Join our investing community

Trading Lesson and scenarios from possible US default

Discussion in 'Shares' started by wdongli, 30th Jul, 2011.

  1. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Still don't believe US would cut its feet. Don't know what would happen if US is really default. But do feel urgent to get the lessons so that I could ingrain the prudence into my blood more.

    1. its effect is huge.
    2. it can hurt everyone
    3. if us could have debt crisis, what if your debt out of control? Could you get it never default?
    4. do you have the plan to reduce the debt?
    5. have you ever got some enough paper profit in the stock market?
    6. do you use it to increase your cash reserve or debt?
    7. why not? Something wrong in your sentiment and business plan!


    If it happens, it would be man-made disaster. It is crazy and mad. If you want to be in hell, you just need to be mad!

    1. Value of US treasuries would be dumped en masse and would become worth less since US cannot pay creditors. Confidence in US assets is reduced.

    2. Interest rates on US treasuries would rise. Rising interest make it more expensive for the government to borrow money by issuing bonds. This will increase the cost to that it would be more difficult for government to raise money and spend on public things (education, defense, infrastructure, social security, medicare). It could disrupt or stop some necessary functions and cause panic, depress, and crisis with the extension in the social life hard to foresee.

    3. Uncertainties and risks will trigger another wave that flight to safety in financial markets: money will pulled out of riskier place and put them into "safer" boxes. This would make markets tank and yields on bonds become small. Less liquidity, less money sloshing around in the economy, so that a new financial crisis happen.

    4. Many banks have held US treasuries. If US treasury go south then they will not have enough cash to lend out meaning that credit would run out. Meaning that companies can’t meet their short term payrolls, banks can’t lend for mortgages, companies can’t borrow money to run their businesses. Capital freezes up. Worse if bank run happened, all depositors were losers.

    5. In response to decreased economic activity people lose job, can’t withdraw money from banks. Possibility of deflation as the price of things would go down, and head towards what is called a “deflationary death spiral” much like it did in the 1930s depression.

    6. Decrease in price causes lower production, lower wages and demand, which further decreases prices and keeps going around. Once this spiraling happen, no one could predict what happen and theoretically everything could worth zero).

    1. Half of US debt is owned by foreign countries, in order to invest in US treasuries they must buy US dollars, if US treasuries aren't an attractive investment foreigners won't buy dollars, the value of the dollar depreciates and ceases to be the world reserve currency.

    2. So what would be a trustful currency for global financial system? That is great wonder and huge confusion and panic would be unavoidable theoretically.

    3. Since many commodities (oil, food, metals) and other currencies are pegged and priced in dollars commodities will become more expensive (inflation) causing starvation and Chaos.

    4. Rising prices would take a bite out of savings and earnings. Assets that protect against inflation such as gold and land will rise.

    5. Governments who invest in US treasuries won’t get their money back so any foreign government spending will also be reduced meaning less international economic development (example decreased spending in international infrastructure and education). Assets that protect against inflation such as land and gold will increase price.

    6. Gold ultimate bubble would be formed.

    No too many option to solve the problems as in our own houses. Bankruptcy and default always are the last option if you don't want to declare a death financially.

    However the crisis of the default shows the seriousness of debt in US, which would support the gold price for years if no the gold ultimate bubble. This could help the exploration and production hopeful gold companies.

    But if US is default, gold price would shoot up sooner or later. The financial system would be in risks and these hopeful gold firms could be in trouble to get the money for gold. No cash flow no happy to any family, business, and nation!

    Debt has to be at the level you could service. Once it is too much you have to

    1. In short term if you could make more money, do so; if you could not make more but would like try to make more and reduce the debt in plan, you have to borrow more for your short term expenses.
    2. Once you could not be default, you could make a strategic plan to reduce the debt when you could manage your debt in short term.

    You have to pay back what you own to others if you are an honest and responsible people even in this modern society, some could be richer to escape the responsibility for their debt.

    Stock market is a war place in my view. I like the challenge but the risk is huge until we could accumulate enough capital to do the business without debt.

    I have made a few chances to pay my debt back since great increase of my paper profit. However by then I didn't really understand the two-edges of debt and didn't know the nature of market, a war place. So every time when the paper profit is inflated I become greedy rather than prudently pay the debt back. So after the paper profit gone in bad time I felt the debt pressure again and again.

    Now I realize the market is a war place. I would make a plan to reduce the debt to zero. If we could make money in the market we don't need too much debt. If we are bad to make money, we would be hurt by debt.

    The problem is I am still not good enough to manage my business. I am very serious about my mistakes I had made since the April 2011. First I would get the cash reserve back to the level for my bottom line goal of business, which would make my portfolio safe in any time. Secondly I would increase the cash reserve for my debt offset account, which would virtually reduce the debt. Third once I don't need the debt to make enough income for business expenses, I would pay all back.

    I would learn how to identify the market sentiment cycle and learn to sell in the bullish trend and buy at the market completely surrender in my holding time horizon!
    Last edited by a moderator: 30th Jul, 2011