China Downgrades US Debt: Should Investors Care?

Forbes ^ | 10/17/2013 | Panos Mourdoukoutas

[Heff]

Interesting stuff.... not sure what it all means.... is the Fed’s purchase of treasuries to buy back debt because its maturing, and what exactly is debt rollover....basically pushing forward the debt you owe, extending the life of the debt and interest?

[TBP]

Many countries have defaulted an they’re still standing.

[TBP]

We ought to keep Chinese trash out of our country, or at least make it so prohibitively expensive that nobody will buy it.

[Milhous]

Interesting stuff.... not sure what it all means.... is the Fed’s purchase of treasuries to buy back debt because its maturing, and what exactly is debt rollover....basically pushing forward the debt you owe, extending the life of the debt and interest?

Those bonds are maturing and must either be paid off or defaulted on. The US does not have the cash on hand to pay off those bonds (or to pay for anything else). The US must issue new bonds just to pay off those old bonds. If no other country buys the new bonds then the Federal Reserve must buy them by creating new Federal Reserve Notes.

The powers-that-be hope that the existing bondholders (ie China) will simply roll their old bonds over by acquiring the new bonds. The powers-that-be promote their bonds as the safest investment. If China doesn't complete buy that line this time around the Fed must make up the difference.

[expat_panama]

the Fed’s purchase of treasuries to buy back debt

That's going to stop or get changed because it's no longer working; the goal had been to lower interest rates and they've just begun to soar. 

OK we keep hearing otherwise from the willfully misinformed in the news and on these threads, but the fed doesn't buy treasuries to finance Obama's spending (they're only paying 10% compared to the 14% they covered for Reagan) and they're not trying to juice the stock-market (been flat for a dozen years now).  The only thing they've wanted was to lower interest rates but over the past few days the markets have put paid to that idea:

Related video:

• 8:34 The US Debt: Just Wait Until Interest Rates Return To Normal! We're Screwed -by Bryan Binkholder

[1010RD]

Which is to be expected, no? I don’t believe the Fed is directly financing Obama’s spending or juicing the stock market. Their ZIRP policies indirectly do that, don’t they?

What should happen in a market with enormous credit errors?
1. Interest rates should rise.
2. Borrowers and lenders will unwind bad deals.
3. Bargains abound and savers/the prudent are rewarded.
4. New money is attracted and the market clears.
5. A return to normalcy.

Arguing the Feds’ side, you are really arguing for fiscal irresponsibility. The low interest rate environment is abetting the idiotic fiscal response. GW Bush was told by the Fed that they’d move to keep rates low. Then he approved the bail out.

Bad firms should go under, their owners should take the hit, and markets can and have cleared, American economic history proves that.

Your chart simply shows what would have happened under normalcy. The Fed’s wasted five years and remember that the Fed was there “managing” things during the previous bubbles. The US economy didn’t just start in 2008.

[expat_panama]

You post is thought provoking, thanks!

To communicate I need to understand the values that it’s based on; namely, are you in favor of Congress having the power to coin money and regulate it’s value. Don’t laugh —some on these threads want no gov’t whatsoever with a pure barter system. Thing is that if that really is your view then I’d be wasting my time explaining Fed strategy. If in case you like that part of the constitution, and you don’t like the way Congress coins’n’regulates money, then I still wouldn’t explain the fed but I’d be more clear if I explained Congress.

Please share your take on how we got money coins’n’regulated.

[1010RD]

Sorry, I did laugh. I’m not a proponent of a managed economy, but I do like the Constitution as constituted. Pun intended.

I’m happy to hear what you see in the Fed strategy, but I think I get it. My point is that the Fed is run by humans, humans are fallible, the Fed is fallible. Perhaps more fallible than the market.

The fiscal issues are bad enough and would create problems left and right. Most of the current fiscal issues are wholly the creation of government and I mean that in the broadest sense - taxes, regulations, entitlements, and etc.

My point is that Fed ‘intervention’ rewards bad fiscal policy and bad political behavior.

[expat_panama]

Good to know we agree Congress should coin money and regulate its value. Sounds like you don't like how congress does it. Please say how you want congress doing it.