Ladies and gentlemen, Matt Yglesias:
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Is he wrong?
Comically so. A basis point is one hundredth of a percent and is an efficient way to describe small movements in rates.
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Oh, ok that makes sense.
This is the reason I basically never say anything unless I’m real fucking sure I’m right.
Extra chef’s kiss for talking down to all the people who are right while being so wrong.
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New Inflation report seems pretty good. Year-over-year CPI down to 6.5 percent from 7.1 percent last month. Core CPI down to 5.7 off 6.1 YOY. CPI actually negative .1 percent month over month so stuff got cheaper compared to November.
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I’ve been putting my savings/emergency fund into staggered 13 week t-bills. Similar question, what happens to these in the very likely event of a government shutdown over the debt ceiling? Should I be rotating out of these ahead of time to be safe?
There’s a big difference between a “government shutdown” and a “default due to failure to raise the debt ceiling.” We’ve had a number of government shutdowns before and the answer to your question is: Nothing. The money is fine. It’s possible I suppose that you can’t access it for a few days (not sure if the website is operated by essential employees) but other than that.
A debt ceiling default is unprecedented and nobody knows what would happen. Most likely you would eventually be made whole, but god only knows.
I doomed us all by putting money in I bonds
Sorry!
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If we actually default there is no safe place to put your money, it’s Armageddon.
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Is the defaulting like an all or nothing thing? Like couldn’t they pay like 95% of the interest or something for a certain time period? Obviously would still wreck confidence forever
Yeah I think defaulting is where they start picking and choosing what thtey pay and are late on other payments? Not really sure, it’s never happened before.
As jman pointed out you’re conflating two scenarios. One is a government shutdown. We’ve had those before, they’re bad, and they suck for a variety of reasons, but in terms of personal finances and investing, they’re not worth changing much unless you’re retired and you need your social security check on time to pay your bills OR unless you work for the government and need your paycheck on time to pay the bills.
Failing to raise the debt ceiling would cause the United States of America to default on its debt. This would cause an immediate downgrade of the US’s credit rating, which will cause all interest rates in the US to shoot up and increase inflation. Moody’s estimates a 33% stock market crash. Six million jobs would be lost (that’s about a 3.5% increase in unemployment). Social security payments would stop. Interest payments on government bonds might stop, which would make bonds crash in value. The military may not get paid. Medicare and Medicaid may not be able to make payments.
Air traffic control might have to shut down, which would ground planes. There would be other second and third level effects like that, and it’s hard to model all of it.
Biden’s White House has previously looked at the impacts and said,
If the United States does default, the consequences could escalate rapidly and profoundly. The timeframe of these impacts is unclear, since the United States has never defaulted; moreover, the effects of a default would not be confined to the United States. The global economy, which relies on a strong U.S. economy, would begin to slide into a financial crisis and likely, a recession.
In the United States specifically, past simulations by the Federal Reserve[7] and the Peterson Foundation[8] that look at the possible month-long default in 2013 suggested that unemployment would increase and remain elevated for at least two to four years afterwards. Projections in a recent report released by Moody’s are even more dire, suggesting that under a prolonged 4-month default, real GDP would fall by 4 percent, unemployment would rise to almost 9 percent, and the U.S. economy would lose nearly 6 million jobs. For context, during the two years of the Great Recession, real GDP fell by 4.3 percent, unemployment rose to 10 percent, and the economy lost almost 9 million jobs.
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I think this overstates it a bit. I mean, safe is a relative term right? Like in a scenario where a US debt default triggers a global recession, or worse, euros have to be better than dollars, right? What you’re probably looking for are extremely stable currencies (Swiss francs?), precious metals (gold?), commodities (wheat? corn?), and investments (consumer staples?). You’re also looking for exposure to puts/short positions as an insurance policy. Perhaps puts on the entire S&P, or even just companies that have to service debt at the market rate that aren’t currently profitable.
If you can lose less relative to everyone else, that’s a form of safety.
All that said, I think if it comes down to it and Biden has a choice between a $1T coin and default, he picks the $1T coin because it seems like a softer landing even if it’s still bad. It would be inflationary and could theoretically still cause a credit rating downgrade, especially if it went before SCOTUS as there would be risk of them striking down the idea all together and forcing a default.
Defaulting on the debt has to be way worse. How could it not be? Imagine credit agencies downgrading US debt.
Way worse than printing a trillion dollar coin? Oh I totally agree.
Why don’t they just use metric?
I’m late to catching up on Levine from the last couple days, but he has some interesting stuff yesterday about the debt ceiling:
But there is a real risk that Congress won’t, so today Bloomberg Opinion contributor Matt Yglesias has a Substack column arguing that Treasury should solve the problem of the debt ceiling using premium bonds. I think this is correct, I have made this argument a few times before, and Yglesias clearly explains why the debt ceiling is very dumb and why Treasury should, if need be, use gimmicks to solve it. And as gimmicks go, this one is fine. But his bond math is a little odd so I wanted to walk through a simplified version here.
The premium-bond gimmick is: Treasury sells you one one-year $100 bond today, with an interest rate of 109%. In a year you get back $209: the $100 face amount of the bond, plus 109% interest. That bond has a face amount of $100, but it is clearly worth $200 today: It is economically the same as the two 4.5% bonds from the previous paragraph. So you’d be willing to pay Treasury $200 for it: the $100 face amount, plus $100 of “premium” to make the yield work out. And Treasury would be willing to sell it to you for $200: It sells you this $100 bond for $200. Treasury gets $200 of cash. But technically this bond is only $100 of “debt,” of face amount, so it only increases the debt by $100.
Anyway as a matter of financial engineering I find this fun to think about. As an actual thing for the US Treasury to do, I think it is obviously very bad; the US Treasury market, perhaps the most important financial market in the world, should not be run on accounting gimmicks. Actually doing this would be terrible! On the other hand the US Treasury market, perhaps the most important financial market in the world, should not default, either. Issuing premium bonds would be bad, but the alternatives are mostly worse, so it’s worth being ready to do it.
There’s a not insignificant chance that the adults in the room are going to be like, “Oh, fuck, these assholes are seriously THAT crazy?” when the time comes. The adults in the room may be caught completely off guard by the House Freedom Caucus actually wanting to drive the global economy into a ditch for LOLs.
That’s the beauty of the coin. Striking a $1T coin has to be a hell of a lot faster then setting up some crazy-ass bond market. Either works, though. Anything to avoid an actual default.
Thought it’s worth noting the $1T coin thing or the bond market scheme may get us downgraded and trigger a lot of the same effects as a default, just to a lesser degree. I mean, it’s not going to feel great to our creditors to get paid with less valuable money due to the inflation from a $1T coin or the bond scheme.
I thought this wasn’t supposed to be a thing until July?