citizens. Which is why it should be even more unpalatable to raise taxes and reduce spending on US citizens to pay down some portion of the debt held by foreign investors. The US has the privilege of issuing the risk free asset and global reserve currency. Why should we consider paying down foreign investors when they are all to willing to finance our deficit spending?
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Re: [Debt ceiling discussion mega-thread]

Post by impatientInv »

ShaftoesSpreadsheet wrote: Wed Jan 18, 2023 11:04 am [We normally do not allow discussions on economic policy. However, the impact of the debt ceiling on investments is major news and investors are concerned. The site owner, Alex Frakt, has given permission to discuss the investing aspects of the current debt ceiling issues.

Please use this single thread to discuss impacts of the US debt ceiling on your investments.

Note that we will enforce policy on other economic policy topics. Political comments remain off-topic. --admin LadyGeek]
The thread only to "discuss impacts of the US debt ceiling on your investments." If folks digress too much this topic will be locked and such topics won't be allowed in future.
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strummer6969
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Re: [Debt ceiling discussion mega-thread]

Post by strummer6969 »

Marseille07 wrote: Tue Jan 24, 2023 10:33 pm
Tom_T wrote: Tue Jan 24, 2023 9:38 pm But what exactly does that mean? Treasury holders should sell now? Not buy any more? Sell half? Because if they wait for the first whiff of an "uh-oh" news, the market will move in a blink of an eye.
That's the million dollar question. I think it depends on how severe you think the damage is going to be. If you think nothing happens then you should do nothing. If you think bonds blow up then you should sell before June 5th, though the timing is tricky since the yields may rise quickly as we approach the date.
On June 5th, we will hit the debt ceiling but it's not the X-date which would be sometime in the 3rd quarter of 2023.

In 2011, after we hit the debt limit deadline, there was a flight to safety and yields actually went down. Yields didn't rise until the subsequent credit downgrade 2 weeks later. [Political comments removed by moderator oldcomputerguy]

I'm not making any changes. My portfolio could take a substantial hit and I will be fine, although not happy.
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Re: [Debt ceiling discussion mega-thread]

Post by GRP »

Marseille07 wrote: Tue Jan 24, 2023 7:24 pm
GRP wrote: Tue Jan 24, 2023 7:21 pm Americans don’t have $96,000 per person to buy the bonds.

The only way they would is if the government prints the money… which again leads to hyperinflation, Weimar style.
The point is, US government debt is your asset. That's the whole point. It is not that every American is borrowing $96,000; they're *lending* the government $96,000 on average (if such a figure is meaningful at all, since foreign nations also own US government debt).
Yes, exactly. And the problem is Americans don’t have $96,000 per person to buy that asset.
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Re: [Debt ceiling discussion mega-thread]

Post by Marseille07 »

strummer6969 wrote: Tue Jan 24, 2023 11:03 pm On June 5th, we will hit the debt ceiling but it's not the X-date which would be sometime in the 3rd quarter of 2023.

In 2011, after we hit the debt limit deadline, there was a flight to safety and yields actually went down. Yields didn't rise until the subsequent credit downgrade 2 weeks later. [Political comments removed by moderator oldcomputerguy]

I'm not making any changes. My portfolio could take a substantial hit and I will be fine, although not happy.
What? My understanding is that we already hit the debt ceiling, and Secretary Yellen is taking extraordinary measures today. June 5th is when she expects her bag of tricks to run out.
Last edited by Marseille07 on Tue Jan 24, 2023 11:06 pm, edited 1 time in total.
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GRP
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Re: [Debt ceiling discussion mega-thread]

Post by GRP »

km91 wrote: Tue Jan 24, 2023 7:23 pm
GRP wrote: Tue Jan 24, 2023 7:15 pm For the record, a 31 trillion dollar tax levied on the economy is approximately $96,000 for every man, woman, and child in the nation.

There’s no good way out of this hole, and denying the problem of the debt doesn’t help. The best course of action is to buy alternative storeholds of wealth to protect you and your family.
It's an illustrative example. The mechanics are the same regardless of the size of the proposed tax. At the end of the day, it is simply an asset swap. The government collects tax money from you and me and uses it to pay down some portion of the debt. The debtholder loses their Treasury (which the government issues) and receives cash (which the government issues). The govt could just levy a 100% value tax on Treasury holders, collect $31T and give it right back to the Treasury holders to retire their debt
I mentioned this to another contributor here.

The problem is that citizens don’t have that money for the government to collect.
strummer6969
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Re: [Debt ceiling discussion mega-thread]

Post by strummer6969 »

Marseille07 wrote: Tue Jan 24, 2023 11:06 pm
strummer6969 wrote: Tue Jan 24, 2023 11:03 pm On June 5th, we will hit the debt ceiling but it's not the X-date which would be sometime in the 3rd quarter of 2023.

In 2011, after we hit the debt limit deadline, there was a flight to safety and yields actually went down. Yields didn't rise until the subsequent credit downgrade 2 weeks later. [Political comments removed by moderator oldcomputerguy]

I'm not making any changes. My portfolio could take a substantial hit and I will be fine, although not happy.
What? My understanding is that we already hit the debt ceiling, and Secretary Yellen is taking extraordinary measures today. June 5th is when she expects her bag of tricks to run out.
Oh, wow. I should turn on the news more. Okay, well never mind then. I don't own much bonds anyway (due to age).
Last edited by strummer6969 on Tue Jan 24, 2023 11:19 pm, edited 1 time in total.
Marseille07
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Re: [Debt ceiling discussion mega-thread]

Post by Marseille07 »

GRP wrote: Tue Jan 24, 2023 11:04 pm
Marseille07 wrote: Tue Jan 24, 2023 7:24 pm
GRP wrote: Tue Jan 24, 2023 7:21 pm Americans don’t have $96,000 per person to buy the bonds.

The only way they would is if the government prints the money… which again leads to hyperinflation, Weimar style.
The point is, US government debt is your asset. That's the whole point. It is not that every American is borrowing $96,000; they're *lending* the government $96,000 on average (if such a figure is meaningful at all, since foreign nations also own US government debt).
Yes, exactly. And the problem is Americans don’t have $96,000 per person to buy that asset.
No, that's not what the number means. It means if we average the US debt per US person, it's 96K per person. But there are foreign nations who also bought US debt. There is nothing the Americans have to buy; the lenders already lent $.
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GRP
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Re: [Debt ceiling discussion mega-thread]

Post by GRP »

Marseille07 wrote: Tue Jan 24, 2023 11:10 pm
GRP wrote: Tue Jan 24, 2023 11:04 pm
Marseille07 wrote: Tue Jan 24, 2023 7:24 pm
GRP wrote: Tue Jan 24, 2023 7:21 pm Americans don’t have $96,000 per person to buy the bonds.

The only way they would is if the government prints the money… which again leads to hyperinflation, Weimar style.
The point is, US government debt is your asset. That's the whole point. It is not that every American is borrowing $96,000; they're *lending* the government $96,000 on average (if such a figure is meaningful at all, since foreign nations also own US government debt).
Yes, exactly. And the problem is Americans don’t have $96,000 per person to buy that asset.
No, that's not what the number means. It means if we average the US debt per US person, it's 96K per person. But there are foreign nations who also bought US debt. There is nothing the Americans have to buy; the lenders already lent $.
Yes, and that $ has to be paid back.
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Re: [Debt ceiling discussion mega-thread]

Post by Marseille07 »

GRP wrote: Tue Jan 24, 2023 11:12 pm Yes, and that $ has to be paid back.
That's the coupon rate you receive by holding bonds. The US government has to pay back, not the Americans.
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Freeadvice
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Re: Safe haven cash

Post by Freeadvice »

cbox wrote: Thu Jan 19, 2023 2:57 pm I'm all for a stash of cash (enough to carry for years), but I've been in the minority in recent years, when the people who thought stocks could go up forever were deriding cash as "trash." Well, my safety net has paid off handsomely last year and this by giving me an "okay, so what else can you show me" attitude toward market turbulence. There's value in that. And I tell you: while my cash may have lost some purchasing power to inflation, stocks and bonds have lost a whole lot more!
Where do you keep this cash? Now that everything is down, will you buy?
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Re: [Debt ceiling discussion mega-thread]

Post by StrangePenguin »

For me personally, I will certainly not change my long-term investment plan. For example, I will buy I-bonds this month as planned.

Lately I have been keeping most of my month-to-month spending money (cash) in Vanguard MM funds. As we get closer to the date of an actual calamity, I might move that money to HYSA and/or checking instead. In case of a black swan event, it seems slightly less risky to have cash that I need for expenses in an account that doesn't have a disclaimer about being allowed to break the buck in extreme circumstances. The loss of a little interest would be a small price to pay for peace of mind.
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Re: [Debt ceiling discussion mega-thread]

Post by Northern Flicker »

km91 wrote: Tue Jan 24, 2023 10:54 pm
Northern Flicker wrote: Tue Jan 24, 2023 10:17 pm There is US debt held by foreign entities and there are US citizens and entities that do not hold US debt.
This is more of a "we" as in "We the people". Not all US citizens hold US Treasuries. And not all US Treasuries are held by US citizens. Which is why it should be even more unpalatable to raise taxes and reduce spending on US citizens to pay down some portion of the debt held by foreign investors. The US has the privilege of issuing the risk free asset and global reserve currency. Why should we consider paying down foreign investors when they are all to willing to finance our deficit spending?
I was not advocating for any particular policy. I do think it is crazy to appropriate spending without setting the debt limit at a level to accommodate the spending, and then engage in brinkmanship over raising the limit at the 11th hour before a technical default.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Does Anyone Worry about the US Debt level and the future impact on US markets and economy?

Post by nedsaid »

Makefile wrote: Tue Jan 24, 2023 4:24 pm
nedsaid wrote: Tue Jan 24, 2023 2:55 pm If this provides any perspective and comfort, our nation started out essentially broke and in debt. Problems are solvable, it takes the will to make difficult choices. I am concerned like you but somehow life goes on.
I read someplace that the US was an emerging market until after World War I.
Was the term even around back then? I would make the argument that the U.S. really started emerging as a World power in the 1890's. Certainly, World War I cemented the U.S. status as one of the great World powers. Not sure what date that I would mark as the dividing line as the U.S. as a Developed Market as opposed to an Emerging Market. The post World War I period is a good dividing line though I would argue that it was about 1890. Of course, a date somewhere in the middle could be picked, the sailing of the Great White Fleet from 1907 to 1909 under President Theodore Roosevelt.
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km91
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Re: [Debt ceiling discussion mega-thread]

Post by km91 »

GRP wrote: Tue Jan 24, 2023 11:06 pm
I mentioned this to another contributor here.

The problem is that citizens don’t have that money for the government to collect.
But they obviously do, there's at least $31T of Treasuries out the somewhere that could be taxed and sold off to pay down the debt
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Re: Does Anyone Worry about the US Debt level and the future impact on US markets and economy?

Post by Northern Flicker »

nedsaid wrote: Tue Jan 24, 2023 11:21 pm
Makefile wrote: Tue Jan 24, 2023 4:24 pm
nedsaid wrote: Tue Jan 24, 2023 2:55 pm If this provides any perspective and comfort, our nation started out essentially broke and in debt. Problems are solvable, it takes the will to make difficult choices. I am concerned like you but somehow life goes on.
I read someplace that the US was an emerging market until after World War I.
Was the term even around back then? I would make the argument that the U.S. really started emerging as a World power in the 1890's. Certainly, World War I cemented the U.S. status as one of the great World powers. Not sure what date that I would mark as the dividing line as the U.S. as a Developed Market as opposed to an Emerging Market. The post World War I period is a good dividing line though I would argue that it was about 1890. Of course, a date somewhere in the middle could be picked, the sailing of the Great White Fleet from 1907 to 1909 under President Theodore Roosevelt.
Before the passage of the Securities Act of 1933 (which among other things authorized the creation of the SEC), I don't think the US would have met the criteria used by various index providers today to be classified as a developed market.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Does Anyone Worry about the US Debt level and the future impact on US markets and economy?

Post by gtrplayer »

z3r0c00l wrote: Tue Jan 24, 2023 3:04 pm
saver1 wrote: Tue Jan 24, 2023 2:52 pm The US debt level is around $31 trillion and rising without any indication of slowing down. Does anyone worry about the implications this will have for the future of the US economy, dollar and the country in general? It seems like a disaster waiting to happen where the FED will be forced back into printing money in order for the government not to default on its debt. As a result, it will be unable to fight inflation and the dollar value may collapse along with the economy and markets for the foreseeable future.

Any thoughts?
In fact, I can't imagine the modern economy functioning without government debt as it is a highly useful product.
It’s more than that. All money today is created out of debt and the ultimate root of that debt is government debt. The economy wouldn’t function at all without government debt because there would be no money.
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nedsaid
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Re: Does Anyone Worry about the US Debt level and the future impact on US markets and economy?

Post by nedsaid »

billaster wrote: Tue Jan 24, 2023 3:59 pm This chart shows the debt interest burden to GDP ratio. As with a deciding how big a mortgage you can carry, you compare your monthly payments as a percentage of income. Here you can see that the burden of debt is quite low compared to the 80s and 90s. Were you panicked about the debt level back then? The debt burden is much lower now. Also keep in mind that about a quarter of that debt is owned by the Federal Reserve and its interest is refunded to the Treasury.

Image
I just looked up the Fed Balance Sheet today and the latest figure I say was that the Fed owned $5.45 Trillion worth of US Treasury instruments. If you add in Federal Debt owned by Social Security and US Government Agencies, you get pretty close to one quarter of the US Debt. Nevertheless, the graph you posted is very reassuring.

The US National Debt is a good thing. It provides investors a safe haven to park money, it aids in foreign trade, the interest rates set a benchmark for the Bond Market, the debt and the interest paid on it helps back the currency, and it plays a role in the creation of new monies as the economy grows.

The reason it aids foreign trade is that foreign countries that have trade surpluses with us can stash their excess dollars in US Treasury instruments. So you might think of the national debt as sort of a national savings account where individuals, institutions, and governments can stash excess dollars. This is why our largest trading partners who run trade surpluses with us have large holdings of our National Debt. It really can be no other way.

So no, the US Government is not bankrupt as its debts are denominated in its own currency and it also has its own bank that can buy US Debt as needed. We can only go bankrupt if we make the bizarre political decision to do so. If we need more dollars, we can create more. As we have seen, the limiting factor is inflation. If money creation exceeds productivity, more money chasing fewer goods, you get inflation.

I did a back of the envelope calculation and figured that a One Trillion Dollar Federal Deficit is about what we need to create enough dollars to fund our trade deficits and to keep the economy's wheels greased with money. Going from memory, inflation got to be a problem at about $1.5 Trillion Federal deficit.

Let's say inflation runs 2%, that is $620 billion a year on $31 Trillion dollars. So in real terms, at 2% inflation we can run deficits of $620 billion without increasing the inflation adjusted amount of the Federal Debt. Of course, the inflation numbers are higher than that right now. So when you look at it that way, things don't look quite so bad. Also the ratio of the US Debt to the US economy has been declining as well.

The numbers look scary because they are large. The numbers are large because the US economy is very large and the total wealth of the United States is very large which is estimated at $145.793 Trillion. The US GDP is just over $25 Trillion.
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munemaker
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Re: [Debt ceiling discussion mega-thread]

Post by munemaker »

As far as I can tell, pricing in the bond market does not indicate a concern.

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Re: [Debt ceiling discussion mega-thread]

Post by evancox10 »

Sorry if I missed this, didn’t have time to read all 8 pages…

Does anyone know what might happen to savings bonds (ibonds, EE bonds, etc.) issuance and/or redemption if we truly hit the debt ceiling? I recommended my mom invest in ibonds and she wanted to know what would happen. The easy answer is “you’d have a whole lot of other things to worry about than savings bonds”, but I thought it was a good question that warranted a better answer, and I didn’t have one.

Here is my best speculation on what might happen, curious what others think.

On the issuance side, I suppose that for every $ of savings bond issued, there would need to be be a $ of maturing treasury debt that is not rolled over to a new treasury. At an accounting level there might be little/no difference between the two funding methods, but at a practical level treasury auctions would probably be preferred since the government has greater control over the timing/amount. My conclusion is Treasury would halt savings bond issuances for this reason.

On the redemption side, not allowing redemptions would I guess be a technical default, but this may still be preferable to a default on a marketable security. For every $ of redemption avoided/prevented, that is another $ that can be used to pay bills, other creditors, etc. Since financial markets don’t rely on savings bond redemption liquidity, I would judge it possible that they halt redemptions, even though this would cause a personal hardship to many people. Arguing the opposite side, politically it might be worse to screw over “mom and pop” savers, and relative to the size of the budget and treasury markets, there might not be enough redemptions to make a meaningful difference anyways. Also, if a savings bond is redeemed, treasury could just issue an treasury to compensate, though it would have to happen on some time lag.

I could not find any authoritative sources on how this would be handled, curious if anyone has seen any or has any other insights to add. Thanks!
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Re: [Debt ceiling discussion mega-thread]

Post by Beensabu »

Tom_T wrote: Tue Jan 24, 2023 9:38 pm
Marseille07 wrote: Tue Jan 24, 2023 7:46 pm
H-Town wrote: Tue Jan 24, 2023 7:41 pm The U.S. treasury bonds is no longer the safe heaven investment assets as it's used to be...that will change the dynamic of T-bills and how investors examine risks for different asset classes going forward.
I agree with this take. Bondholders should absolutely be careful here.
But what exactly does that mean? Treasury holders should sell now? Not buy any more? Sell half? Because if they wait for the first whiff of an "uh-oh" news, the market will move in a blink of an eye.
There's a big IF that belongs at the beginning there. And the whole eventual aftereffect of that, should it come to be, would take awhile. Not a blink of an eye kind of thing. Whatever happens around June (if anything) will recover, or else everything will suck for everyone real bad (and there's nothing much outside the completely outrageous - and potentially harmful if it turns out to be a bunch of whatever for now - to be done about that). And the rest of it (but only IF) will take much longer. There's only a short-term potential liquidity issue looming around a known point. The best way to address that seems to be agreed upon as keeping some cash for short-term upcoming needs in a bank account just in case.
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Re: [Debt ceiling discussion mega-thread]

Post by exodusing »

km91 wrote: Tue Jan 24, 2023 11:26 pm
GRP wrote: Tue Jan 24, 2023 11:06 pm
I mentioned this to another contributor here.

The problem is that citizens don’t have that money for the government to collect.
But they obviously do, there's at least $31T of Treasuries out the somewhere that could be taxed and sold off to pay down the debt
There's an asset (treasuries owned) that balances the liabilities (treasuries issued). On a system-wide level, it nets to zero.

The market is perfectly happy to lend to the Treasury at relatively low rates (even in the face of a Fed working to raise rates), which would not seem likely if the market had concerns about the ability to repay.

The problem for investors is the possibility that the government could decide not to pay.
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Re: Does Anyone Worry about the US Debt level and the future impact on US markets and economy?

Post by technovelist »

km91 wrote: Tue Jan 24, 2023 5:11 pm
technovelist wrote: Tue Jan 24, 2023 4:34 pm Even aside from the multitude of times when that has happend in other countries, there have already been two such episodes in US history. I don't know how anyone can be certain that there won't be another one.
In those countries where the currency collapsed, I wonder what currency replaced the domestic currency for day to day transactions?

I'm not questioning whether or not the USD could collapse, anything is possible. I'm questioning whether owning some physical gold and silver is all it takes to make oneself prepared. The USD collapsing would seem to have far reaching implications for the global financial system and our own lives, and would probably lead to a collapse in our standard of living whether we have some gold hidden under the mattress or not
Yes, of course there would be far-reaching implications if that happened, and equally of course just having gold wouldn't protect one from all of those implications. Other preparations would be required too, just as they are for other disasters such as floods, hurricanes, etc. See KlangFool's comments on this.

And in fact as may have already been pointed out elsewhere on this thread (but I didn't notice it if it was), gold wouldn't be useful as day-to-day money during such an emergency, any more than it is even today. Even the smallest practical gold coin (1/20th ounce or so) is too valuable for most daily transactions. The purpose of gold in such an emergency is to preserve wealth to the other side of the emergency when daily life is back to relative normalcy, as it has done for thousands of years.

In the past people have used sound currencies from other countries, e.g., US dollars during the Weimar collapse. What you would need during the emergency, in the US anyway, is pre-1965 silver coins, mostly dimes. Those are recognizable units of wealth that should be spendable if the paper dollar is no longer acceptable. And the fact that silver is too bulky to serve as a store of significant wealth is why it is appropriate in such circumstances. So a bag ($1000 face) or half a bag, of dimes and/or quarters wouldn't be a bad idea as part of preparations for such an emergency.
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Re: [Debt ceiling discussion mega-thread]

Post by dknightd »

I've given this only a little thought. So far. My current thinking is to do nothing.
Low cost diversified investments, and an "adequate" emergency fund, should work.
I'm not sure how to define "adequate". I'm not sure how to define an "emergency!"

Most of my short term "emergency" money is in a MM account. But I do have a little in a local bank, and a local credit union. I think if things continued to get weird I'd diversify my "emergency money". Perhaps move some money from MM to local bank, and local credit union, maybe some actual physical cash. I might even consider moving "emergency" money out of 403b to make it more accessible.

My best guess is the government will figure this out. And I'll have to do nothing. I hope I'm not wrong!

The interesting thing about the "debt ceiling" is that the government needs to keep increasing it. Because they spend more than they receive. And investors want it, so we can buy government bonds. Without an increasing government debt, we could not buy an increasing amount of government bonds.

If the USA had a balanced budget we would not be able to buy USA bonds. So we'd either have to purchase other loans, or not have bonds in our portfolios.

I keep thinking of the saying, "you can not pay off debt by borrowing more money". And that is true. But I think if the USA did not take on more debt, for now, our current system could break.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: [Debt ceiling discussion mega-thread]

Post by dknightd »

The reality is, if the global economy collapsed, I'd die sooner than expected. I don't think I could shoot my neighbor for the can goods in their basement. Gold, silver, or any other "currency" would not save me.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: [Debt ceiling discussion mega-thread]

Post by strummer6969 »

dknightd wrote: Wed Jan 25, 2023 9:48 am The reality is, if the global economy collapsed, I'd die sooner than expected. I don't think I could shoot my neighbor for the can goods in their basement. Gold, silver, or any other "currency" would not save me.
It seems like between nothing happening and a collapse of the global economy, there's a wide range of possibilities. I think there's a greater possibility that we do irreparable harm but doesn't lead to collapse. What about another credit downgrade? How would that impact our investments going forward?
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Re: Does Anyone Worry about the US Debt level and the future impact on US markets and economy?

Post by JackoC »

Tellurius wrote: Tue Jan 24, 2023 3:25 pm It is difficult to overestimate the immense power one has when all one’s debt is in one’s own currency.

Imagine being able to print enough to cover all your debts

What is 2+2? Correct answer: How much do you want it to be?
But it' definitely possible to overestimate it, and it's common. Issuing in your own currency gives you more leeway than issuing in somebody else's or a collaborative currency (EUR), not unlimited.

The ability to print money only *absolutely* insulates you from market reaction to your fiscal policy if two things are true
a) the debt maturity is perpetual
b) you don't run a deficit, ie need issue no more debt.
As historical trivia, those two conditions were basically met by the US ca. WWI, when almost all the relatively small federal debt was perpetuals and the budget deficit ca. zero. In that case you can 'run the presses' all you want and it's just too bad for the debt holders.

The real situation is fundamentally different. The avg maturity of US debt is only around 5 yrs, not accounting for the debt the Fed holds*. And much of it, obviously, is shorter than that. When it comes time to roll over the debt, the market gets to vote what it thinks about previous 'running of the presses', which would be a far higher rate. A rate which could get out of control, coming to dominate the budget. Then, high inflation is also harmful to the real economy; offhand comments about 'running the presses' seem to ignore this.

Look at a real case not that long ago. Russian in 1996 defaulted** on its RUB debt. Not because it *could* not 'run the presses' anymore, but the debt maturity was short, already very high inflation was damaging the real economy, and jacking up inflation by 'printing' more would just jack up the debt rollover rate by enough to offset the benefit, ie the market wasn't stupid. The path of least resistance became to default.

The US (and other heavily indebted rich country) situation is different not because they can 'run the presses' but the market has confidence they will eventually address fiscal challenges *without* 'running the presses'. Think about it, is the market willing to accept nominal 30 yr US debt at 3.69% thinking 'it's OK, they can always just jack inflation up to a sustained 10% on purpose if they run into a problem'. ? :shock: The reason US debt trades at reasonable yields is the assumption US fiscal challenges can eventually be addressed, including by maintaining growth, *without* relying on substantial deliberate inflation. If the market ever changes its collective mind about that, look out below.

*'debt held by the public', ~$24tril v GDP ~$21tril, includes that held by the Fed, debt within the government proper (SSA etc) is not included and is meaningless economically. But the debt the Fed holds effectively pays a short term rate, the rate on the reserves created from buying the bonds. Effective cost of that portion of the debt depends whether the Fed is fighting (sets high short term rate) or abetting (low short term rate) a big increase in inflation. This effect substantially reduces the average effective maturity of various rich countries' debt recently.
**forced investors to accept longer term lower yielding debt at par in exchange. That's how intact governments usually default, and it's not a grey area or 'effective default': the rating agencies formally rate sovereign bonds subject to forced exchanges 'D'.
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Re: [Debt ceiling discussion mega-thread]

Post by dknightd »

strummer6969 wrote: Wed Jan 25, 2023 10:12 am
dknightd wrote: Wed Jan 25, 2023 9:48 am The reality is, if the global economy collapsed, I'd die sooner than expected. I don't think I could shoot my neighbor for the can goods in their basement. Gold, silver, or any other "currency" would not save me.
It seems like between nothing happening and a collapse of the global economy, there's a wide range of possibilities. I think there's a greater possibility that we do irreparable harm but doesn't lead to collapse. What about another credit downgrade? How would that impact our investments going forward?
I do not know. That is why I diversify.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: [Debt ceiling discussion mega-thread]

Post by strummer6969 »

dknightd wrote: Wed Jan 25, 2023 10:25 am
strummer6969 wrote: Wed Jan 25, 2023 10:12 am
dknightd wrote: Wed Jan 25, 2023 9:48 am The reality is, if the global economy collapsed, I'd die sooner than expected. I don't think I could shoot my neighbor for the can goods in their basement. Gold, silver, or any other "currency" would not save me.
It seems like between nothing happening and a collapse of the global economy, there's a wide range of possibilities. I think there's a greater possibility that we do irreparable harm but doesn't lead to collapse. What about another credit downgrade? How would that impact our investments going forward?
I do not know. That is why I diversify.
Yeah, I plan to just stand there and do nothing. Of course it helps that I keep a large portion of my portfolio in safe assets. Should the opportunity present itself, I will buy more than my usual.
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Re: [Debt ceiling discussion mega-thread]

Post by LadyGeek »

Discussions regarding (1) general economic policy and (2) politics have been removed.

Please stay focused on the debt ceiling limit as it relates to investments.
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Re: [Debt ceiling discussion mega-thread]

Post by rockstar »

From an investing POV, you have to ask yourself some questions. If we default, what happens? Is that risk worth it for some spending cuts?

Basically standing there sounds good.
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Re: [Debt ceiling discussion mega-thread]

Post by gtrplayer »

GRP wrote: Tue Jan 24, 2023 11:04 pm
Marseille07 wrote: Tue Jan 24, 2023 7:24 pm
GRP wrote: Tue Jan 24, 2023 7:21 pm Americans don’t have $96,000 per person to buy the bonds.

The only way they would is if the government prints the money… which again leads to hyperinflation, Weimar style.
The point is, US government debt is your asset. That's the whole point. It is not that every American is borrowing $96,000; they're *lending* the government $96,000 on average (if such a figure is meaningful at all, since foreign nations also own US government debt).
Yes, exactly. And the problem is Americans don’t have $96,000 per person to buy that asset.
I’m afraid I don’t understand the $96,000 analogy. We would never pay all $31 trillion in debt because that would wipe all dollars out of existence. The debt is an accounting mechanism. It can be reduced and it can be raised but it can never be paid off. Our monetary system doesn’t work that way.

That’s not to say the debt can’t cause hyperinflation. It surely could and that may be something to consider when making an investment choice that relies on the value of the dollar. But making choices based on the idea that every American owes $96,000 is not something to consider.
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Re: [Debt ceiling discussion mega-thread]

Post by Hector »

typical.investor wrote: Mon Jan 23, 2023 12:42 pm
ShadowCat wrote: Mon Jan 23, 2023 10:38 am Sorry if this has already been asked earlier in the thread, but I have nearly all of my liquid funds at Fidelity in FZFXX (Fidelity Treasury Money Market Fund). And by nearly all I mean 99+%: I have easily six figures in the fund and use it to pay my bills and act as my emergency fund. I have exactly $500 elsewhere. Needless to say, if FZFXX became insolvent or restricted I would be completely unable to pay my bills or sustain myself.

Should I be doing something about this situation? Should I open a bank account somewhere? Withdraw a few thousand dollars in cash and hold cash?
You have credit cards right? How many months will spending on those buy you?
I used to carry decent balance on credit cards before mortgage crisis due to 0% apr and decent rates on savings accounts. my multiple credit cards were closed by financial institutions when crisis happened.
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Re: [Debt ceiling discussion mega-thread]

Post by typical.investor »

Hector wrote: Wed Jan 25, 2023 7:15 pm
typical.investor wrote: Mon Jan 23, 2023 12:42 pm
ShadowCat wrote: Mon Jan 23, 2023 10:38 am Sorry if this has already been asked earlier in the thread, but I have nearly all of my liquid funds at Fidelity in FZFXX (Fidelity Treasury Money Market Fund). And by nearly all I mean 99+%: I have easily six figures in the fund and use it to pay my bills and act as my emergency fund. I have exactly $500 elsewhere. Needless to say, if FZFXX became insolvent or restricted I would be completely unable to pay my bills or sustain myself.

Should I be doing something about this situation? Should I open a bank account somewhere? Withdraw a few thousand dollars in cash and hold cash?
You have credit cards right? How many months will spending on those buy you?
I used to carry decent balance on credit cards before mortgage crisis due to 0% apr and decent rates on savings accounts. my multiple credit cards were closed by financial institutions when crisis happened.
Nice strategy! None of my cards are zero% though, so I bet they are less likely to be closed.

Sure, the CC could completely shut down I guess.
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Re: [Debt ceiling discussion mega-thread]

Post by Tooth »

https://www.morningstar.com/articles/11 ... bt-ceiling

Morningstar has an interesting read on "likely" scenarios for a resolution. Also does a brief analysis of impact. From reading this thread to this analysis I'm sticking with having cash on hand to pay the bills for several months. Even if the dollar is worth nothing in this event, my mortgage and everything else is priced in dollars.
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