In the weeks following IL&FS disclosure, government fired and replaced the managing body. But as IL&FS is a holding company with more than 60 different subsidiaries it is very difficult for the new managing body to fix things. Check out this podcast for more detailed information:
http://www.seenunseen.in/episodes/2018/10/22/episode-91-ilam...
What I never understood is that many countries like America and EI states have triple A credit ratings despite having trillions of debt that is never going to be paid back. Whilst developing countries have much worse ratings on the assumption they can't pay it back. Neither the rich or poor countries are going to pay the debt back yet the system is rigged to allow the richer ones to have AAA/AAB ratings so they can continue taking more money to invest. Am I missing something or is this true?
Yeah, interallied debt to the US was linked to German reparations which stopped in 1932 (I think?). The US wasn't fussed about it...so I'm not sure it was a default.
The other one I can think of was the downgrade of the coupon on WW1 war bonds from 5% to 3.5%. Again, seemingly everyone agreed with this, so there is some debate over whether it was an actual default.
Debt really translates to assets sitting somewhere. If Somalia defaults you might end up owning a couple goats but if US defaults maybe you get an Airfield.
State defaults and restructurings don't quite work like that. If the state won't pay its debt there is not much you can do to enforce it.
The real difference is that the US or European countries are borrowing in their own currency and under their own laws (well for euro area countries, sort of). So they will inflate their debt away. EM countries typically borrow in USD and often under foreign law and don't have the option to inflate away.
But Greece found itself with effectively a foreign currency debt (EUR which they don't control) and ended up defaulting (well, technically "restructuring" but that's the same).
What's really weird is that if the USA started inflating their debt away, the value of their debt would drop and they'd need to start borrowing at a higher rate.
As long as the USA willing to increase the size of their debt, that doesn't happen.
For this to continue, people need to keep lending the USA money, so that the USA can pay off their old debts. People are willing to lend the USA money as long as they don't think the USA will start inflating their debt away.
There isn't really a limit to this. Loans to the USA are stable because people keep loaning to the USA because loans to the USA are stable. The size of the debt doesn't affect that equation.
You say this, but it doesn't work nearly as easily as you seem to think. You cannot just devalue your currency and pay people off with zero effects. And if that was actually a threat, the US would not have an AAA credit rating.
I'm not so sure it would work out like that in practice. If the US were to default I'd expect something closer to: "Yeah, try getting this airfield; just try..."
Not too far of the mark, But the size of an economy matters more. The United States is the only exception to an otherwise straightforward system of supply and demand the USD is required for most forex transactions which keeps its credit rating propped UP. In all other cases, the size of the economy dictates its credit rating and not always the amount which is owed to its creditors.
What makes you think the debt is not going to be paid back? These are bonds, they come due are repaid continuously. In any given year, any given western government are repaying bonds (and also selling new ones).
Hedge funds have a long history now, and the core of their business model is (simplifying) to arbitrage such differences. So what's left? Whose currency is irrationally treated? Which lenders make a borrower more/less secure?
The United States has never missed a coupon payment and it doesn't look like it will for the forseeable future (many, many decades). What would you call that besides the best credit any organization could possibly have?
The US is critically reliant on creditors rolling their debt. At one point the music will stop. They will then likely inflate the debt away rather than miss a payment but this biggest accumulation of peace time debt in history will end in tears somehow.
There have been multiple pauses of music and it hasn't really done much to the USD. The argument that the music will stop requires there to be a new conductor and financial instrument that can replace the USD and the role that the United States plays in the world economy. The EUR was the closest thing we've had in my lifetime, if you don't count all the ridiculous goldbug rushes we've had in the last five decades - the same people saying the exact same thing you are, who have been perpetually wrong when compared to any other type of financial instrument such as the S&P500 or more recently, VTI.
I am no fan of carrying enormous amounts of debt. I critically disagree with the United States economic and fiscal policies of the last twenty years, including most quantitative easing initiatives.
But if you think the AAA credit rating is somehow fake or corrupt, no metric-driven analysis that even remotely resembles fairness would agree with you. Only theories like "the music will stop" do.
The phrase, "cleanest shirt in the laundry basket" comes to mind. Relatively speaking, the US is in a much better place than others, even if it isn't perfect.
Cryptocurrency will replace the dollar. A world currency free of any nation’s policies is too attractive. Transferring all your wealth to it allows the rich to escape all these massive debts that have been accumulated by governments and the financial system. This flip will be quite violent as the money moves from one sector to the other and is called hyperbitcoinization, although I don’t believe bitcoin will necessarily be the actual coin used.
That is a very low bar though, any country still functional enough to run a printing press can make coupon payments.
The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.
The numbers are staggering, the economic growth isn't there. The US has a technological edge and a big army, but at the end of the day it is 'just' a country like all the others. At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.
After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.
>> That is a very low bar though, any country still functional enough to run a printing press can make coupon payments.
This hasn't happened unless you count QE as printing money to pay debt, which would be a pretty serious twist of logic.
>> The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.
>> At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.
If you think this is actually true, there is a ton of money to be made on the open markets by securing your position with capital. There's plenty of financial instruments you can leverage to back your position.
>> After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.
This is a legitimate criticism but separate from your other claims. QE is protectionist and massively contributes to inequality (in more ways than just income). I am quite critical of the USG and their economic policies.
Now I can admit that and also admit that the United States is probably the safest credit risk on the planet, primarily due to the hegemony-driven policies we exert globally. You might argue that this is not for long, but I highly doubt this to be true, and the rest of the world acts as if.
> This hasn't happened unless you count QE as printing money to pay debt, which would be a pretty serious twist of logic.
Credit ratings are forward-looking though. The US's financial position is the worst it has ever been - public debt to GDP is on wartime footing in a long period of peace between major powers.
And from my admittedly highly unreliable sources, a number of states aren't in great financial health and there is a pension crisis afoot.
The fact that the US is going to hand out the nominal value of its debt is not comforting in light of this.
> ... there is a ton of money to be made on the open markets by securing your position with capital
That isn't a fair challenge and you know it, there are a lot of ways to lose everything being clever with derivatives even if the macroeconomic assessment is right. Profiting off something isn't the only way to be right about an opinion.
> This is a legitimate criticism but separate from your other claims.
No it isn't. If the US isn't honoring the capitalist system inside their markets, it is legitimately risky to assume that they will treat foreigners with more respect.
There is an argument that they will, but it isn't a sure thing by any stretch. If something does change, by the time everyone admits that it will be far too late for investors.
The US is chronically unable to balance its budget. The first thing to give could easily be foreign-owed debt, because foreigners don't vote.
Everything is relative. Even with all the problems in the US, the world has decided that it is still where they should put most of their trust. Also, having the most powerful military means it can do whatever it needs to keep itself going (not that it necessarily will, but it can, so that adds to the trust).
This sounds like an interesting statement. What are the main differences in lending money at nation scale vs. local bank (or payday loan)? We can agree that both lenders are in it to improve their economical/financial stance? Beyond possible political levers, I can't think of how they are that much different.
> At nation scale, lending money does not work like buying coffee.
This seems to be the econ 101 answer all modern day Chicago - school influenced economists give out.
Student: if the US has a debt that's more than their current GDP, isn't that bad? If a family had a credit card debt higher than their current salary, we'd say that they were in bad financial shape.
Economist: The macroeconomics of a nation work much differently than a single family's budget.
Student: Well, when the family has no plans to cut expenses, continues to charge more and more each year on the credit card, and their solution involves some vague plan of getting a huge raise sometime in the future, how does this not end in disaster for the family, but turn out fine for a government doing the same thing.
Economist: Running deficits and borrowing money in perpetuity is good for a large country to do, just not for an individual. It is known.
Student: well eventually the family's interest payments will be more than they actually make, leaving nothing left for actual expenses. At that point, their card is canceled and they have to sell all their stuff, move out of their home, and crash with the parents. And nobody lends to them again for a long time, and only at high rates. How does a nation avoid this outcome when the math is the same?
Economist: Trust us <waves Jedi hand>.
I get the feeling we're going to someday look at today's accepted macroeconomic theories, and wonder just WTF we we're thinking.
> Student: How does a nation avoid this outcome when the math is the same?
Economist: As I have told you multiple times by now, it isn't. That is what we taught you in first year. You can't simply arbitrarily scale up models from lemonade stand to international trade. Things are not all linear, simplifications in one model are simply not valid in another model.
Arguments like these always strike me as similar to "if evolution, then why are there still monkeys". Maybe you are right, everything is really simple and everybody else has been too stupid to see it. Or maybe people are right when they tell you that you don't quite understand what you are talking about.
there are many facts about computers that seem trivial to me, but would take weeks of background to even begin to explain to my intelligent friends in other fields, so i can accept that there might be some complex topics in other disciplines where you just have to take the experts at their word. that being said, are there any economists here who can ELI5 the actual difference between private and public debt?
I've been experimenting with explaining this - here is the current draft.
An ordinary borrower has a number of ways they can get in to trouble - like losing their job and so being unable to repay a loan. The government avoids all that because government writes the law and it controls the creation of currency so it can always choose to technically not have a problem.
These changes make it almost meaningless to assess a government's debt in norminal terms (eg, 'the debt is $x trillion!' isn't actually a concern, because the government as a body can simply create $x trillion if it wants. Wish I could do that :P).
So we have to look at the governments debt in real terms, at which point we need a completely different model than a small time player, who is mostly concerned with by nominal issues. Then you run in to the issue that in real terms, nobody agrees on anything - which is why the economy is run with a nominal currency system. But there are people, like me, who think in real terms the US of today is a completely different beast from the US of the 1970s. There are massive demographic and political differences.
it sounds like you're saying that the debt load vs GDP is important, but the relationship in nominal terms doesn't say much. is that an accurate reading?
Yes. But even then it is a bit difficult to speak with certainty because governments choose the tax rate and as long as the army stays intact can recover from nearly anything.
In this context, I believe debt load to GDP for the US after WWII, and that didn't cause a problem. The concern is that the US has a debt load consistent with a world war and conditions that are really quite favorable. So the obvious questions are "at what point does this get paid back?" and "in like-for-like real terms, assuming politicians are cynical and greedy, is there any reason to believe this debt will be honored?".
You make it sound like the answer to the student’s question is something like:
“Government debt is different because it’s in a currency that the government can arbitrarily create. The government can force its subjects to use this currency through the power of taxation and in the worst case, military occupation and martial law”
The assumption that savings must always have positive real returns, is one of the most weirdly persistent fallacy in economic debates.
Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.
There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.
In one sense yes, it's a bit unfair (see the 2008 fiasco with the CDSes)
In another, they don't care that a country's debt go to zero, they care that the titles they have (used to be paper, today it's all electronic - but they have a maturity date, a face value and some pay interest periodically) get paid. If they sold a new coupon to pay that debt they're paying now is not so important (usually)
But then again if the US or Japan/China/some big EU player defaults in a big way that suddenly becomes the least of your problems.
You mean Credit Default Swaps (CDSes)? [Or perhaps Mortgage Backed Securities?] Outside of the SEC being stupid enough not to regulate these instruments, the government didn't have much to do with over-leveraging of the private sector.
Though the government did give everyone who fucked up a fall from grace rather than what they deserved, which is bankruptcy and the other side of capitalism that our system tends to forget exists when it is convenient.
> Though the government did give everyone who fucked up a fall from grace rather than what they deserved
I understand this feeling and also wish that there was some sort of moral reckoning.
But I feel like the better end state for society is "everyone has access to the same fall from grace that the rich and powerful have" rather than "_everyone_ gets to experience the crushing, arbitrary justice system that those at the bottom rungs of society experience".
It will probably never be paid down to zero, but this doesn't matter. The debt is made of individual bonds, which have a duration (usually up to 30 years), and are paid back at the end of that duration. By taking out new bonds.
They are valuable because what else are you going to do with your money, when you have a large amount to safeguard?
They always pay back any individual loan because they can get a new one to cover the expense. That's what the rating agency is judging, whether they can in one way or another pay back what is due.
Many investors in government bonds don’t want to be paid back. They just want interest payments forever. So the rating is really just about the confidence that it will happen.
I was chatting to a guy from Sybase once who had written some special date-handling code at the request of a customer who was still handling payment streams from the time of Napoleon.
> Napoléon was first emperor in 1804 - if it was from then, we’re talking 214 year old debt - fascinating!
The UK issued perpetual bonds starting in 1751. They were called Consol Bonds, but they were all redeemed in 2015.
The US has historically issued Consol bonds with the right of redemption. The last mention of Consol bonds I can find is the June 1935 Treasury report [1] so presumably that's when they were fully redeemed.
The thing you're missing is that government debt has an automatic expiry date to it, for example 10 years. So the question is, if I lend the US government my money for 10 years am I more or less likely to get it all back than if I lent it to a third world nation?
With the US gov whether the republicans or the democrats are in power I can reasonably assume I'll get my money back, can I say the same about the various political parties in a third world country were they to be elected?
The AAA/AAB style ratings are simply estimates of that reality.
In the case of US, it is because the dollar is by far and away the largest international reserve currency, which gives the US what is known as the "exorbitant privilege"[0]. Putting it simply, this means few countries are going to let anything bad happen to the dollar because if it does most countries would suffer, and as a result the US can get away with things other countries could not, such as building up trillions of dollars of national debt. The same applies to the other countries whose currencies are used for foreign reserves, but on a much smaller scale given relative proportions.
The US is a special case. Every country is caught up in it. It can't be allowed to fall or we all go down with the ship. America is exempt from the rules.
Other developed countries DO keep their deficit in check. And they make their payments on time. Indians don't trust their own government, why would foreign lenders?
Probably unrelated. This crisis is due to aggressive lending to unreliable parties, leading to mass default. The Lehman analogy is apt and to the point.
I have not seen a cogent explanation for the ban, other than their volatility. I suspect the ban is because of the fact that governments are wary of cash outflow from the country. This is a problem with developing countries, especially. I think probably crypto currencies are being equated with "hawala"[1].
My (off the cuff) theory is they want the money to stay in the banks and the reason is the same as for them getting rid of large denomination bills to make the friction of holding cash higher. Can't really recapitalize the banks if everyone has their money on some blockchain or in their mattresses.
One of the disastrous consequences of the current government rule is the stifling effect it has had on press freedom. There is no honest discussion of the issues. I have invested in the non-banking financial sector, as have many other Indians, directly, or indirectly through mutual funds.
There is no honest and frank financial reporting on the current imbroglio even in the financial press, aside from some vague reports on the fight between the government and the central bank, RBI.
What is the exposure due to ILFS default? What are the projections? What are the fallouts? How much recapitalisation is necessary? Is it only ILFS? No discussion.
What was the demonetisation for? No discussion.
The fin min has been trumpeting "consolidation" of public sector banks. Isn't this "too big to fail" coming up? Do we really need this? No discussion.
-- Another fact that I sometimes worry about: after demonetisation, real estate has stagnated, and mutual funds have seen a boom. Hence the exposure of the economy to bad loans made by the banks has increased in the last 2 years. So the catastrophe, when and if it happens, might be much more enormous than might otherwise have been.
I don't think that's due to 'freedom of press'; I think it's probably more due to 'lack of intellect'. Don't worry this affects every other part of the world.
Perfectly valid comment, I do not see reason why it is being downvoted. Despite being a democracy, many things the government does in India lack transparency, and the press despite being nominally 'free' are very much complicit in maintaining the status quo.
I don't know how this is related to press freedom. It's more related to the quality of the press these days. They are more interested in click-baits and twisted quotes.
In contrast i see the usual media personalities rallying against the govt. on a daily basis, i do not see how can you claim there is an issue with the media.
They claim emergency at a drop of a hat, the SC makes a lot of decisions unilaterally frequently crossing its constitutional mandate without accountability to anyone.
I would say that the media is doing a bad job of unearthing the actual facts and not being able to portray anything impartially without a political angle to it.
The fact remains that this govt has been cleaning the sins of the 2005-2013 years and initiatives like GST, demonetization even with their short term pains are a much needed antidote in the long term cleaning up of the system. There has been a significant jump in the tax collections from individual taxpayers in this year and last and these are changes that will contribute in the cleanup.
Which media houses are you talking about exactly? Even a cursory glance on the news channels at prime time will reveal the govt bias quite easily. People have been fired for criticising govt and even NDTV recently had, what some believe, to be a politically motivated takeover.
even a cursory glance at twitter and the usual high profile journalists: Shekar Gupta, Rajdeep Sardesai, Barkha Dutt etc. Only Arnab Goswami amongst the English media is more inclined towards this govt.
In the last 15 years, ever heard any media house criticize Sonia Gandhi ? Even after the umpteen scams. That is what real power is.
Sure they make fun of Rahul Gandhi, but every few months articles and reinvention of his persona is done.
This is in contrast with the hounding of Modi from his CM days and nowadays where every tangential issue is attributed to him. Will Modi answer is like the Thanks Obama version of India.
Even among the mainstream Hindi channels I would say only IndiaTV and ZeeNews have some pro-Modi bias. The rest of them(ABP news, Aaj Tak etc.) criticize the government routinely.
Check the reply on their twitter posts for a more balanced perspective. These people hold almost no influence. Think of Prasoon Bajpai, Karan Thapar, Vinod Dua etc. thats the trajectory Sardesai, Dutt et al are on, and not on their path of becoming the next Arnab.
Of course they did name Sonia Gandhi. Do you remember the India Against corruption movement which gave rise to AAP? The movement had posed questions to MMS and Sonia Gandhi and media had championed the movement. There was no equivocation about it from any mainstream channel, neither about the multiple scams that preceded it. Media houses had done their duty in speaking truth to power especially in UPA2 days.
What I am trying to say is your opinion about Modi's hounding in media seems to be built on what gets printed in wire/print/caravan etc. Although these sources might be heavily represented in your FB timefeed their influence/readership is miniscule compared to a news channel and news papers which have extremely lenient to Modi. Just think how hard media was on UPA2. That same level of scrutiny is sorely missing.
It's really not clear what's going on in the Indian state.
IL&FS apparently has funded quite a large number of infrastructure projects, which unlike Lehman have tangible value. NHAI, the state highways agency is said to owe a great deal of payments to IL&FS (rumoured to be on the order of $ 5 B).
I'm not sure who the planned intervention is for, but it looks very much like it's for the corporate sectors.
The MSME sector, which is touted to employ 92% of India's labour has widely been reported as having taken a very bad hit after the double attack of GST and demonetization. RBI on the other hand is said to favor vulture funds (resembling IMF's 'solution' during the Asian crisis).
Then again, the Indian state has let high profile defaulter escape with impunity in the past few years. There are indications that this was done consciously, through PMO/CBI intervention.
All in all, I have very little trust in any institution of the Indian state.
"The present troubles have their roots in 2005-12, when state banks went on a lending bender, extending credit to dubious tycoons and to infrastructure projects. Net bad debts are 9% of state banks’ loan books. The government has not properly recapitalised these zombies and the flow of credit from them has slowed. Accidents keep happening. In February pnb, the second-biggest state lender, disclosed a $2bn fraud involving diamond merchants."
> It's really not clear what's going on in the Indian state.
It's crystal clear actually. Decades worth of stupid decisions (or indecision, as many claim) are finally bearing fruit. Unfortunately the current government, the first in many years that is actually taking some decisions to get the ship in working order is gonna get caught in the quicksand created by its predecessors.
> Unfortunately the current government, the first in many years that is actually taking some decisions to get the ship in working order is gonna get caught in the quicksand created by its predecessors.
Citation (and additional information) required on this part, please.
> Unfortunately the current government, the first in many years that is actually taking some decisions to get the ship in working order
Well, the current government did its part in letting the tycoons, who took large loans, get out of the country. The currency ban was another stupid mistake (source:https://www.nytimes.com/2018/08/30/world/asia/modi-india-rup...) that led to chaos and people lost trust in the banking system. They don't know if they will easy access to their money in the banks with the cash withdrawal limits and ATM issues.
If people lose trust and don't deposit the money, eventually the whole system would collapse.
The BJP(current government) has neither the brains and nor the motivation to develop the country. All they want to do is get the country back to the vedic period(which is nothing but denting the education to the majority of the people).The leader of the party Modi was in the ads(jio) publicly. It was a public announcement by the corporate to the other organizations that they own the government. Also this same government banned the beef. This government is more like trump focusing on religious hatred for votes and nothing more that that(https://en.wikipedia.org/wiki/2002_Gujarat_riots was led by the current leader and prime minister of the party).
Construction of roads and toilets, GST, IBC, electrifying of all villages and all other reforms initiated by the current government are part of a larger scheme that's taking us back to the vedic period.
To understand real indian culture with the proofs and evidence this short essay(Annilation of Caste) will gives the idea http://ccnmtl.columbia.edu/projects/mmt/ambedkar/web/reading.... Once you read this essay you will have pretty clear idea when speaking to indians about their motivations. Also this author arundathi roy is fascinating https://www.youtube.com/watch?v=ddKzcrwC9os. She has shared stage a lot of times with Noam Chomsky too.
The Indian Government trusts no one and will make 99% of Indians jump through all kinds of hoops like KYC, getting bank letters, stamp paper documents, notarized documents to supposedly avoid such problems. And then they find out all the bureaucracy they put in place was rendered useless because the 1% bad actors know how to leverage that same bureaucracy to beat the system.
The American Govt trusts everyone and lets them go about their business and self report while keeping the option to audit or selectively target the bad actors. Its why foreigners love to start businesses in the US. Its so refreshing.
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The credit rating system is necessarily bayesian, and EM markets all have their most recent defaults within the models' event horizons.
The other one I can think of was the downgrade of the coupon on WW1 war bonds from 5% to 3.5%. Again, seemingly everyone agreed with this, so there is some debate over whether it was an actual default.
[1] https://www.theglobalist.com/a-brief-history-of-u-s-defaults...
The real difference is that the US or European countries are borrowing in their own currency and under their own laws (well for euro area countries, sort of). So they will inflate their debt away. EM countries typically borrow in USD and often under foreign law and don't have the option to inflate away.
But Greece found itself with effectively a foreign currency debt (EUR which they don't control) and ended up defaulting (well, technically "restructuring" but that's the same).
As long as the USA willing to increase the size of their debt, that doesn't happen.
For this to continue, people need to keep lending the USA money, so that the USA can pay off their old debts. People are willing to lend the USA money as long as they don't think the USA will start inflating their debt away.
There isn't really a limit to this. Loans to the USA are stable because people keep loaning to the USA because loans to the USA are stable. The size of the debt doesn't affect that equation.
You say this, but it doesn't work nearly as easily as you seem to think. You cannot just devalue your currency and pay people off with zero effects. And if that was actually a threat, the US would not have an AAA credit rating.
https://en.m.wikipedia.org/wiki/United_States_federal_govern...
If Somalia decides they love their goats too much and are not handing them over, their ratings get trashed.
Hedge funds have a long history now, and the core of their business model is (simplifying) to arbitrage such differences. So what's left? Whose currency is irrationally treated? Which lenders make a borrower more/less secure?
I am no fan of carrying enormous amounts of debt. I critically disagree with the United States economic and fiscal policies of the last twenty years, including most quantitative easing initiatives.
But if you think the AAA credit rating is somehow fake or corrupt, no metric-driven analysis that even remotely resembles fairness would agree with you. Only theories like "the music will stop" do.
The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.
The numbers are staggering, the economic growth isn't there. The US has a technological edge and a big army, but at the end of the day it is 'just' a country like all the others. At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.
After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.
This hasn't happened unless you count QE as printing money to pay debt, which would be a pretty serious twist of logic.
>> The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.
>> At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.
If you think this is actually true, there is a ton of money to be made on the open markets by securing your position with capital. There's plenty of financial instruments you can leverage to back your position.
>> After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.
This is a legitimate criticism but separate from your other claims. QE is protectionist and massively contributes to inequality (in more ways than just income). I am quite critical of the USG and their economic policies.
Now I can admit that and also admit that the United States is probably the safest credit risk on the planet, primarily due to the hegemony-driven policies we exert globally. You might argue that this is not for long, but I highly doubt this to be true, and the rest of the world acts as if.
Credit ratings are forward-looking though. The US's financial position is the worst it has ever been - public debt to GDP is on wartime footing in a long period of peace between major powers.
And from my admittedly highly unreliable sources, a number of states aren't in great financial health and there is a pension crisis afoot.
The fact that the US is going to hand out the nominal value of its debt is not comforting in light of this.
> ... there is a ton of money to be made on the open markets by securing your position with capital
That isn't a fair challenge and you know it, there are a lot of ways to lose everything being clever with derivatives even if the macroeconomic assessment is right. Profiting off something isn't the only way to be right about an opinion.
> This is a legitimate criticism but separate from your other claims.
No it isn't. If the US isn't honoring the capitalist system inside their markets, it is legitimately risky to assume that they will treat foreigners with more respect.
There is an argument that they will, but it isn't a sure thing by any stretch. If something does change, by the time everyone admits that it will be far too late for investors.
The US is chronically unable to balance its budget. The first thing to give could easily be foreign-owed debt, because foreigners don't vote.
ITs an entirely different mechanism. Think of the difference between breaking styrofoam apart and pulling atoms apart.
This seems to be the econ 101 answer all modern day Chicago - school influenced economists give out.
Student: if the US has a debt that's more than their current GDP, isn't that bad? If a family had a credit card debt higher than their current salary, we'd say that they were in bad financial shape.
Economist: The macroeconomics of a nation work much differently than a single family's budget.
Student: Well, when the family has no plans to cut expenses, continues to charge more and more each year on the credit card, and their solution involves some vague plan of getting a huge raise sometime in the future, how does this not end in disaster for the family, but turn out fine for a government doing the same thing.
Economist: Running deficits and borrowing money in perpetuity is good for a large country to do, just not for an individual. It is known.
Student: well eventually the family's interest payments will be more than they actually make, leaving nothing left for actual expenses. At that point, their card is canceled and they have to sell all their stuff, move out of their home, and crash with the parents. And nobody lends to them again for a long time, and only at high rates. How does a nation avoid this outcome when the math is the same?
Economist: Trust us <waves Jedi hand>.
I get the feeling we're going to someday look at today's accepted macroeconomic theories, and wonder just WTF we we're thinking.
Economist: As I have told you multiple times by now, it isn't. That is what we taught you in first year. You can't simply arbitrarily scale up models from lemonade stand to international trade. Things are not all linear, simplifications in one model are simply not valid in another model.
Arguments like these always strike me as similar to "if evolution, then why are there still monkeys". Maybe you are right, everything is really simple and everybody else has been too stupid to see it. Or maybe people are right when they tell you that you don't quite understand what you are talking about.
An ordinary borrower has a number of ways they can get in to trouble - like losing their job and so being unable to repay a loan. The government avoids all that because government writes the law and it controls the creation of currency so it can always choose to technically not have a problem.
These changes make it almost meaningless to assess a government's debt in norminal terms (eg, 'the debt is $x trillion!' isn't actually a concern, because the government as a body can simply create $x trillion if it wants. Wish I could do that :P).
So we have to look at the governments debt in real terms, at which point we need a completely different model than a small time player, who is mostly concerned with by nominal issues. Then you run in to the issue that in real terms, nobody agrees on anything - which is why the economy is run with a nominal currency system. But there are people, like me, who think in real terms the US of today is a completely different beast from the US of the 1970s. There are massive demographic and political differences.
it sounds like you're saying that the debt load vs GDP is important, but the relationship in nominal terms doesn't say much. is that an accurate reading?
In this context, I believe debt load to GDP for the US after WWII, and that didn't cause a problem. The concern is that the US has a debt load consistent with a world war and conditions that are really quite favorable. So the obvious questions are "at what point does this get paid back?" and "in like-for-like real terms, assuming politicians are cynical and greedy, is there any reason to believe this debt will be honored?".
Only on bonds in their own currency! Argentina would be in a much better position if they could print dollars.
> 'just' a country like all the others
For this to be a problem the US has to fail in a way that doesn't bring the rest of the developed world down too
Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.
There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.
btw, you are talking about credit ratings made by agencies that consistently rated Lehman's products as AAA.
In another, they don't care that a country's debt go to zero, they care that the titles they have (used to be paper, today it's all electronic - but they have a maturity date, a face value and some pay interest periodically) get paid. If they sold a new coupon to pay that debt they're paying now is not so important (usually)
But then again if the US or Japan/China/some big EU player defaults in a big way that suddenly becomes the least of your problems.
You mean Credit Default Swaps (CDSes)? [Or perhaps Mortgage Backed Securities?] Outside of the SEC being stupid enough not to regulate these instruments, the government didn't have much to do with over-leveraging of the private sector.
Though the government did give everyone who fucked up a fall from grace rather than what they deserved, which is bankruptcy and the other side of capitalism that our system tends to forget exists when it is convenient.
I understand this feeling and also wish that there was some sort of moral reckoning.
But I feel like the better end state for society is "everyone has access to the same fall from grace that the rich and powerful have" rather than "_everyone_ gets to experience the crushing, arbitrary justice system that those at the bottom rungs of society experience".
It will probably never be paid down to zero, but this doesn't matter. The debt is made of individual bonds, which have a duration (usually up to 30 years), and are paid back at the end of that duration. By taking out new bonds.
They are valuable because what else are you going to do with your money, when you have a large amount to safeguard?
Many investors in government bonds don’t want to be paid back. They just want interest payments forever. So the rating is really just about the confidence that it will happen.
I was chatting to a guy from Sybase once who had written some special date-handling code at the request of a customer who was still handling payment streams from the time of Napoleon.
The UK issued perpetual bonds starting in 1751. They were called Consol Bonds, but they were all redeemed in 2015.
The US has historically issued Consol bonds with the right of redemption. The last mention of Consol bonds I can find is the June 1935 Treasury report [1] so presumably that's when they were fully redeemed.
[1]https://www.treasurydirect.gov/govt/reports/pd/mspd/pre1997/...
https://www.youtube.com/watch?v=cfSIC8jwbQs
With the US gov whether the republicans or the democrats are in power I can reasonably assume I'll get my money back, can I say the same about the various political parties in a third world country were they to be elected?
The AAA/AAB style ratings are simply estimates of that reality.
[0] https://en.wikipedia.org/wiki/Exorbitant_privilege
Other developed countries DO keep their deficit in check. And they make their payments on time. Indians don't trust their own government, why would foreign lenders?
[1] https://en.wikipedia.org/wiki/Hawala
There is no honest and frank financial reporting on the current imbroglio even in the financial press, aside from some vague reports on the fight between the government and the central bank, RBI.
What is the exposure due to ILFS default? What are the projections? What are the fallouts? How much recapitalisation is necessary? Is it only ILFS? No discussion.
What was the demonetisation for? No discussion.
The fin min has been trumpeting "consolidation" of public sector banks. Isn't this "too big to fail" coming up? Do we really need this? No discussion.
-- Another fact that I sometimes worry about: after demonetisation, real estate has stagnated, and mutual funds have seen a boom. Hence the exposure of the economy to bad loans made by the banks has increased in the last 2 years. So the catastrophe, when and if it happens, might be much more enormous than might otherwise have been.
They claim emergency at a drop of a hat, the SC makes a lot of decisions unilaterally frequently crossing its constitutional mandate without accountability to anyone.
I would say that the media is doing a bad job of unearthing the actual facts and not being able to portray anything impartially without a political angle to it.
The fact remains that this govt has been cleaning the sins of the 2005-2013 years and initiatives like GST, demonetization even with their short term pains are a much needed antidote in the long term cleaning up of the system. There has been a significant jump in the tax collections from individual taxpayers in this year and last and these are changes that will contribute in the cleanup.
In the last 15 years, ever heard any media house criticize Sonia Gandhi ? Even after the umpteen scams. That is what real power is.
Sure they make fun of Rahul Gandhi, but every few months articles and reinvention of his persona is done.
This is in contrast with the hounding of Modi from his CM days and nowadays where every tangential issue is attributed to him. Will Modi answer is like the Thanks Obama version of India.
Of course they did name Sonia Gandhi. Do you remember the India Against corruption movement which gave rise to AAP? The movement had posed questions to MMS and Sonia Gandhi and media had championed the movement. There was no equivocation about it from any mainstream channel, neither about the multiple scams that preceded it. Media houses had done their duty in speaking truth to power especially in UPA2 days.
What I am trying to say is your opinion about Modi's hounding in media seems to be built on what gets printed in wire/print/caravan etc. Although these sources might be heavily represented in your FB timefeed their influence/readership is miniscule compared to a news channel and news papers which have extremely lenient to Modi. Just think how hard media was on UPA2. That same level of scrutiny is sorely missing.
IL&FS apparently has funded quite a large number of infrastructure projects, which unlike Lehman have tangible value. NHAI, the state highways agency is said to owe a great deal of payments to IL&FS (rumoured to be on the order of $ 5 B).
The MSME sector, which is touted to employ 92% of India's labour has widely been reported as having taken a very bad hit after the double attack of GST and demonetization. RBI on the other hand is said to favor vulture funds (resembling IMF's 'solution' during the Asian crisis).
Then again, the Indian state has let high profile defaulter escape with impunity in the past few years. There are indications that this was done consciously, through PMO/CBI intervention.
All in all, I have very little trust in any institution of the Indian state.
(I'm glad to see Economist reflect my understanding.)
No person in India cares much anybody or anything else. Unless they are directly affected by it.
People optimize so much personal good, that bad things happening to others are actually celebrated.
Quote from the article
It's crystal clear actually. Decades worth of stupid decisions (or indecision, as many claim) are finally bearing fruit. Unfortunately the current government, the first in many years that is actually taking some decisions to get the ship in working order is gonna get caught in the quicksand created by its predecessors.
Citation (and additional information) required on this part, please.
Well, the current government did its part in letting the tycoons, who took large loans, get out of the country. The currency ban was another stupid mistake (source:https://www.nytimes.com/2018/08/30/world/asia/modi-india-rup...) that led to chaos and people lost trust in the banking system. They don't know if they will easy access to their money in the banks with the cash withdrawal limits and ATM issues.
If people lose trust and don't deposit the money, eventually the whole system would collapse.
Construction of roads and toilets, GST, IBC, electrifying of all villages and all other reforms initiated by the current government are part of a larger scheme that's taking us back to the vedic period.
The American Govt trusts everyone and lets them go about their business and self report while keeping the option to audit or selectively target the bad actors. Its why foreigners love to start businesses in the US. Its so refreshing.