SERVING THE QUANTITATIVE FINANCE COMMUNITY

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Joined: September 20th, 2002, 8:30 pm

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: CrashedMintSo now that T-Bills are AA+, what exactly happens to the other products that derive their price in part from the fact that tbill=safe?Probably everyone will invent some fudge factor (e.g., UST CDS rates) to shift the UST AA+ rate curve to a synthetic AAA curve.

exCBOE
Posts: 80
Joined: May 19th, 2010, 9:48 pm

S&P are idiots. How can the quant community take this lying down? Name a safer dollar denominated investment than a 90 day t-bill. It is a good example of bad math and bad statistics spewed out by morons. The debt could be paid off tomorrow with freshly minted QE certificates. That would suck for sure but it isn't a default. What would happen to non treasury AAA securities then? Sometimes it seems we become so enamored of our models that we forget that the real world contains things of value like homes and factories and raw materials and rocket scientists, and nuclear weapons on submarines.In the case of the USD, a quick glance at the American balance sheet shows assets worth fifty to a hundred times liability of the federal debt. Recoverable coal, natural gas, shale, oil and other hydrocarbon resources alone probably approach a quad or two in net present value. (See http://www.americanthinker.com/2010/09/ ... treet.html).America probably has assets in excess of fifty times the total debt, public and private.Nobody in their right mind thinks that the ratings of S&P and the others constitute more than a cursory level of due diligence. Just because the treasury department is even stupider doesn't mean much if you're about to make a bad investment.Still it is good for what used to be called "the smart money". They can take the dollar and securities down in order to buy them back cheaper in a few months with $500 dollar an ounce gold.It's time the quant community got some cojones and told it like it is. Boycott the rating agencies!!! And stop comparing the US to Greece. You just embarrass us all. traderjoe1976 Posts: 1544 Joined: May 19th, 2006, 9:50 am ### Actual consequences of a U.S. / Greece bankruptcies? In August 2011, we are looking at$14.3 trillion of outstanding debt in a scenario where Congress has annual fights to increase the debt limit by $2 trillion in order to finance the medicare and social security programs which are currently being financed by increasing debt.In August 2021, we will be looking at$30 trillion of outstanding debt in a scenario where all the baby boomers have retired and $70 million people over 65 want to live off the government and collect social security and medicare. The tax base is not sufficent to support these entitlements.Take a look at US government spending charts and you will see that most of the spending is on social security and medicare programs.Anyway, with$30 trillion of debt which will have to be serviced and 70 million people over 65 wanting to collect their social security and medicare, you can easily see the direction in which the US government credit rating will be heading in the next 10 years.The reality is that the government does not have the tax base to support these programs. At the same time, the government cannot terminate these programs. So they are being financed by ever-increasing debt which will eventually lead to a US government default.The Canadian $and the Australian$ have already achieved parity with the USA $from being 1:1.6 just a few years ago.Folks, get ready for financial Armageddon. It is going to happen. USA and Europe will be looking to China to bail them out and the Chinese may not feel obligated to do so.We are going to witness a massive shift in the global economy in favor of Eat Asia and South Asia, largely based on a younger and more highly skilled workforce. CrashedMint Topic Author Posts: 2591 Joined: January 25th, 2008, 9:12 pm ### Actual consequences of a U.S. / Greece bankruptcies? QuoteOriginally posted by: exCBOES&P are idiots. How can the quant community take this lying down? Name a safer dollar denominated investment than a 90 day t-bill....The Economist: "Sovereigns aren't like companies. They can't go bankrupt, and creditors can't seize their assets. Their creditworthiness depends as much on their willingness as their ability to pay." Source Last edited by CrashedMint on August 6th, 2011, 10:00 pm, edited 1 time in total. Traden4Alpha Posts: 23951 Joined: September 20th, 2002, 8:30 pm ### Actual consequences of a U.S. / Greece bankruptcies? QuoteOriginally posted by: exCBOEIn the case of the USD, a quick glance at the American balance sheet shows assets worth fifty to a hundred times liability of the federal debt. Recoverable coal, natural gas, shale, oil and other hydrocarbon resources alone probably approach a quad or two in net present value. (See http://www.americanthinker.com/2010/09/ ... treet.html).America probably has assets in excess of fifty times the total debt, public and private.Very interesting! Unfortunately, the americanthinker analysis contains three serious flaws. First, the conversion ratio from asset value to taxes is quite low. The high cost of extracting the resource (especially in the U.S.) and converting it to dollars means relatively modest net profits per original dollar of assets. Net profits run less than 10% of revenues at U.S. oil and coal companies and taxes extract about 40% of net profits so one must sell$25 trillion in oil or coal to cover $1 trillion in deficit spending or debt retirement. The second flaw is in the potential rate of monetization. Total global oil consumption only runs$3 trillion per year which implies that even if the U.S. produced 100% of the world's oil, it would only bring in a meager $120 billion in taxes. Perhaps one might double the tax revenues by becoming the world's only producer of coal and gas, too, but that seems unlikely due to transportation costs. The third flaw is the competitive landscape. I'm sure that Saudi oil and Chinese coal are cheaper than their U.S. counterparts. The U.S. could never become the monopoly producer and any attempt to do so would result in lower oil prices, much less net profit from U.S. oil, and even less tax revenues than was calculated in point two. And if solar or some other alternative energy source becomes cheap enough, then demand for fossil fuels would plummet and the net asset value of U.S. oil, gas, and coal will drop to zero or even become negative (due to long-term costs of environmental remediation). It reminds me of the recent headline that a box of Girl Scout cookies was worth$15 billion in graphene. Of course the ugly reality is that: 1) it would probably cost about $15 billion to convert a box of girl scout cookies into graphene; 2) there's not sufficient demand for graphene at the$15 billion/box rate; 3) some clever competitor would make graphene from a cheaper feedstock than overpriced cookies. The point is these total asset valuations mean almost nothing.Finally (fourth!), there's also the small matter of environmental issues, especially with the coal reserves than dominate the U.S. remaining energy assets. Perhaps instead of giving up entitlements, we should give up on the environment? I smell partisan bickering!
Last edited by Traden4Alpha on August 6th, 2011, 10:00 pm, edited 1 time in total.

exCBOE
Posts: 80
Joined: May 19th, 2010, 9:48 pm

### Actual consequences of a U.S. / Greece bankruptcies?

Where to begin? Are you suggesting that government revenue from the oil industry is around 4% of the price of say a gallon of gas. I don't know where to get truly reliable figure but I'll wager a black swan that it is more like 40%, or maybe 60%. Not only that, but much of the new supply is on publicly owned land. Even if not, ultimately it is the total wealth, public and private, which determine he health of our balance sheet.In a strong world economy, demand for energy could easily double in a decade or two. In the meantime, energy independence is worth a lot, not to mention the (ugh) multiplier effect of extracting and converting tens of billions of barrels of oil. More to the point, demand for energy is insatiable. it will always be a choke point for economic growth. You ignore the tax revenues from a booming private sector.Competition is always a risk, but in this case what is the downside? If a new, even cheaper source of energy is available, the economy will do even better. It is a classical error of anti-capitalists to underestimate the benefits from competition. We are not Saudi Arabia, with no income other than from pumping oil. What our economy needs is increasing productivity. A positive second derivative would be nice. It's not a zero-sum game.There are billions of people in the world who would like to see their children grow up healthy and educated. By "solving" the energy problem for a century or more, the growth we need may be attainable. Nobody knows the future. We may yet blow ourselves up or squander our wealth on welfare or other endless pits of demand. The question is whether we can manage the transition from the current situation to one where the government can spend a smaller share of GDP. Adding ten or twenty trillion barrels of oil worth of energy certainly improves the balance sheet.The issue of Social Security and Medicare certainly looms large in all economically advanced nations. Europe and parts of Asia are far worse off. Several years ago, in "America Alone", Mark Steyn painted a gloomy demographic picture. Several years ago, he pointed out that the birthrate in Greece practically guaranteed what we are seeing today. I doubt if anybody knows to what extent generational transfers of income from young to old and assets from dead to alive balance out over time. Fascinating topics to be sure, but not subject to glib or obvious reasoning.The take away is that the bond market continues to lend America money at very low rates. That is not consistent with a fear of default. If it isn't the newly economical supplies of energy, maybe it's that old fashioned reservoir of good ol' American knowhow. Your nose is accurate. America must choose between economic pain now and hypothetical warmer climates next century. How do you think the voters will react?
Last edited by exCBOE on August 6th, 2011, 10:00 pm, edited 1 time in total.

CrashedMint
Topic Author
Posts: 2591
Joined: January 25th, 2008, 9:12 pm

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: exCBOE How do you think the voters will react?By praying and fasting.

farmer
Posts: 13477
Joined: December 16th, 2002, 7:09 am

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: exCBOEIn the case of the USD, a quick glance at the American balance sheet shows assets worth fifty to a hundred times liability of the federal debt. Recoverable coal, natural gas, shale, oil and other hydrocarbon resources alone probably approach a quad or two in net present value.I guess you would lend money to an unemployed person because he has 10 fingers? Come on, in theory he could do all kinds of useful work!
Last edited by farmer on August 6th, 2011, 10:00 pm, edited 1 time in total.

exCBOE
Posts: 80
Joined: May 19th, 2010, 9:48 pm

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: farmerQuoteOriginally posted by: exCBOEIn the case of the USD, a quick glance at the American balance sheet shows assets worth fifty to a hundred times liability of the federal debt. Recoverable coal, natural gas, shale, oil and other hydrocarbon resources alone probably approach a quad or two in net present value.I guess you would lend money to an unemployed person because he has 10 fingers? Come on, in theory he could do all kinds of useful work!I don't get the analogy. I would lend him money if he was a concert pianist or if he had a trust fund worth 20 times the loan. The US is (has) both.

farmer
Posts: 13477
Joined: December 16th, 2002, 7:09 am

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: exCBOEI would lend him money if he was a concert pianist or if he had a trust fund worth 20 times the loan. The US is (has) both.The number of adults in the US who don't work is more than half and rising quickly. The number of adults who don't eat is holding steady at 0.

GiusCo
Posts: 124
Joined: March 26th, 2010, 10:00 pm

### Actual consequences of a U.S. / Greece bankruptcies?

Make or break for the eurozone, here we go.Italy may call a one-off "national tax" on the huge savings of the residents, say 10% in order to cut 50% of the national debt in one blink of eye, but that would not solve the fundamental problem: mafia, privileges, amoral family system and closed ranks that avoid the Country enjoying growth and a regualr free market. Hard nut to crack. We are in fact surrendering sovereignty to Frau Merkel and Monsieur Sarkozy to do the job for us common people: eradicate the parasites without killing the patient. That would be well worthy the above said "national tax" when we, as a population, are asked to make our part.

farmer
Posts: 13477
Joined: December 16th, 2002, 7:09 am

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: GiusCoItaly may call a one-off "national tax" on the huge savings of the residents, say 10%That's a lot of cash in the mattresses. I should move there and get into mattress recycling.

GiusCo
Posts: 124
Joined: March 26th, 2010, 10:00 pm

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: farmerQuoteOriginally posted by: GiusCoItaly may call a one-off "national tax" on the huge savings of the residents, say 10%That's a lot of cash in the mattresses. I should move there and get into mattress recycling.mattresses mafia would gently invite you to trade at their price and agree to their "protection" in exchange of a "small part of your profit"if not agreed: softly defame you, send bullets in an envelope, set up a fire to your firm and finally melt you in acid

Posts: 23951
Joined: September 20th, 2002, 8:30 pm

### Actual consequences of a U.S. / Greece bankruptcies?

QuoteOriginally posted by: exCBOEWhere to begin? Are you suggesting that government revenue from the oil industry is around 4% of the price of say a gallon of gas. I don't know where to get truly reliable figure but I'll wager a black swan that it is more like 40%, or maybe 60%. Not only that, but much of the new supply is on publicly owned land. Even if not, ultimately it is the total wealth, public and private, which determine he health of our balance sheet.You are correct that the U.S. also collects royalties and rents on natural resource leases, but you might be surprised that it totals a meager $10 billion across all oil, gas, and coal leases. Retail gas taxes bring in$32 billion (but these won't increase regardless of increasing domestic energy production or export of oil). I'm not sure how you get 40% but would like to see your figures. How much tax would the U.S. collect on exports of domestic oil?QuoteOriginally posted by: exCBOEIn a strong world economy, demand for energy could easily double in a decade or two. In the meantime, energy independence is worth a lot, not to mention the (ugh) multiplier effect of extracting and converting tens of billions of barrels of oil. More to the point, demand for energy is insatiable. it will always be a choke point for economic growth. You ignore the tax revenues from a booming private sector.Demand is not insatiable and there's no reason to expect the U.S will provide a growing fraction of global oil supply. The U.S. energy industry isn't even price-competitive with U.S. borders (i.e., the U.S. must import fossil fuels), let alone on a global stage. More to the point, if the Democrats block relaxation of environmental laws or local NIMBYs block specific developments, then the U.S. won't monetize those assets.QuoteOriginally posted by: exCBOECompetition is always a risk, but in this case what is the downside? If a new, even cheaper source of energy is available, the economy will do even better. It is a classical error of anti-capitalists to underestimate the benefits from competition. We are not Saudi Arabia, with no income other than from pumping oil. What our economy needs is increasing productivity. A positive second derivative would be nice. It's not a zero-sum game.The downside competition is that Saudi oil or Chinese solar panels negate the value of U.S. energy assets. The supposed \$X hundred trillion in oil, gas, and coal on U.S. lands will provide zero tax revenue if the economies of the world get their energy from non-U.S. sources. No doubt, the economies of the world are growing and will continue to grow. But that does not imply that all economies will grow. Some economies may stagnate under the weight of their debts, stifling regulation, and overweening promises of entitlements to an insufficiently productive populace. What is the probability that the U.S. will be in the growth camp and what is the probability that it will fall in the stagnation camp? S&P sees a growing chance of the latter.QuoteOriginally posted by: exCBOEThere are billions of people in the world who would like to see their children grow up healthy and educated. By "solving" the energy problem for a century or more, the growth we need may be attainable. Nobody knows the future. We may yet blow ourselves up or squander our wealth on welfare or other endless pits of demand. The question is whether we can manage the transition from the current situation to one where the government can spend a smaller share of GDP. Adding ten or twenty trillion barrels of oil worth of energy certainly improves the balance sheet.Agreed. But will the U.S. solve this problem or will others? It doesn't look like the U.S. is likely to dramatically increase budgets for science, R&D, and education in the near future. Worse, the U.S. is far behind on maintenance of critical logistical infrastructure (e..g, the Mississippi River, Houston ship channel, etc.) that would be crucial to cost competitive exports of natural resources. QuoteOriginally posted by: exCBOEThe issue of Social Security and Medicare certainly looms large in all economically advanced nations. Europe and parts of Asia are far worse off. Several years ago, in "America Alone", Mark Steyn painted a gloomy demographic picture. Several years ago, he pointed out that the birthrate in Greece practically guaranteed what we are seeing today. I doubt if anybody knows to what extent generational transfers of income from young to old and assets from dead to alive balance out over time. Fascinating topics to be sure, but not subject to glib or obvious reasoning.This seems like an argument for both the US and EU having less than AAA ratings (and Greece, Portugal, etc. have been rightly downgraded). Estimating the risk of default is less about what a country could do to grow and repay a debt, and more about the worst-case chance of being trapped. When Greece looked like it wouldn't be able to roll it's debt, the ECB stepped in. If the U.S. hits a debt-roll liquidity crisis, who will step in? Part of the S&P's logic on the U.S. is problem of partisanship, not just economic fundamentals. If the Democrats block entitlement cuts and the Republicans block revenue increases, isn't default a sufficiently likely outcome (say P=0.01%) to merit a downgrade?QuoteOriginally posted by: exCBOEThe take away is that the bond market continues to lend America money at very low rates. That is not consistent with a fear of default. If it isn't the newly economical supplies of energy, maybe it's that old fashioned reservoir of good ol' American knowhow. Your nose is accurate. America must choose between economic pain now and hypothetical warmer climates next century. How do you think the voters will react?You are right that U.S. voters probably won't vote for carbon taxes and fossil fuel phase-outs. But the bigger picture is not just in the hands of U.S. voters. Monetizing U.S. energy assets requires worldwide acceptance of U.S. oil, gas, and coal. But if the EU imposes carbon taxes on fossil-fuel derived goods and services or if China, India, and Brazil eschew foreign sources of energy, then the U.S strategy of repaying it's global debt with global oil sales will fail.****exCBOE, I entirely agree with you on many aspects of what you say about the benefits of competition and productivity growth. Where we disagree is growing chance that the U.S. in the current political climate will fail to benefit sufficiently from those factors to sustain and repay a growing public debt.