Sovereign Debt Crisis
[courtesy Google Images]
For example, in a debt-based monetary system:
1) Debt is our measure of wealth. I.e., the more debt you have, the wealthier you become (or at least, appear). Could you enjoy the apparent “wealth” of living in a $250,000 home, if you hadn’t first been able to go into debt for a mortgage? Could you enjoy the apparent “wealth” of driving a new car, if you couldn’t first go into debt for an auto loan at the bank? Our apparent wealth is a function of each debtor’s capacity to make promises rather than engage in productive work. As an extreme example, think “liar’s loans” (people who couldn’t possibly repay their loans were still entitled to move into expensive homes based on mere “promises” to repay).
2) If debt is wealth, then destroying debt (through bankruptcy) destroys wealth and, more, destroys whatever fiat currency that’s based on that debt.
3) The governments and creditors of the world should have a vested interest in restricting debtors’ access to bankruptcy laws. If debtors can’t file for bankruptcy, they can’t destroy the debt and debt-instruments that support the debt-based monetary system.
• In an asset-based (gold or silver) monetary system, bankruptcy laws allow courts to seize all of an insolvent debtor’s remaining assets and possessions and divide them among his creditors. Bankruptcy was ruinous for the insolvent debtor (he lost virtually everything), bad for his creditors (they received only part of what was owed to them) but not so bad for the economy.
Why? Because, in the asset-based monetary system, the creditors loaned hard assets (gold and silver coin, or cash redeemable in gold or silver) to the now-insolvent debtor. The bankruptcy might deprive both the debtor and creditor of that original gold, but the monetary assets/gold still existed within the economy. Therefore, the economy’s money supply was not significantly reduced and the economy was not particularly damaged by the individual’s bankruptcy.
Today, however, in our debt-based monetary system, if a debtor files for bankruptcy, he destroys the value of whatever paper debt instruments (promises to pay) he’d issued to his creditors. For example, if a man files for bankruptcy, the value of his mortgage is destroyed and falls to zero. The destruction of his mortgage (and other debt-instruments he’d signed) may have a significantly adverse effect on the economy since the destruction of debt-instruments (the mortgage, etc.) used to as collateral to increase the currency supply could reduce that supply. If enough people filed for bankruptcy at the same time, the currency supply might be reduced sufficiently to push the economy into a recession, depression or even collapse.
Thus, in order to preserve the currency supply in a debt-based monetary system, the debtors’ ability to file for bankruptcy should be restricted.
We see some support for this conjecture in the Bankruptcy Abuse Prevention and Consumer Protection Act of A.D. 2005. This act provided tighter eligibility requirements for those wishing to file for bankruptcy—which made it harder for most people to file for bankruptcy. Under the A.D. 2005 bankruptcy law, most insolvent debtors who wish to file under Chapter 7 must meet new eligibility requirements under a “means test” and/or instead file under Chapter 13. In either case, they’ll be forced to continue to make some payments on the existing debts, even after their bankruptcy petition is granted.
Previously, if they filed under Chapter 7, debtors could wipe out virtually all of their existing debt. Since A.D. 2005, insolvent debtors may be bankrupt, alright, but they’ll still have to pay something on their debts after they’ve been through the bankruptcy court. Takes all the fun out of bankruptcy. Fewer people file.
• In order to protect the debt-based currency supply and the debt-based economy, government should reduce most public access to bankruptcy courts.
There’s also more recent evidence to support this hypothesis. For example, the Associated Press reported in “Greece readies for bailout talks as Plan B details revealed,” that:
“The Greek government was poised Monday for the imminent start of intricate bailout discussion . . . . The talks have been delayed but are due to start Tuesday with technical teams paving the way for high-level discussions possibly by the end of the week.”
That week has come and gone, and they’re still talking. In fact, for at least the past seven months, Greece and its creditors have been engaged in in “intricate bailout discussions,” “talks” and “high-level discussions”. All that talk has come to nothing.
Is the situation really that difficult? If Greece can’t pay, why not simply let Greece file for bankruptcy and be done with it? Could it be that the debtors have an ulterior motive? Are they more worried about Greece filing for bankruptcy than they are about losing the remainder of the money Greece owes?
If Greece files for bankruptcy, the pretense that Greek debts are payable and that Greek bonds are still valuable will be lost. The only way for creditors to avoid openly admitting that the Greek debt-instruments are worthless is by continuing to lend more currency to Greece to be used to seemingly “pay” existing Greek debts. But, in truth, Greece won’t be able to repay its current debt or any significant new debt for at least another decade.
Why is the truth that Greek bonds are already worthless being denied?
• Two weeks ago, Reuters wrote,
“Greek debt restructuring is inevitable, says IMF chief.”
“Greece’s international creditors will have no choice but to accept an easing of the terms of Athens’ debts, the head of the International Monetary Fund said on Wednesday.”
The IMF is admitting that Greece is already technically bankrupt. The new Greek government openly admitted to being bankrupt last January. Greece wanted to declare bankruptcy. But, so far, the only thing that’s come from all the endless drama is that Greece hasn’t filed for bankruptcy.
Given that Greece can’t pay its existing debts, there are only two options:
1) Greece declares bankruptcy and extinguishes virtually all of its debts—and renders all Greek bonds officially worthless; or,
2) The creditors agree to “restructure” (reduce) the existing debt of € 540 billion down to, say, €270 billion. Dramatic reduction in the debt, might enable Greece to pay, avoid filing for bankruptcy and retain pretense of value for at least some Greek bonds.
But even if the debt is reduced by 80%, it’s virtually impossible that Greece will be able to repay all of the remaining debt. So, why not face the truth, let Greece file for bankruptcy, and be done with it?
- “The IMF has teamed up with the European Union and the European Central Bank in recent years to lend Greece money repeatedly to save it from a debt crisis.”
When we read that IMF, EU and ECB have teamed up in recent years to lend Greece even more money to save Greece from a “debt crisis,” does that make sense? If Greece is already so indebted that it can’t pay its current debts, how can it make sense to lend even more money to Greece to “save” Greece by putting Greece even deeper into debt?
The answer may lie in the fact a “debt crisis” only exists before an official bankruptcy is filed. In a “debt crisis,” the debtor may be insolvent, unable to pay his bills and technically bankrupt—but he’s not yet officially bankrupt. So long as Greece remains in a pre-bankruptcy, “debt crisis,” its bonds can be carried by banks as valuable assets.
On the other hand, if Greece were officially bankrupt, that would mean that Greece had gone through a legal bankruptcy procedure, virtually all of its debts had been extinguished, its debt-instruments (bonds) were void and worthless. The creditors would have to admit on their own accounting records that 1) they’d lost hundreds of billions of euros loaned to Greece; and worse, 2) that all of existing Greek bonds were worthless.
However, if the Greeks can be kept in an indefinite state of “debt crisis,” the creditors might not ever have to admit that the remaining €540 billion in Greek bonds were worthless.
So long as Greece (or any other insolvent debtor, including you, me or the US government) can be prevented from declaring an official bankruptcy, the creditors can maintain the illusion that the paper debt-instruments (bonds) that memorialize the €540 billion loaned to Greece (or the $18 trillion loaned to the US government) are still valid and valuable. So long as those bonds are presumed valuable, they can be used by banks as collateral in fractional reserve banking to lend even more fiat currency to more consumers and thereby stimulate the economy.
• Once we define a “debt crisis” to be the state of affairs that exists before a debtor files an official bankruptcy, we can see that it actually makes some sense for creditors to lend more money to insolvent Greece (or to the insolvent US government).
I believe the creditors want to prolong the Greeks’ “debt crisis” as a means to avoid the Greek bankruptcy.
Why?
Because an “official” bankruptcy would destroy the value of the Greek debt-instruments (bonds) and used as collateral for other loans.
Why?
Because under fractional reserve banking, banks holding €540 billion in Greek bonds might be able to “create” and lend up to €12 trillion to other bank customers. Get that? Under fractional reserve banking, the €540 billion in Greek bonds might’ve been ”multiplied” as into €12 trillion in additional loans. If the Greek bonds were “officially” declared to be worthless in a bankruptcy proceeding, the banks might have to call in up to €12 trillion in loans made to EU customers.
Could the EU’s €14 trillion annual GDP economy withstand the loss of €12 trillion in loans and might collapse? I don’t think so.
If so, that might explain why the creditors seem so determined to prevent Greece from simply filing for bankruptcy. It’s not about the debt. It’s about the Greek sovereign bonds.
• Greece currently owes about €540 billion. The next bailout is said to total about €86 billion. Thus, the plan du jour is for creditors to lend another €86 billion to Greece so Greece can pretend pay down some to the existing debt and thereby prevent Greece from filing an official bankruptcy that would wipe out €540 billion in Greek sovereign bonds.
Which implies what?
It implies that the creditors aren’t lending more money to Greece in order shield Greece from the “debt crisis”. The creditors are lending more money to Greece to prolong the “debt crisis” and thereby prevent Greece from filing an “official” bankruptcy that would force bankers to admit that Greek debt-instruments they’ve already used as collateral are worthless.
The creditors aren’t lending more money to Greece to protect Greece from a “debt crisis”. The creditors are lending more money to Greece to protect themselves and/or the EU economy from the consequences of an “official” Greek bankruptcy.
If this hypothesis is valid, it follows that from the creditors’ perspective, the “debt crisis” is not the problem—it’s the solution. The problem is an official bankruptcy and total destruction of €540 billion in Greek sovereign bonds.
The “debt crisis” is the remedy that prevents Greece from filing an official bankruptcy and repudiating the value of the €540 billion in sovereign bonds issued by Greece.
• From this perspective, Greece needn’t suffer a “debt crisis”.
Greece’s solution to the “debt crisis” is apparent: file for bankruptcy; get out from under the debt that everyone knows won’t ever be repaid; and get on with their lives. After the bankruptcy, there’ll be two or three tough years, but then things should smooth out and, if the Greek people are willing to work, Greece will become relatively prosperous.
Greece can end the “debt crisis” whenever it finds the nerve to simply file for an official bankruptcy and escape the €540 billion in debt.
The creditors, however, can never escape their problem since Greece can never truly repay that €540 debt. All the creditors can do is pretend that Greece will someday pay. Inevitably, that pretense will fail, it will be admitted that the Greeks can’t pay the €540 billion, and the Greek sovereign bonds will be declared void—and that’s when the stuff hits the impeller.
• In our brave new world order of fractional reserve banking, some or all the €540 billion in Greek bonds may be being used by creditors as collateral to lend more fiat currency in their countries to consumers and thereby “stimulate” the EU’s economy.
If I understand correctly, EU banks can lend up to 23 times the face value of whatever collateral they hold in their vaults.
So, let’s suppose that the creditors have used the entire €540 billion in remaining Greek bonds as collateral to justify lending up to 23 times that much to consumers throughout the EU. Under that supposition, the €540 billion in Greek bonds could be collateral for over €12 trillion in loans to EU consumers, businesses and even other governments.
If so, and if the Greeks declared an official bankruptcy that wiped out €540 billion in Greek bonds, the €540 billion in collateral would be wiped and the (possible) $12 trillion in bank loans might have to be called in. Thus, an official Greek bankruptcy might cause some or all of €12 trillion in loans to be recalled from the EU’s economy.
The EU’s annual GDP is about €14 trillion. There’s no way the EU’s already-fragile economy could survive the recall of €12 trillion in loans.
If the fractional reserve ratio in the EU was only about 9 to 1 (as it is in the US), the €540 billion in Greek bonds might still have been used as collateral to lend 9 times €540 billion = €5 trillion in loans to EU consumers, businesses and governments. If Greece declared bankruptcy and wiped out those €540 billion in bonds, the EU might still have to recall €5 trillion in loans or currency based on those bonds.
Again, could the EU’s €14 trillion annual GDP survive the recall of €5 trillion in loans? Or, would that recall plunge the EU into a deeper recession, “Greater Depression” or collapse?
• Given the previous conjecture, we can imagine why the creditors might be lending more currency to Greece to maintain the “debt crisis” as a remedy—not a problem—a remedy to prevent an official Greek bankruptcy, the destruction of the existing €540 Greek sovereign bonds, and the possible recall of somewhere between €5 and €12 trillion in loans to EU consumers, businesses and governments.
In fact, it may be that only part of the €540 in Greek bonds are being used as collateral in fractional reserve bank vaults to justify additional loans to Europeans. Maybe the total amount of debt-based currency that’s based on the Greek bonds isn’t €14 trillion or even €5 trillion. Maybe there’s only one trillion in debt-based euros that are based on the Greek bonds/debts.
Even if that were true, could the EU economy withstand the loss of even €1 trillion in loans?
• The world’s fractional reserve banking system is vulnerable to the same sort of chain reactions that could start at any moment that a nation or territory as small as Puerto Rico or city the size of Chicago declared bankruptcy, wiped out its existing debt and invalidated its bonds, and thereby forced local and national banks to recall billions or even trillions of dollars in loans.
The fractional reserve banking system works wonderfully, almost magically, to multiply the currency supply and stimulate an economy while that economy is growing. But if the economy starts to shrink, the same system works to multiply the losses to the currency supply and destroy the economy.
Fractional reserve banking is threatened by the fact that sovereign bonds of Greece (or the US) are too great to ever be repaid, won’t be repaid, and the loans based on those government/sovereign debts (bonds) will have to be recalled.
It’s bound to happen. The only question (as usual) is when.
• The EU is caught between the rock and the hard place.
The Rock: If the EU allows Greece to declare bankruptcy, Greek sovereign bonds might be invalidates and the EU economy might be wrecked.
The Hard Place: If the EU won’t allow Greece to file for bankruptcy, then the EU will be forced to lend more currency to Greece that they know will never be repaid.
The only way the EU can prevent Greece from declaring bankruptcy and perhaps collapsing the EU economy, is to keep pouring more currency down the Grecian rat hole and pushing Greece deeper into debt.
I can’t see a painless exit from this dilemma. Sooner or later, Greece, Spain, Ireland, or Portugal, perhaps even France, will declare an official bankruptcy and void billions of euros worth of sovereign bonds which, under fractional reserve banking, could cause the loss of trillions of euros in loans. The EU will slide into recession, depression of overt collapse.
When that happens, the EU will probably declare its own “official” bankruptcy and void hundreds of billions of dollars’ worth of debt-instruments held in the vaults of US banks. Then the US fractional-banking-system may collapse and drag the US economy down with it.
Those who live by fractional reserve banking, will die by fractional reserve banking.