Maintaining Public “Confidence”–in What?

Over-Confidence is Self-Delusional
[courtesy Google Images]

“confidence: . full trust; belief in the powers, trustworthiness, or reliability of a person or thing: We have every confidence in their ability to succeed. belief in oneself and one’s powers or abilities; self-confidence; self-reliance; assurance:”“self-delusion, noun:  the action of deluding oneself; failure to recognize reality.”he retreats into a world of fantasy and self-delusion”

If you’ve followed the news about the economy for even a brief amount of time, you’ve almost certainly read article after article where someone in a position of authority talks about the need to “maintain public confidence”.

Strangely, they never seem to say exactly what that “confidence” should be in.  Is it confidence in our leaders?  Confidence in our public-school-educated children as the “future of our country”?  Confidence in what?

Nevertheless, it appears to be economic gospel that, no matter what, in order to protect the economy, we absolutely must maintain public confidence!–in . . . something . . . .

OK.  Sounds great.  Let’s all agree to maintain public confidence.  But, we’re still left to wonder “confidence in what”?  What, exactly, is it that we must have confidence in in order to sustain our economy?

That question has faintly bothered me for years.  I didn’t face it directly and I didn’t find an answer–at least not until a few days ago, when answer became almost laughably obvious.  Once I saw that answer, I nearly giggled about my own inability to see the obvious for so long.

In order for you to see what we must have confidence in if the economy is to be sustained, answer a question:  What kind of monetary system to we have?

That’s an overly-broad question.  There might be six or ten plausible answers.  But virtually everyone who’s read about economics for long knows and will agree that we have a “debt-based” monetary system.

Get it?  Now do you see?

No?

Well, if we have a “debt-based” monetary system, all of our currency and financial affairs are based on paper and digital debt-instruments (like stocks, bonds, Federal Reserve Notes, bank accounts, pension funds, etc.).  We treat these debt-instruments as forms of wealth and even money–but, in fact, they are nothing more than promises to pay.

For a debt-based monetary system (and associated economy) to function, the people of that system must believe that the “promises to pay” (that are memorialized with their paper debt-instruments) will be kept.

For a debt-based monetary system and economy to be sustained, the public must have confidence that all of those promises to pay will be kept and all of the “debts” will be paid.

That’s it.  Get it?

The mysterious “confidence” that must be maintained for our economy to prosper is confidence that the debts will all be paid.

I don’t mind accepting a perfectly worthless piece of paper (debt-instrument) in return for my work or private property, so long as I am confident that that paper-debt instrument will one day be redeemed and paid in full.  So long as you, I and all of our friends and neighbors remain confident that a $100 Federal Reserve Note (debt-instrument) will certainly be paid in full by providing me with a full 100-dollars’ worth of goods and services, the debt-based monetary system can continue to function.

The value of our paper debt-instruments is directly dependent on the public’s confidence that the underlying debts can and will be paid.  I will accept your IOU for $1,000 if I have confidence that you can and will repay your debt.  If I don’t have that confidence, I will not accept your IOU.

If people lose confidence that a $10,000 bond (paper debt-instrument; promise to pay) will provide them with the “promised” $10,000 in goods and services, the value of that bond will drop from $10,000 to, what?  $9,000?  $5,000?  $50?  (Ask Enron how low your stock can go if investors lose confidence.)

If enough people lose confidence in the idea that all of our debt-instruments will be redeemed and paid in full, the whole monetary system and economy will flush right down the pipe.

Now, tell me this:  What is the probability that the $18 trillion National Debt will be paid in full?

Not so good, hmm?

After all, there are about 320 million people in this country and if we divide the National Debt by the population, each American’s “fair share” of the National Debt is about  $55,000.

Do you have an “extra” $55,000 that you’d be willing to hand over to Uncle Sam?  Do you have another $55,000 for your spouse and each of your kids?  How many families of four are there who have an “extra” $220,000 to give to the government to redeem the National Debt?

Not many?  In fact, damn few.

When you look at the National Debt from that “fair share” perspective how much of the national debt do you think will be paid in full?  Half?  Less?  Does that inspire or shake your “confidence” that all the debts can and will be paid?

What about John Williams (ShadowStats.com) who believes the real National Debt is way over the “official” $18 trillion and is actually about $100 trillion?  If he’s right, each American’s “fair share” is about $300,000 ($1.2 million for a family of four).  How many Americans have that much in assets and are willing to give those assets to the federal government?

Not many.

If the National Debt is $100 trillion, who’s going to pay it?  How will it be paid?  From the “fair share” perspective, do you still feel confident that the debts can and will be paid?

And then there’s the Congressional Budget Office and economist Laurence Kotlikoff who’ve both independently estimated that (including unfunded liabilities) the real National Debt is over $200 trillion ($625,000 per person; $2.5 million per family of four).  There’s no way to look at those numbers and maintain confidence that the National Debt will be repaid in full, or even by 10%.

And, all I’ve talked about, so far, is the government’s National Debt.  I haven’t even considered the American people’s private debts on mortgages, car loans, school loans, credit cards, consumer loans, loans to purchase stocks and bonds, etc.  Add in all those additional debts and the real “American” debt might be double the national debt and (again) absolutely beyond any hope of being repaid in full or even by 10%.

And then there’s the derivatives.  Some people think there might be up to $2 quadrillion in derivatives scattered around the world.  Plus, there’s all of the debts owed by other countries and peoples around the world.  There might be up to $3 quadrillion in global debt.  That’s a $400,000 “fair share” for every man, woman and child on the face of this earth.  How many Mexicans, Africans, or Chinese do you think can come up with $400,000 each?

How will all of that global debt ever be paid in a world where the annual global GDP is about $80 trillion and the global average income per person is about $11,000/year?  Where is the money going to come from to pay US government, US private and global debts?

That money doesn’t exist and can’t be created.  As I’ve said for at least five years, “What can’t be paid, won’t be paid.”

The is no way for any rational, semi-educated person to conclude that all or even most of the world’s debt will ever be paid.  Thus, there is no way for any rational, semi-educated person in our brave, new “debt-based” global monetary system to have confidence that more than a fraction of the existing debts can be paid.

If it’s true that the “confidence” required to sustain the US and global economies is confidence that the total debt will be repaid, there is no valid reason to believe that the US and global economies can last more than a couple more years.  There’s good reason to suppose that they may collapse suddenly and sooner.

Whenever some significant percentage of the American people and/or people of the world realize that:

1) the “confidence” required to sustain our debt-based economies is confidence the total debt can and will be paid; and

2) there’s no way in Hell that the total debt can ever be repaid in full or even substantially; then

3) the requisite “confidence” will vaporize and the US and global economies will collapse.

You gotta be nuts to maintain confidence in the total debt ever being repaid.  It can’t happen.  It won’t happen.  The world’s current confidence to the contrary is irrational, self-deluding and absurd.  Those who embrace this delusion will lose their assets.

For the system to function, you must have confidence that the debts will be repaid.

For the system to function, you must have confidence that the debts will be repaid.

For the system to function, you must have confidence that the debts will be repaid.

If you have confidence that the debts will be repaid, you’re an ignoramous or a fool