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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Worldwide Debt Default is the Only Solution

Politics / Global Debt Crisis 2012 Jul 21, 2012 - 11:00 AM GMT

By: Jason_Hamlin

Politics

Diamond Rated - Best Financial Markets Analysis ArticleSovereign nations, state governments, Californian cities, small businesses, homeowners, middle-class families, recent graduates and all types of other individuals and entities around the world are facing the same growing problem… DEBT. While the European Union is in the spotlight at the moment, the debt crisis is arguably worse in the United States and reaches its nasty tentacles into just about every nook and cranny of modern society.


It is sucking the life out of economies, stagnating growth, leading to central bank debt monetization, which leads to inflation and higher food prices, job cuts, furlough days, rising unemployment, harsh austerity, record small business failure, record foreclosure rates, depression, stress and an overall sense of anxiety throughout most of humanity.

The only two solutions being debated for the Eurozone at present time are additional austerity measures/tax hikes or a massive new round of debt monetization and quantitative easing. But it does not take an economic expert to conclude that neither one of these courses charted above will resolve the crisis. They have confined the debate to these two options in the same manner that we are presented with the false left vs. right illusion of choice in our political elections.

It should seem obvious to anyone with a pulse that reducing government debt via inflationary policies is nothing more than theft from current holders of the currency (savers) or past purchasers of said debt. Intentionally devaluing the currency to pay back creditors with significantly less valuable money is really just a stealth form of default, without all the fanfare. The only real difference with this approach is that just about everyone in society suffers, rather than solely those that made the bad lending decisions.

It is another no-lose situation for the banks which get to privatize gains and socialize losses. How would you like to walk up to a blackjack table in Vegas, betting $10,000 per hand, keeping the money when you win and spreading the losses to the rest of the casino whenever you bust? This is ‘moral hazard gone wild’ and only leads to bigger bets, bigger losses and a continued attempt to stick the rest of society with the bill.

The other solution being proposed is to raise taxes while cutting spending (austerity). Of course the problem with this solution is that higher taxes and aggressive austerity hurt economic growth and crush small businesses, the engine of growth for economies.

Even if you want to argue for a more progressive taxation system, the problem remains that the money is being handed to an entirely corrupt, inefficient and incompetent government. We can expect more $16 muffins, $500 toilet seats, no-bid contracts, kickbacks, political favors and general misallocation of capital (hello corn-based ethanol or Solyndra). Not only this, but increasing the tax burden on businesses will lead even more companies to move their operations overseas, thus exasperating the unemployment problem and losing even more in tax revenues.

Cutting spending seems logical enough, but rest assured it will be cut in all of the wrong places for all of the wrong reasons. And even if spending were to be cut to the bone, the government would still be unable to balance their bloated budget, largely due to rising interest on existing debt and military spending that is larger than the next 10 nations combined, yet somehow sacrosanct.

I found it fascinating that Richard Duncan, author of “The New Depression,” was able to accurately diagnose the problem with our economic system and the potential severity of the crash, yet concluded that the solution was even more money printing, borrowing and government stimulus?!? Oy vey!

Some people argue that the crux of our problem is that debt, at its core, is mathematically impossible to repay. This is because all money is created out of debt and there is interest attached to all of that debt. Yet the additional cash required to pay back the interest on the debt DOES NOT EXIST in the system. At any given point, there is always going to be more debt owed back than there is money in existence.

If I lend you $100,000 and ask you to pay me back $120,000 over the next five years, you might be able to find that extra $20,000 to pay me back if you are industrious or clever enough. However, that additional $20,000 that you acquired in the market was also created out of debt and is owed back to someone with interest. Thus, all debt can never be repaid. For more on this concept, see here, here, here or here.

It is a good gig for the banks with the privilege of being able to create money out of thin air and lend it out at interest. With the certainty of defaults, the banks then move in to seize assets, resources, cheap labor, political influence or anything else they wish. This has been occurring since 1913 and is only now reaching a boiling point, as the money lenders are taking over the power of sovereign nations. It is a form of slavery, though cleverly hidden so as to prevent any widespread realization or revolt.

Conclusions

1) Raising taxes will not solve the problem. We could raise the tax rate to 100% and the government would still not be able to get out of debt.

2) Cutting spending (austerity) will not solve the problem. We could cut every non-essential government service and the government would still not be able to get out of debt.

3) Inflating away the debt will not solve the problem in the long term. It will only kick the can down the road, exasperating the final crisis and making everyone pay for the poor decisions of a small group of lenders.

Solutions

So then, what is the solution to the debt crisis in Europe, the U.S. and around the globe?

The immediate default on all fiat debt. An old-fashioned debt jubilee of sorts.

I know this may seem like a radical proposal, but I believe it is the best option we have as a society and that there exists both a sound economic and moral argument for this course of action.

If we agree that the debt can never be repaid, which is a position held across the ideological spectrum by everyone from Ron Paul to Paul Krugman to the Zeitgeist Movement, then let’s get on with the default and start anew. The sooner that the debt liquidation occurs, the sooner that we are able to transition to a new, more sound and more sustainable monetary system. The longer this inevitable outcome is delayed, the longer we languish in this mode of low growth, high unemployment and extreme wealth disparity.

I won’t pretend that the transition is going to be swift or painless, but the vast majority of humanity stands to benefit from the default happening sooner rather than later. Only the banking power elite, politicians they support and those feeding at the trough have any interest in sustaining the current corrupt and inequitable system any longer.

If we want to end the sovereign debt crisis that is rapidly engulfing the planet, we need a worldwide strategic default on all fiat debt. This can be followed by the implementation of a new system, whether it be a debt-free monetary system or shift to something entirely different such as a resource-based economy.

While there are surely going to be serious challenges and unintended consequences, let’s focus on some of the benefits that may come from the cancellation of fiat debt…

Removing the suffocating debt burden would free up both sovereign nations and individuals to once again enjoy the fruits of their labor. That giant sucking sound of the non-productive money changers stealing from the rest of society would fizzle out and go silent.

The largest part of the national debt (over 40%) that is owed to the Federal Reserve would be immediately canceled, along with this privately-owned, immoral, parasitical and unconstitutional organization.

The next big piece of the pie is the debt owed to foreign nations such as China and Japan. These countries would also take a loss, a risk they assumed when investing in the debt of a bankrupt government. They will survive the hit, as they have already begun diversifying reserves into non-dollar assets.

Mortgages and bank-owned student debt would be canceled and the too-big-to-fail banks would go out of business. Excuse me if I fail to shed a tear. This would free up a considerable amount of discretionary spending for the citizenry, who would no longer have bloated monthly payments, excessive interest rates and “fiduciaries” working the opposite side of the trade.

With the canceling of debt, government funds would no longer be necessary to pay the interest on the debt, thus allowing for a significant reduction in tax rates. This would also result in more discretionary spending money in the pockets of the citizens and a friendlier environment for small businesses. These small businesses would then have more customers with more spending power, resulting in more job creation and economic growth.

The size and scope of government could be downsized drastically, as deficit spending would be eliminated and budgets would need to be balanced. The money owed to individuals (up to a certain point) via pension and mutual funds invested in Treasuries, would be compensated via such tax reductions.

The moral argument to the cancellation of debt is the other side of the equation. Given the fact that the debt was not created in good faith and that the banks well understand that their system was unsustainable, I see moral grounds for such action. A legal argument can also be made that most bank loan contracts are invalid, as the banks offered up no consideration. They merely made a few keystrokes into a computer and created the loan out of thin air, not from existing reserves or deposits. The upside to banks going out of business is that much of the intellectual capital of the nation could then be re-deployed to engineering, science and solving real-world technical problems, rather than figuring out how to steal money from unwitting pension funds.

So, the world’s citizens protesting in the streets are right to reject tax increases, austerity or bailouts as legitimate and viable solutions to the debt crisis. We are being asked to pay for the mistakes of others and hand over sovereignty to the international banks, the richest individuals in the world.

Dismiss the puppets and paid pundits on television encouraging such solutions and casting blame at the feet of the citizens. There has been an intentional effort to trap and ensnare as much of the world as possible in this black hole of a endless debt. Likewise, more debt is not the solution to the problem of too much debt. It is amazing that these words even have to be written, but when the public is fed the same line over and over about needing more money printing, it starts to become believable.

Of course, the NY Times and other establishment media will warn of the devastating effects of such a debt jubilee. But they are only serving their owners, who clearly stand to benefit from the continuation of the status quo.

The brilliance behind this proposed debt cancellation is that it strategically allocates losses to those that created the mess, have grown rich from it and can most handle the hit, while protecting and indeed returning wealth to the rest of society that has suffered under this unfair system of fiat money and crony capitalism. Justice?

This solution would, in essence, hand back Trillions in bailout money, tax breaks and other economic benefits that the banks have enjoyed at the expense of the taxpayers. We’ve already seen the impact of handing bailout money to the banks. I think it is safe to assume that the money would have a higher velocity and greater impact on economic activity if instead given to those that would actually spend it, rather than hoard it. With respect to the late President, we are still waiting for that great rain to come trickling down.

If we want to get serious about tackling the debt issue, the key driver in all of our economic problems, we have to move the debate beyond the narrow confines of tax increases, austerity and central bank liquidity injections. The only lasting solution is to cancel the debt now, deal with the ramifications and shift to a debt-free, non-fiat, non-fractional reserve monetary system with sound money or some reference to real-world assets.

The few who understand the system, will either be so interested in its profits, or so dependent on its favours that there will be no opposition from that class, while on the other hand, the great body of the people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests. – John Sherman…a protégée of the Rothschild family

By Jason Hamlin

http://www.goldstockbull.com/

Jason Hamlin is the founder of Gold Stock Bull and publishes a monthly contrarian newsletter that contains in-depth research into the markets with a focus on finding undervalued gold and silver mining companies. The Premium Membership includes the newsletter, real-time access to the model portfolio and email trade alerts whenever Jason is buying or selling. You can try it for just $35/month by clicking here.

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