People are worried about America's solvency

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• Hacker News
• Well reasoned throughout
  by hn9zmdcaou
• The US emits two types of scrapes of paper, one of which (bonds) promises the other (the us dollar) and the "experts" somehow think america can actually go bankrupt. That's hilarious.
  by mono442
• You will not go bankrupt, its just that a BigMac will cost you $10,000.
  by root-parent
• The US is not going to go bankrupt, but the purchasing power of the dollar will continue to go down and down and down.
  by ahnick
• If the United States tried to make various geopolitical moves to sabotage its reserve currency and ultimately become insolvent as a result of a self inflicted debt crisis then I don't see how the current agent orange situation could be topped.

  There are so many plumbing issues with the financial system happening at once that people really do not have a clear picture of what is happening in totality.

  Start with Japan... Still the largest foreign creditor. However they are facing a situation where the yen carry trade that began after the plaza accords in the 1980s is unwinding. The recent Treasury intervention and the associated expansion of the repo market so they do not sell treasuries directly reveals a hidden structural weakness. This leads to the AI boom because cheap Japanese debt was recycled into larger yields in the U.S. And it's different this time because companies like Microsoft have what is rated as safer debt than the US Treasury itself. The yield on financing part of the AI boom has been much better than yields back home in Japan. So even Japanese institutional investors may start seeing domestic debt as more attractive as the carry trade unwinds and domestic Japanese debt starts paying more. This ties back into the recent treasury intervention and offering a way to unload U.S. debt without impacting the markets directly.

  Which brings us to an ongoing structural change that will remove the largest foreign investor in U.S. debt. Which as we all know, is approaching $40 trillion with over $30 trillion of that being held as public debt. Meanwhile, the budget deficit is continuing to rise causing even more issuance of debt. After the 2008 crash, and over the next decade, the U.S. was able to issue debt basically for free and it issued a ton of it. But that debt matures and when it matures, it has to largely be reissued at current rates. There was no free lunch. With the Japanese largely pulling back and at best not selling the debt they have now to defend their currency or to chase domestic yields in Japan, that goes to the UK as the second largest foreign investor. And the UK clearly can't absorb what the US has to issue and refinance. China has been reducing its holdings because as the BRICS bank, etc, replace their need for dollars, they will begin using it in more creative ways.

  Some speculation is that the U.S. intervention into the yen carry trade is being challenged by foreign actors, which did not happen during past interventions. Monitoring the daily spread, and if the yen continues climbing over 160 then this will be the first time the U.S. intervention failed to work. To prevent selling existing Treasuries to defend the currency, the Japanese investors will unload it in the repo market.

  But this brings us to a new structural problem in response to the insane amount of debt being issued and refinanced and this is called the weighted average maturity. Recently, the U.S. Treasury implied that they are going to begin moving more issuance to shorter term debt because those markets are currently still much more liquid than the longer term markets that had issues revealed by the failure of Silicon Valley Bank. When SVB needed to cover deposits, they found the 20 and 30 year Treasury market was not as liquid as they had hoped. This same fact likely pushed the Treasury to have Japanese investors move towards the repo market instead.

  But this brings a new problem, because there is only so much appetite for increasingly taking long term debt and reissuance and moving it towards the front of the weighted average. Currently around 6 years, and the goal is to move it between 2 and 4. Imagine the liquidity impact on moving large amounts of new debt issued and refinanced debt from the 30yr to more short term funding.

  Next up, there is a need to have the Federal Reserve unwind its balance sheet even more quickly at the same time all of the above is happening. But it is the Feds balance sheet and forms of QE that have propped up the repo market itself under times of stress. So after Japan, the UK and China all have reasons to continue cutting back, and after the short term funding gets eaten up, the yields will have to rise dramatically to continue attracting investors for even the short term. The immediate response to this will first be to stop issuing the 20 year and reduce the 30 year. They may debate the 50 year but odds are if the 30 has a weak showing that there would be even less appetite for the 50.

  But with the unwinding yen carry trade, we have to consider the impact on funding the AI boom going forward. Clearly this has been on the mind of nVidia recently, with the move to create a form of mortgage backed securities for GPU capacity. The largest tech companies have something like $2-3 trillion in shell companies set up specifically for the data center buildouts. The rest of the revenue seems to be going in a circular motion among several large companies. They know as soon as they stop funding the AI buildout, or are forced to by the unwinding of market forces, that the party will end. This is the very reason for the move from nVidia recently. And if mortgage backed securities don't make you feel better about it, they have also compared it to how airlines trade airplanes as assets. Neither is a comparison that they should want to make for historical reasons.

  Now in the past, the U.S. allies would see the value in the financial alliance and would ride to the rescue of something like a 50 year bond to lock up these bubbles for a long time. After so many years of tariffs and other forms of coercion, even the recent yen internvention broke norms between the U.S. Treasury and the European Central Bank. Maybe in the past the Saudis, UAE, etc would have jumped in to invest, but clearly those days are over too... With massive implications for the petrodollar. Which itself is another major factor in the reserve currency system and is clearly under strain from the Iran War and other geopolitical factors.

  The U.S. response to a debt crisis won't be to default, it will do what it always has done, and try to inflate itself out of the situation. It's just that they can't really take this path either. The more the Federal Reserve becomes the lender of last resort and expands its balance sheet to backstop moving all this to the short term repo market, the end result will be extreme inflation. The yields will begin rising on short term debt faster than we have been seeing on long term debt. Before long, it will be early 1980s style interest rates, and if they don't find a solution, this process will be self repeating... The $40 trillion, with roughly $1.2 trillion in deficits every year, and past reissuance, all into short term funding markets, where the only buyer capable of absorbing it all is the Federal Reserve, there is just no real way out of it.

  Even all the structural problems with mortgage backed securities haven't been fixed since 2008. If the AI bubble pops, the energy prices keep increasing, the yen carry trade continues to unwind, any South East Asian conflict with North and South Korea, China/Japan/Taiwan, etc... Or with the Ukraine war ending poorly with Russia moving further into the baltic states...

  Maybe hope that a guy who bankrupted several casinos can figure out to do when the largest casino in history runs out of money? I don't know.

  EDIT: Sorry for the wall of text. Had a lot to say.

  by treebeard901
• US government solvency is backed by the power to tax and tap into the massive US economy.

  Considering the US has one of the lower overall tax rates of developed economies, I’m not sure we’ve reached any sort of crisis level

  by refurb
• This is the truest and most impactful point so far on this thread. Rescinding the Trump I tax cut (IIRC technically the permanent extension of a temporary tax cut) would fix a lot of problems. That and not being belligerent to our creditors gets you pretty close to a complete solution.
  by Zigurd
• I am sure this is a nice article, but I'm always surprised when something with a hard paywall makes it this high up on HN. Does everybody but me have a Financial Times subscription?
  by OneManHorde
• I guess most promote the title by sentiment.
  by chicken-stew
• Others know how to use https://news.ycombinator.com/item?id=49329360.
  by layer8
• No one serious is worried about American solvency. The paper says 50% over the next 10 years, but even most economists misunderstand how the monetary system works.

  There are so many other issues to worry about at the moment more immediate than solvency.

  by epsteingpt
• The US ticked all the boxes that are credited with the break up of the USSR last year aiui.

  Anyone not taking that seriously is in for the most hilarious of surprises.

  by DarkmSparks
• When enough non-"serious" people believe it, they still sell the bonds, and shit can hit the fan pretty quickly.
  by d--b
• Tell that to the Romans.
  by danesparza
• > but even most economists misunderstand how the monetary system works.

  It seems to be more of a subjective topic to me. Otherwise we would all have a perfect plan and never any monetary concerns. Highlighting weak links in the system is I believe a perfectly healthy thing to do. A sanity check would go a long way these days.

  by bilekas
• Our creditors will be reliable because of American soft power. Do you think we could lose that in single presidential term, much less a year?

  Wait...

  by Zigurd
• The word in the headline “solvency” versus the phrase in the article “debt crisis” is a major difference.

  To your point, I don’t think anyone has to be worried about American solvency, but a looming debt crisis doesn’t seem like a stretch of imagination at all.

  by Grombobulous
• >> There are so many other issues to worry about at the moment more immediate than solvency.

  The U.S. government spends about one-third! (roughly 33% to 39%) of individual income tax revenue strictly to pay the interest on the national debt and that is not even paying off the principal balance itself:

  https://budget.house.gov/imo/media/doc/cbo_baseline_february...

  A raise in interest rates for treasuries, can bring this into 50% to 60% within days.

  Yeah...worry about other things...

  by root-parent
• Here are the numbers for the US, as a percentage of GDP:

  - Government Debt: 123.0%

  - Tax Receipts: 17.2%

  - Spending: 23.1%

  - Deficit: 5.9%

  - Interest on Debt: 4.2%

  So yeah, 1/4 of taxes go to paying interest. To allay the debt concern crowd a bit: gdp numbers are real numbers, so inflation of 3% and growth of 1% = 4% nominal, so that deficit number actually means that next years govt debt as percent of gdp won’t be materially higher.

  This is the government playbook: create actual inflation of 6% per year, with reported statistic inflation of 3% per year. This means real growth looks like +3% before you need to talk about contractions/recession.

  All this means that the sovereign crisis is not near and the government steals your savings at 6% per year.

  by m101
• Interesting part is the gap between beliefs and prices => if the investors expect a US debt crisis we expect it to show up somewhere in the term premium real yields dollar or inflation expectations ; those signals can remain muted for a long time
  by latentframe
• What happens if US becomes insolvent? Is USD going to be inflated? hyperinflated? Will other currencies appreciate or just devalue their own currency by the same percentage to keep up the exports and continue to earn USD for oil?
  by thelastgallon
• America will move to Trump Coin of course!

  /s

  by alfiedotwtf
• The US can’t become insolvent. Those who say it can are just hard of accounting.

  It’s scaremongering nonsense.

  All treasuries will be swapped back into dollars on maturity and interest settled

  by neilwilson
• > continue to earn USD for oil?

  Iraq started taking Euros for oil. Shortly after that, they were invaded. Venezuela started selling oil for Yuan. Shortly after that, their president was kidnapped by American troops. Iran is selling oil in Yuan. Shortly after that, American bombs started falling on them.

  There is a very strong incentive for oil producing nations to only accept USD.

  by Tangurena2
• There is no way, unless by political choice, for the US to become insolvent, meaning, not paying it's "debt" in US dollars
  by blahblaher
• If the US becomes insolvent, that would severely impact the USD. But other currencies will not try to follow the USD, there would be no point in that. The USD would just lose more status as an anchoring point. The US is also not a major oil exporter, so presumably most oil will trade for other currencies, rather than try to sell for an inflationary currency.

  In short, if the US becomes insolvent, the rest of the world will largely ignore what happens in the (at that point) 8th economy in the world, and mostly try to untie their economy from it.

  by 317070
• Nobody knows. There is no precedent for that happening in a post globalisation world.

  Think sht would get very real for everyone fast both inside and outside the US.

  Global economy can’t even deal with a ship stuck in the suez without wobbling…

  by Havoc
• I'll tell you what is going to happen, b/c it is happening as we speak. The U.S. Government is soft-defaulting on the debt by devaluing the currency. (The debasement rate is somewhere in the 7%-8% range)

  There will never be a real default, but it is likely that the USD will lose reserve currency status. The U.S. Government has $114+ Trillion in total debt. (Something like $325,000 per person in the US) We are never paying that off. The only way we can do anything about it is to grow the economy and devalue the debt via inflation.

  by ahnick
• https://archive.is/L8RM7
  by root-parent
• Financial markets work in strange ways.

  The markets generally respond to US concerns by buying more US treasuries. That’s counter-intuitive but reflects the situation that if things hit the fan they feel loaning the US money is still the safest place for their money.

  For better or worse there’s unlikely to be a scenario where the US becomes insolvent but it’s not far worse for those outside the US.

  by cmiles8