Does the future include collateralized sovereign borrowing?
A guest on this week’s Financial Sense Newshour alluded to something I hadn’t even considered as a possibility: collateralized sovereign debt. The more I thought about it, the more I realized that is a very possible scenario.
Right now, a whole lot of us are dumbfounded to understand why the rest of the world is willing to lend money to an insolvent nation (the USA) at 3% interest. Many of us have been waiting for them to wise up and realize how imprudent they have been, and China has recently made noises that suggest it’s finally smelled the coffee and may not be as interested in our debt on current terms.
The natural reaction mechanism is higher interest rates. Less buyers for the bonds means higher rates – simple supply/demand economics. But our nation just can’t affort higher interest rates during this depression.
So the next logical choice is to replace unsecured debt with secured debt. So China might say "You want another few billion but you can only pay single-digit interest rates? Ok, we’ll loan you the money, but you have to send us a bunch of that gold from Ft. Knox as collateral for the loan."
Where does it lead from there? Need a few hundred billion more? Well sorry, we can’t loan it to you unsecured because your credit isn’t so good any more. But this park of yours — Yellowstone… We’re willing to take that as collateral, but only if you sign a treaty that says if you default, we can use the land for any purpose we like.
Oh that monument of yours… what’s it called? The Statue of Liberty? We can do a cash-out refi on that one, but again if you default we own it and can do anything we want with it.
Still need more money? What? A Trillion this time? Well, we could take a couple of those aircraft carriers of yours as collateral. We’ll need the planes and support equipment too so we can find a buyer if you default. But don’t worry, just tell your people that you’re not going to default and not to worry. Oh, as long as you’re talking to them, please tell them to go shopping again. Every time you do that it helps the economy. Not your economy perhaps, but it definitely benefits ours!
Seriously, I think this is a very realistic scenario. Maybe not aircraft carriers, but if rates go thru the roof (they will), we won’t be able to afford unsecured financing any more. The standard banking solution to that problem is to ask the borrower to put up collateral in order to secure a lower interest rate. The rules for countries are no different than for consumer borrowers.
A scary prospect indeed. The only issue is that collateralized lending makes sense within borders because borrower and lender are subject to law enforcement, courts, etc. There is a controlling legal authority, not that I really want to bring back that phrase. 🙂 But this type of collateral being handed over to China seems implausible. We could simply say, "if you want it, come get it, and fight your way through the USAF." Now, that would setoff the endgame in US bonds and the dollar, but I think the people would accept that before they’d accept handing territory, gold, military capital assets over to China.
Good point about the logistics of collateral in another jurisdiction. But the gold scenario still makes perfect sense. Send that gold from Ft. Knox and we’ll take physical posession here in Beijing, and send it back when you pay us back.
I know I am not the first one thinking this- but what if the gold is already there- in China? Do we really know what the truth is about anything, much less what back-room deals our government has made? Is it possible for any US citizen to actually go and see/count the gold bars in storage? Maybe the banksters emptied that out years ago and left a big, fat I.O.U. lying on the floor of the vault.
I apologize, in advance, for muddying the waters of this topic with this, sorry; forgive me.
Your forgetting about your army. Maybe China will ask for weapons as a collateral.
Quick rough calcs
USA gold reserves are about 8300 tons
I make that to be 250 billion or so,
Ain’t going to do many bailouts on that
Brilliant question Erik. It is akin to something I have wondered myself. What exactly will the quid-pro-quo (money for something) be in the new international lending atmosphere? I believe we will see new and interesting "favors" done for U.S. creditors. For one thing, I would not expect the defacto independence of Taiwan to last very long. Sorry Taiwan, you heard the President. We have to make sacrifices, and you can’t vote. This prediction is evidenced by the complete absence of human rights criticism from Hillary Clinton on her recent trip to China, during the 50 year aniversary of the annexation of Tibet. Not a word. Sorry Tibet.
I believe the most painful collateral which will be offered to foreign U.S. debt holders will be public infrastructure. Not the land, per-se, but certainly vital structures on the continental U.S., some of which will actually include huge expanses of land. I am thinking particularly of our highway system. Indiana leased (read hocked) its East-West Toll Road to Cintra, a Spainish company, for a good bit of cash in 2006. These kinds of deals will increase in all of our cash-strapped states. You can bet our foreign creditors would love to ‘manage’ our water supply as well. I don’t know about you but when I think China, I think drinking water. YUM! Then they can set the prices (google Bolivia Water Privatization). These holdings allow a direct taxation of the U.S. citizenry by foreign powers. These infrastructures are cash cows, and are very valuable as collateral.
This is exactly the kind of thing developed nations have done to developing nations for very many years now. First you get a country inescapably in debt. Usually through impossible contracts and greasing some decision-makers’ palms. Then, when they default, all of their resources belong to the wealthy corperate types connected to those who made the loan. They go after water, minerals, oil. You get the idea. You see, debt is a trojan horse to the wealth of a nation. It is well documented and explained, I hear, in the book "Confessions of an Economic Hitman", though I haven’t yet read the book.
It will be very interesting to see what goes first to China. The fact is that we cannot possibly service our debt with dollars having any sembelance of value. This being true, our creditors will take what they can get.
Great post, I alluded to this in another forum, but that forum consists mainly of Rush Limbaugh fans/"a flag pin makes you an American" thinkers and maybe I didn’t explain myself as well as others do on this forum. I got no response. I think its already happening, although I didn’t imagine "hard" assets like water and income producing resources, but rather "soft" asset issues like Taiwan and Tibet. Military assets are also possible, especially with this current administration.