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Why the U.S. Need Not Fear a Sovereign Debt Crisis: Unlike Greece, It Is Actually Sovereign

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  • Wed, Jul 28, 2010 - 03:30pm

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    DrKrbyLuv

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    Why the U.S. Need Not Fear a Sovereign Debt Crisis: Unlike Greece, It Is Actually Sovereign

   by Ellen Brown, Complete article link from Global Research

Last week, a Chinese rating agency downgraded U.S. debt from triple A and number one globally, to “double A with a negative outlook” and only thirteenth worldwide. The downgrade renewed fears that the sovereign debt crisis that began in Greece will soon reach America. That is the concern, but the U.S. is distinguished from Greece in that its debt is denominated in its own currency, over which it has sovereign control.

We did not hear much about “sovereign debt” until early this year, when Greece hit the skids. Investment adviser Martin Weiss wrote in a February 24 newsletter:

“On October 8, Greece’s benchmark 10-year bond was stable and rising. Then, suddenly and without warning, global investors dumped their Greek bonds with unprecedented fury, driving its market value into a death spiral.

“Likewise, Portugal’s 10-year government bond reached a peak on December 1, 2009, less than three months ago. It has also started to plunge virtually nonstop.

“The reason: A new contagion of fear about sovereign debt! Indeed, both governments are so deep in debt, investors worry that default is not only possible — it is now likely!”

So said the media, but note that Greece and Portugal were doing remarkably well only 3 months earlier. Then, “suddenly and without warning,” global investors furiously dumped their bonds. Why? Weiss and other commentators blamed a sudden “contagion of fear about sovereign debt.” But as Bill Murphy, another prolific newsletter writer, reiterates, “Price action makes market commentary.” The pundits look at what just happened in the market and then dream up some plausible theory to explain it. What President Franklin Roosevelt said of politics, however, may also be true of markets: “Nothing happens by accident. If it happens, you can bet it was planned that way.”

That the collapse of Greece’s sovereign debt may actually have been planned was suggested in a Wall Street Journal article in February, in which Susan Pullian and co-authors reported:

“Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.

“The big bets are emerging amid gatherings such as an exclusive ‘idea dinner’ earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. . . .

“It is impossible to calculate the precise effect of the elite traders’ bearish bets, but they have added to the selling pressure on the currency—and thus to the pressure on the European Union to stem the Greek debt crisis.

“There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion. Regulators haven’t suggested that any trading has been improper.”

These sorts of rumors have not been confined to the Greek bond and the euro.  In The Financial Times, Niall Ferguson wrote an article titled “A Greek Crisis Is Coming to America,” in which he warned:

“It began in Athens. It is spreading to Lisbon and Madrid.  But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies.”

America, he maintained, would suffer a sovereign debt crisis as well, and this would happen sooner than expected. 

“The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.”

The catch is that the U.S. does not need to satisfy the IMF . . . . 

“Sovereign Debt” Is an Oxymoron

America cannot actually suffer from a sovereign debt crisis. Why? Because it has no sovereign debt. As Wikipedia explains:

“A sovereign bond is a bond issued by a national government. The term usually refers to bonds issued in foreign currencies, while bonds issued by national governments in the country’s own currency are referred to as government bonds. The total amount owed to the holders of the sovereign bonds is called sovereign debt.”

Damon Vrabel, of the Council on Renewal in Seattle, concludes:

“[T]he sovereign debt crisis . . . is a fabrication of the Ivy League, Wall Street, and erudite periodicals like the Financial Times of London. . . . It seems ridiculous to point this out, but sovereign debt implies sovereignty.  Right?  Well, if countries are sovereign, then how could they be required to be in debt to private banking institutions?  How could they be so easily attacked by the likes of George Soros, JP Morgan Chase, and Goldman Sachs? Why would they be subjugated to the whims of auctions and traders?  A true sovereign is in debt to nobody . . . .”

Unlike Greece and other EU members, which are forbidden to issue their own currencies or borrow from their own central banks, the U.S. government can solve its debt crisis by the simple expedient of either printing the money it needs directly, or borrowing it from its own central bank, which prints the money. The current term of art for this maneuver is “quantitative easing,” and Ferguson says it is what has so far “stood between the US and larger bond yields” – that, and China’s massive purchases of U.S. Treasuries. Both are winding down now, he warns, renewing the hazard of a sovereign debt crisis.

Market jitters may be a hazard, but if the U.S. finds itself with government bonds and no buyers, it will no doubt resort to quantitative easing again, just as it has in the past – not necessarily overtly, but by buying bonds through offshore entities, swapping government debt for agency debt, and other sleights of hand. The mechanics may vary, but so long as “Helicopter Ben” is at the helm, dollars are liable to appear as needed.

Hyperinflation: A Bogus Threat Today

Proposals to solve government budget crises by simply issuing the necessary funds, whether as currency or as bonds, invariably meet with dire warnings that the result will be hyperinflation. But before an economy can be threatened with hyperinflation, it has to pass through simple inflation; and today the world is struggling with deflation. The U.S. money supply has been shrinking at an unprecedented rate. In a May 26 article in The Financial Times titled “US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus,” Ambrose Evans-Pritchard observed:

“The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.”

So long as workers are out of work and resources are sitting idle, as they are today, money can be added to the money supply without driving prices up. Price inflation results when “demand” (money) increases faster than “supply” (goods and services). If the new money is used to create new goods and services, prices will remain stable. That is where “quantitative easing” has gone astray today: the money has not been directed into creating goods, services and jobs but has been steered into the coffers of the banks, cleaning up their balance sheets and providing them with cheap credit that they have not deigned to pass on to the productive economy.

A true sovereign need not indebt itself to private banks but can simply issue the money it needs.  That is what the American colonists did, in the innovative paper money system that allowed them to flourish for a century before King George forbade them to issue their own scrip, prompting the American Revolution. 

It is also what Abraham Lincoln did, foiling the Wall Street bankers who would have trapped the North in debt slavery through the exigencies of war.  And it is what China itself did successfully for decades, before it succumbed to globalization.  China got the idea from Abraham Lincoln, through his admirer Sun Yat-sen; and Lincoln took his cue from the American colonists, our forebears.  We need to reclaim our sovereign right as a nation to fund the Common Wealth they envisioned without begging from foreign creditors or entangling the government in debt.

We have the sovereign authority to end the financial crisis anytime we want by simply issuing money instead of bonds (debt).  First, we should remove the money making monopoly awarded to the private, for profit, Federal Reserve.

Why didn’t we do this in 1933 to end the great depression and avoid national bankruptcy?  Why don’t we do it now?

Larry

  • Wed, Jul 28, 2010 - 05:11pm

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    Peak Prosperity Admin

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Great article, but I have a hard time believing we can smoothly transition out of the financial crisis by abolishing the Fed and printing our own sovereign money. How can we convert so much private debt to equity without creating significant fears of price inflation? Why would our current external creditors (China, Japan, etc.) hold on to dollar reserves after we decide to pay their debts with freshly printed money? I completely agree that sovereign money (such as the colonists’ scrip or Lincoln’s greenbacks) is what our nation eventually needs to embrace, but I’m unconvinced we can make that transition without first a severe episode of decomplexificaton and therefore economic depression. All actions have consequences (or every action is followed by an equal and opposite reaction), and our actions to date have served to create an extremely complex economy on the back of borrowed money, impoverishing a large segment of the population in the process.

  • Wed, Jul 28, 2010 - 06:36pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Ashvinp,

Have you ever ran a business?

  • Wed, Jul 28, 2010 - 07:00pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=Thomas Hedin]

Ashvinp,

Have you ever ran a business?

[/quote]

No, why? Analogy to the corporate bankruptcy process?

  • Wed, Jul 28, 2010 - 09:10pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

I want to address your fears of price inflation.

Can you please correct me if I’m wrong but the only two reasons businesses raise their prices is costs and projected future earnings correct?

  • Wed, Jul 28, 2010 - 09:39pm

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    Peak Prosperity Admin

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

OK, I’ve asked this question at least 20 times, and no one pushing the debt-free monetary system has replied to it. 

How does the physical printing of debt-free money (currency inflation) with no means to extinguish it not lead to hyperinflation down the road, especially if growth in the economy and growth in the money supply diverge for some unknown reason or circumstance?

At least with a credit-money system, the money supply is extinguished by repayment of the debt or by default. What piece of the puzzle am I missing here? And if you can’t explain it to me, then how are you going to explain it to the masses? And the fear of the masses is not something that should be marginalized with theoretical constructs, btw.

Strabes and/or Larry, please respond.

 

 

  • Wed, Jul 28, 2010 - 10:49pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=JAG]

OK, I’ve asked this question at least 20 times, and no one pushing the debt-free monetary system has replied to it. 

How does the physical printing of debt-free money (currency inflation) with no means to extinguish it not lead to hyperinflation down the road, especially if growth in the economy and growth in the money supply diverge for some unknown reason or circumstance?

At least with a credit-money system, the money supply is extinguished by repayment of the debt or by default. What piece of the puzzle am I missing here? And if you can’t explain it to me, then how are you going to explain it to the masses? And the fear of the masses is not something that should be marginalized with theoretical constructs, btw.

Strabes and/or Larry, please respond.

[/quote]

+1,000,000,000,000,000!!!!!!

  • Wed, Jul 28, 2010 - 10:59pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=Thomas Hedin]

I want to address your fears of price inflation.

Can you please correct me if I’m wrong but the only two reasons businesses raise their prices is costs and projected future earnings correct?

[/quote]

…and rising taxes, and increased regulations that increase business risk, and government-imposed labor provisions (such as severance pay provisions, insurance provisions, pension fund provisions).  I guess those could all be lumped into “increasing costs”, but most business people see distinctions between them.  When raw materials go up, that’s a change in a direct cost.  When new regulations force you to raise salaries across the board, that’s partially a direct and partially an indirect cost change, depending on the nature of the business.  

Sometimes, rising costs do not result in rising prices.  Instead, they can result in cost-cutting, such as lay-offs, off-shoring, and cutting back on service/product support.  Most governments are experts in promoting all of these actions and then wonder why entire industries have moved out of town.

  • Wed, Jul 28, 2010 - 11:56pm

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    Peak Prosperity Admin

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Businesses also raise costs because they can. If market conditions allow, they can raise prices for no other reason than to arbitrarily increase profit. Barrier to entry, market place domination and monopoly are but a few reasons why businesses might raise prices irrespective of costs or projected future earnings.

Sometimes governments do impose regulatory requirements on business that raise operating costs. Some of these costs are unique to government purview, such as taxes and some types of labor regulations. Others are not. Some costs are created by corporations engaging in root cause activity, such as the aforementioned “off shoring”. If a corporation offshores jobs, and exports a large labor component external to a community, the local residents that formerly had these jobs remain in their community for the most part. In many cases, these displaced workers can be absorbed by other businesses who do not offshore. Increasingly, they cannot be absorbed. These workers become net drains to the community, and require the same services for which the tax base can no longer support.

This has a cascading effect, and as more companies offshore, there are fewer and fewer local business to absorb a growing (unemployed) work force. The tax base drops proportionally, and must be amortized over a shrinking headcount of net inflows. This raises taxes and costs to the remaining citizens and businesses that do not participate in offshoring.

This type of cost externalization is not often mentioned in discussions about government encroachment into our lives. Yes, we can do with less regulation, less taxes, less government intrusion, but when are the structural reasons for these effects going be acknowledged and addressed?

  • Thu, Jul 29, 2010 - 12:15am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=darbikrash]

Businesses also raise costs because they can. If market conditions allow, they can raise prices for no other reason than to arbitrarily increase profit. Barrier to entry, market place domination and monopoly are but a few reasons why businesses might raise prices irrespective of costs or projected future earnings.[/quote]

Barriers to entry are usually surmountable as the only real barrier to entry into any market is capital.  However, most barriers are created by the very same government regulations that are supposed to “protect” the citizen/consumer, and instead provide the consumer with fewer choices, higher prices, and lower quality. Some industries are so over-regulated that only the very big boys can play.  Smaller players don’t stand a chance as they are not equipped with the teams of lawyers, consultants, and government experts needed simply to comply with and obtain necessary licenses and permits.  The big boys keep slipping Uncle Bens to the lawmakers to make sure those regulations – you know, the ones that are there to protect “you and me”, stay in place or are expanded, thereby guaranteeing their closely-held grip on the industry.  

Other industries become very tightly held due to government laws that have little direct intention on said business.  Take the inheritance tax, for example.  If it expires in 2010, as Obama threatens to allow it to do so, small farmers will go bankrupt as heirs will be completely incapable of paying the inheritance tax due.  So what will happen is that small farms will disappear at an even greater pace and large corporations, who do not need to worry about silly things like inheritance, will eventually take over 100% of US farms.  The same thing will happen to your local thriving mechanic or car dealer. They too will succumb to the tax and only national chains owned by unknown shareholders will take over.  

[quote]

Sometimes governments do impose regulatory requirements on business that raise operating costs. [/quote]

Sometimes?  How about just about every other month?  The US congress alone has passed over 6,000 pages of legislation this year alone.  Consider state, municipal and city legislatures who, while maybe not on the same steroidal warpath to drown America in legislation as our dear congress is, surely have also passed some of their own this year, and the word “some” is simply not even in the ballpark.

 

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