Saturday, November 2, 2013

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.


  1. I have no doubt that you are correct about regulatory democracy, and QE. Bond buying could not slack without less government spending, and we know that will not happen. The real estate pump can not slack without causing "'08 only worse." The only program they can add next that makes sense to me is buying other worthless paper. If they buy commodity futures, (gold etc.) even children will know that the economy is a lie. They could buy bonds issued by other governments but if they are foreign the outrage would be immediate. State and local paper are a logical next step that some of the public would believe beneficial. The Fed may start buying derivatives in purchases that are not thought of as bailing anyone out. I don't think it would be credit default swaps at first, but where else is there to go? taxes

    1. taxes

      It is an interesting possibility that the game will be extended via central banks basically writing off the sovereign debt held, and as necessary buying more sovereign as well as potentially state debts...and then writing these off as well.

      It is very "Brownian" as DB puts it. Perhaps this is the direction Yellen will take, as it seems she isn't satisfied that enough has been done through the current transmission mechanisms.

    2. Well Jonathan, DB hasn't been on my list lately, having of financial necessity taken up the more intellectually satisfying tools of shovel, hammer and chainsaw.

      It does seem rather Brownian but I'll try not to blame the botanist and instead lay it on the false economists. Keynesian economist seems to encompass all but the Austrians now, and in my mind is just as solidly oxymoronic as abortion doctor. And that last might be better if you leave out oxy, for evil and.

      Barry hired Tiller's friend Sebelius to crush us in one way, I guess he has bookended her with Yellen to crush us in another. If people are ridiculous enough to believe that anything they are doing is good, then I suppose they are gullible enough to believe that canceling debt owed to people while creating debt owed to the either will work. It puts governments and central banks on the same level as a six year old saying 'I rule the world because I said so infinity.' The basic differences being that they have well oiled propaganda machines, and guns.

      We know it will reach a tipping point and end but in the mean time, watching how stupid we can be continually pushed to new heights, makes me want to stop watching. Great news, the patient died but we saved the tumor! taxes