Sovereign Debt Default: In the Works

The elite will pull out all the stops to maintain regulatory democracy – the single-most important tool in the toolkit used to keep the people willingly subservient.  Hence, sovereign default – which I will come to after a necessary diversion.

Liam Halligan has written a piece for the Telegraph, entitled “The Fed is locked in a QE prison of its own making.” 

Well, yes it is.

Back in the spring, Ben Bernanke told the world that "tapering" would start "later this year". The Federal Reserve Chairman was indicating, in other words, that America's central bank would start to wind-down its $85bn-a-month money-printing habit by the end of 2013.

Such an outcome now looks increasingly unlikely.

Austrian theory suggests that injections of fiat money and credit require ever-greater injections if recession is to be avoided.  So, until CPI as commonly measured becomes politically intolerable, tapering is unlikely.

My view, in fact, is that the Fed, could soon unleash more, not less, quantitative easing – ramping up the policy rather than tapering.

Yes, that is what I just wrote.

When the big central banks create virtual cash, it tends to end up in asset markets, giving share prices a boost – resulting in bigger City and Wall Street bonuses.

This has been true under Bernanke; let’s see if Yellen offers a different approach to get inflation to the masses.

Given how much its helps our political and financial "elites", then, QE has grown like topsy.

Well, as there have been no negative consequences, why not?  A perpetual motion machine.

As such, the new market consensus is that tapering won't start until January 2014 at the earliest…Just beyond the mainstream, though, there's a growing view that QE could continue at its current rate for even longer – until, say June 2014.

What about those way beyond the mainstream – like way, way, way beyond it.  Say, like Austrians.  QE will continue and increase until consumer price inflation improves – to the high teens or so.

The longer QE goes on, the higher the chances that our central banks come under even more political pressure, which they're powerless to resist, to turn up the funny-money dials further.

Wait a minute – I thought the central banks of the west were independent of the political pressure.  What is Liam writing here?  Blasphemy!

Now for the good stuff – sovereign default:

We could then see the likes of the Fed and the Bank of England get heavily leant on to simply retire – or cancel – the government debt they owe.

I have written about this possibility here and here.

Cancelling government bonds bought by central banks will take us back to the bad old days of 1970s-style inflation and economic mismanagement. Yet this ghastly outcome looms increasingly large as the Western world's central banks look to escape the trap that they themselves have laid.

To my knowledge, central banks did not do this in the 1970s, so I don’t think it is fair to say we will be taken back to those happy-go-lucky years if such an action is taken.

Frankly, I am not sure what would occur.  Does it matter if a central bank loses money?  Does it matter if it is technically insolvent?

What is clear is that this option of central banks writing off the sovereign bonds they hold is one way to kick the can forward a few years…depending on the consequences.  Other than ensuring the continued stagnation of the global economy (as such an action would free governments to take over ever-larger portions of economic activity), I don’t know what the consequences might be.

Whatever the consequences, these might be far more palatable to the elite than the loss of faith in regulatory democracy.