Wednesday, July 14, 2010

What About the Default Option…?

The US has but three methods for restoring economic growth: austerity measures (as in spending cuts and tax increases), monetary expansion (as in “printing money”), or default (as in not paying back on the various bills, notes, and bonds issued by the US Treasury). The national debate regarding the merits of both austerity measures and monetary expansion is well underway in the public domain. However, the default option has still to be fully considered as an alternative to austerity or monetary expansion.

To start the discussion, consider the following advantages of defaulting on the national debt:
  1. The people would enjoy a $13 trillion dollar windfall from principal reduction in the national debt that would never be paid back.
  2. The people would enjoy a windfall from the $400 billion dollars a year in interest payments that would no longer be required.
  3. The “banksters” would have to abandon their looting operations in Washington, DC and return to regional and local limited purpose banking in order to compete for new investments in small businesses and Main Street.
  4. The government would lose its ability to borrow in the future due to zero creditworthiness and would therefore have to end deficit spending and henceforth, balance the budget.
  5. Mega-banks would likely split up and reorganize into regional and local service operations in order to redirect their marketing and lending activities toward small businesses on Main Street.
  6. The government would have to lay off most of the Federal workforce due to lack of money – these workers would become available to join Main Street investment activities lead by small businesses.
  7. The trade deficit would be solved because foreign manufacturers would cease exporting to the US as the world would no longer accept US treasury paper as payment for goods and services. 
  8. The Federal Reserve would be bankrupted and closed permanently.
  9. Washington politicians would have to redirect their concerns away form Federal issues and toward regional, state, and local politics in order to stay current and involved in the reemergence of small businesses and Main Street politics.
  10. Small business on Main Street would be back in business as the centerpiece of American enterprise, employment growth, capital formation, and production of goods and services.
A default on the national debt by the US is an option separate from monetary expansion and austerity measures. I encourage the public to at least consider the default option more fully as part of its discourse on methods and possible courses of action for economic recovery.

Comments welcome below...

121 comments:

Vitus Capital said...

er... some "externalities" here I guess. Like, war with China, hot and cold. And how to pay for same. And, ...

nevermind.

Dr William J McKibbin said...

OK, let's talk about China...? If you think about it, China is not about to start a war over debt. When in history as any nation started a war over debt...? Also, the debt issued to China is non-recourse, so there would be no support from the global community who would likely join the US by defaulting on their debt as well...

Anonymous said...

i would suggest u to go to ur local commercial bank, not on a busy day, and ask for the manager to explain to you why anarchy of global proportions may not be good for the prosperity of our society.

dR.

Dr William J McKibbin said...

Hi Anonymous, thank you for your comment, but perhaps you could fill me in on the disadvantages -- I'm trying to get the details of specific merits and demerits in front of the public audience. I have posted some advantages -- so what are the disadvantages in specific language and numbers...

Anonymous said...

I don't know that these are advantages, nor disadvantages, but merely far fetched consequences of not paying debt.

1. I think we already got the windfall from the $13 trillion dollars we have borrowed.
2. $400 billion dollars will not be a windfall, that is about 7% of our annual federal government expenditure.
3. I doubt that the "banksters" would leave DC, they would just compete for a larger piece of a smaller pie.
4. Maybe, maybe not, I have hunch someone would be willing to lend to us. Besides, we can print money at will.
5. I really doubt it, again they still won't need to focus on main street. Most would probably relocate off shore.
6. No, most of the budget is not in employees, but in the money we spend on citizens. Some programs may shrink, but I doubt that there would be massive Federal layoffs. We had a balanced budget in the 90's without the Federal government shutting down.
7. Wouldn't we shoot ourselves in the foot, perhaps you haven't looked at the back of your TV lately, but don't we need those things. I don't know that we could possibly restart that scale of manufacturing here in the US.
8. No, they could still print money. Whose going to shut them down.
9. Aren't Federal issues the point of the Federal government? Don't we have state and local governments to handle their respective areas?
10. What would they sell? I suppose that guy that sells sweet corn on the corner of my street will be in business. See number 7.

I think the reason people don't talk about Federal default, is because, 1.) we are not in danger of defaulting on our current debt obligations, 2.) If we did, it would be disastrous for our economy and for our citizens.

But thanks for the nonsense, I got a good chuckle out of this.

Anonymous said...

Until you deal with the systemic spending imbalance by the Federal Government, the default option cannot be considered. The problem with Austerity measure is that it is focused too much on the tax increases that are implied.
Option 4, stop the runaway spending period.

Dr William J McKibbin said...

Hi Anonymous, I'll leave you to chuckle to yourself -- in the mean time, I invite serious commentary on the advantages and disadvantages of a national default -- your input is most appreciated as I am seeking to more fully understand what a default might mean for our nation in very specific terms and numbers, thanks...

Dr William J McKibbin said...

Hi Anonymous, I did make a note that the government could keep "printing" money and therefore inflate the economy, however I was presuming that monetary expansion has been rejected by those running the nation today, and that their goal is to eliminate any chances of inflation. But yes, if after a default the austerity folks would change their minds, I suppose "printing" money could occur, yes...

Anonymous said...

For one thing it would keep the government from paying back Social Security. What would the elderly do? Starve in the streets?. What about the disabled? What would they do? Putting them on Welfare would help but would it really save that much?

It would still leave the plunderers of Medicare (the prescription drug companies with their high charges and other health care overcharges) alive and well.

You can bet the well to do will already have their rear ends covered in case of default.

The hatred and loss of faith would take hundreds of years to overcome.

Dr William J McKibbin said...

Hi Anonymous, I tend to agree with you, and for that reason have been advocating monetary expanions as the way forward from the ongoing economic crisis. However, the austerity people have apparently won the debate and are now planning to sharply reduce all forms of government spending. In other words, everything you are describing is coming anyway under the leadership of the austerity hounds. So the matter of entitlements is mute at this point. My concern though is that if the nation is going to have austerity forced upon it, then why not default on the national debts, skip paying back the $13 trillion in existing principal, and go ahead and suffer through the austerities under the leadership of small business leaders...? I certainly trust small business leaders more than I trust banksters, Washington politicians, and Federal employees -- all of that would be wiped out in favor of state government and local leadership. As for the social security pensioners, the austerity hounds have already written them off and intend to sharply reduce their benefits and extend the retirement age regardless. Thanks for your comments, but it seems that the social security breakdown is going to happen anyway under the deft hand of the austerity hounds now emerging to power in Washington...

kdallas999 said...

My concern is three-fold.

First, most of the world's economies are based on the dollar. If we were to have a wholesale default, all of the economies would have to realign their basis, which would take all of the value away from the dollar. China has already begun to do this (which isn't a good sign) but it would alter our position in the world economy forever, and not for the good.

Second, it is not ideal to run a country with no debt at all. It is recipe for runaway inflation which would not be able to be controlled.

Third, wer're not truly self-sufficient. Whether we like it or not, many things we buy which are manufactured in other countries (such as computers and electronics) are critical to our day-to-day functioning. If we defaulted on all of our debt, you can be sure those countries will want to inflict some pain - how about not selling anymore computers to the US? What do we do then?

Morgan Warstler said...

The Fed can ALWAYS print more money, so before it even considers it, it should liquidate the hard assets now acting as a storehouse of false value, so everyone can really see what their home is worth and make an honest choice.

Homes are not gold. They are monthly debt obligations + often they hold some cash value if sold. The Fed buying the worst assets at face value and marking them on their balance sheet artificially is forcing people to send too much of their paycheck to service an inflated asset, ruining labor mobility, and causing guys with dry powder to sit on the sidelines - they know houses are worth less than currently listed.

Essentially, as long as home prices are inflated, and the Fed lies about the mark-to-market value of the MBS it holds - the pressure to print money COMES DIRECTLY the need to inflate home prices towards the mark.

Dr William J McKibbin said...

Hi kdallas999, I agree that all of your points would be consequences, yes -- the hard part is to set them aside the $13 trillion dollar windfall plus another $400 billion per year in interest the US would enjoy as a result of not having to pay off the principal in interest on the national debt -- in other words, $13 trillion <--> not being able to borrow more, not being able to import, reducing the size of government substantially, and so forth -- said still another way, generalizations of disadvantages are not helpful when we are citing a $13 trillion dollar plus benefit to ordinary Americans and the economy as the prize -- I am not sure the disadvantages you cite add up to anything close to $13 trillion -- thanks for your contribution however which I will consider in the paper I am preparing...

Anonymous said...

Wow. Okay, where to start.

You mention a $13 trillion windfall. I assume this is the size of the current debt. But if we default, we don't get $13 trillion. We don't get anything, except we can stop paying on the debt, which is the $400B figure, so you can't count that twice.

After a quick internet search, the best figure I could find for US exports was $1.5 trillion (www.census.gov) for 2009. If we defaulted on our debt, trade would be severely curtailed. The savings from the debt payment wouldn't even come close to the loss in trade.

You say that the government laying off all federal workers would be a good thing for main street? I don't know if you've noticed, but we're not exactly suffering from a shortage of available workers right now. The last thing we need is another 100,000 unemployed workers.

I work at a startup company (can't get more 'main street' than that), and our business strategy involves selling globally. Your proposal would put me out of a job. In fact, I would guess that it would put most Americans out of a job.

Not liking big government or federal spending is one thing, but this proposal is ridiculous. There are better options.

Dr William J McKibbin said...

Hi Anonymous, thanks for the feedback -- I was looking at the export numbers earlier, but that number is offset by imports -- in other words, the US net import/export activities are driving down the US GDP at this point, which implies that the US would benefit from ending its import/export activities (I'm just speaking to the numbers). Thanks for the comments in the mean time...

VangelV said...

Default is inevitable but it will create some serious problems for Americans.

For one, savers would be wiped out as the currency collapses. The US capital markets will be destroyed at a time when capital is scarce and the ability to create wealth is declining. While the collapse of the government bond market is not a problem the collapse of the corporate bond market would create big problems moving forward.

Without the status of the USD as a reserve currency it will be a lot harder to buy oil, base metals, fertilizers, and other commodities that are required for a healthy economy. Prices would explode and we would be looking at hyperinflation until a new, hard currency system were put into place.

Steve said...

A few problems:

1. A double-digit percentage of that $13 Trillion figure--about 4 trillion, I believe, is "intragovernmental" debt--debt than one arm of the federal government owes to another arm of the federal government, mostly to the Social Security Trust Fund. Default on that? Either no more social security, or social security will have to be funded by general revenues. Neither is a particularly good idea. (not that I'm a fan of our current Social Security system, but killing it outright would be a disaster.)

2. Of the approximately $9 trillion PUBLIC debt, a large percentage (about half, I think) is held by American investors. If you think Citigroup and Bank of America were "too big to fail" wait until Uncle Sam defaults on his obligations. Even if we don't care about the economic disaster we'd be inflicting on other nations (a bad position in and of inself), we'd be inflicting even worse problems on our own economy. No foreign nation holds as much U.S. government debt as domestic investors do.

Dr William J McKibbin said...

Hi Steve, I have the numbers on the breakdown between foreign debt holders and domestic, and they are significant, yes. I am still pondering the concentrations. Clearly, a default would create liquidity problems for some companies. On the other hands, these same companies generally already have liquidity issues already. But yes, I have made a note too look at this much closer, thanks...

VangelV said...

I have the numbers on the breakdown between foreign debt holders and domestic, and they are significant, yes....

The breakdown does not matter because you can't selectively default on treasuries. Once the government fails to pay what it owes to one party all of its debt paper becomes worthless and the USD, which is backed by that paper, turns into Monopoly money.

Dr William J McKibbin said...

Hi VangeIV, yes, I am studying the effects of an across the board and total default by the Fedeeral government, good and bad, and preferably in dollar terms...

Anonymous said...

In numerical terms, I think you must assume as fact that all derivatives are worth zero.
Thus, this affects any twisted propaganda concerning Social Security.

Also: 1) my intuitive sense and gut feeling is that default simply happens soon because controllers lost control and that this can be proven via math and there is now a critical mass of people who are awake ( the veil is down and the little man's bull horn is not working). The controllers do not know this yet because they can not feel; only angelic humans can feel.

2) Another benefit of the default option is that the world is now free from the Fortune 500 ... high fructose corn syrup, big phama
cuts, burns and pills, zombie food, zombie banks, privacy etc etc.

Sharkie said...

This will come about with a soft global default, commencing with competitve currency debasement first,(US$ down 32% since 2000) and followed with a worldbuck somewhat backed by gold.
They are'nt keeping Mr. "destabilize the monetary system" Paul Volcker around for his cheerful tidings and pleasing looks. As 1971 under sec he removed gold from the international monetary system and I feel was responsible for the chaos which has since ensued. And would venture to say he is ready to "get 'er done again", making you 100% correct in your default assumptions.

wuffa said...

lets see just to start a Default on US bonds would be very bad.
no more low cost oil(gas)can you say
$500 a barrel $20 a gallon.
no new home loans for anyone for many years, as the Feds underwirht 75% of home loans and back it with bonds.
food prices go way up for a lot of the stuff we import. cost to import goes way up.
we do not grow most of our cooking oil.
do you know how many 10's of millions are on Social Security?
thats like well over 20% of the POP
60,000,000 people with out a income.
who VOTE the party in power who lets the US Default would be out of power for a very long time.
many us farms would go out of biz
as most of what they grow gets exported and i think in the case here a lot of the world would not want to trade with us for a bit.
most banks ( even the small ones are out of biz)most money market funds( like the ones your checking acct at the bank is in) go away
and if you are thinking "we made it thru the 30's) what would happen to the world would make the The Great Depression look good.
worldwide economic depression for 40 years if the us does not pay bonds not just here .
Farming and rural areas suffered as crop prices fell by approximately 60 percent in the 30's

Tony said...

If you look at the graph here:
http://www.usgovernmentspending.com/federal_deficit_chart.html

you'll notice that the US debt to GDP ratio is only 1/2 to 1/3 of what is historically has been in the past. With all we hear about the deficit, this is a surprise to most people. The truth is that the size of the deficit relative to the economy has been greatly exaggerated, and while we do need to eventually take steps to get things into balance again, the government has come back from much worse.

So how did they do it in the past? The majority of it was just reduced through inflation. By printing more money, the amount of debt that's owed by the government begins to reduce in value. More tax revenues are generated since an increased monetary base boosts GDP. The normal downside to increasing the monetary base is inflation. But currently we are in a deflationary cycle, so inflation is no a concern, and a little more inflation might be the best remedy for the economy since it would create a floor to the housing market.

Dr William J McKibbin said...

Tony, delete the government employment and spending from the GDP, and you will find a clearer picture of the US GDP -- support for removing government spending from GDP is a growing trend amongst economists who are seeking to normalize current GDP data with historical data. Once this exercise is complete, the debt to GDP ratio argument becomes mute. I am still pondering how the cost of a default would exceed the benefits in terms of dollars as a null hypothesis...

Dr William J McKibbin said...

Tony, incidentally, I have carefully studied the monetary expansion approach as a method to rout the national debt and entitlements through inflation, however such an approach appears to have been rejected by the austerity advocates globally. Thus, monetary and inflation appears to be off the table as an approach to resolving the national deficit in the US, unfortunately. My objective now is to understand how a default may be better or worse as an approach to resolving the budget deficit in dollar terms, than non-default approaches...

Anonymous said...

I read an article which claimed that Bernanke was told at the G20 meeting "Reality is not an option" and that "default was an option". When austerity looks identical to pay as you go then why not default? What is the difference between not having any credit and not using any credit. Many families have been placed in this situation and we know what they are choosing.

VangelV said...

...I am studying the effects of an across the board and total default by the Fedeeral government, good and bad, and preferably in dollar terms...

As I wrote above, I do not believe that a partial default is not possible. Many of the bonds owned by foreigners have been used as collateral for loans taken to purchase the equipment and materials needed to build infrastructure. Those bridges, railways and airport are going to be around after the paper has become worthless. If the US government defaults the liability side of the borrowers will disappear.

The same is true of all of the companies that the Chinese have been purchasing around the globe. Many of those companies have a huge amount of USD denominated debt outstanding. If the US government defaults the companies will have little in the way of debt.

And if you see a default you will have all fixed income recipients wiped out. They will take it out on the politicians at the ballot box and you will see a major change in the way that the country is being run. It is very possible that the Democrats and Republicans will be wiped out, much as the Whigs were in the 19th century.

In the best case scenario we have a deep but short liquidation period after which the government becomes small and manageable and you go back to a republican system of government. (Note the small 'r' in republican. Think Cicero rather than GWB.) In the worst case you have a hyperinflation that ends with the rise of a populist strong man type who claims to have the answers and can 'fix' things if citizens agree to give up their freedom. That probably means the rise of national socialism and the end of the principles on which the republic was founded.

VangelV said...

you'll notice that the US debt to GDP ratio is only 1/2 to 1/3 of what is historically has been in the past. With all we hear about the deficit, this is a surprise to most people. The truth is that the size of the deficit relative to the economy has been greatly exaggerated, and while we do need to eventually take steps to get things into balance again, the government has come back from much worse.

You are missing the NPV of the unfunded liabilities, which run over 75 trillion. Given that there is no lock box from which SS and Medicare payments will be made you need to increase taxes to around 100% of income to make the payments that were promised. Sorry but your math does not work.

VangelV said...

lets see just to start a Default on US bonds would be very bad.
no more low cost oil(gas)can you say
$500 a barrel $20 a gallon.


I think that you are optimistic. The USD will no longer be accepted as payment for anything because it has no intrinsic value. If you want oil or gasoline you will have to use something tangible to buy it with or have a hard currency that cannot be created out of thin air by the Fed.

Dr William J McKibbin said...

VangeIV, you are right about the unfunded obligations, which would have to be renegotiated or cancelled on a line by line basis...

VangelV said...

As 1971 under sec he removed gold from the international monetary system and I feel was responsible for the chaos which has since ensued.

This is the most perceptive statement on this thread. Most people see Volker as a saviour and have no clue about how he started us down the road to ruin when he advised Nixon to close the gold window at the NY Fed. August 15, 1971 was one of the worst day in American history but few people know what happened on that black day and how it will influence the lives of their families and of future generations.

And would venture to say he is ready to "get 'er done again", making you 100% correct in your default assumptions.

In the era of the internet I doubt that Volker and the central bank bandits will be able to pull off a heist once again. If they try the productive class will fight back and governments will fall.

Anonymous said...

yes, I agree wholeheartedly, the best thing for America would be to repeat the experience of Weimar Germany, and hope that a glorious leader will emerge to save us from the global economic implosion...then we would get the chance to exercise our second amendment rights on a continual basis

Another Anonymous said...

Default would be insane, the only thing more insane than austerity. Neither are measures that would restore economic growth, but means of economic suicide: slitting your wrists - austerity, or blowing your brains out - default.

National debt and deficits are utterly nonexistent, meaningless problems, which do not need to be "routed". You have been misled by "mainstream" economic discourse which is logically inconsistent and bears no resemblance to economic facts. Google "Modern Monetary Theory" if you want an actual description of how money works.

The problem that the USA and most other nations have now is that their governmental debt and deficits = private savings are TOO SMALL, not too big.

"Monetary expansion" if this means old fashioned New Deal deficit spending fiscal policy is exactly what is direly needed, and under current conditions would not at all be inflationary.

Default amounts to saying that the US Dollar and everyone's savings denominated in it is worthless, and would cause worldwide chaos. The national debt could easily be shrunk to zero by the government not issuing bonds to roll over its debt. Spending and taxing are essential functions of government; debt issuance is not.

Of course default cannot happen. It is unconstitutional:

Section 4 of the Fourteenth Amendment: "The validity of the public debt of the United States, authorized by law,... shall not be questioned." On this, the Supreme Court said in 1935 in PERRY v. UNITED STATES, 294 U.S. 330: "... the government is not at liberty to alter or repudiate its obligations".

VangelV said...

Tony, incidentally, I have carefully studied the monetary expansion approach as a method to rout the national debt and entitlements through inflation, however such an approach appears to have been rejected by the austerity advocates globally.

I am sorry but you just confused me. I see no true advocates of austerity in the political class. From what I can tell the central banks are still inflating their balance sheets and bailing out their banking systems and governments are still spending money that they do not have.

What we really need is true austerity that would see us follow the path taken by Warren Harding and Andrew Mellon rather than the failed methods used by Hoover and FDR. If the federal government cut spending by 75% or so, lowered taxes, and let failed companies like AIG, GM, Fannie, Freddie, etc., go under we could get a sharp contraction that would end in a year or so and would allow good American businesses and prudent individuals to thrive as the currency remained strong. But that takes courage and virtues that are not found in the electorate and the political class. That means that we will struggle trying to keep the game going until it is no longer possible to hide the fact that the states, consumers, and the federal government are bankrupt.

Anonymous said...

Last time we had a major financial systemic failure, it was in 2008, because the ABS market shutdown after fears of SOME DEFAULT. We only got out of that one because central banks and governments guarantied almost everything against default.
The planets GDP was in 2008 $61.06 Trillion US dollars.
Now you suggest as a possibility that we erase 13 trillion of the most trusted asset. Whit no possibility of protecting the global economy against the domino effect.
Did you ever thought about what is are the consequences.
EVERY THING AND EVERY ONE WOULD BE BANKRUPT.
You may had suggested total nuclear war and that would not had been crazier.
I never thought I would ear something so mad.

Please do not speak of that seriously. I don't want to live in a cave.

Benoit Lauzon

Dr William J McKibbin said...

Hi Benoit, I am trying to analyze what the effect would be in terms of dollars for the US -- keep in mind that very few people in the US benefit from the government and/or its services -- most of us receive no health benefits and basically no services from the government -- conversely, the government cuts large amounts out of our earnings in taxes that appear to benefit a) investment banks who move the money overseas; b) unions (which most of us are not members of); and c) government workers. The fact that only a relatively small number of Americans benefit from borrowing by the US makes the analysis interesting. Again, since I receive basically no services from the US anyway, what would a default mean to me and people like me (?). By the way, most of my earnings come from overseas at this point regardless. I am trying to study the entire dollar impact of a default using financial economics that make sense, avoiding the negative view that a default “can't happen...” The default option needs to be studied by someone so other can consider the facts based on their individual situation. Thanks for your feedback...

John Freeland said...

We may very well have a de facto default in progress. We keep hearing about how our kids are going to have to pay. Why? We don't have to pay. We keep kicking the can down the road. Why wouldn't they? We say we're going to pay up. We just don't say when.

And it's stupid and unnecessary. Clinton raised taxes and the economy grew. We had a buget surplus. Now, "No New Taxes" is a religion. Greedy "let's cut taxes and start a war and a new Medicare drug entitlement and not have the government be able to negotiate" idiots have enough power to financially cripple the nation for generations to come. There isn't a patriot among them.

VangelV said...

Default would be insane, the only thing more insane than austerity. Neither are measures that would restore economic growth, but means of economic suicide: slitting your wrists - austerity, or blowing your brains out - default.

I disagree. The most insane action would be to continue on the path that has created the problem in the first place. All fiat money becomes worthless and the USD is no different. If there is to be a recovery federal spending must be cut by 75% or more and bad businesses must be allowed to fail. The system has to be cleansed of all of the malinvestments that would never make sense in a market economy and the productive have to be able to buy up assets that are liquidated as the unproductive go out of business.

National debt and deficits are utterly nonexistent, meaningless problems, which do not need to be "routed". You have been misled by "mainstream" economic discourse which is logically inconsistent and bears no resemblance to economic facts. Google "Modern Monetary Theory" if you want an actual description of how money works.

Unfunded liabilities stand at around 7 times GDP. There are two wars going on, the military has bases and offices in more than 100 countries across the globe and more than two thirds of the states are bankrupt. I would say that you are ignoring reality.

"Monetary expansion" if this means old fashioned New Deal deficit spending fiscal policy is exactly what is direly needed, and under current conditions would not at all be inflationary.

Wonderful. What we need is a replay of the Wiemar hyperinflation that would make the USD worthless and the nation bankrupt.

Default amounts to saying that the US Dollar and everyone's savings denominated in it is worthless, and would cause worldwide chaos. The national debt could easily be shrunk to zero by the government not issuing bonds to roll over its debt. Spending and taxing are essential functions of government; debt issuance is not.

The USD will be worthless either way. Savers are losing purchasing power as the Federal Reserve keeps creating more and more money out of thin air and bailing out Fannie, Freddie, AIG, Goldman Sachs, GM, Chrysler, and other badly run companies that have friends in Washington. There is no way to fight reality because there is no way for all of the unfunded liabilities to be paid off in a currency that has the current purchasing power because in the real world, the math does not work.

Buy gold to protect yourself. Buy foreign companies that have good business models. Keep your head down.

Anonymous said...

Study that all you want but the only thing you would gain from it is jobless benefits. Oh there would be no more of that.

From the government you receive:
1. Army services
2. Roads
3. Airports
4. FD
5. PD
6. Insurance against extreme poverty (is there someone you love or like who is poor)
7. Laws and rules
8. Regulation authorities (like FDA)
9. Some social cohesion
...

Everyday you use federal government services. Maybe not as much as other but more than you think.

There is no ethical deferences between union of workers and union of owners, which we call corporation. Both exist to promote the interest of their members.

Banks do not ship tax money abroad. The big expanse the US pays abroad are 2 wars.

Government workers provide useful services and the buy the stuff your employers make. So they pay a part of your salary.

To end my argument 13 trillions is a lot so a lot people have some of it. If those people have to default because their assets are erased an other lot of people have to default etcetera. Including your employers.

I'm a good gardener so I would have something to eat.

Benoit Lauzon

VangelV said...

And it's stupid and unnecessary. Clinton raised taxes and the economy grew. We had a buget surplus. Now, "No New Taxes" is a religion. Greedy "let's cut taxes and start a war and a new Medicare drug entitlement and not have the government be able to negotiate" idiots have enough power to financially cripple the nation for generations to come. There isn't a patriot among them.

Clinton had a friend in Greenspan, who kept printed more money than all previous Fed chairmen combined. He fought every crisis with more liquidity and by doing so just made the next bubble bigger. And as the financial sleight of hand took place the nation's infrastructure crumbled, aging factories closed down, and the level of debt grew exponentially. The process continued under Bush until the liquidity driven housing bubble burst and people figured out that the illusions created by money printing were no substitute for capital formation and real wealth creation.

Dr William J McKibbin said...

Hi Anonymous, thanks for the list of services provided by the government to the population -- frankly, none of the services is really that expensive to provide, or the services really do not benefit me to begin with -- but, I have added your list to my notes to look over in more detail, thanks again...

Anonymous said...

An 'out of the blue' or 'edict' type of default will not happen. You may as well ask what would be the effect of printing away US debt obligations, as that scenario is more likely than an outrageous (if not unlawful) declaration by your government.
Creditors and those with large amounts of wealth prefer austerity, and so austerity is what we will get. What is best for them is the ONLY consideration on the table. This is the road our leaders are taking and everyone may as well get used to it.

Dr William J McKibbin said...

Hi Anonymous, for the record, I would prefer an effective monetary expansion plan as my first choice. My second choice would be an effective austerity program. And my third choice would be a default. However, until we fully analyze the details of what a default would look like in terms of dollar, we cannot simply rule a default out -- frankly, the only method that I am sure will not work at this point is trying to sustain what we are doing already, which is nothing more than wishful thinking -- however, the more I examine the default scenario, the more questions I have about why I would care if a default occurred -- a very small percentage of Americans benefit from deficit spending, including banks, unionized industries, and government employees. Since I am none of those things, I would like to better understand how much of the Federal budget is actually used for my benefit given that I am a small business person in private practice as a decision analyst. I love analyzing decisions, and the default option has not yet been analyzed. So, I accept the challenge...

VangelV said...

Study that all you want but the only thing you would gain from it is jobless benefits. Oh there would be no more of that.

If you subsidize something you get more of it. Why would you want more people to be unemployed.

From the government you receive:
1. Army services


You mean you get to invade and occupy Iraq? Why is that a good thing that taxpayers should pay for?

2. Roads

Roads are funded by gasoline taxes, license fees, fines, and other related payments. Users pay much more than is spent on the road system.

3. Airports

Should be private.

4. FD
5. PD


Should also be private.

6. Insurance against extreme poverty (is there someone you love or like who is poor)

Ever hear of mutual societies or charities? They worked fine before the government got into the act and expanded poverty by subsidizing it.

7. Laws and rules

Many are very stupid and make no sense. They punish voluntary activities in which there is no victim. Why is that a good thing?

8. Regulation authorities (like FDA)

Most regulators are failures and what they do can be done more efficiently privately.

9. Some social cohesion

Nonsense. Private social transactions need no government intervention.

Everyday you use federal government services. Maybe not as much as other but more than you think.

Most are monopolies and not very efficient. If competition is permitted there would be no government services.

Dr William J McKibbin said...

Hi VangeIV, your discussion regarding the true value of government services is spot on -- the Federal government is going through hundreds of billions of dollars and we the people have almost nothing to show for that spending -- nevertheless, government services are factors to be considered as part of a default decision...

VangelV said...

There is no ethical deferences between union of workers and union of owners, which we call corporation. Both exist to promote the interest of their members.

Of course there is. Unions can use threats to stop non-unionized workers from doing the jobs of employers. The initiation of force is not ethical.

Government workers provide useful services and the buy the stuff your employers make. So they pay a part of your salary.

More nonsense. I can choose which services to purchase from the marketplace and get to vote with my wallet. I can't do that when governments use monopoly power to prevent competition and force me to pay for services that I would rather get from other providers.

To end my argument 13 trillions is a lot so a lot people have some of it. If those people have to default because their assets are erased an other lot of people have to default etcetera. Including your employers.

Actually, most people have more debts than they have in savings. A default would mean that those debts would be gone. Of course, so would their pensions but those will be gone either way.

VangelV said...

Hi Anonymous, thanks for the list of services provided by the government to the population -- frankly, none of the services is really that expensive to provide, or the services really do not benefit me to begin with -- but, I have added your list to my notes to look over in more detail, thanks again...


Actually, they are very expensive when compared to what the private sector could offer them for. And the choices are very limited.

Anonymous said...

...however, the more I examine the default scenario, the more questions I have about why I would care if a default occurred -- a very small percentage of Americans benefit from deficit spending, including banks, unionized industries, and government employees. Since I am none of those things, I would like to better understand how much of the Federal budget is actually used for my benefit given that I am a small business person in private practice as a decision analyst. I love analyzing decisions, and the default option has not yet been analyzed. So, I accept the challenge...
What makes you believe that a default would be preferable to hyperinflation in erasing US debt?
If you are not concerned about your economic and physical well-being following a financial collapse, then why indeed would you care how that collapse came about?

Another Anonymous said...

Thanks for the comments, VangeIV, but your and Dr. McKibbin's understanding of macroeconomics is incorrect. I believed something like it myself until I found out about the small group of academic economists who actually study reality and real finance, and come up with economic models that respect double entry bookkeeping and basic arithmetic, unlike almost all economic theorists nowadays. The three big names are William J Mitchell, Warren Mosler and L. Randall Wray. The recently deceased Wynne Godley, formerly the head of economics at Cambridge and James K. Galbraith (son of the more famous father) should also be mentioned.

As I said, New Deal style fiscal policy, enlarging the deficit to boost demand is exactly what is necessary. IT WOULD NOT BE INFLATIONARY - and the consensus of even mainstream economics is not far from reality enough to think it would be. The USA did not experience hyperinflation from the New Deal or WWII. I agree with Dr McKibbin and you that there is an enormous amount of insane and criminal government spending - but what austerity and opposing a New Deal means is opposing SANE government spending - e.g. a FICA tax holiday, federal support for state governments, a guaranteed job for anyone who wants to work along the lines of the WPA. Since we are in a depression with enormous unused resources and unemployment, spending wildly would not cause inflation. The naive quantity theory of money and inflation is wrong.

Deficits are meaningless numbers. Worrying about their size makes as much sense as worrying whether they are prime numbers or not. The only conceivable bad result of deficit spending is inflation. Currently the thing to fear is deflation. The Fed does not create money. The only thing that does create money - net financial assets which are not balanced as somebody else's debit - is deficit spending. We need not issue debt for it. If anything "financing" government spending by bonds is more inflationary than just "printing the money."

Government Deficits = adding to private savings are generally good. Government Surpluses = private dissaving are generally bad - the Clinton surpluses were one of the causes of the credit financed "boom".

Mogden said...

There would be an enormous increase in fear and uncertainty as expectations reset. This would be most negative for the business and investment climate, at least for a while.

Dr William J McKibbin said...

Hello Another Anonymous, again, my personal preference would be to exit this economic crisis with stimulus spending (which requires monetary expansion) and if required, hyperinflation, yes. However, that is only one option for recovering the economy. The other two options are austerity or default.

Keep in mind that there are but three ways forward:

a) monetary expansion, with risk of inflation

b) austerity measures with risk of deflation

c) default

The debate between stimulus (monetary expansion) and austerity measures is underway already, and the austerity hawks have already won in Europe and they are preparing to come to power in Washington in November, which is fine. However, if the powers that be reject stimulus (monetary expansion) and choose instead austerity measures and the concomitant risk of deflation, then we are going to see public job losses and at least local and regional depression anyway.

The default option is simply a third less considered and studied option that I am seeking to understand better.

Thanks for your comments by the way...

VangelV said...

An 'out of the blue' or 'edict' type of default will not happen.

The math does not work. There is no way for the government to meet its promises so we will be looking at a default in SS and Medicare. People will not get what they think that they will.

You may as well ask what would be the effect of printing away US debt obligations, as that scenario is more likely than an outrageous (if not unlawful) declaration by your government.

Either way the effect is the same. The USD will see its purchasing power collapse and the only way out is a hard money system and the end of the Warfare/Welfare State.

Creditors and those with large amounts of wealth prefer austerity, and so austerity is what we will get.

What matters are voters. If they support austerity that is what we will get. But I doubt that is what the voters will want once the contraction begins. In a social democratic system all roads lead to inflation.

What is best for them is the ONLY consideration on the table. This is the road our leaders are taking and everyone may as well get used to it.

Nonsense. The whole system is based on monetary expansion and can't exist if the liquidity flows end. Given the leverage in the financial system the banks can't survive writing down their bad loans. With so little equity, the only way to keep them alive is ton keep injecting money and credit into the system.

VangelV said...

Hi Anonymous, for the record, I would prefer an effective monetary expansion plan as my first choice. My second choice would be an effective austerity program. And my third choice would be a default.

Here is the problem that I have with the logic. If we use your preference for monetary expansion we only ensure that the default is kicked down a road and that the economy moves even further from where it should be in a market system. That makes the pain worse and increases the systemic risks. Had Greenspan allowed a correction to proceed in the 1990s we would not have had the dot.com bubble and the housing bubble.

Government intervention can't be effective because of the knowledge problem so no amount of hoping and praying will fix the problems that we are facing. We need to step back and let the markets do their job by liquidating bad investments that were only made because of the Fed's intervention in the markets.

VangelV said...

Hi VangeIV, your discussion regarding the true value of government services is spot on -- the Federal government is going through hundreds of billions of dollars and we the people have almost nothing to show for that spending -- nevertheless, government services are factors to be considered as part of a default decision...

Why not consider those services now? Given the fact that they can be delivered more effectively and at lower costs by a market system in which consumers have choice, we should have the government stop wasting scarce resources and wasting taxpayer earnings. More effective and cheaper police, fire, and waste removal services can be delivered by the private sector. If governments are bankrupt most of those services will be provided by companies who can do the job cheaper and better.

VangelV said...

There would be an enormous increase in fear and uncertainty as expectations reset. This would be most negative for the business and investment climate, at least for a while.

The most negative thing for business is the regime uncertainty just as it was in the 1930s.

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

VangelV said...

What makes you believe that a default would be preferable to hyperinflation in erasing US debt?

Hyperinflation is much more corrosive and can destroy social institutions. Once people figure out that the link between money and reality has been severed things fall apart quickly.

http://mises.org/journals/rae/pdf/rae7_1_1.pdf

VangelV said...

I believed something like it myself until I found out about the small group of academic economists who actually study reality and real finance, and come up with economic models that respect double entry bookkeeping and basic arithmetic, unlike almost all economic theorists nowadays.

Let me be clear. There is no connection between economic models and reality. The economy is a dynamic, non-linear system that can't be modeled effectively.

The three big names are William J Mitchell, Warren Mosler and L. Randall Wray. The recently deceased Wynne Godley, formerly the head of economics at Cambridge and James K. Galbraith (son of the more famous father) should also be mentioned.

Galbraith is an even bigger idiot than his father. I suggest that you stay away from the Book of Keynes and try something credible.

VangelV said...

As I said, New Deal style fiscal policy, enlarging the deficit to boost demand is exactly what is necessary


Great. Let us take an economic contraction and create a Great Depression. The New Deal did not work very well in the 1930s so I do not see why anyone rational would want to repeat the same errors.

Anonymous said...

While I'll agree that austerity measures are not palpable and largely that depends on where the tax increases are seen. And that expansion is definately the most dangerous creating many potential problems down the road. Default would destroy our ability to ever secure debt purchasers ever again in the way the U.S. is used to. Forget that China might HAVE to go towar over that, they certainly would never buy our debt again.

Anonymous said...

So your talking about GLOBAL default of debt or Global debt forgiveness? Do you actually understand anything about how money works. Every dollar of currency represents debt. Without debt, no value of that currency exhists thus total global meltdown of currency valuation. Ummmm not a good idea at all. We certainly are not going to go back to the barter system. LOL! Maybe I have you wrong here but if not your way out there.

Dr William J McKibbin said...

Hi Anonymous, I understand that you believe that a default is "not a good idea at all." My question is make a financial case with the numbers that proves your case, generalizations against a default are not helpful or interesting. I am not really sure I would argue in favor of a default by the way -- I need more information -- but I am observing that a default would lower the American peoples' liabilities (and future negative cash flows) by over $15 trillion within the first five years alone. So far, the $15 trillion dollar case in favor of default is the only financial arugment on the table. We need to understand exactly what the financial case is against a default, in numbers that can be defended with evidence thereof. Again, we need the financial numbers and their source to build the case against a default. The case for a default is very strong financially...

PS: You asked whether I know anything about money -- I would say that I have much to learn about money -- how about you...?

Dr William J McKibbin said...

PPS: the comment I made above about $15 trillion in reduced liabiliites is over the first five years, yes. I was not meaning to say that the negative cash flow savings would occur during the first five years, however. The existing $13 trillion dollar debt would come off the balance sheet immediately...

Dave said...

perhaps you should think outside the box on this one. as you know, the FED is a private, for profit corporation. as I'm sure you also know, money/credit is created out of thin air by the Fed, and the banks via the fractional reserve system. perhaps you could pursue the angle that money/credit should be government issued, and debt free. and of course the abolition of the FED.

just a thought.

Benoit said...

I truly hope you are not a doctor in Economics. You fail to establish one very important variable. The fact that default you cause complete depreciation of the US dollar and hence forth the elimination of all monetary assets in the US and abroad. Freaking idiot!

Dr William J McKibbin said...

Hi Benoit, I'm not really clear what you are saying in your last post, but if you are saying that the dollar would lose all of it's value as a result of a default, then I am not sure you understand what fiat currencies are. Anyway, I'll keep your post on the thread as part of the thinking process...

Benoit said...

Fiat currencies are simply moneys declared as being legal tender (as in, must be accepted as the settlement of debts). What you fail to understand is that in a global economy, the purchasing power of you currency means everything. If creditors, either domestic or abroad, are not willing to accept the US dollar to settle debt, then purchasing power of americans is elimanated. Of course you could make the argument that we simple create a new currency but do you really believe that international markets you value a new US currency anywhere near its current level if the US defaulted on its financial obligations, please don't tell me you're that naive.

Dr William J McKibbin said...

Hi Benoit, you said, "What you fail to understand is that in a global economy, the purchasing power of you currency means everything." I guess it's true that I "fail" to accept your reasoning or description of what a fiat currency is. Valuation of the dollar vis-a-vis foreign currencies would be irrelevant in the event of a default, because very few vendors would accept dollars following a default. However, that does not mean that one could not export goods and services from the US to countries. For example, one could accept Chinese Yuan for goods or services produced and exported from the US (which I do already), and then use those Yuan to buy goods and services from other countries around the world (which I do already). So, I'm not sure that my understanding of fiat currencies has failed me as you are suggesting. Anyway, all comments and feedback are welcome, so thanks...

Anonymous said...

It seems the only groups in favor of a default are Libertarians and Communists. They believe a default would lead us towards their respective version of utopia.
Meanwhile, the Democrats and Republicans are not going to pull the plug on the status quo. They will continue to try and save it, to restore investor / consumer confidence and keep the ball rolling...

William, if there were someone you could vote for in the next American election who promised to default on America's debt, what do you think would happen to financial markets during the run up to November 7th?

Morgan Warstler said...

As I posted, but somehow it did not get approved:

The Fed is sitting on MASSIVE amounts of MBS, far more than treasuries.

It should unwind these, foreclose on all 90 day lates and sell EVERYTHING in massive property auction.... but only allow private property owners with 30% down to buy. Hell, don't let anyone in financial sector buy - just to screw bankers.

This will bring $2T in private capital sitting on sidelines to the table.

As property values drop, home "owners" current, but underwater will decide whether to put the keys in the mail box.

This will prove immediately which banks are insolvent. They can be unwound - use Fed to backstop interbank lending, and report over-borrowers to FDIC for liquidation.

This will reduce rents - freeing up dollars for spending elsewhere.

If we really want to one-two punch this thing: END THE MORTGAGE DEDUCTION.

The purpose here is to once and finally stop putting our finger on scale towards home ownership.

We will become a nation of renters.

Renters are far more mobile, and the heavy change in attitudes will more quickly punish states with bad policies.

-----

Before we even look at default, we need to admit we have a far better easier way of rectifying our ship.

Dr William J McKibbin said...

Hi Anonymous, good question about market reactions. In response, I would like to think that voter and market reactions would depend at least partly on the dollar implications that would be associated with a default, which is what I am seeking to understand. Hyperbole are not helpful, but if we could fully understand the financial implications of a default, then at least we the people and the markets would be better informed and prepared to draw our own conclusions...

Anonymous said...

I believe the first reaction to a possible default would be to dump the US dollar in favor of other currencies, gold, or assets. The market reaction would then snowball from there.
I don't believe the markets could be convinced that it wasn't facing an apocalypse.
Btw, who is to say the US would be the only country considering default in such a scenario?

In the aftermath of a collapse, local exchange currencies might be the way to go in beginning a recovery.

Brian said...

The logic here is similar to saying "If I were to burn down my home, I then can walk away from my mortgage AND finally go back to living in my home without a mortgage. " It's completely absurd. If you burn down your house the bank won't walk away, and you will not longer have a house to live in.

If there was a default then the IMF would come in to restructure the debt. The net result would be a restructured version of the same debt along with a huge cost of uncertainty tied to the currency. A much worse position than just managing the debt.

If the US resisted an IMF restructuring then the currency would fall to zero, and all the citizens holding treasuries (which is a high percentage of the debt) as well as any foreign interests would end up with nothing.

These bilked investors would refuse to accept that result, and simply stop all investment, and try to get as much back as they could. From that position you can't just say "Then the banks are free do XY or Z." because there is nobody credible to work with, and no viable currency to do anything. The country would dissolve from within and without and something else would have to take its place.

Most likely there would be one part of the population that would want back into the world market and try to make a deal with those who hold US treasuries, and another part of the population (the part that didn't want to make a deal with the IMF in the first place) that would be mostly exiled from the world market. That population would probably look a lot like some version of North Korea.

A country either supports its currency or does not support its currency. When it plays games with its currency (as North Korea does regularly) it ceases to exist as a viable entity in the world market, and has to become a military state, or a non-govern-able state like Somalia.

You can't say one day "Treasuries are now of no value, but all the other cash and assets I have are of value so buy those. " Who is going to buy these assets?

Debt is merely a bet on future productivity. If you show that you have no intention of ever paying this future productivity back then the economy will cease to function, and you won't have a country anymore. Sorry, no free lunch.

VangelV said...

So your talking about GLOBAL default of debt or Global debt forgiveness? Do you actually understand anything about how money works.

What I am talking about is fiat money losing its purchasing power until it becomes worthless. I do know how money works but it seems that you do not. The market will not choose fiat money and clearly prefers a hard money system in which notes are backed by a physical commodity like gold or silver. But that is something governments do not want because it limits their ability to transfer wealth from workers, savers, and investors to their constituents.

Every dollar of currency represents debt. Without debt, no value of that currency exhists thus total global meltdown of currency valuation. Ummmm not a good idea at all.

A default on the unfunded liabilities does not extinguish any of the treasury debt. And letting the over-leveraged banks fail will not do away with the treasuries that are backing the currency. The default would cause the currency to collapse if treasury bond holders are not paid but that does not have to happen if politicians have the courage to stand aside and let lenders use their treasury holdings to pick up assets at liquidation sale prices. (For the record, I do not see that happening and expect more liquidity to be added to the system until we get hyperinflation.)

We certainly are not going to go back to the barter system. LOL! Maybe I have you wrong here but if not your way out there.

You don't have to go to barter. You can go back to the market's money of choice, gold and silver coins and notes that are backed by physical gold or silver.

VangelV said...

While I'll agree that austerity measures are not palpable and largely that depends on where the tax increases are seen.

Tax increases would cause more problems. To solve the problem you need a massive cut in government spending.

And that expansion is definately the most dangerous creating many potential problems down the road.

It was money printing and the expansion of credit that created the problem that we have now. Taking that route again will make the problem bigger.

Default would destroy our ability to ever secure debt purchasers ever again in the way the U.S. is used to.

Great. What you need is a limited government that does what it is permitted to do by the Constitution. Not being able to saddle future generations with massive debt loads is a good thing.

Forget that China might HAVE to go towar over that, they certainly would never buy our debt again.

As I wrote above, that is a good thing. Why is the ability for the government to borrow supposed to be positive for individuals?

Morgan Warstler said...

I'll also note here, that if Local, State, and Federal governments focus on Productivity Gains (say 4-5% a year for 5 years) through outsourcing and privatization... the savings?

$400B EVERY YEAR.

This would still place government below the private sector in productivity gains since 2004, let alone 1994 - where the governments still operate.

----

I'm going to say it again: LONG BEFORE we have a discussion on the nuclear option - the two policies I've outlines will SOLVE OUR PROBLEMS.

Solving for SS and Medicare is easy by comparison.

The main thing is deflating the value and monthly payments on housing. The BANKS own the property, deflating it, and we comparatively remain unscathed.

After that Government Productivity solves for the deficit - and without the stranglehold of Public Employees and Wall Street money - small business interests will rule in DC and state government everywhere.

Keys in the mailbox, rent for half as much, put the savings somewhere else.

Morgan Warstler said...

That's the manageable and moral kind of default.

VangelV said...

My question is make a financial case with the numbers that proves your case, generalizations against a default are not helpful or interesting.

Here is the argument for default. While the US debt may be servicable, there is no way to pay off the unfunded liabilities in the SS and Medicare systems. The numbers are quite simple. The total Social Security unfunded liability is estimated to be around $17 trillion. The unfunded liabilities for Medicare Part A are estimated to be around $36 trillion, about $1 trillion less than the liabilities for Medicare Part B. The unfunded liabilities for Medicare Part D is around $16 trillion. That means that we are looking at around $100 trillion of promises that have no funding attached to them.
Given that the data from the Fed claims that the private net worth of all Americans is around $50 trillion dollars, we should be able to figure out the extent of the problem.

The way I see it, there has to be reform that would make it clear to taxpayers that those unfunded liabilities will not be paid out as was expected. A default on internal obligations would still permit the currency to survive but unless the government gets rid of the Federal Reserve System and goes back to a hard money system there is no way to avoid a collapse in purchasing power.

PS: You asked whether I know anything about money -- I would say that I have much to learn about money -- how about you...?

Here you go. The best book on money ever written and one of the finest contributions to economic theory made in the 20th century. If you have e-Reader software you can download the book for free here:

http://mises.org/books/TheoryMoneyCredit.epub

If you do not you can view a PDF version at this link:

http://mises.org/books/tmc.pdf

A shorter treatment was written by Murray Rothbard. It can be found at the links below.

PDF: http://mises.org/books/whathasgovernmentdone.pdf

ePub: http://mises.org/books/WhatHasGovernmentDone.epub

Or you can look at Jesus Huerta de Soto's classic, Money, Bank Credit, and Economic Cycles.

PDF: http://mises.org/resources/2745/Money-Bank-Credit-and-Economic-Cycles

ePub:http://mises.org/resources/2745/Money-Bank-Credit-and-Economic-Cycles

VangelV said...

perhaps you could pursue the angle that money/credit should be government issued, and debt free.

Great. Let us have Robert Mugabe print a lot of nice coloured paper. While I agree that the Fed should be abolished, the supply of money is too important to be left to government fiat. What we need is competition and a free market system in which consumer choice determines what is acceptable as money. Governments don't like that because people choose gold or silver and they can't be created out of thin air for political purposes.

Dr William J McKibbin said...

Hi VangeIV, thanks for the analysis, and yes, the Mises book library is fantastic -- my personal ebook library for economics is almost 500 volumes from not only Mises but every where else as well -- economics is my profession -- on the other hand, I remain awed by what I do not understand about money, accouting, finance, and economics -- mastery takes a lifetime -- thanks once again for the analytical outline...

VangelV said...

You fail to establish one very important variable. The fact that default you cause complete depreciation of the US dollar and hence forth the elimination of all monetary assets in the US and abroad. Freaking idiot!

The dollar is a fiat currency and all fiat currencies lose all of their value. I agree that a default on the outstanding treasuries would cause the USD to become worthless overnight. But that may not be the case if the default is on the unfunded liabilities that we see in the Social Security, Medicare Part A, Medicare Part B, and Medicare Part D systems. In fact, your lenders may be happy to see spending under control and might refrain from abandoning the treasury market due to concerns about the inability to pay them back with dollars that have the same purchasing power.

In effect, the default on domestic SS and Medicare obligations that can't be met without resorting to the printing press would have the USD gain credibility, particularly if the municipal bond market collapses and the government chooses not to bail out the states, counties, and cities.

VangelV said...

Fiat currencies are simply moneys declared as being legal tender (as in, must be accepted as the settlement of debts). What you fail to understand is that in a global economy, the purchasing power of you currency means everything. If creditors, either domestic or abroad, are not willing to accept the US dollar to settle debt, then purchasing power of americans is elimanated.

I agree. As I wrote above, failure to pay off treasury debt will cause the USD to collapse and there would be hyperinflation in the US. But if the government defaults on its SS and Medicare promises the effect on the purchasing power of the USD is likely to be positive and you would have a deflationary event that would reward savers who have kept their money out of the banking system.

The banks would be insolvent and FDIC could not pay back depositors because it does not have the funds necessary to do so. That would make money in circulation worth much more and the economy would have to readjust the price of labour, capital and commodities. This last scenario is being pushed by inflationists like Bob Prechter but their error is the assumption that the central banks and the federal government would stand aside and refrain from using the printing presses to add liquidity as they would have to in a hard money system. (Of course, a hard money system would not permit the massive expansion that created the bubbles in internet stocks and housing in the first place but that is a topic for another thread.)

Morgan Warstler said...

The concept of unfunded liabilities, is just that - a concept.

We simply will give less in care and comfort than we are scheduled too.

Again, this is a manageable default.

Notice: default on houses, default on Public Employee pensions, default on Medicare /SS -

Things turn out ok.

We have shit money, this is true. Fiat is a joke, we should demand 100% in reserves, loaning $1 for every $1 held.

Another way to do it is to force banks to keep the loans they write on their books.

VangelV said...

However, that does not mean that one could not export goods and services from the US to countries. For example, one could accept Chinese Yuan for goods or services produced and exported from the US (which I do already), and then use those Yuan to buy goods and services from other countries around the world (which I do already). So, I'm not sure that my understanding of fiat currencies has failed me as you are suggesting. Anyway, all comments and feedback are welcome, so thanks...

You may be having two one-way conversations and talking past each other. I believe that he is saying that when the USD becomes worthless the advantage of having a reserve currency would be lost and the US would become a has been former power, like Britain. If Americans had to trade real goods to pay for their imports the standard of living would collapse and most Americans would be a lot poorer.

Certainly the old, who rely on fixed income would be wiped out as would anyone of public assistance. The parasite class would have to get real jobs and society would be turned upside down. Think of a university Professor having less prestige and influence than a street hustler who is nimble enough to trade or obtain goods from the black market. Think of the old being dependent on the young. Of things being so screwed up that one has a hard time distinguishing reality from illusion.

If you want to see where a collapse in purchasing power leads you might be interested in Paul Cantor's brilliant analysis of Thomas Mann's inflation story, Disorder and Early Sorrow.

http://tinyurl.com/23tuf7c

VangelV said...

It seems the only groups in favor of a default are Libertarians and Communists. They believe a default would lead us towards their respective version of utopia.

Libertarians do not believe in utopia but in reality. It is a fact that all fiat currencies lose all of their purchasing power and that the USD has lost more than 85% of its purchasing power since Nixon closed the gold window in 1971. It is a fact that unfunded promises of around $100 trillion cannot be kept, no matter what the Keynesian nutcases keep trying to spin.

Meanwhile, the Democrats and Republicans are not going to pull the plug on the status quo. They will continue to try and save it, to restore investor / consumer confidence and keep the ball rolling...

I agree. The two parties are very similar and have been since the 1890s. Both are losing support as independents are disgusted by both parties and their lack of principles.

VangelV said...

Hyperbole are not helpful, but if we could fully understand the financial implications of a default, then at least we the people and the markets would be better informed and prepared to draw our own conclusions...

As I wrote above, there are two possible defaults.

One is to default on the national debt by not paying treasury holders what they are due. That action would make the USD worthless immediately and the US would have a hyperinflation that would destroy the financial system, social order, and the political system.

The second default is to ignore the promises made by the SS and Medicare programs. If that happens, the currency might gain purchasing power as debt holders are satisfied that the government has tried to get its spending under control.

And as I wrote above, Thomas Mann did a good job explaining what happens when a currency dies. Society is turned upside down and people have a hard time separating reality from illusion. Cantor is a good writer so you should enjoy reading the paper.

VangelV said...

This will prove immediately which banks are insolvent. They can be unwound - use Fed to backstop interbank lending, and report over-borrowers to FDIC for liquidation.

I would say that most of them are insolvent. And it is clear that the FDIC does not have the money to bail out depositors. The only way to make them whole in nominal terms is to lean on the printing press but that creates major problems as prices in some sectors explode.

Before we even look at default, we need to admit we have a far better easier way of rectifying our ship.

I don't see the politicians having the courage to let the bad banks and unprofitable companies go under. I can't see them stand aside and let foreign bond holders pick up American housing at pennies on the dollar as the former owners (who have a vote) are told to rent.

Dr William J McKibbin said...

Hi VangeIV, I am taking notes on all thoughts, thanks. Also, your observation about how the two-party system has created this mess since 1890 is a most useful point. When we compare the US political economy with the pre-industrial revolution political economy, important differences stand out -- the rise of Federalism in particular. You have me thinking and reading...

VangelV said...

I'll also note here, that if Local, State, and Federal governments focus on Productivity Gains (say 4-5% a year for 5 years) through outsourcing and privatization... the savings?

First, a municipal bond default has nothing to do with the federal treasury bond market. The states, counties, and municipalities, have to learn how to live within their means and should be forced to do so. If that means laying off overpaid public sector employees and getting rid of their fat pensions so be it.

Second, the federal debt is manageable on its own. There is no default required if the government acknowledges that the SS and Medicare systems are insolvent and that unfunded promises will not be kept. That default would not cause a crisis for the USD and may actually increase its purchasing power for a while.

Third, government spending has to come down by a minimum of 50%. There is no need to waste money by stationing troops in Japan, Germany, Korea, Iraq or Afghanistan. They have to come back home and get back into civilian life as soon as possible. There is no need to spend hundreds on billions on the War Against Drugs. Legalizing drugs will cause prices to collapse, raise additional tax revenue, and reduce property and violent crimes by a massive amount. When drugs can be purchased from the drug store that makes 8% margin there is no need to have dealers shooting each other for the 400% margin that was available when drugs were illegal. There is no need to have a federal Department of Energy, Commerce, Housing, Education, etc., etc., etc. The people who work in those departments need to be fired so that they can use their skills productively. There is no need to have government run airports, trains, fire protection services, police services, mail delivery, schools, waste treatment plants, etc. All of the services can be provided cheaper and better by a competitive system in which companies depend on consumers to vote for them with their wallets.

VangelV said...

That's the manageable and moral kind of default.

It is a matter of simple mathematics. Unfunded liabilities are nine times the federal debt level and stand at around $100 trillion. No matter how we try to sole the problem there has to be a default on SS and Medicare promises.

VangelV said...

The concept of unfunded liabilities, is just that - a concept.

You mean a concept like gravity or electromagnetism?

Look, no matter how you spin it the promises made by the SS and Medicare systems require payouts into the future. If you add up all of those payouts you need to have around $100 trillion to fund them. If you do not have the $100 trillion you have insolvent systems that will fail to make good on those promises. It is as simple as that.

We simply will give less in care and comfort than we are scheduled too.

If you want to argue that you can keep those promises in nominal terms if you use inflation I will agree. Or we could cut back and ration services based on incoming revenues. But that will not work very well under the current demographic conditions because there aren't enough productive individuals to pay for those services.

Notice: default on houses, default on Public Employee pensions, default on Medicare /SS -

I agree. Those are all doable practically. But I doubt that there is the political will to do what must be done so I suspect that politicians will keep their immoral transfer of wealth game going for as long as they can.

We have shit money, this is true. Fiat is a joke, we should demand 100% in reserves, loaning $1 for every $1 held.

I agree. But to fix the problem all we really need to do is to repeal the legal tender laws. It would not be long until the fiat currency saw its purchasing power match its intrinsic value and people forced the government to live within its means.

VangelV said...

Hi VangeIV, I am taking notes on all thoughts, thanks. Also, your observation about how the two-party system has created this mess since 1890 is a most useful point. When we compare the US political economy with the pre-industrial revolution political economy, important differences stand out -- the rise of Federalism in particular. You have me thinking and reading...

I am not an American so my knowledge of your political system is not as good as it should be.

A good discussion of the changes can be found in Chapter 30 of the book, History of Money and Banking in the United States: The Colonial Era to World War II. You can download the free version at the link below.

http://mises.org/books/historyofmoney.pdf

An audio version can be found at:

http://mises.org/media/5090

Anonymous said...

I agree. The two parties are very similar and have been since the 1890s. Both are losing support as independents are disgusted by both parties and their lack of principles.
There are no credible alternatives to the status quo in the US. If the current system fails, it won't be because 'independents' demanded it.
History warns us to expect a more authoritarian government in the aftermath of a socioeconomic crisis.

Another Anonymous said...

I could not disagree more with VangeIV. Essentially all of his arguments are wrong and based on invalid assumptions. Fables about "unfunded liabilities" are ridiculous scare stories manufactured by bankster con-men to rob the American people and wreck the American economy. Vange, like all Austrian-economists is nostalgic for a legendary gold-standard era which never really existed. We don't live under a gold standard, but under a fiat currency, and nobody here has evinced real knowledge of what a fiat currency is. Modern fiat currencies are not based on "confidence" but have a very real backing. A gold star for someone who comes up with the answer.

National debt problems or burdens are impossible under a fiat currency controlled by a sovereign government. Period. There is no problem with the deficit, except that it is currently too small.

Sane deficit spending is the thing to do now. All the empirical facts and economic history support this. What are the countries that have had a real Keynesian stimulus response to the crisis and ignored the ranting of the austerians and deficit terrorists?: China, Australia and eventually, S. Korea - they all have had far better results and growth than the austerity lunacy states. I note that James Galbraith, far from being an idiot, has been an adviser to the Chinese government - which understands economics a lot better than ours.

The US & the rest of the world basically had Keynesian / full employment policies from WWII to 1980. This was the greatest prosperity the world has ever seen. For the last 30 years, neoliberal, monetarist, anti-Keynesian, "fighting inflation" with unemployment policies have held sway, with ridiculous theories concocted that purported to show that the flabby tool of monetary policy - playing around with interest rates, was more powerful than the potent tool of fiscal policy. These last 30 years have had much worse economic results, slower growth, financialization, wealth distributed upwards.

The New Deal did not cause the pre-existing Depression as Vange wrote - it cured it. It was dramatically successful in reducing unemployment and creating growth, with only a blip in 1937 because of a return to misguided austerity, balance budget policies. Do people really think that their grandparents were fools to reelect FDR with whopping majorities in Congress in 1936- they did so because FDR quickly made their lives better.

Another Anonymous said...

Social Security is not going broke, even using gold-standard economics that ignores the fiscal power of the government. Look at Baker & Weisbrot's book Social Security: The Phony Crisis. The Social Security scare is a scam perpetrated by thugs like Pete Peterson who knows exactly what they are doing, who are knowingly lying and deceiving people like Vange. Social Security ain't broke. The only way to destroy it is to fix it. The only problem with Medicare is that it doesn't cover everybody, only the expensive oldsters, and not the profitable youngsters. If we had a Medicare for all program, it would make health care so much cheaper and more efficient that we would have a macroeconomic problem of government surpluses, which cause real problems in almost all situations, unlike deficits.

Worrying about unfunded liabilities far in the future, summing up over many years and pretending that it would have to be paid at one time rather than continually paid over time is ridiculous. One might as well calculate the amount that all of humanity will excrete in the next century, get some enormous amount of s**t, and pretend we are immediately about to be overwhelmed by a tidal wave of s**t. In the real world, flush as you go works quite well.

Why do the banksters oppose sane, tried and tested, workable Keynesian measures? -BECAUSE THEY KNOW THEY WOULD WORK. People would see that their government could do things to directly help them and help the economy as a whole - and they might wake up and stop giving corporate welfare to the banksters. We might get a real, efficient national health care system like the rest of the world, instead of a fascistic scam forcing people to pay through the nose to criminals for inferior care.

Again, the US is in no risk of default and has no debt problem. Treasury bill auctions are oversubscribed with more buyers than sellers. "Printing money" to finance large amounts of an even larger debt would not be inflationary under current conditions. Default is illegal and it would require a constitutional amendment to default on US debt. Why on earth would the USA wreck its economy for a nonexistent burden, that amounts to typing in numbers into computers? Dr McKibbin: If you want to learn about real macroeconomics, based on real world finance and accounting instead of comical pseudomathematics (I'm a mathematician, so I know to call bullshit on 98% of standard macroeconomics) - the coming wave of the future, I suggest you go to http://bilbo.economicoutlook.net/blog/ - I think that someone mentioned your blog there, which is how I found it.

Dr William J McKibbin said...

Dear Anonymous, for the record, I have been an advocate of monetary expansion and stimulus spending from the start, however the austerity hawks seem to have won the day, to my chagrin. Should the US go full power on austerity measures, then the US is going to feel that and there will be repercussions for life styles, whether we like that or not. I weep for America as the austerity hawks find their way into power.

Up to 36 million Americans will be unemployed at some point during 2010 -- that's a level of pain that Main Street will notice, especially as large segments of the economy are protected from the depression on Main Street, including Wall Street bankers, Federal workers, and the automobile industry.

Our nation has but three ways forward: monetary expansion (stimulus), austerity, or default. Monetary expansion risks inflation. Austerity risks deflation. But, what are the risks of a default specifically (?). I confess that we econmists have not studied the default option in sufficient detail...

Morgan Warstler said...

Public employees currently receive $1.2T in wages. I'm talking about TRULY cutting this buy $400B.

What I advocate is GOV.20, wherein every procedure of government is exposed - I'm talking the day to day paper pushing, with the singular goal of Productivity Gains.

At the state level and local level, this will happen because Federal money will be tied to Productivity.

This means the states that make the most violent cuts in public employee pensions get the largess.

It also means that the technology platforms built for the early adopting states are easily ported to the union run states, when they continue to be bankrupt.

Example:

We're talking about radical new approaches to video based education. Record the very best teacher who teaches a given text book, allow every student with the text book to use that video, collect the questions, and improve the best teacher's recording with feedback on what is not understood.

No more tens of thousands of teachers repeating same lessons every year, instead continuously improve the already record best lecture - tie it to the textbook, and use in class "assistants" who's job it is to babysit, and cheer lead kids through the now VERY COOL interactive lessons.

The beauty here is it only takes one state - say Texas - and suddenly this new way, a far cheaper way, hangs out there getting better and better - taunting other states - and empowering them to get out from under yoke of teacher unions.

It doesn't take much to get there, we just need a crisis (we have one) and a pro-small business president / congress - we're getting them.

-----

As far as SS / Medicare goes - NO we will not print money for them, we will move towards a TWO TIER healthcare system.

Bottom tier will average $3-4K per patient in costs - this means heart surgery with a giant scar down your chest. It means cancer drugs that are out of patent. It means far fewer MRIs / C Ts - and they are not used for preventative medicine. It means rationing based on costs under a global budget. It means the exact kind of care - lines, and waits that Europe has. It means doctors employed VA style.

Top tier - exactly what we have now - approaching $10K+ per patient per year. This will continue to go up - after a while, the only thing anyone wants to buy more of is health.

VangelV said...

History warns us to expect a more authoritarian government in the aftermath of a socioeconomic crisis.

That might be true for the US. But given the fact that many Americans are armed and that the tradition of liberty has yet to be killed off by the public school system we may see the size of government be reduced by a substantial amount and better prospects once the lousy investments are liquidated.

VangelV said...

Social Security is not going broke, even using gold-standard economics that ignores the fiscal power of the government. Look at Baker & Weisbrot's book Social Security: The Phony Crisis.

I have looked at it. The authors talk about the SS trust tund, which does not really have any marketable assets to fund operations. The SS 'loans' to the government have already been spent and all there is left is an IOU by the government to pay SS back. But the government is running a deficit and can't pay SS back.

Baker and Weisbrot play a game of make believe by assuming value for nonmarketable securities that have none. In a make believe world there is such a thing as a free lunch and governments can keep running deficits forever but here in the real world we have to see things as they are, not as we wish them to be.

The only problem with Medicare is that it doesn't cover everybody, only the expensive oldsters, and not the profitable youngsters. If we had a Medicare for all program, it would make health care so much cheaper and more efficient that we would have a macroeconomic problem of government surpluses, which cause real problems in almost all situations, unlike deficits.

No, the problem is the unfunded liabilities. The promises made cannot be kept because there is no money to pay for them.

Worrying about unfunded liabilities far in the future, summing up over many years and pretending that it would have to be paid at one time rather than continually paid over time is ridiculous. One might as well calculate the amount that all of humanity will excrete in the next century, get some enormous amount of s**t, and pretend we are immediately about to be overwhelmed by a tidal wave of s**t. In the real world, flush as you go works quite well.

Great. Let us be like the grasshoppers and ignore that winter is coming. Economic and financial illiteracy is not a virtue. We have to see the SS and Medicare programs as they are and can't pretend that there is money for them if it is not there. As I wrote, the math and accounting suggest that the default is inevitable.

Why do the banksters oppose sane, tried and tested, workable Keynesian measures? -BECAUSE THEY KNOW THEY WOULD WORK.

On what planet do you live? Keynesianism has dominated government policy for decades. We are in the mess that we find ourselves in because of those policies. The long term that Keynes told us not to worry about is here. You can pretend that there is nothing wrong and look to Hoover/FDR as salvation but it won't work any better now than it did in the past.

VangelV said...

I could not disagree more with VangeIV. Essentially all of his arguments are wrong and based on invalid assumptions.

That is because you are a Keynesian and have no idea about how the real world works. You expect the solution to come from government bureaucrats that set policies without considering the knowledge problem that destroyed centrally planned economies in the past.

http://www.youtube.com/watch?v=d0nERTFo-Sk

The New Deal did not cause the pre-existing Depression as Vange wrote - it cured it. It was dramatically successful in reducing unemployment and creating growth, with only a blip in 1937 because of a return to misguided austerity, balance budget policies. Do people really think that their grandparents were fools to reelect FDR with whopping majorities in Congress in 1936- they did so because FDR quickly made their lives better.

If you want to see what a cure looks like you might try seeing how Harding and Mellon handled the post WWI crisis that caused the economy to contract sharply and unemployment to explode. They cut government spending and taxes and a year later the economy was booming.

Contrast the Harding recovery and boom to Great Depression that was caused by the big government policies advocated by Hoover and FDR. Harding inherited a mess. Between 1920 and 1920 GNP declined by around 24% while the number of unemployed people increased by more than 130%. Instead of spending money and increasing taxes Harding and Mellon did the opposite. Two years after he took office spending was down by around 50% while tax revenues were reduced by 40%. As a result, the economy recovered sharply and just a year after Harding took office the economy began to boom.

Things did not work out as well for spend and tax policies of Hoover/FDR. In their paper, New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis (ref: http://www.economics.hawaii.edu/research/seminars/02-03/02-21.pdf), Cole and Ohanian wrote, "Real GDP per adult which was 39 percent below trend at the trough of the Depression in 1933, remained 27 percent below trend in 1939. Similarly, private hours worked were 27 percent below trend in 1933, and remained 21 percent below trend in 1939. The weak recovery is puzzling, because the large negative shocks that some economists believe caused the 1929-33 downturn - including monetary shocks, productivity shocks, and banking shocks - become positive after 1933. These positive shocks should have fostered a rapid recovery with output and employment returning to trend by the late 1930s." The bottom line is that the New Deal policies failed to end the Great Depression. The high taxes and attacks on business created an air of uncertainty that caused private investment to dry up and the jobs market did not recover. Consumers had a tough time because they could not afford to purchase many goods and services.

The facts show a huge difference in outcome between the two approaches. The big government, central planning approach led to a prolonged contraction and low economic performance that lasted for a decade and a half. The small government, low tax, hands off approach let the correction run its course and allowed private investment to drive the economy to recovery.

I think that you need to stop reading Keynesian spin and look at the actual facts as they were.

VangelV said...

Dear Anonymous, for the record, I have been an advocate of monetary expansion and stimulus spending from the start, however the austerity hawks seem to have won the day, to my chagrin.

If they had won you would have seen AIG, Fannie, Freddie and GM be allowed to fail and the true money supply would not have gone up as much as it did.

http://tinyurl.com/2cvysny

VangelV said...

Our nation has but three ways forward: monetary expansion (stimulus),...

This leads to the collapse of the USD, state and municipal bankruptcies and greater distortion in the markets. You can postpone the crisis for a while but that will only make the subsequent crisis, which is necessary to cleanse the system of malinvestments, much worse.

austerity,...

That will not happen because the Keynesians who run government agencies will not abandon their religion and voters will not accept austerity if it is spun a certain way by both the left and the right. The left will not abandon the Welfare State and the right will not abandon the Warfare State.

or default...

If you mean defaulting on treasury bonds you will destroy the USD and will have a hyperinflation that will change the US forever. If you mean defaulting on SS and Medicare obligations you could have a viable option but only if it coincided with a massive cut in government spending. That is unlikely to happen either.

Monetary expansion risks inflation. Austerity risks deflation. But, what are the risks of a default specifically (?). I confess that we econmists have not studied the default option in sufficient detail...

If your currency is worthless you lose the advantages gained by the reserve status of the USD. A default on debt by the government would wipe out savers and those on fixed incomes. It would make most government services impossible to provide, will require that you pull your troops back home, would end the war on drugs, and would wipe out the Welfare State. Social order would break down and society will be turned upside-down. Sorry but I don't see how the default option is going to be good for anyone other than those people who have made a bet against the purchasing power of fiat currencies.

VangelV said...

Public employees currently receive $1.2T in wages. I'm talking about TRULY cutting this buy $400B.

Still too much. We need government to be limited and that requires repealing many laws and regulations, fewer bureaucrats, and a competitive system that allows a choice of service providers based on consumer preferences.

Example:

We're talking about radical new approaches to video based education. Record the very best teacher who teaches a given text book, allow every student with the text book to use that video, collect the questions, and improve the best teacher's recording with feedback on what is not understood.


You are talking about central planning when we know that it does not work. If you want to improve education all you need is competition. Get government out of the business of education and academic performance will improve.

As far as SS / Medicare goes - NO we will not print money for them, we will move towards a TWO TIER healthcare system.

Why two tiers? Why not allow more competition that provides a wide spectrum of choices?

boneman said...

Wow. It's going to be a while till you get to my comment here, isn't it?
First, without having read all the other comments, you mentioned only three optins, then listed the points of only one of the three.
Interesting choice. I've come from a completely different school of thought, however. Maybe you've even seen my remarks around various comments.
No biggie, but, the problem you are attempting to solve actually seems to have yet another solution.
Ending the war (and for security reasons, you realize that if it were going to be tomorrow at 3 AM, we would not find out until the country is cleared out.
TA-DAA!
Talk about a windfall!
Next, it seems the Senate is under te impression that the oil industries in and around the United States of America are not profitable enough, and they are being given (no repayment plan) $35 Billion annually to stay and poison our soil, gulf, lakes and rivers with their toxic ilk.
I'de say, stop that business right away.
If it isn;t profitable enough for them, Say La-Vee (I know, but, I never did learn French)
OK, now about the war on marijuana. Dang, throwing away $12-$15 Billion a year to continue a war on what has to be the most benign laughter medicine ever seems a bit overboard, doesn't it. Especially when you consider that aspirin overdoses are about 400 a year and pot overdoses are still at zero for ten thousand years. Add to that the fact that legalizing pot creates tens of thousands of jobs and opens up thousands of new industries (all fairly small in comparison to, say, GM, but, working folks, none the less)
Fearing to be told that I was out or=f room for this many words brings this all to a quick end, however. Do return word when you come to my suggestions.
firstfarmandweatherreport.blogspot.com/

Anonymous said...

No its not James Bond or Science Fiction.

The largest holder of US Debt could well be the Rothschild Banking Group.

Centuries of money lending has made "International Bankers" very rich with the power that only Trillions of dollars can bring.

Banking Houses have backed both winners & losers in wars & other ventures & made enormous profits no matter who won.

The Rothschild "Family" made fortunes out of wars,"lending" to both sides with the proviso that if the loosing side could not pay its bill then the winning side would pay it for them.

The Bankers then tyrannize Governments (populations ) who do not submit to their economic system of plunder.

The "Bankers" even in the US refer to their "Mother Bank" as the Bank of England.

The Bank of England is the Rothschild group and the London banking houses ultimately "own" the US "Fed" Bank via a nefarious collection of other Banks , stock holdings subsidiary firms etc.

The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914.

These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914.

In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control. All 5 directors of the FED are Jews.

Money is needed for wars -- big money -- or thats where the really big money is to be made in Banking.

At the end of WWI the Rothschild Bank had a seat at the negotiating table

At the end of WWII the UK was bankrupt with the Bank of England ( Rothschild ) holding the Mortgage.

Yes its hard to believe that the Rothschild group practically "own" the USA and the UK which may explain why the US the UK and Israel pushes for War on Islam.

http://www.save-a-patriot.org/files/view/whofed.html

http://www.save-a-patriot.org/bbs/bbs.html

The Money Masters - How International Bankers Gained Control of America.

http://video.google.com/videoplay?docid=-515319560256183936#

The above is shockingly no exaggeration , not antisemitic but true & we need to be alarmed.

http://tinyurl.com/yfgxton

http://www.youtube.com/watch?v=USGSOViaulc

http://www.minesandcommunities.org/article.php?a=65

http://tinyurl.com/m884bs

VangelV said...

Next, it seems the Senate is under te impression that the oil industries in and around the United States of America are not profitable enough, and they are being given (no repayment plan) $35 Billion annually to stay and poison our soil, gulf, lakes and rivers with their toxic ilk.

This comment smells bad. From everything that I have seen the government gets a huge amount of taxes from the activities of the energy companies. Please provide support for the $35 billion claim by citing a credible source that explains where the numbers come from. If I were to be forced to guess I would say that tax costs would be around four to five times net income for the average integrated oil company.

OK, now about the war on marijuana. Dang, throwing away $12-$15 Billion a year to continue a war on what has to be the most benign laughter medicine ever seems a bit overboard, doesn't it....

Why stop there. The War on Drugs should be ended immediately because it creates far more harm than good.

VangelV said...

The largest holder of US Debt could well be the Rothschild Banking Group.

Please cite sources that tell us who are the holders of US debt. All of us have opinions but unless they are supported by evidence they are useless.

Anonymous said...

VangelV --- sorry but the information you request is well guarded & a matter of National Security.

However History & Finance students will know that the Rothschild family were central in Banking in Europe in the days of Napoleon & "became" The Bank of England before setting their sights on America.

Their business is Banking to make money & they have successfully focused on this by being well known & having the resources.

http://www.youtube.com/watch?v=USGSOViaulc

http://www.youtube.com/watch?v=8F4IGwuKdUQ&feature=related

"Finances" of the Rothschilds or Rothschild holdings are secret as one can expect.

Jewish presence in "Banking" is well documented & as "always" the 5 Directors of the US FED are Jews.

http://www.realjewnews.com/?p=177

http://www.rense.com/general77/POWERS.HTM

http://www.youtube.com/watch?v=oWFhfoAvkmc&feature=related

http://www.youtube.com/watch?v=CkzFbKeK5kM&feature=related

http://iamthewitness.com/DarylBradfordSmith_Rothschild.htm

Morgan Warstler said...

Sorry, must have sources cited. Otherwise, I use Forbes for wealthiest. Each generation of any fortune, dilutes its worth. QED.

Also, Jews rock.

VangelV said...

However History & Finance students will know that the Rothschild family were central in Banking in Europe in the days of Napoleon & "became" The Bank of England before setting their sights on America.

So what you are saying is that you are stating an opinion and have no facts to back up your speculation. You have no idea who is the biggest holder of USTs and are picking the Rothschild family because that is easy for conspiracy theorists and anti-Semites to believe. But I suggest that you have it absolutely backwards. Had you paid attention you would have noticed that in 2004 N M Rothschild & Sons made an announcement that it was pulling out of the London gold fix. I suspect that the Rothschild interests have been running away from fiat money and gone back into the free market's money of choice--gold. At the time gold was around $390 so their move seems to have paid off.

I suggest that you stop looking at hidden conspiracies and open your eyes to what is obvious.

VangelV said...

Sorry, must have sources cited. Otherwise, I use Forbes for wealthiest. Each generation of any fortune, dilutes its worth. QED.

People miss the obvious. In all non-primitive human societies there is a power law distribution that describes how much wealth is held by each decile of population. It is perfectly normal for more than half the wealth in a country to be held by the top 10%-20% of the population. The best societies are not those that have a more egalitarian distribution but those that allow movement as some lose their wealth while others increase it. A vibrant economy will have a high turnover and will see many new individual rise to the top as they come up with some product or service that makes them rich as consumers choose to buy what they have to offer. At the same time, many of the previous generation rich will slide down the scale as they are unable to maintain the capital accumulation activities as effectively as they (or their parents) used to when they became rich.

The second best way to ruin a society is to have government crowd out productive activity and create a large parasite class of bureaucrats and dependents. The best way is to adopt policies that create hyperinflation.

Another Anonymous said...

VangeIV, you have your religious beliefs, which the banksters want you to be deceived by. But you don't really believe them in the real world. You write that the SS Trust Fund has no assets but government IOUs (actually a particularly nice kind of IOU that bears interest). These IOUs are called dollars - and if you think they are worthless I will be happy to take all of your dollars off your hands.

You want to worry about imaginary unfunded liabilities - without looking at the real-world assets and capacities. Even by obsolete gold-standard economics, SS is not going broke and the professional liars who purport it is have to work very hard to come up with bogus numbers to show imaginary problems. Yes, grasshopper thinking is correct. You have to get through the short run to get to the long run. Your idea is to conserve oxygen to keep from suffocating 100 years in the future by stopping breathing now. The only way there will be a "winter" is if it is created by the policies you favor. Cole & Ohanion produced a well known piece of ad hoc garbage.

Replying to Morgan Warstler on health care: "It means the exact kind of care - lines, and waits that Europe has. It means doctors employed VA style." If only we could have the far superior European style healthcare (or VA care under Clinton, and now Obama - one of the few good things he did was restoring the VA to the model system that Clinton built). The two-tier system provides worse results for the upper tier than the results provided to everybody in Europe or anywhere else civilized.

AMERICAN HEALTHCARE IS S**T - a disgrace, even for the rich. Is it so surprising that something run as a scam gives crappy results? The lowest third in income of white UK residents has better health across the board, live longer lives, than the top third of white Americans. And Americans lead a healthier lifestyle - they smoke less.
Again, people who think they are hardheaded are just falling for a scam. The smart, cheap, efficient thing, as usual, is the morally right thing - socialistic health care for all.

The whole point of thinking very carefully about the nominal, financial side in MMT - which describes what really happens in banks rather than concocting some fable - is to understand the real world by avoiding the confusions between the two that "mainstream" or e.g. Austrian economics perpetrate.

VangelV said...

VangeIV, you have your religious beliefs, which the banksters want you to be deceived by....

The banks would be allowed to fail in the market system that I prefer so let us not divert attention from your weak position by attributing to me a position that I do not hold. We note how you right and left wingers never seem to be able to support your positions very well and keep diverting from the argument. My position is based on logic and sound theory. It is yours that is based on theology.

But you don't really believe them in the real world.

On the contrary, my position is entirely based on the real world and not the make believe fantasy that you seem to be stuck in.

You write that the SS Trust Fund has no assets but government IOUs (actually a particularly nice kind of IOU that bears interest).

The 'interest' paid does not accrue in the fund by showing up as an accumulation of treasury debt or cash; it is in the form of new non-negotiable treasuries that have no market and are only claims on future taxes.

That is the problem. The only way to pay the obligations, is to increase taxes in the future to retire those non-negotiable United States Treasury bonds. But the math does not work because taxes would have to rise on all earnings to more than 75% of income and that will not happen because the young are not going to pay for a pay as you go system that primarily benefits for the old.

These IOUs are called dollars - and if you think they are worthless I will be happy to take all of your dollars off your hands.

Boy are you deluded. The SS trust fund has no marketable securities, no cash, no assets of any type. All there is in the fund are IOUs.

You want to worry about imaginary unfunded liabilities - without looking at the real-world assets and capacities....

Please provide a link to an audited statement of SS that shows that there are treasuries or cash in the trust fund. As I said, the trust fund contains non-negotiable UST bonds that can only be paid off by future tax increases.

Even by obsolete gold-standard economics, SS is not going broke and the professional liars who purport it is have to work very hard to come up with bogus numbers to show imaginary problems.

Again, lot of opinion but you have yet to show any evidence that the SS trust fund contains marketable securities that can be sold to pay for the promised obligations.

I find it ironic that if a company made pension promises and did not put any marketable assets aside to pay for it we would see the left claim fraud and ask that management go to jail. But when the government does it they turn a blind eye and claim that unfunded liabilities do not matter.

Yes, grasshopper thinking is correct. You have to get through the short run to get to the long run. Your idea is to conserve oxygen to keep from suffocating 100 years in the future by stopping breathing now. The only way there will be a "winter" is if it is created by the policies you favor. Cole & Ohanion produced a well known piece of ad hoc garbage.

Again, you say stuff without any support for your position. Until you do, you continue to lack credibility.

VangelV said...

Replying to Morgan Warstler on health care: "It means the exact kind of care - lines, and waits that Europe has. It means doctors employed VA style." If only we could have the far superior European style healthcare (or VA care under Clinton, and now Obama - one of the few good things he did was restoring the VA to the model system that Clinton built). The two-tier system provides worse results for the upper tier than the results provided to everybody in Europe or anywhere else civilized.

First, a lot more Europeans come to the US to purchase health care than Americans go to Europe.

Second, VA is government health care. But I am glad that you like the VA system under Clinton because that is exactly what the national system is about to become like. Donald Berwick, Obama's appointee to head Medicare and Medicaid, is a strong supporter of rationing health care and an admirer of the failed British system.

http://www.youtube.com/watch?v=r2Kevz_9lsw&feature=related

AMERICAN HEALTHCARE IS S**T - a disgrace, even for the rich. Is it so surprising that something run as a scam gives crappy results?

I agree that there are major problem with the US system. Unlike the systems in other countries, American doctors are forced to practice expensive defensive medicine and run useless tests. That said, the US system is the best, which is why so many rich people and politicians from abroad use American doctors and hospitals rather than use their national systems.

The lowest third in income of white UK residents has better health across the board, live longer lives, than the top third of white Americans. And Americans lead a healthier lifestyle - they smoke less.

First, I take it that you do not live in the UK because you have no idea what you are talking about. UK hospitals are dirtier, older and have poor equipment. Health care is being rationed but even with all of the cuts the system is still insolvent. Things are so bad that the system is killing hospital patients by starving them.

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Second, Americans are obese and abuse drugs in high numbers. That causes the mortality rates to be higher than those in other countries with poorer health care systems. Of course, Americans also die in much bigger numbers due to firearm based crimes. Americans also do not ignore low birth weight babies and include them in the mortality statistics. Adjust for those factors and Americans have a higher life expectancy than the English.

Of course, the statists ignore the data because they like nothing better than to see bloated governments get even bigger but that is an argument for another posting.

Anonymous said...
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Morgan Warstler said...
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VangelV said...

May I suggest not having trust much....

I do not 'trust' anything but the objective evidence. And that is something that you have yet to provide. I asked for a reference to support your contention that the Rothschilds held the biggest amount of UST but you came up with all kinds of conspiracy theories that did not address your point. I even pointed out what is a clear fact; that the Rothschild bullion bank stepped away from the London gold pool in 2004. To me that is more likely to mean that the Rothschild interests are betting against the USD by accumulating physical bullion while the dumb money is trading paper gold in the futures market and through the ETFs.

Now it is clear that I have no idea exactly what the Rothschild companies are doing but I did not make the comment about the bond holdings; you did. Please support your claim without the 9/11 sideshow and the other distractions. Leave such strategies for anti-Semites, UFO hunters, and astrology nuts.

VangelV said...

What we do right now, is let the market optimize in this the greatest country for the folks with the money to spend - thats WHERE invention happens.

While I agree with most of your comments about how good the US care system is for those that have the money to buy the best, it is hardly an example of a market system. Because of all of the regulations and the interference it is far too expensive than it would be under market conditions.

Another Anonymous said...
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VangelV said...

I judge the standard of healthcare by who is healthier and lives longer. I want to go where the healthy people go, not the rich fools.

When adjusted for all factors Americans live longer than Europeans yet you still seem to imply that the UK has a better health care system. When you are measuring longevity you have to treat all deaths equally. For example, the higher fatality rates due to gunshots have nothing to do with how good a system of healthcare there is in the country. It is also necessary to count live births the same way. A low birth-weight baby in the US, with a morality rate of around 800 out of 1,000 is counted as a live birth while it is ignored in most countries. Given the fact that such babies are much more common amoung drug using mothers, which are more likely to be found in the US, the statistics also make the US look worse than countries that ignore those deaths.

You are also confused. Healthy people do not need much health care so they do not have to go anywhere in particular to meet their needs. It is when you have a problem and need a piece of equipment or specialized procedure that you see how good a system is. Given the fact that Canadians and British have to wait for months for procedures that you can get the same day in the US or Hong Kong I would not call the UK or Canadian systems very good.

Please note that in France, where there is a private system available for those that can afford to pay, health care is much easier to get than in the places where the government runs the system and private providers are not permitted to compete on an even playing field if at all.

Yours is a political position that is not supported by the facts. You may have more credibility if you did some more research.

No matter how you play with the figures, lower-income Britons are healthier than higher-income Americans.

Making up stuff does make it true. You go to a UK hospital and tell me how good the healthcare system is. Most vets in the US that have better equipment than your average NHS hospitals. (That is not true in Canada where pets tend to have access to the same MRI equipment as humans. Of course the private system allows a pet to be scanned within a day or two. A human would have to wait a few weeks.)

cwon1 said...

In fact the first gulf war directly tied to debt conditions of Iraq and Kuwait.

There are plenty of debt wars I can think of;

WW 1 was very much tied to debt obligations, the US was a credit source to England which locked the issue of sides in the end.

WW II was driven by fiat currency after WW I debts could nopt be paid in real money. The conditions haunt us today.

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