Monday, May 30, 2016

Debt default

This came in response to Trump toying with the idea of US debt default a few weeks ago. My intention was to post it here in a timely manner but it got lost it the sauce for awhile. So in the famous words of Ringo Starr, forgive the lateness of my reply.


Trump was probably just trying to reveal a little perceived financial acumen. When interest rates rise, bonds become cheap. Since the government has an effective perpetual lock on how low the floor is on the money supply and an explicit perpetual lock on how much of the real value of that money supply that accrues to itself, it can make good on those bonds for less than it sold them for. Instead of taking money from taxpayers, it's taking money from investors. It's all smoke and mirrors since the currency is fundamentally unsound, based on nothing but word of the federal government itself.

That said, there are three ways the US federal debt resolves:

1) A massive increase in the money supply and corresponding severe inflation, 2) default, or
3) some sort of advance comparable to the industrial revolution or maybe scalable nuclear fusion that supply-sides us out of the massive hole the US has dug itself into (tinkering with marginal tax rates is not going to do it--this requires a revolutionary technological advance).

It will never be paid off otherwise. The Keynesians and the monetarists have no more arrows left in their quivers. They're to the point now of talking about negative interest rates. We've had almost a decade of rates approaching zero while simultaneously seeing real per capita growth, well, approaching zero as well. There's no way out.

We're on top of another bubble. Student loans are my best bet for the primary way it expresses itself, with another housing bubble as the next most likely trigger. It may be a combination of the two or something else altogether but it's not a question of if, it's a question of when. Another deep down turn is coming, and the "recovery" we've seen over the last eight years has been so anemic that it feels disingenuous to even refer to it as such. We're going to be stuck in this bumpy, secular decline until something major gives.

Option #1, government-induced hyperinflation, is massive theft from the collective productive class in America. This is the most likely way it resolves. It's why we don't have a mortgage (if nothing else, we'll have the house and the land it's on), a large chunk of savings in gold (and varied other tangibles like the power nine), the rest in stocks (which are inflation-resistant if not inflation proof), and virtually nothing in cash or cash equivalents.

I prefer #2, the Rothbard option, default. It's the ultimate America-First answer. For all other non-governmental or government-backed investment options, creditors take a real risk in lending for a return. If the debtor can't pay, the creditor takes a haircut. The creditor has legal recourse depending on the situation, but best case scenario he gets less than his principal, often substantially less, as in pennies on the dollar. For those who foolishly assumed the debt of the US federal government was a safe place to plant their assets, they'll have a rude awakening.

The sovereign wealth funds and the big foreign government buyers of US debt can go to hell. The drug dealer, China, wanted to keep lending to the drug addict, the US, so the addict could keep buying opiates--the stuff that makes up our half-trillion dollar annual trade deficit with China--from the dealer, and now the addict is kicking the habit and refusing to pay because he can't pay. Too bad, dealer. You should've seen what a bad investment this was. There's no squeezing blood from a stone, and the addict can still kick your ass in a fight so you just lose, hard, on this deal, dealer.

It's a reset button, it'll cause a lot of immediate economic turmoil, but what rises out of the ashes will be a saner, more sober global financial system that ideally won't be based on absurd fractional reserve banking, massive debt leveraging, and perpetual debt servicing.


MC said...

If you expect hyperinflation, why not get a mortgage? The house goes up and up in price while the mortgage shrinks in value.

Samuel Nock said...

You sure the addict can still kick the dealer's ass? China can take a lot more casualities than we can. Indeed they would welcome it as a way to get rid of some excess population.

Anonymous said...

What the elites really want is a default on the Social Security debt to ordinary working Americans, and to pay the bondholders 100%. This is what is behind "entitlement reform."

Anonymous said...

The Arabs that want to kill us can destroy us by selling US bonds:

Anonymous said...

gold revaluation comes first, that takes care of a lot of the problem, then comes the nuclear printing... its the final solution. but this will all produce civil war, and then world war. interesting times

Mil-Tech Bard said...

There will be a massive hyper-inflation.

There really is no other way out beyond an industrial wealth creating technology like electrification.

Maybe 3D printing/additive manufacturing will be it.

I have a lot of doubts in that regard.

The political-regulatory infrastructure to really take advantage of it is not in place and won't be until after a lot of people ate killed by bad actors scamming people to death with 3D printing/additive manufacturing.

Anonymous said...

You haven't solved the problems of removing the malicious actors and criminally insane [both] elites who did this...what's to stop them from profiting if they remain in power?

They.Mean.Harm. This is why they never fail to do harm.

They must be removed from any power to harm at the very least.

Why we should settle for any haircut above their necks is beyond me. I suspect given their relentless efforts to keep it going at any price to live another day means they can't think of other alternatives either.

As to War and Wars they've already begun. It began here with shooting cops as a political program - that's war - and overseas we can see power struggles as we retrench.

How bad the wars get depends on how quickly we get warriors cold about their interests in resolution.


Audacious Epigone said...


Right, as long as it's fixed and not adjustable that makes sense.

Ownership is insurance though in this case. I'm not trying to leverage here, I'm hedging. If I have a mortgage and put that equity into something that protects against inflation then all the eggs are in the same basket (and if I diversify, what's the point?). As is, most of them are, but the house and the land are an untouchable sanctuary against general financial instability.


No ground wars in--or with!--Asia!

It's not going to get any easier by waiting longer.


Trump brilliantly realized as much. The general election dividends have yet to be earned by him on account of his opposition to said entitlement reform.


The consequences occur eventually. It's when, not if.


You mean sound currency comes first? Gold is headed up. It's not done moving. Disclosure: Not financial advice blah blah blah.

Mil-Tech Bard,

Yes, it'll have to be legitimately game-changing, not just have the snake-oil initial appearance of being so.


We are seeing a shift away from political principles (Conservatism, Inc) and towards political interests (America First) on the right, broadly defined. It's not moving nearly as fast as we'd like, but it's moving in our direction.

TangoMan said...

Ownership is insurance though in this case. I'm not trying to leverage here, I'm hedging.

If you're going down this route then you should give some thought to going just a bit more serious, call it the half-prepper mode.

An asset which will hold its value is food. Build yourself a root cellar and stock it with food.

Same with energy production for your home. Either renewable or an emergency generator with a fuel supply.

Same with insulation to cut energy use.

If you think there will be instability in the future, you make your life easier by eliminating or reducing instability in some crucial aspects of your life, like shelter, food, energy, and for that matter, personal protection.

You can go full doomsday prepper mode or just go partial and either will help you in an unstable world. Buy a freezer, buy a pressure canner. Rotate the food you eat and you're no worse off because you can always eat your food if the world becomes sane again.

Think about your unexamined premises - why presume that your electrical utility will function like clockwork in an unstable economy? Same with the food supply infrastructure. Most cities have only a 3 day supply of food in the supermarkets, warehouses and local distribution centers. A hiccup there, not even a shut-down, will catch unprepared people and cause suffering. Look at the shit going down in Venezuela right now. Are you even safe in your neighborhood if half the families there lose their jobs? It's great that the house is paid for and you don't have to worry about financial stress from a bank holding a mortgage over you but there are other threats which arise simultaneously to the insecurity of meeting a mortgage payment in an unstable economy. If you want to hedge, then you should give give thought to factoring all of this into the calculation. Normalcy bias handicaps most of us.

There's lots of roads you can take if you go down this path, but food, water, protection, shelter should, IMO, take precedence over gold and other tradeable assets. Lock in 6 months to a year of food and then just rotate out the old and stock in the new and you're way ahead of most of your neighbors (unless they're Mormons.) If you hate shopping, then you get the added benefit of having a mini-store in your basement, all stocked up with beer and chips and frozen pizzas and chicken wings. What more does a growing family need?

TangoMan said...

Here's a piece from the WSJ:

CHICAGO—U.S. cattle prices are surging again, a fresh blow to consumers already stung by record costs for steaks and ground beef.

Live-cattle futures leapt to an all-time high of $1.705 a pound last week, reflecting concerns that domestic cattle supplies are even tighter than many analysts expected. Futures have risen 11% since mid-August and 23% for the year, among the best-performing U.S. commodities.

Analysts said the latest jump in cattle prices likely would be passed along to grocery shoppers in the next few months. That would push up retail fresh-beef prices that soared to a record $5.924 a pound in September, a 20% increase over a year ago, according to the U.S. Department of Agriculture.

A 20% price increase translates to a 20% return on investment if you had bought a side of beef and put it into your freezer. That's a pretty good return compared to index funds.

munch said...

Re Hyperinflation. I don't understand why Japan cannot induce domestic inflation. Right now new money comes in as debt and stimulus requires increasing levels of debt. Over a long period of time progressively lower interest rates have allowed service of more debt, but apparently Japan is reaching the point that no one will borrow (and the US might be there). I think that is the cause of negative interest rates, but even that is not making people borrow.

Emitting new money without an obligation to repay would be a hard sell to the voters. Who gets the free money? Why not me? Probably the most acceptable way would be to forgive student loan debt. But you still have a problem of rich universities with huge endowments receiving the benefit of all that student loan debt while the taxpayer pays it off. And the unlimited federal money pile will be gone if people stop buying treasury bonds. The fed can't just buy them all because foreigners will see that the value of the dollar is doomed and will sell, which the Fed will also have to buy.

Dan said...

There is a fourth way, if the native birth rate was significantly above replacement so that the US could organically grow out of the problem.

The Wall Street crowd thinks that there is a fifth way, to import this population growth. This doesn't work however when the average immigrant is an economic drain instead of an economic boon.

The foolishness of our overlords is tragic.

Audacious Epigone said...


I may have a Brazilian level of preparation but not a Venezuelan one. Nothing to disagree with. It's apathy and it shouldn't be. In the land of the blind the one-eyed man is king so there's no excuse not to have contingencies to deal with catastrophe, not just economic malaise. Thanks.


To have negative interest rates and simultaneously experience inflation means no borrowing at all is occurring, right?


Keep your eye on the horizon. That's the long game.

Irate Eye Rater said...

Not quite nothing. The .gov accepts payment for its taxes in US dollars only. At least a fraction of your income equal to what you owe has to be in US notes or you won't be able to pay and they'll shoot ya.

There's your backing. As long as the US government has the strength to enforce tax law, the dollar will have some minimum real value.

Dan said...

Munch, the Japanese situation is no mystery.

Private debt in Japan has declined very sharply, from 273% of GDP in 1996 to 113% of GDP in 2009. I assume the latest is more of the same. That is an unbelievable decline in consumer debt, and suggests, as AE notes, that there is virtually no new borrowing going on, while consumers pay down existing debt.

This serves to dramatically shrink the money supply (since loans create money and decreases in debt do the opposite). The Japanese government policies *have* been effective. In a vacuum, that level drop in outstanding debt would collapse the money supply and bring about heavy duty deflation.

Consider that during the Great Depression, there was something like 30% deflation of consumer prices. Asset prices collapsed 90% and commodities dropped by 2/3.

The collapse in Japanese lending is probably similar in size to the debt contraction in America in the 1930s. Dramatic things are happening, but they kind of balance themselves out. I think that is because Japan is acting in bits and pieces to fend off deflationary collapse. Getting to inflation would be trivial to do. You would only have to look at the money deficit from the collapse in lending and surpass that with new money creation. Would that be a good idea? I have no idea.

This is of course a byproduct of fractional reserve lending. If I deposit $100 in a bank and they lend out $90 of it, I still 'have' $100 and somebody gets their hands on $90 for a total of $190. If such loan arrangements end, the actual money supply shrinks, dramatically in Japan's case.

Audacious Epigone said...

Irate Eye Rater,

Touche. It's not backed by specie or any broadly productive resource, but it is backed by the coercive power of the state which is, as you say, not nothing.


Very well put, thank you.

munch said...

Dan said:

"The collapse in Japanese lending is probably similar in size to the debt contraction in America in the 1930s. Dramatic things are happening, but they kind of balance themselves out. I think that is because Japan is acting in bits and pieces to fend off deflationary collapse. Getting to inflation would be trivial to do. You would only have to look at the money deficit from the collapse in lending and surpass that with new money creation."

1.Fighting the collapse in private borrowing has lead Japanese government borrowing over the cliff in trying to make it up. Maybe they are not able to fight the market successfully?

2. You seem to be agreeing with me, Japan hit a wall in the willingness of citizens to borrow so there is no monetary policy effect. If going to inflation is trivial, they are incompetent - they ran up debt that can never be repaid trying to go to inflation and did not get there. "acting in bits and pieces" is probably code for not enough borrowing and buying assets. You know that they are scared s*itless with all the borrowing that they have done without getting results. Every Time that they have doubled down they lost (not enough yet, acting in bits and pieces, moar . . ) Now they are facing national bankruptcy. Perhaps more will solve nothing and put them in a deeper debt pit? Do you think they know? Why don't they inflate away some of their debt? Perhaps more borrowing will leave nothing left over to buy food for people too old to continue working.

Dan said...

"Japan hit a wall in the willingness of citizens to borrow so there is no monetary policy effect."

I am not saying that. There is a big monetary effect because inflation should have been deeply negative. Not -1% maybe -30%, based on the unprecedented collapse in private debt.

If I am swimming upstream against a fast downstream current, it is easy to say my swimming has no effect, unless you see what happens to someone who is not swimming upstream.

In any case, Japan will get to inflation soon, assuming government deficits continue. Private debt cannot collapse much more since there isn't that much left. Already the majority of private debt has been eliminated and private debt will not go to zero, so this process is almost over.

Japan went from loving debt to rejecting it utterly. I don't blame authorities for not expecting this.

Mil-Tech Bard said...

I read a fair amount of economic news, and have often wondered why the Japanese government was going on this suicidal debt bing, but this fact --

>>Private debt in Japan has declined very sharply, from 273% of GDP in 1996 to 113% of GDP in 2009.

was new to me.

It explains a great deal.

We are not that far from the middle class going there -- no-little borrowing -- in America.

And it also explains the push for a 'cashless' electronic money supply.