where are stashing your "safe" money?

[41_swish]

You are all being doomers. If the U.S. really defaults on its debt, the whole system is going tits up.

[habanero]

You are all being doomers. If the U.S. really defaults on its debt, the whole system is going tits up.

Yep. But there are other ideas floating out there, like extending the duration of existing bonds outstandig. I dont personally think its very likely, but with the current adiminstration a lot of weird things can happen the next few years. US governemnt bonds continue to sell off, albeit in a rather controlled fashion. The US public finances are horrible and more importantly there is nothing even remotely looking like a credible plan to bring down the budget deficit. There wasn't one during the previous administration and there most certainly isn't any now. Contrary to Trumpian belief, foreigners ain't gonna be paying the tariffs (whatever remains of those in the end). Tax hikes are very un-american, the idea behind DOGE was dumb as fuck and as expected didn't deliver anything apart from most likely making a ton of things much worse, the US looks willing to openly let go of what has been some of the greatest competitive advantages and with the recent signals out from Trump today about not touching Medicare, Sosical Security etc nothing substantial will happen on the fiscal side.

These times are indeed different.

[ChpBstrd]

You are all being doomers. If the U.S. really defaults on its debt, the whole system is going tits up.

What could be more doomer than saying the whole system will go tits up? There's certainly not any plausible political path to avoid a debt crisis.

[Radagast]

You are all being doomers. If the U.S. really defaults on its debt, the whole system is going tits up.

You seem to be thinking of an extreme scenario that I wasn’t necessarily implying. I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk. There are a wide range of bond ratings for a reason, and many different ways and magnitudes of defaulting. In fact the US defaulted on some bonds for a short period in the 1980s as I recall (maybe the decade is off) and nobody remembers. Then are ways to default in spirit but not letter, and infinite methods of partial default. A Venezuela scenario is certainly possible though.

[habanero]

I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk.

The 3 major rating agencies and the general market commentary seems to disagree. It's a pretty widespread opinion that the only reason US held an AAA rating is the USDs reserve currency status. If you owe money to someone and the debtor doesn't want to / cannot pay you there are options besides not handing back the principal at maturity or declaring they have no intention of doing so, like for example stop or delay paying interest or paying less interest. Or extend the maturity profile of the bonds outstanding and/or adjusting the coupon. This is how debt restructuring generally looks in the corporate world and is also how the greek sovereign debt was restructured about a decade ago.

 

[reeshau]

I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk.

The 3 major rating agencies and the general market commentary seems to disagree. It's a pretty widespread opinion that the only reason US held an AAA rating is the USDs reserve currency status. If you owe money to someone and the debtor doesn't want to / cannot pay you there are options besides not handing back the principal at maturity or declaring they have no intention of doing so, like for example stop or delay paying interest or paying less interest. Or extend the maturity profile of the bonds outstanding and/or adjusting the coupon. This is how debt restructuring generally looks in the corporate world and is also how the greek sovereign debt was restructured about a decade ago.

I think this dissonance speaks to how much the current administration has shaken the post-WWII global order.  But in Microsoft's case, $98B of its $198B in revenue in 2024 came from outside the US.  If the US experienced crippling inflation, then its foreign earnings would balloon by a corresponding amount.  So, presumably, its risk-free rate should be some blend of the countries it does business with, not just its home country.  Which is to say, it has probably been the case for some time that its credit has been better than the basket of countries it serves; everyone just hand-waved the simplifying assumption because otherwise it makes judging it's credit much harder.

[ChpBstrd]

I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk.

I think there are plausible scenarios where the US defaults but Microsoft does not.

Microsoft does not have Congresscritters having a vote every few months on whether to fund itself or default. Internal political brinkmanship is simply less of an issue for Microsoft. Plus, Microsoft is, let's say, "less likely" to impose symbolic sanctions and asset seizures against a major bondholder, and is unable to start a war with China.

Microsoft's net income on 6/30/24 was 36.2% of its total liabilities, and its net income has grown quickly over the years.

The U.S. government, on the other hand, has net revenues of $3.11T and a national debt of $36.877T, so revenue that is only 8.4% of its liabilities. Tax changes in the past, and a forecasted tax bill in the near future, suggest that US government revenue as a percentage of debt is going down over time. 

In terms of management quality.... OK, hopefully you're sold on the idea by now.

[tooqk4u22]

I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk.

I think there are plausible scenarios where the US defaults but Microsoft does not.

Microsoft does not have Congresscritters having a vote every few months on whether to fund itself or default. Internal political brinkmanship is simply less of an issue for Microsoft. Plus, Microsoft is, let's say, "less likely" to impose symbolic sanctions and asset seizures against a major bondholder, and is unable to start a war with China.

Microsoft's net income on 6/30/24 was 36.2% of its total liabilities, and its net income has grown quickly over the years.

The U.S. government, on the other hand, has net revenues of $3.11T and a national debt of $36.877T, so revenue that is only 8.4% of its liabilities. Tax changes in the past, and a forecasted tax bill in the near future, suggest that US government revenue as a percentage of debt is going down over time. 

In terms of management quality.... OK, hopefully you're sold on the idea by now.

Certainly plausible that US can default before MSFT because of debt ceilings/budget stalemates due to your congresscritters, but those "Normally" are short lived and temporary in nature while those dopes flash their feathers.   

But if the US defaults in the truest sense that it can't ever pay its bills, we are basically going back to the stone ages of finance...its over at that point.

But before you get there, the US has the option of changing MSFT's tax rate from 20% or whatever to 75% and likewise across the board, won't be great for the economy but will help pay the bills a little longer and increase MSFT's risk of default.

[ChpBstrd]

I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk.

I think there are plausible scenarios where the US defaults but Microsoft does not.

Microsoft does not have Congresscritters having a vote every few months on whether to fund itself or default. Internal political brinkmanship is simply less of an issue for Microsoft. Plus, Microsoft is, let's say, "less likely" to impose symbolic sanctions and asset seizures against a major bondholder, and is unable to start a war with China.

Microsoft's net income on 6/30/24 was 36.2% of its total liabilities, and its net income has grown quickly over the years.

The U.S. government, on the other hand, has net revenues of $3.11T and a national debt of $36.877T, so revenue that is only 8.4% of its liabilities. Tax changes in the past, and a forecasted tax bill in the near future, suggest that US government revenue as a percentage of debt is going down over time. 

In terms of management quality.... OK, hopefully you're sold on the idea by now.

Certainly plausible that US can default before MSFT because of debt ceilings/budget stalemates due to your congresscritters, but those "Normally" are short lived and temporary in nature while those dopes flash their feathers.   

But if the US defaults in the truest sense that it can't ever pay its bills, we are basically going back to the stone ages of finance...its over at that point.

But before you get there, the US has the option of changing MSFT's tax rate from 20% or whatever to 75% and likewise across the board, won't be great for the economy but will help pay the bills a little longer and increase MSFT's risk of default.

I think a U.S. default would look something like strong-arming holders of 2 year treasuries to extend the duration to 5 years, and 1 year treasury holders to accept a 2 year term, or unilaterally making that sort of declaration. Other than the effects on the currency's value and interest rates, it doesn't directly affect Microsoft or force them to default.

It's more likely the U.S. allows its currency to fall to shrink the real value of its debt. I.e. it would accelerate the printing of money to pay interest on its debt. This is not a default, but rather the sort of devaluation seen in places like Turkyie or Russia. Companies in countries with rapidly falling currencies just adapt, trying to keep up with price increases and cost-of-debt increases so that a balance is kept with rapidly rising wage costs. Long-term contracts for services like are common in the U.S. will be replaced with month-to-month billing and leases.

So even in that case, Microsoft could adapt to high inflation, although not without pain. They wouldn't necessarily default though, unless the inflation happened so fast the bond market utterly seized up when they needed to roll debt, and they were unable to get out of long-term contracted services agreements, and their massive cash flows couldn't fill that gap.

[tooqk4u22]

In any event I hope we never find out because it won't be good!

[Radagast]

I was explaining how Microsoft cannot have a higher credit rating than the US government, and in fact their credit rating is equal to the US government credit risk plus Microsoft credit risk.

The 3 major rating agencies and the general market commentary seems to disagree. It's a pretty widespread opinion that the only reason US held an AAA rating is the USDs reserve currency status. If you owe money to someone and the debtor doesn't want to / cannot pay you there are options besides not handing back the principal at maturity or declaring they have no intention of doing so, like for example stop or delay paying interest or paying less interest. Or extend the maturity profile of the bonds outstanding and/or adjusting the coupon. This is how debt restructuring generally looks in the corporate world and is also how the greek sovereign debt was restructured about a decade ago.

30 year Microsoft bonds yield 0.5% more than 30-year US bonds, so it seems the markets agree with me. Elsewhere I imagine you could find ChpBstrd arguing that this spread is very low and you should possibly avoid Microsoft at this slim difference.

Sorry, any meaningful default by the US would take Microsoft bonds down with it, while the reverse is not true. The "risk free rate" isn't named that because it's free of risk, it's named that because all other options (in USD) are riskier.

The US controls it's own currency and would no doubt just mint some extra money to pay off the debts which would look like inflation. Unless we wanted to tax billionaires, but I doubt we want to do that. Inflation is both tax on holders of nominal assets and a form of default.

Norway and Berkshire Hathaway should have their own "god-level" credit rating scales.

[Radagast]

So even in that case, Microsoft could adapt to high inflation, although not without pain. They wouldn't necessarily default though, unless the inflation happened so fast the bond market utterly seized up when they needed to roll debt, and they were unable to get out of long-term contracted services agreements, and their massive cash flows couldn't fill that gap.

I'm not arguing that Microsoft would be unable to pay because of rising inflation. Quite the opposite. In fact I'm sure that inflation would allow them to pay their bonds quite easily. So easily that it would make the bonds' value quite small to bond holders.