A very beginner economic question

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akamai mom's picture
akamai mom
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A very beginner economic question

Why can't a country as big as the United States, simply decide to not pay their national debt?

When the circumstance arises that an entire country basically collapses due to interest obligations on debt, what happens if they stop paying?  How does the world foreclose on a country?

I understand that it seems this economic crisis has been intentionally orchestrated to collapse our republic, similar to what is described in John Perkins, "Confessions of an Economic Hit Man", but who is the ever imposing U.S. to the U.S.?

...forgive my ignorance.

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Doug
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Re: A very beginner economic question

The debt holders, including most importantly in our case, China.  Ours is the world's reserve currency.  If we don't maintain faith with our creditors, the dollar crashes.  That would have ripple effects on the world's currencies since they are all based on the dollar and the dollar is based on faith.  If faith fails, the world's currencies fail.  Or, at least that's my marginally educated take.

Doug

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Re: A very beginner economic question

Akamai Mom

Another problem with outright default is that a lot of those bonds are held by pension funds, insurance companies for annuity holders, mutual funds, 401(k)s and other investment holdings.  Many families are depending on these for their current investments or retirement.  Default would directly wipe out many ordinary people.  That's why the probable path is a "slow default" using inflated / debased dollars.  The debt gets "paid" according to the numbers, but the value has been stolen anyway, leaving us holding the bag.

Travlin 

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sosMsos
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Re: A very beginner economic question

Germany refused to pay back wwI reparations that caused a debt trap with no exit in sight for  them -> thus the only way out was political isolaton through demagogy leading into WWII. So that what happens with those countries.

And the US admin is doing better everyday in isolative politics.

Also that the US$ is the worlds leading currency is not a coincidence. In fact it was already planned when the USA entered WWII, a pretty evil plan so to say. Henry White was ordered to create a plan for a new global economic order just one week after Pearl Harbour happened.

This is all revealed now from lately released Fed documents and shown in the (german) book: Georg Zoches book  „Welt Macht Geld“

http://www.zeitpunkt.ch/news/artikel-einzelansicht/artikel/bretton-woods...

here the google translation:

http://translate.google.de/translate?js=n&prev=_t&hl=de&ie=UTF-8&layout=...

in short:

After WWII Great Britain had  presented a popular  plan for global trade that should be free from interest rates.  ( if that agenda had been implemented there most likely would not have been Vietnam, Irak, Afghanistan..9/11). Basically the US had called the ghosts early in the 1940th that they are fighting now, and its again the FED behind it.

The US delegation had undermined the multinational negotiations cause they wanted by all means to enforce their own agenda. (Its compareable with the Federal reserve act but with global dimensions)

And during these Bretton Woods negotiations they have reached their goal through noumerous misleading acts, i.e. where they have manipulated contracts overnight and manipulated the whole negotiations, and it was all planned way earlier in great detail...

THATS not Conspiracy, that are facts that can be reviewed!

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akamai mom
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Re: A very beginner economic question

Thank you Doug, Travlin and sosMsos.  

The Dutch article is interesting.  It is kind of staggering, the many layers of deceit in our economic system.  

It seems like our currency is very likely to crash or to at least is in high risk to stop being the world reserve currency.  If that happened and our credit were to become 'shot' with the foreign markets anyway, I am struggling to understand how nations can exist in insurmountable levels of debt.  At an individual level, the creditor sometimes has to take the loss for being foolish enough to make a high risk loan in the first place.

In agreement with the article, it seems there have been layers of financial coups from 1913 to 2008.  Why not cheat the cheaters? Just as in bankruptcy, some debt is honored while other debt is not.  I wish we could starve the Federal Reserve.

I really appreciate Senator Bernie Sanders castigation of the elite who are swindling the nations wealth in the senate hearing:

It is well worth the time to watch.

Thanks again.

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sosMsos
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Re: A very beginner economic question

"At an individual level, the creditor sometimes has to take the loss for being foolish enough to make a high risk loan in the first place."

Its not about wether to decide giving insolvent people a loan or not. The money system due to compound interest forces the market participants to do that. Everyone is forced to expand in this system to outlast the pressure that compounding interests puts on us. And to expand only works through loans. You dont need to be a debitor to feel the effects of compound interest, its all priced in your every day spendings, rent, goods you buy...

The FEd is not the evil part, as there is no evil bank. If there were evil banks than our goal has to be to create good banks. But thats not  logical.

Market participants like the FED and the banks aswell are forced to act like they do now, because the mathematics of our money system dictates them. They choose the optimal strategy for them. Mathematics cant be good or evil thus market participants cant behave good or evil when mathematic law determines how to act optimally.

The thing is we need a complete different money sytem. gold currency is not a solution, as to abandon central banking also is not a solution, as the money system determins the action of market participants!

Hope that helped :)

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Re: A very beginner economic question

I have a little different perspective.  We have a real economy with goods and services, and we have a monetary system that we use to aid in the exchange of real goods and services.  We can play games with the monetary system - print money, lend it out of nothingness into existence, hoard it in banks, etc.  But money by itself has no intrinsic value, so when all is said and done what really matters is what is happening in the real economy of goods and services - and how the ability to access the real economy is distributed to the population.  

On a worldwide basis, there are regions that have either a plethora of resources, cheap labor, food, educational institutions, etc.  So we trade.  Ideally, the relative demand for other countries' goods and services, compared to other's demand for our goods and services will defines a currency exchange rate.  Good old supply and demand.  

So, it the dollar is really in trouble, then its value should fall until our exports can pay for our imports.  Of course there is some game-playing going on.  China wants customers for their consumer goods so they lend us money so we can buy them.  We have big appetites for Saudi oil, so we send lots of dollars to the mid-east without a commensurate purchase of goods and services - so imbalances develop.  But this game is a two way street.  The Faustian bargain that China and OPEC nations make is that they support the American consumer so that they may have markets.  Tensions are building in China, because they are trying to play the game of top-down price control rather than allowing market pressures to work themselves out.  Ultimately China could have as much to lose from these actions as we do.  

But keep in mind that as long as the oil of the economy (money) is still around to allow for markets to function, what really matters is what is happening over in the real economy.  Inflation and deflation generate sets of winners and losers - but not necessarily with the productive capability of the real economy.  As long as I can still produce a loaf of bread, or some 2x4's, or clean windows, etc., someone will be willing to exchange my productive capability for the currently perceived value in monetary terms.  

It's the job of the FED to make sure that this works.  Their dual mandate is to keep the perceived value of the currency from fluctuating wildly, and to -  ensure that the monetary system is not stifling full employment.  

But all of us like to put money in the bank and have it earn interest - so we can make money without working.  Ponzi - did this as well.  We also want to provide for ourselves when we are older - so we need to hoard resources that we can accumulate when we are productive workers. This time-shifting function of personal savings provides for more opportunity for fun and games.  Mild inflation tends to cause our savings to dwindle - thereby requiring that we work longer.  A little bit of inflation is a great motivator for the economy.   Life's expenses are front loaded, where as earning potential peaks later in life, so there is need again for financial time-shifting with mortgages.  Here again, a little inflation makes the debts much easier to swallow.  We all play the game.  As long as the FED can produce 2% inflation, the Federal government gets an easy 2% payment against the national debt every year - without having to collect any taxes!  There is really nothing wrong with this.  Adding an extra zero to the check you right after 50 years is part of the game - but it doesn't really change anything over in the real economy of goods and services.

Back to your original question - Mostly we owe the national debt to ourselves. So not paying it - or defaulting on a portion of it is just a way of taxing a particular segment of our population.  Defaulting  on the foreign component is really just a way of modifying currency exchange rates. The balancing act will eventually happen.  What matters is whether it is rapid and disruptive, or more gradual.  There are few winners when things get chaotic - so all sides try to avoid this outcome. 

 

 

 

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akamai mom
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Re: A very beginner economic question

Thank you, Grondeau.

That was helpful, especially the discussion on the real economy of goods and services regardless of the currency position.

If the debt is mostly to ourselves, I agree it would be problematic to default on the sector of Americans who are willing to essentially bridge our government in times of cash flow crises.  We need to maintain confidence for that sector.  When I read, or watch about the national debt, it is usually presented as a recent rapid increase with the majority being owed as 1.) interest to the FED and 2.) debt service to foreign entities like China and the Saudi's.  It is less compelling to me to take care of those two entities than to allow a manageable future for the next generations of Americans.  Your comment, 'The Faustian bargain that China and OPEC nations make is that they support the American consumer so that they may have markets.' has meaning to me, but supports my thought that they are equally culpable in the risk.  By encouraging these relationships, it enables us to over-consume and be reckless with our energy habits.

I just finished reading The Creature from Jekyll Island, and if the facts are correct, the FED does not appear as a legitimate Central Bank.  I can understand the strength of having a central bank, but the debt based currency seems a crazy scheme that ensures a loser, much like musical chairs.  That system needs to be corrected.  We need to transition out of that; the less chaotic the better, but better out than in.  If we did do some defaulting, maybe we could be selective with who is paid and who is not, much like a personal bankruptcy or estate settlement.

As a beginner learning the financial rules, it feels like there are two sets of rules; one for the citizen and another changing set for a group that is allowed to cheat.  With or without a change, the 'real' set of goods and services needing to be exchanged will continue.  I hope we have the creativity to construct a better system.  It is certainly possible as change always happens, though we clearly lack the will.

Thanks for your explanation.

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akamai mom
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Re: A very beginner economic question

sosMsos,

I guess you are right that I am suggesting there can be an 'evil bank'.

As I pointed out to grondeau, after reading The Creature from Jekyll Island, the FED very much does seem like a predatory bank cartel that is more interested in harvesting the earnings of the citizen and monopolizing the monetary system, than it is at creating a stable economy.  It does want a stable economy, but primarily so there is a stable debtor population to continue paying interest.  The book is cited in many discussions, but I finally read it.  It does seem pretty well supported.  I am open to hearing where it is incorrect.  The book illustrates how the mathematics of our monetary system were set up in concert with the Federal Reserve and the Fractional Reserve System.  Thus the bad money mathematics are a creation of the private central bank.  It is a system that demands growth and a loser somewhere.  I believe we really do need a completely different money system, as you suggest, but one that is not orchestrated by a private cartel with their own profit interests underlying the currency.  How should I be separating the private FED from the debt based currency?  If they are a bad entity, who cares if we cheat them out of their interest?  They have been cheating the population for close to 100 years.

Are the assertions of this book inaccurate to your (or anyone's) knowledge?  Is the interest owed to the FED insignificant?  

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grondeau
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Re: A very beginner economic question

akamai mom,

It's not easy to figure this stuff out.  During the heat of the crisis I was looking for several points of view.  Over time, I find myself leaning with a fairly strong Keynesian bent.  I have found Paul Krugman's blog very informative and helpful.  He has a lot of detractors, but I find his track record very good and his explanations clear and persuasive (and he does have a Nobel Prize in economics).  

I have a few posts on economics over at my blog: http://squashpractice.wordpress.com/ and will have more in the future.  Presently I am interested in how growth in inequality is part of the driver of economic crisis.  

Here is an interesting paper from of all places - the IMF - Inequality, Leverage and Crises:  http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf  

You can ignore the detail of their model and still get a good idea about what they are talking about.  It's good stuff.

I'm also concerned that the present political paralysis will lead to further economic problems.  It seems to me that corporate interests have enough power to stifle any reform that could potentially gradually unwind the mess we are in. 

Have fun!

 

 

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Rojelio
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Re: A very beginner economic question

I've wondered about this as well. Would it now be possible to do something like what Abraham Lincoln did, and invent  a new currency (the greenback) and declare it legal tender and leave the Federal Reserve central bank  and their trillions of debt "out of the loop"? But I guess we wouldn't be able to puchase oil with the new currency.

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