Peter Schiff made a statement that if the government pays its debts by printing money, that in essence the government is defaulting on its debts. This is only partially true. Yes, the creditor is getting paid in a devalued currency, but the creditor can still buy things, just not as much. The thing is, that the currency is devalued for everyone, not just the creditor. Which means it is also a tax on everyone holding that currency. So, printing money to pay off debts is unique, in that it is both a tax and a default.
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
Spideynw: Peter Schiff made a statement that if the government pays its debts by printing money, that in essence the government is defaulting on its debts. This is only partially true. Yes, the creditor is getting paid in a devalued currency, but the creditor can still buy things, just not as much. The thing is, that the currency is devalued for everyone, not just the creditor. Which means it is also a tax on everyone holding that currency. So, printing money to pay off debts is unique, in that it is both a tax and a default.
I'm not so sure I agree with that analysis. But I think it's probably a bit of a gray area and depends upon ones definition of default.
I don't think that the criteria for a default is whether or not "the creditor can still buy things", even if not as much. Dubai, for instance, recently notified its creditors that it would be slow on paying its debts. I believe they were going to delay payment by several months. That sent shock waves through the world's financial system and the newspapers screamed that Dubai had defaulted on their loans. If they did in fact pay up, but a few months late, their creditors could still "buy things" and the loans they held would still have value, but Dubai was still in default. They didn't pay what they had promised to and when they had promised to.
The same is true of people, companies or countries that pay a portion of what they owe. Even if they pay 95% of what they promised, they are still in default on their obligations.
I would submit that a country has an implied obligation not to inflate the money supply to such an extent that their creditors would be receiving payments that are significantly less than what the creditors had given them in the first place. China and several other countries have been publicly and loudly complaining about US fiscal policy and worrying about whether they were going to be ripped off on the massive pile of Treasuries they are currently holding. If the US were to massively inflate its money supply and pay them back with what would amount to pennies on the dollar, I personally would say they have a valid point if they were to complain that we had defaulted on our promise to them, even if one might claim that we had not technically defaulted.
We not only had that implied promise, but probably even explicit ones, even if they were off the record, that we would pay them back with dollars that have held their value. Even now, officials have given public statements that they don't have anything to worry about, and that they intend to safeguard the value of the dollar. I personally think that is a lie, however, and that they are deliberately devaluing the dollar and hope to do so for a sustained period, but ideally, from their perspective, in a "controlled manner".
JeffB:Even if they pay 95% of what they promised, they are still in default on their obligations.
Which is why I said that he was wrong, kind of. Yes it is still a default, like you say. But it is not a 100% default. I would daresay not even close to a 100% default. Of course it depends on how devalued the currency is when the money is printed to pay the debt.
Does anyone know exactly what happens if a government declares bankruptcy? I mean do they go to a bankruptcy court and distribute the remaining assets among the different claimants or does the insolvent government just get all their debts annulled? I'm asking because I really have no idea and I think knowing would probably shed some light on what a proper "sovereign default" would look like.
As a side note, imagine in my question that the government in question can't just monetize all the debt like what Spidey is talking about.
bloomj31:Does anyone know exactly what happens if a government declares bankruptcy?
I could be wrong, but I don't think a national government has ever declared bankruptcy, since it can print money to pay off its debts.
I know in the U.S. city and county governments can declare bankruptcy, however I do not believe a state government has ever declared bankruptcy, nor do I think they even have the option to do so. If that is the case, it will be interesting to see what happens when state governments go belly up. We know that the California government issued IOUs for a while and that banks were forced to accept them as payment.
bloomj31: Does anyone know exactly what happens if a government declares bankruptcy?
Does anyone know exactly what happens if a government declares bankruptcy?
The s*** gets crazy.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
Precisely what Spidey laid out in the OP. In fact, he is talking about a bankruptcy. The assets behind the currency (the value of the taxpayers' holdings) are liquidated at a fraction of their value in order to satisfy creditors. This is done by creating lots of new currency (essentially lowering the prices of the capital of the country) and then offering that capital in an informal auction to the people standing in line with notes to redeem.
This is a reorganization of the American peoples assets into the hands of their foreign creditors, who will be able to better manage those assets.
If Schiff could explain this in his excellent manner of communicating to laymen, it would probably scare the heck out of a lot of people.
liberty student:Precisely what Spidey laid out in the OP. In fact, he is talking about a bankruptcy.
Ah, excellent point.
liberty student: This is done by creating lots of new currency (essentially lowering the prices of the capital of the country) and then offering that capital in an informal auction to the people standing in line with notes to redeem. This is a reorganization of the American peoples assets into the hands of their foreign creditors, who will be able to better manage those assets.
This is done by creating lots of new currency (essentially lowering the prices of the capital of the country) and then offering that capital in an informal auction to the people standing in line with notes to redeem.
Does this mean that chinese (or whatever nationality they are) creditors will have a claim on all property owned in America, or just property that the government owns? In other words, am I personally on the line?
bloomj31: liberty student: This is done by creating lots of new currency (essentially lowering the prices of the capital of the country) and then offering that capital in an informal auction to the people standing in line with notes to redeem. This is a reorganization of the American peoples assets into the hands of their foreign creditors, who will be able to better manage those assets. Does this mean that chinese (or whatever nationality they are) creditors will have a claim on all property owned in America, or just property that the government owns? In other words, am I personally on the line?
Yes, because of taxes.
Daniel Muffinburg:Yes, because of taxes.
And the devaluation of your property, which is an indirect tax.
Daniel Muffinburg: Yes, because of taxes.
Well, that's lame.
bloomj31:Well, that's lame.
We like to call this system, and its inevitable economic failure, statism.
Yeah yeah.
"if the government pays its debts by printing money, that in essence the government is defaulting on its debts"
I don't agree. If it owes 1 trillion pieces of green paper to a creditor, and prints them up, then it is has satisfied its agreements. The creditor was promised 1 trillion wallet-sized portraits of George Washington, and nothing else.
baxter:I don't agree. If it owes 1 trillion pieces of green paper to a creditor, and prints them up, then it is has satisfied its agreements. The creditor was promised 1 trillion wallet-sized portraits of George Washington, and nothing else.
What can you do with 1 trillion wallet-sized portraits of George Washington? Buy property denominated in US dollars. That means US land, infrastructure, businesses etc.
Repudiating the National Debt - MNR
Posting because it is relevant and possibly helpful.
I actually like the repudiating idea. And it's not like foreign nations can really do anything about it, our military is very powerful. Unless they team up against us...
bloomj31:nd it's not like foreign nations can really do anything about it, our military is very powerful.
Sure they can do something about it unless you suggest enslaving them. They can stop trading with, and accepting US money going forward.
America is an import nation. Without imports or with dramatically higher priced imports, the American standard of living will decline.
Ron Paul has said it many times, a nation that lives beyond its means will be forced to live below its means. Particularly when it has to pay for military force to protect itself when it goes bad on its debts.
The free ride is at an end.
liberty student: They can stop trading with, and accepting US money going forward. America is an import nation. Without imports or with dramatically higher priced imports, the American standard of living will decline.
They can stop trading with, and accepting US money going forward.
Do you think that would happen? Is that really acceptable to you?
bloomj31: liberty student: They can stop trading with, and accepting US money going forward. America is an import nation. Without imports or with dramatically higher priced imports, the American standard of living will decline. Do you think that would happen? Is that really acceptable to you?
I think it's entirely possible that the large exporting nations will no longer accept U.S. currency. It won't be something that happens overnight but, the situation is already brewing for a changeover to a new reserve currency.
Is this acceptable? Well, there won't be much we could say about it short of launching a new world war. This is the inevitable path of mixing Mercantilism and subsidization across industries with an ever-inflating national debt and money supply.
bloomj31: I actually like the repudiating idea. And it's not like foreign nations can really do anything about it, our military is very powerful. Unless they team up against us...
No, they probably would not do anything about it, militarily. But, who would then lend the U.S. government money? Nobody! Given that something like 80% of government spending is financed through borrowing, the government would have to cut 80% of its spending or print money, and then the cat would definitely be out of the bag, as hyper-inflation hit.
Spideynw: as hyper-inflation hit.
as hyper-inflation hit.
Wouldn't that actually be hyper deflationary? What am I missing?
Couldn't the government sell all of it's assets like roads, buildings, police cars and such? Debt could become a road to panarchy.
bloomj31: Spideynw: as hyper-inflation hit. Wouldn't that actually be hyper deflationary? What am I missing?
It wouldn't necessarily be deflationary, unless banks were allowed to fail and FDIC didn't cover people's lost deposits, for example. The more likely scenario, though, is that the Fed would continue to print money and keep interest rates low.
bloomj31:Do you think that would happen?
I know it will happen. That's the beauty of AE. We understand the outcome of pursuing one choice or another. We're not anti-state and pro-market only because we don't like politicians, we understand that the economic system of socialism has to fail in the long run, because politically managed money has no incentives to be stable. Every great state collapsed financially, and so to it will be with the US.
bloomj31:Is that really acceptable to you?
What is the alternative? Attack China and force them to keep making toys and electronic goods for everyday low prices?
I know it will happen.
That's exactly what I was thinking. It's inevitable. Even just a rudimentary understanding of AE leads to that conclusion. The police state/military-industrial complex/[add next alex jones apocalyptic scenario here] will all collapse or at least be drastically reduced once the inevitable crash occurs.
It's one of the few certainties that help me sleep at night. Fuck statism.
free paradigm blog ::: free paradigm on youtube
I don't understand, how would printing massive amounts of money result in hyper deflation?
Spideynw: I don't understand, how would printing massive amounts of money result in hyper deflation?
People panic and stop spending. In fact, they might take to hoarding their money. That would remove liquidity from the market faster than it could be replaced. Look at the hoarding the banks are doing with their new funds, is it so difficult to imagine a similar scenario in the event of a sovereign default but at an individual level?
bloomj31: Spideynw: I don't understand, how would printing massive amounts of money result in hyper deflation? People panic and stop spending. In fact, they might take to hoarding their money. That would remove liquidity from the market faster than it could be replaced.
People panic and stop spending. In fact, they might take to hoarding their money. That would remove liquidity from the market faster than it could be replaced.
Don't people need to buy food, clothing, furniture, cars, homes, fuel, electricity, appliances, etc., etc.? If so, why would they stop buying things they need and want? I am still confused.
bloomj31:Look at the hoarding the banks are doing with their new funds,
They are not hoarding. They are lending money to the government.
bloomj31:is it so difficult to imagine a similar scenario in the event of a sovereign default but at an individual level?
I am still confused about your line of reasoning.
If the government defaults on its debts, then it still has lots of things to pay for. To pay for them, the government would probably just start printing money. This would result in an increase in the supply of currency, which means it takes more dollars to buy the same thing.
I dunno, something seems off here, I just can't put my finger on it.
bloomj31:People panic and stop spending.
Or they make a rational decision in adverse economic conditions to save and recapitalize, until prices adjust and become more stable, when they can get back to making sound economic decisions.
bloomj31:In fact, they might take to hoarding their money.
Hoarding is keynesian speak. We call it saving here. Hoarding has negative connotations, and economics is a value free science.
bloomj31:That would remove liquidity from the market faster than it could be replaced.
A debt riddled economy might need liquidity to be reduced. That is the whole point of having a recession. To reduce liquidity, and remove everyone who cannot pay their debts or operate their firms without artificially induced credit. In other words, get rid of all of the businesses which are unprofitable or borderline unprofitable, shifting the resources in capital goods and labour to the firms who have shown they have a successful product/service and management model.
bloomj31:Look at the hoarding the banks are doing with their new funds, is it so difficult to imagine a similar scenario in the event of a sovereign default but at an individual level?
I don't understand this.
bloomj31: People panic and stop spending. In fact, they might take to hoarding their money. That would remove liquidity from the market faster than it could be replaced. Look at the hoarding the banks are doing with their new funds, is it so difficult to imagine a similar scenario in the event of a sovereign default but at an individual level?
None of this means that there is or would be deflation, though. People who "hoard" their money still have the ability to spend it, right?
jmorris84: None of this means that there is or would be deflation, though. People who "hoard" their money still have the ability to spend it, right?
Sure. But if they're spending it, they're not hoarding it. Sure, we might see inflation in necessities. But we might also see deflation in asset prices. I don't know, I'm no economics expert, but it just seems like there would be a serious psychological reaction to a sovereign default, no matter what form it takes. That psychological reaction seems most likely to be fear, in my mind. That's all I'm saying here.
bloomj31:Sure, we might see inflation in necessities.
Can't everything be considered a "necessity"?
Here is the thing. If today we have 1 trillion dollars in the world, and tomorrow the government printed another 1 trillion, doubling it to 2 trillion dollars, would you not expect all wages and prices to double, eventually, since now twice as many dollars are chasing the same amount of goods and services?
Isn't the problem with this that, technically, if you only make a partial re-payment--aren't you still defaulting? Perhaps I misunderstand the term's specific meaning, but I'd imagine that if you have a loan payment due and you only pay 50% of it, you've still defaulted on the loan.
Of course, if the gov prints the money to "repay" the loans, they'll probably get away with it (as opposed to anyone else making a partial payment).
Spideynw: Can't everything be considered a "necessity"? Here is the thing. If today we have 1 trillion dollars in the world, and tomorrow the government printed another 1 trillion, doubling it to 2 trillion dollars, would you not expect all wages and prices to double, eventually, since now twice as many dollars are chasing the same amount of goods and services?
I mean I guess everyone could be considered a necessity, but for the purpose of clarity, I think we could try to define necessities in terms of the goods and services that people require for base level of survival. That's probably a lousy definition, but we could probably come up with a better one.
Also, as I understand it, inflation (rising prices) would only occur with the goods and services that were in high demand. So the question is not just "is the money supply growing?" but also "where is it being spent?"
So not all wages would double and not all prices would double. Just the wages and prices where the money was changing hands the fastest. Or, to use a nice economic term, wherever the velocity of money was the highest. Isn't that consistent with economic theory?
Ansury:Isn't the problem with this that, technically, if you only make a partial re-payment--aren't you still defaulting?
Yes, someone else already made this point (a good one). However, someone else made an interesting point that the agreement was to be paid back a certain number of dollars, not a certain number of dollars worth a certain amount. As such, it really would not be a default, if the government prints money to pay of its debts.
bloomj31:Also, as I understand it, inflation (rising prices) would only occur with the goods and services that were in high demand.
Why? Again, the only variable that changed was that the currency supply was doubled. I mean are you saying if tomorrow you received a million dollars, the only things you would go buy would be lots of new products that are on the market (if you are thinking of things with the highest demand)? You would not buy a new home, or a new car, or go to a fancy restaurant, or go on a nice vacation? Or when you say high in demand, are you talking about "needs"? If so, does that mean you would just buy a cheap car, a cheap house, lots of cheap food, etc., etc., just so you can have your basic demands met?
bloomj31:So not all wages would double and not all prices would double.
If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.
Spideynw: If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.
If this is true, why haven't we seen aggregate (or whatever word you want to use) prices increase at the same rate that the money supply has? What's not happening here?