Valuetainment - May 23, 2023


Shocking Debt Ceiling History and The Danger of Defaulting


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Length

16 minutes

Words per minute

221.868

Word count

3,758

Sentence count

308

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Hate speech

1

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Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

Will the U.S. Government default on their debt payments? Is this a real possibility or is it just a leverage game? In this episode, we discuss how the government gets their money and how they get it from the public.

Transcript

Transcript generated with Whisper (turbo).
Hate speech classifications generated with facebook/roberta-hate-speech-dynabench-r4-target .
00:00:00.040 Will the U.S. government for the first time ever default on our debt payments that we have?
00:00:04.580 And if we do, what does this really look like?
00:00:06.240 In the last hundred years, six countries have defaulted on their debt.
00:00:08.980 Will we really go through it as America, the greatest nation in the world?
00:00:11.940 How do we get here in the first place?
00:00:13.320 Why are Republicans and Democrats fighting?
00:00:15.620 Is this really a leverage game that the Republican controls the House
00:00:18.740 and these guys want to raise the debt limit?
00:00:20.320 And they're saying, well, before you lower your expenditure, we're not going to raise it.
00:00:23.580 They're like, no, we want all of it and then some.
00:00:25.780 So then President Trump in the town hall meeting says, let them default
00:00:29.120 because they're bullying you.
00:00:30.300 So we're going to see if McCarthy is going to hold ground and say, nope, we're not doing this.
00:00:34.360 Janet Yellen said, we could be running out of money as early as June.
00:00:37.060 And that scared the crap out of a lot of people in the market.
00:00:39.320 So there's a lot of things going on.
00:00:40.640 We're going to dive into this to really see is U.S. going to default or not.
00:00:43.700 So during chaotic, uncertain times, sometimes, you know, people don't have somebody to talk to.
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00:02:06.740 Let's get right into it.
00:02:07.620 First thing we need to all know about is the fact that the government has access to,
00:02:11.460 you know, tools that we don't have, you and I don't have.
00:02:13.620 They can manipulate money in ways you and I cannot do.
00:02:16.200 But before we get into the levels of manipulation they can do,
00:02:18.920 let's kind of figure out how the government gets money in the first place.
00:02:21.280 There's two ways they get money.
00:02:22.440 One is either through taxes, the other one is through bonds.
00:02:24.820 So taxes is taxes, corporate, individual, any other way that they get their money.
00:02:28.960 The other one is by you and I buying bonds from them.
00:02:31.660 Treasury bills, T-bills, T-bonds, short-term, mid-term, long-term.
00:02:35.540 That is one way that they get money from the public.
00:02:37.920 We'll talk a little more about the treasuries later on,
00:02:39.880 but let's first look at the history of debt ceiling in America.
00:02:42.700 So the power to issue money is specifically granted to the U.S. Congress by the Constitution.
00:02:46.580 The debt ceiling was established by the Second Liberty Bond Act of 1917.
00:02:52.340 It was not created as a restriction on the federal government's ability to borrow it.
00:02:55.960 It was created to simplify the process and provide the U.S. Treasury
00:02:59.640 with more flexibility in managing the country's debt.
00:03:03.100 So pre-1917, the government had to get each line of debt that they wanted to get approved.
00:03:08.180 It was one by one by one.
00:03:09.420 And like, listen, this is taking too much time.
00:03:11.100 Can we kind of speed up the process?
00:03:12.420 Instead of having to do this, and then boom, World War I happens. 0.62
00:03:14.800 That was a perfect excuse for them to say,
00:03:16.820 why don't we do it through a debt ceiling that we don't have to get approval every time?
00:03:20.880 Obviously, the government likes that because they need less approvals.
00:03:23.560 So here's what's crazy about it.
00:03:24.700 It went as a way to improve and speed up the process and streamline it to now being politicized,
00:03:30.460 and they're using it as a weapon and a point of leverage against each other,
00:03:34.060 which is causing the mayhem that we have today.
00:03:35.880 It's causing Congress to be divided.
00:03:37.360 So now Congress has raised, extended, or revised the debt ceiling nearly 100 times
00:03:41.400 since it was established, even in 1939 and 1941, Congress established the first limits
00:03:46.480 that allowed the U.S. Treasury the ability to issue new debt
00:03:49.420 as long as the total amount outstanding remained under a specified ceiling.
00:03:54.580 Now, if I was to ask you, since 1960, we've raised, revised, extended the debt limit nearly 78 times, right?
00:04:00.620 How many times do you think it was under a Republican president?
00:04:02.980 How many times do you think it was under a Democratic president?
00:04:05.340 Ready?
00:04:05.840 Here's the numbers.
00:04:06.380 49 times it was under a Republican president, 29 times it was under a Democratic president.
00:04:12.080 Why?
00:04:12.520 Because most of the time when the president is president, the House is owned by the opposite side.
00:04:16.680 So if a Republican president, Dems control the House.
00:04:19.340 If they're a Democratic president, Republicans own the House.
00:04:22.420 You see how this thing kind of works out.
00:04:24.000 So meaning, even though it's a Republican president, typically the left owns the House.
00:04:27.460 They're the ones that are raising the debt limit.
00:04:28.880 But listen, both sides do it regularly because they want to spend more money.
00:04:32.360 You know, the chance of getting these guys to want to say, hey, you got to spend less, good luck getting these guys to want to spend less on either side of the aisle.
00:04:39.720 So now, last hundred years, let's look at how many governments have actually defaulted.
00:04:43.260 Okay, first one, Germany, 1932, 1948, caused by the inability to repay the reparations imposed after World War I.
00:04:50.300 The default and subsequent economic instability contributed to the rise of the Nazi party.
00:04:55.000 That's Germany, number one.
00:04:56.020 Number two, Argentina, 1951, 1982, 2001, 2014, 2020.
00:05:00.980 It's fair to say Argentina is the goat, the dynasty of defaulting on their government's debt.
00:05:08.260 No one's done a better job defaulting on the debt than Argentina.
00:05:11.020 This is not a good area to be the best one in.
00:05:13.320 Due to unsustainable fiscal policies, economic crisis, and volatile commodity prices, the defaults have resulted in severe economic recessions, high inflation, and political stability.
00:05:22.640 Number three, Russia, 1998, caused by a collapse in confidence in the Russian government's ability to repay its debt, leading to a default.
00:05:31.160 This led to a sharp devaluation of the ruble, a severe economic contraction, and political upheaval.
00:05:37.620 Four, Greece, 2012, largest sovereign default in history.
00:05:42.380 Causes included structural weaknesses in the Greek economy, misreported government financial data, and the global financial crisis of 2008.
00:05:49.640 This crisis resulted in severe austerity, measures high unemployment, a significant contraction in the Greek economy, and a European sovereign debt crisis.
00:05:59.880 Number five, Venezuela, 2017.
00:06:02.160 The Venezuelan debt crisis was a result of a drop in oil prices, economic mismanagement, and political instability.
00:06:07.860 The country has since experienced hyperinflation, severe shortages of basic goods, and a humanitarian crisis.
00:06:13.640 Number six, Lebanon, 2020, caused by a banking crisis, political instability, and civil unrest resulted in severe economic contraction, hyperinflation, and a humanitarian crisis.
00:06:26.240 So if we look at all the six and see what things they have in common, this is what you would find.
00:06:29.760 Economic mismanagement, political instability, external shocks, and unsustainable debt levels.
00:06:34.880 So the question becomes, since 1776, we've never once defaulted.
00:06:39.160 Will this be the first time we do?
00:06:41.200 No one knows.
00:06:42.000 We'll find that in the next four to eight weeks.
00:06:44.180 So the main question becomes, what's so different about America versus Germany, Argentina, Russia, Greece, Venezuela, Lebanon?
00:06:49.740 How different are we?
00:06:51.240 There's a lot of people that are saying, that's not going to happen in our lifetime, but why not?
00:06:54.740 What if it does?
00:06:55.460 Let's take a look at this to see how different U.S. is than these six countries we just talked about.
00:06:59.680 First, U.S. treasuries are considered the safest and most liquid assets in the world.
00:07:04.600 It's seen as pristine collateral or tier one asset, even though some people recently,
00:07:09.560 Basel III is now looking as gold as being a pristine collateral, but still U.S. treasuries all the way at the top.
00:07:15.080 They play a crucial role as a collateral in global financial markets,
00:07:17.980 as they are often used to secure loans, margin accounts, and other financial transactions.
00:07:22.580 So let's look at what causes U.S. treasuries to be pristine collateral or safe.
00:07:27.480 Number one, low credit risk.
00:07:28.960 The U.S. treasuries are backed by the full faith and credit of the U.S. government.
00:07:32.540 Number two, high liquidity.
00:07:33.960 U.S. treasuries are highly liquid due to their deep and well-established secondary market.
00:07:39.000 This allows market participants to buy and sell those with ease, making them an ideal form of collateral.
00:07:44.040 Three, price stability.
00:07:45.280 U.S. treasuries have relatively stable prices compared to other assets like stocks and commodities.
00:07:50.340 The price stability is advantageous for financial institutions as it reduces the risk of collateral value fluctuations.
00:07:57.160 Why does fluctuations matter?
00:07:58.320 Because fluctuations in collateral value leads to margin calls.
00:08:01.500 You don't want to have margin calls.
00:08:02.800 Four, global acceptance.
00:08:04.400 The U.S. treasuries are widely accepted and used as collateral worldwide, providing ease of use for international transactions.
00:08:10.760 And last but not least, five, repo and reverse repo market.
00:08:14.020 The repurchase agreement market and reverse repo market is a critical part of the short-term funding and money markets.
00:08:19.740 They facilitate the flow of cash and securities between financial institutions, central banks, and other market participants.
00:08:25.400 So, again, this is what leads to the whole quantitative easing or quantitative tightening market.
00:08:30.940 Easing, if they want to, through the Fed.
00:08:32.840 Let's put more money into the market by buying bonds from banks, right?
00:08:35.620 So, that money goes in.
00:08:36.540 The banks get more money, hoping that the banks start lending money to people.
00:08:40.080 And, boom, the economy goes up, right?
00:08:41.500 Small business owners, all this stuff.
00:08:42.800 The quantitative tightening, which is like, listen, we got a little bit too much money under it.
00:08:45.700 Let's take money off the table to tighten the market, to tighten loans, and to reduce inflation.
00:08:51.320 Those are two different ways they can do it.
00:08:52.660 But, regardless, this causes U.S. treasuries to be a very safe investment.
00:08:57.680 Why?
00:08:58.280 Many don't think default will actually happen.
00:09:00.580 So, now let's actually go there and say, let's just say we do default.
00:09:03.200 What happens to America?
00:09:04.360 Here's eight things that happen.
00:09:05.260 Number one, global financial crisis.
00:09:07.180 A default would cause severe disruptions in the global financial markets as U.S. treasuries are used as the benchmark for other debt securities and as collateral in numerous transactions.
00:09:16.900 This could lead to a liquidity crisis, credit crunch, and increased market volatility.
00:09:20.300 Number two, economic chaos.
00:09:21.680 Financial markets would be destabilized and the flow of credit would be constrained.
00:09:25.000 Number three, currency devaluation.
00:09:26.860 The U.S. dollar might lose its status as a world reserve currency, leading to a depreciation of the currency and increased inflationary pressures.
00:09:34.320 Number four, geopolitical implications.
00:09:36.480 A U.S. default could diminish the country's global influence and potentially alter the balance of power in the international financial system.
00:09:42.720 Number five, loss of confidence.
00:09:44.300 A U.S. default would erode global confidence in the country's ability to honor its obligations, potentially leading to a decline in demand for U.S. treasuries and a rise in borrowing costs for the U.S. government.
00:09:55.240 Six, government shutdown.
00:09:56.540 Without the ability to borrow, the government would have to cut spending drastically.
00:10:00.080 Secondly, this could lead to government shutdowns, layoffs of federal employees and cuts on services, affecting everything from Social Security payments to military spending.
00:10:07.660 Seven, legal and constitutional prices.
00:10:09.740 The 14th amendment you keep hearing about to the Constitution states that the validity of the public debt shall not be questioned, so a debt default could potentially trigger a constitutional crisis.
00:10:20.600 And last but not least, number eight, impact on credit rating.
00:10:23.160 The U.S. could lose its AAA rating status, leading to even higher borrowing costs in the future and further damage in the country's fiscal situation.
00:10:30.920 So in other words, this is catastrophic if that were to happen.
00:10:33.700 So the left and the right needs to know that.
00:10:35.320 That's why they're both banking on one's going to cave and they're going to finally say, here's the limit.
00:10:40.140 Do what you got to do.
00:10:40.960 Just don't spend this much.
00:10:41.880 They're going to figure out how to negotiate.
00:10:43.080 Hopefully they will.
00:10:44.040 Neither one of them.
00:10:44.800 One's going to say, well, if the defaults, it's going to be on you, Congress.
00:10:47.660 McCarthy, you're going to have to live with us on your legacy.
00:10:50.120 And Congress is going to say, hey, Biden, forget about, you know, me as a Speaker of the House.
00:10:55.200 You're the president.
00:10:56.180 Everyone's going to say the first default happened under a Biden administration.
00:11:00.260 Nobody 50 years from now is going to know who the Congress was.
00:11:02.720 They're going to know who the president was.
00:11:03.880 Remember how earlier at the beginning of the video I said the government has the ability to manipulate money and kind of use collaterals multiple times that you and I cannot do to kind of make it look like they're okay?
00:11:12.720 There's this concept called the Treasury rehypothecation.
00:11:15.920 Just kind of stay with me here as we go through this together.
00:11:18.560 So this is the practice of reusing pledged U.S. securities as collateral for additional loans or financial transactions.
00:11:25.820 So let me explain to you what this really means.
00:11:27.080 So let's just say I'm going to go out there and buy a house.
00:11:29.680 So I go to the bank.
00:11:30.480 I get a half a million dollar loan.
00:11:32.120 I buy this house.
00:11:33.280 I own the house, but the bank really owns the house.
00:11:35.480 So imagine if the bank can use this house as a collateral.
00:11:39.380 It's my collateral.
00:11:40.380 I'm using that.
00:11:40.880 I'm going to pay it back.
00:11:41.860 If I don't, the bank can come and take it away from me.
00:11:44.680 But what if the bank now gives that loan out to somebody and they say we can use this guy's house as a collateral and they do that two, three, four, five, six, kind of sounds like Pat, what are you talking about?
00:11:55.520 That's exactly what they can do.
00:11:57.160 They can use the same exact asset as collateral multiple times and no one knows it or sees it.
00:12:04.660 This is kind of what happens behind closed doors.
00:12:06.260 So if this still doesn't make sense to you, to go to a time in history where we can kind of see what caused the collapse in the market, it's 2008.
00:12:12.560 You ever seen a movie, Big Short?
00:12:13.840 Remember the whole mortgage-backed securities?
00:12:15.740 What was the problem with that?
00:12:17.420 Exactly what we just talked about, the rehypification concept.
00:12:19.960 Let me explain it to you.
00:12:20.680 So in 2008, rehypification came under increased scrutiny due to the risk it can pose to the financial markets.
00:12:27.000 As such, there have been regulatory efforts to limit the extent of rehypification, particularly in derivatives markets.
00:12:34.740 Mortgage-backed securities were used as collateral in many financial transactions leading up to 2008 financial market.
00:12:39.700 And this was a misuse.
00:12:40.600 It was constantly being used left and right.
00:12:42.600 So look, if you do it right and nobody pays attention to it and everything is good, you can make billions of dollars.
00:12:47.120 It's like having margins, having all your money in your short trade account or your e-trade account, and everything's margin, but the market keeps going up.
00:12:54.500 And I'm like, man, look how much money I'm making.
00:12:55.980 I would have normally only made 50%.
00:12:57.360 I just made 150% because I'm using somebody else's money.
00:12:59.960 And then, boom, market crashes.
00:13:01.620 Now you're like, I thought I was going to lose a million dollars, but no, I owe two and a half million dollars.
00:13:06.260 Exactly.
00:13:06.960 So it's good when the market's great.
00:13:08.980 It's terrible when the market's bad.
00:13:11.320 All right, so this next number is going to scare you a little bit.
00:13:13.420 So the U.S.'s GDP is roughly $20 trillion, right?
00:13:16.540 They only have $200 billion in their general account.
00:13:21.100 That's kind of like you may say, that's a lot of money.
00:13:22.980 Oh, my God, the government has $200 billion.
00:13:24.820 That's so much money.
00:13:25.920 It's not.
00:13:26.580 That's like you making $200,000 a year, okay, but you only have $200 in a bank.
00:13:31.900 Do you realize how scary that is?
00:13:33.840 What do you have to do if you only have $200 in a bank and you're making $200,000 a year?
00:13:37.060 Super problematic.
00:13:38.160 This is why they're so scared about what's going to happen.
00:13:40.220 But here's the concern.
00:13:41.020 The reason why Republicans on House are saying, listen, lower your expenditure is because this
00:13:46.820 is what's happened to the interest on our debt today.
00:13:49.800 Look at this chart on what's happening with our interest payment.
00:13:53.040 Do you see the sudden spike that we went from $600 billion a year to suddenly a trillion dollars,
00:14:00.940 almost a trillion dollars of interest payment?
00:14:04.860 The U.S. cannot afford that the way we're going right now.
00:14:07.720 This is why they're saying we got to raise the debt limit.
00:14:09.880 The other side is saying, why are you spending like a crazy man?
00:14:12.560 Let's kind of tone it down a little bit.
00:14:14.400 Then we'll give it increased debt limit.
00:14:16.160 That's the real battle that's going on.
00:14:17.820 So with the election cycle being here, you know, one of the things that's being talked
00:14:20.720 about is Social Security, right?
00:14:21.900 So both sides wants the 65, the vote, the older Social Security, maybe boomer market.
00:14:27.160 They want that vote.
00:14:28.020 But, you know, Social Security was a net positive.
00:14:30.860 We were doing okay with the general account.
00:14:32.460 If you look at this chart here right now, what it looked like in 2008, 2009, we're doing okay.
00:14:37.180 And then all of a sudden, look at 22 and look at 23.
00:14:40.140 We're not starting to lose money.
00:14:41.420 And so they're saying we're going to have payments being missed even for Social Security.
00:14:45.820 So the left is saying, are you promising to not do anything to Social Security?
00:14:49.920 The right is saying, listen, man, we got to kind of figure something out here because
00:14:53.000 we got to do something.
00:14:54.060 We can't afford to go the way we're going right now.
00:14:56.620 So the left wants to blame the right.
00:14:58.380 The right is saying, let's be responsible.
00:15:00.000 This is a whole mayhem going on here.
00:15:01.520 Eventually, do not be surprised if they increase the age for Social Security benefits, 67, 69,
00:15:06.560 72.
00:15:07.840 Mathematically, they're going to have to eventually go there or stop the benefits.
00:15:11.080 They're obviously not going to stop the benefits.
00:15:12.640 They're probably going to increase retirement, but it's going to be very painful before they
00:15:15.920 get there.
00:15:16.600 So, okay.
00:15:16.960 So what's going to happen?
00:15:18.000 There's a couple of things that's going to happen.
00:15:19.260 We've never defaulted.
00:15:20.180 We've never ran out of money.
00:15:21.220 So they're going to have to figure it out because neither one of them want this on their
00:15:24.000 resume.
00:15:24.340 But there's a couple of things that people are speculating could happen.
00:15:26.600 One is continuing resolution can be used until an agreement is made if the Treasury General
00:15:31.900 account does run out of money.
00:15:33.720 And a continuing resolution is legislation used by the U.S. Congress to fund government
00:15:37.360 agencies and programs in the absence of former appropriation law.
00:15:41.200 Others are arguing that Biden should invoke the 14th Amendment to raise a debt ceiling himself.
00:15:45.680 And that's kind of problematic because when you look at 14th Amendment Section 4, the validity
00:15:50.640 of the public debt of the United States authorized by law, including debts incurred for payments
00:15:55.140 of pensions and bounties for services and suppressing insurrection or rebellion shall
00:15:59.200 not be questioned.
00:16:00.020 So this is where lawyers get involved and say, well, that's not technically what it says.
00:16:04.000 You can't really do this.
00:16:05.220 You can do this.
00:16:06.000 You should do this.
00:16:06.740 Nobody knows what's going to happen.
00:16:07.960 But here's probably what's going to happen.
00:16:09.180 From 1776 till today, they've figured it out.
00:16:12.060 They're probably going to figure it out because these guys in politics, one thing they fear
00:16:15.040 is not being reelected.
00:16:16.620 And if they default, it's going to be a lot of people not getting reelected.
00:16:19.480 And these guys don't know how to make money any other way but politics.
00:16:21.820 Most of them have no clue about how to make money in the free market.
00:16:24.280 If they did, they probably wouldn't be involved in politics.
00:16:26.920 Not taking a shot at them, but you understand what I'm saying to you.
00:16:29.140 So they're probably going to end up figuring it out.
00:16:30.720 How painful will it be?
00:16:31.680 Both sides have to give something up.
00:16:33.160 Don't know who's going to give up more.
00:16:34.540 This is when negotiation matters.
00:16:35.880 Will it be McCarthy?
00:16:36.900 Will it be the other side?
00:16:38.040 We don't know, but we're definitely going to find that in the next four, six, eight weeks.
00:16:41.500 If you got value from the video, give it a thumbs up.
00:16:43.320 Subscribe to the channel.
00:16:44.180 I got another video I want you to watch if you like this one here.
00:16:46.660 Will the dollar collapse?
00:16:48.200 If you've not seen that, click here to watch it.
00:16:50.760 Take care, everybody.
00:16:51.500 Bye-bye, bye-bye.
00:16:54.280 Bye-bye.
00:16:55.280 Bye-bye.