"Down To The Wire": Oaktree's Howard Marks Takes On The US Debt Ceiling

Tyler Durden's picture

While it is always good to hear grizzled veterans explain what we all know, namely that the US debt situation is untenable and America will eventually collapse under the weight of its obligations, we wonder: where were these same people while the debt was being accumulated and everyone was shiny and happy (there is a reason why the correlation between US GDP and debt is about as close to 1 as they come) and without a care in the world about America's long term solvency?  Yes: we do enjoy the writings of Oaktree's Howard Marks who has chosen to dissect the US debt ceiling and more specifically America's untenable deficit spending as the topic of his latest letter, although we can't help but wonder: why now? Why not a year ago? Or, better yet, a decade ago? Furthermore, as last night's explosive announcements by the president and Boehner demonstrated the debt hike story has so many moving parts that staying on top of it is virtually meaningless. Indeed, it would have been much more useful for America if financial luminaries as Marks had actually spoken up while the US Treasury was accumulating trillions in debt, instead of all the Monday Morning quarterbacking we seem to be getting each and every day from all the "fiscally prudent" ones who rode the train of America's "great moderation" runaway debt to stratospheric wealth and were all very silent then...

So crticism aside, here is one of the better analyses of where we are vis-a-vis America's debt situation.

From Marks' essay:

For the last several years, as I’ve visited with clients around the world, I’ve described the typical American as follows (exaggerating for effect, of course): He has $1,000 in the bank, owes $10,000 on his credit card, makes $20,000 a year after tax, and spends $22,000. And what do lenders do about this? They mail him additional credit cards.

Most people laugh – perhaps uncomfortably – when they hear this. But no one says it’s inaccurate or benign. The bottom line is that consumer credit has been extended without any thought for how the full balance might ever be paid off. As long as the borrower is able to make monthly payments covering the interest and a tiny bit of principal, the situation is considered acceptable. But that’s not my version of fiscal health.

So now let’s jump from the top of the above list of developments to the bottom. In much the same way, credit has been available to governments deemed creditworthy without limit and without concern for the fact that:

  • Countries were constantly spending more than they were taking in.
  • Their deficits were growing non-stop relative to GDP.
  • Their national debts likewise were expanding relative to GDP.
  • In other words, repayment of principal was absolutely unimaginable.

One of the most striking aspects of debt in the modern era is that little if any attention is paid to repayment of principal. No one pays off their debt. They merely roll it over . . . and add to it. Thus credit ratings are highly deficient (shocker!) in a way that few people talk about. What ratings describe isn’t the borrower’s ability to repay principal, but its ability to make interest payments and refinance principal. But the assessment of their ability to roll their debt – likewise – isn’t based on an ability to repay, but rather to refinance again. So ultimately the security of capital providers stems not from the borrower, but from the continued willingness of other capital providers to roll debts in the future. (It was their occasional refusal in 2007-08 that caused the worst moments of the financial crisis.)

With no one asking how debt could be repaid, nations were allowed for decades to increase their deficits and debt non-stop relative to their GDP. And then, in the first quarter of 2010, the little boy stepped out from the crowd, took note of the emperor’s non-existent new clothes, and said “Hey, wait a minute: Greece will never be able to repay even the debt it has, forgetting that it takes on more all the time. Its economy is non-competitive and stagnant, and tax compliance is non-existent. They shouldn’t be able to borrow.”

That’s all it took. Greece was denied further credit. And then people took a look around peripheral Europe and saw more of the same. Today, although the situation is nowhere as dire, they’re also looking at the U.S. and some of its states.


The problem isn’t the ceiling, it’s our behavior. The debt ceiling merely imposes a discipline that our national leaders should provide but generally haven’t. On this note, in his press conference on July 15, when asked about conservatives’ insistence on a balanced-budget amendment to the Constitution, President Obama replied, “We don’t need a constitutional amendment to do that [balance the budget]; what we need to do is to do our jobs.” But clearly we do need some enforced discipline, because the years in which we haven’t run a deficit have been by far the exception of late, not the rule.

It seems apparent that in recent decades, politics has become more partisan, and solving the nation’s problems has taken a back seat to adhering to ideology and getting re-elected. And what gets people elected? Promises of more: more benefits without increased taxation, and more take-home pay without reduced largesse. Only recently have large numbers of politicians begun to face the music, admitting that the government has to either do less or charge people more or both.

His conclusion:

The world has awakened to the undesirability of ever-growing government debt. Repairing the situation will require difficult decisions and great sacrifices, especially on the part of lawmakers required to vote for unpopular solutions. This would be a great time to start taking positive steps.

Much more in the Full letter below

Howard Marks Debt Ceiling

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
rajat_bhatia's picture

i bought gold futures today in the indian metal exchange MCX India. At almot the same price as yesterday 1601$, wat should i do on monday?

Doña K's picture

Best revenge for the ones who can afford to buy the stuff.

Doña K's picture

Beware of a debt ceiling agreement next week during PM option expiration, and an attempt to smackdown the price.

Buy more at the end of next week.

Salinger's picture

completely agree there will be an agreement announced - the question is when will it be leaked

oogs66's picture

I hope not until late Monday morning after i've covered my shorts

GetZeeGold's picture


Fed Audit by the GAO just out.........tried to bury it over the weekend.

An audit of the Fed reveals why the establishment resisted an audit for so long – The U.S secretly provided an eye-popping $16 Trillion in secret loans to bailout U.S. and foreign bankers.

Here is the direct link to Senator Bernie Sander's press release.


Here is the link to the 266 page pdf GAO report.


I added this after I saw the junk....this is not a hoax or a joke. Go to the Senate website.

Here's another site.


Use of Weapons's picture

I've read parts of the report - question:

I never worked out if anyone had tracked the offset liabilities - are they costed into the $16 tril? By this, I mean all the Chinese bailouts - e.g. 10% in JP Morgue that matured in Dec/Jan - given JP & co were accepting both Fed $, and "private equity" $, and China was buying debt at that point, I'm a bit confused. There's a lot of money flowing around that I couldn't tell if it was being fresh injected, or recycled. Add to this China has bought $3 tril in treasuries, which I've not seen accurately tracked back in (i.e. They hold X. They liquidate X-n for cash, they then invest X-n into US stocks...into companies who have been bailed out already - so are they getting a double bill, or a double bailout?)

Did any cash go to Chinese banks [indirect]? (Even Libya was getting the pie, even while GS was cleaning out the fund, so... ??) If not, I think they're not mentioning something.


Sorry, I've had my head in Aryan Crusader Book of the Dead [Dan Brown has a lot to answer for] which required some heavy duty duty free to clear away, so the above will sound garbled. Please tear apart and enlighten me.


RockyRacoon's picture

I hope not until late Monday morning after i've SHIT my shorts

Sorry, that needed fixin'.

traybien's picture

already did leaked like six times, so your broker will force cover it for ya, wink..

Calculated_Risk's picture

1. Because the possible announcement of a debt ceiling deal. The markets will rally that we're going into more debt with money we don't have, and pm's will tank because the paper hft algo's will dump paper metals, thus head faking, or should I say shaking out the weak hands in the pm trading facad.

2. It's options expiration. The cartel uses any means necessary to beat down the price so contract holders won't take delivery. Thus, keeping the game moving...


edit: end of the week cause that's when the options expire.. third thursday or friday of the month I believe..


blindman's picture

7/26/2011 is a tuesday.
this tuesday. no?

blindman's picture

and then there is this.
"We believe this information is correct, but cannot be held responsible for its accuracy. Dates subject to change, please verify with each exchange."
. 26th, 27th, 29th ?
i would like to know.
i was looking here.

Calculated_Risk's picture

I looked around and keep seeing 27th...

But I believe you are correct cme group has 26th

"Last Trade Day
Aug 11: HX, OG"

OG = gold options

HX = copper options


Poster probably meant buy toward end of the week to let the momentum settle if there is a drop.(?)


29th on the other calendar is for equity options expiration (could be wrong on that)..


blindman's picture

right or wrong i am looking for a brief window of opportunity centered on something like this ..... Silver Huge Manipulation Caught in the act July 20, 2011 http://lonerangersilver.wordpress.com/2011/07/20/silver-huge-manipulatio... . based on expiry schedule. throw in europe/euro trouble trajectory and debt limit / qe3 trajectory. the date becomes potentially significant. and won't repeat for some time ?

HungrySeagull's picture

I agree. The Market Spread where I am between Bid and Ask is frozen at the moment very close to spot. This is not the time to do anything but buy, if you can do it clean cash without leverage. Take delivery.

Then wait a few days. We are probably going to write a new page going into next week.

BlackSea's picture

Don't try eating it, that's for sure.

P.S. Are you a retard or just a garden variety troll?

rajat_bhatia's picture

Anything wrong with my question?

snowball777's picture

Nope. Answer: give your money to a worthy charity instead of banksters. You'll still lose the same amount, but you'll sleep better. Now STFU.

Diogenes's picture

It is inappropriate to ask for trading advice on this board. The concensus is, if you have to ask, you should not be trading. You should already know what you expect the market to do, and why.

The second point is, this board is modelled on a movie called Fight Club. Members of the club feel they have to act mean and make very frank remarks. Some of them are funny, some of them are true, it is all part of the Zero Hedge experience.

One other thing, and that is sarcasm. You would think with all the frankness you would know what everyone thinks. But some prefer to say the opposite, they consider this funny.

Stick around, it can be fun. No sarcasm intended.

RockyRacoon's picture

You just talked about fight club.   You're up next punk.

traderjoe's picture

Yes. You splashed on every other story today that your gold shorts were going to be mega-profitable. Then this.

Most people here don't trade gold. They own it in physical form and therefore don't care about daily fluctuations.

Gully Foyle's picture

Since y'all missed it


FAA hits partial shutdown. Nobody notices.

We previously posed the question, what happens if Congress can’t manage to agree on another extension of the FAA authorization before the current one expires? Well, when the clock struck midnight yesterday, we found out.

Since politicians were not able to come to an agreement over extending the operating authority of the FAA as of midnight tonight, about 4,000 people will be out of work and federal airline ticket tax will no longer be collected. The shutdown will not affect airline safety, but it will stop airlines from collecting about $200million per week in ticket taxes that would help to to fund FAA programs. In the short term, passengers might celebrate since they will be able to save money by not paying taxes, but this means that projects will be delayed and costs might end up being higher in the long run.

Folks, this is a disaster. Sure, the planes are still flying. And, yes, the flight controllers and safety personnel are still on the job so it should be safe. But a lot of government workers were furloughed. And they won’t be able to collect taxes! And tickets may be cheaper this week! And… and…

You know, I’m not actually making a very good argument against shutting down the FAA, am I?

I’m kidding, of course. There will be some long term repercussions from this, with particularly fierce impact on smaller, rural airports. Those funds are required for repairs, construction and some scheduled maintenance items. It may seem like a short term, happy tax holiday for travelers, but the bill is going to come due sooner or later. (And we’re talking about the government here, so you already know who gets to pay that bill, right?) And since the Senate seems to have left town, it’s not going to get resolved overnight.

Just another example of congressional action and efficiency at work!


As evidence of American infrastructure vulnerabilities, the report specifically cites the attempted insider sabotage this April at a water treatment plant in Arizona.

Officials said then a disgruntled night shift worker took over the control room and tried to create a giant methane gas explosion.

"I am taking the plant hostage," the worker said in a recorded 911 call.

There was no tie to al Qaeda and his plot failed, but the incident was a reminder of how easily one insider could create potentially deadly mayhem.

yabyum's picture

Make the greedy fuck bastards in DC ride the Greyhound. Problem will be solved in hours.

Pool Shark's picture


Did the disgruntled worker look like Jack Lemmon?


jekyll island's picture

US Air is already raising their rates, they are going to try and profit from the lapse in federal taxes.  Expect the other airlines to follow suit, $60 in taxes on a $300 round trip ticket is too much for them to allow to be passed on to their customers.  

RockyRacoon's picture

FAA shutdown.   Really?   Hmmm.   [Yawn]

Smiddywesson's picture

Your question asumes that there is a market for gold.  There is a manipulated price for traders, and a market for holders.  If you were a holder, I would say take delivery and wait for fiat to be destroyed, only selling when a stable paper money appears and proves itself.  However, you are obviously a trader.  This is a very complex area, and the "market" you are dabbling in is the playground of the most wealthy, ruthless, and powerful manipulators in the world.  You are going to get killed.  Sell on Monday and reassess your strategy.  You can either be patient and take possession of PMs or play in front of all the steamrollers.  

Prometheus418's picture

Doesn't seem so obvious to me that he is a trader- more like a troll or a guy dipping his toe in the water for the first time.  Either way, there's no problem with his questions- this is a financial discussion fight club, after all.  As long as every remembers to DYODD, we can chatter at one another all we like, and new guys (myself included) might learn something.

Prometheus418's picture

Should have bought gold- not pretend gold.

But take delivery, if you can.  

It doesn't look good for the US raising the debt ceiling, and if we lose the reserve currency status, your next best bet is the Euro, which is also a steaming pile of PIIGS shit.

Only real money right now is gold, with silver trailing behind like an ambitious little brother.

IQ 145's picture

 I'm glad you encouraged me to reference MCX, India on Google and read up on your contracts. It's refreshingly straightforward material. I don't understand your question. If you bought a futures contract surely you did so in order to wait for some time in the anticipation of price increase; certainly their would be nothing "to do" on Monday.

Use of Weapons's picture

Look for a poster named "Robotrader" - I'd suggest following his posts [you can track other user's posts] and asking him financial advice whenever he's on. He is known to give out insider data on stocks.

He is something of a guru around here, all the old timers (of which I am not one) know him well.

RockyRacoon's picture

Hey, congratulations.   You're catching on to that sarcasm thing quite well.

rajat_bhatia's picture

I also bought silver, at $40 rate, monday forecasts please, LOL

Dr. Gonzo's picture

The sun will rise in the east and set in the west. 

Pool Shark's picture


"Tonight's forecast: Dark; followed by widely-scattered sunlight tomorrow morning."

(RIP Carlin)


BlackSea's picture

I forecast that you will ask more retarded questions.

Sudden Debt's picture

If silver goes up, you'll realize you forgot to press the "CONFIRM" button :)


Jack Sheet's picture

If you bought it, the price will go down. If you didn't, it will go up

DoChenRollingBearing's picture

That always happens to me too.  In the short run.  Don't sweat it, precious metals are a good buy here.  Just be patient.

RockyRacoon's picture

Where ARE these people coming from?

Cue the Twilight Zone music.

Prometheus418's picture


Kind of like making plans for the weekend based on the weatherman's forecast.


New_Meat's picture

Kind of like making plans for life based on the Weather Underground's projections. - Ned

High Plains Drifter's picture

it will be hotter than hell across the southern states, and the eastern seaboard as well as the midwest.........

snowball777's picture

100% chance of a forehead slap on realizing it's time for the options expiry dance (the contango tango).

EHM's picture

You are too stupid, now get off our porch!