Uncommon Fallacies: Financial Armageddon

Source: Gold And The Coming Collapse: Are We Close To A Major Monetary Event?

Debt is poorly understood. There is the axiom that debt must be repaid, other than bankruptcy or death, this is the case. Government debt never dies, it just gets rolled over. Donald Trump imagined that the rules of bankruptcy as they apply to him could be applied to government debt, which is not possible.  He now represents the issuer of the debt.

There’s also the axiom that market crashes never come when you expect them. A watched pot does boil. Then of course Janet Yellen does not expect a market crash in her lifetime, which if you enjoy the notion of paradox is the perfect indicator that the crash is imminent.

In homage to Machievelli, private debt equals public good. So much seems obvious, whether that debt is for consumption or production. Government debt can do very little for either, and what’s more those debts are never settled. A soldier needs a rifle certainly, but he didn’t need one before, and he won’t need one later and it’s likely he won’t use it anyway.

The notion of an ad hoc economic policy, making personal deals between the executive office, and corporate businesses, reflects some fulfillment of the prophecy, without any of the enlightenment.

recourse debt holds the borrower personally liable. All other debt is considered nonrecourse. In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they’ve taken collateral (home, credit cards).

Should there be a government default, there will be no distributing of the collateral, or reading of the will, because government debt is allowed to extend itself in perpetuity.  It’s a bit like saying “God is Dead!”, it doesn’t change anything. Have we lost confidence in God, or the Central Bankers? Money is a public utility. We never lose faith in electricity, we do sometimes demand a change in management.

In the event of default there is the possibility of payment in kind, mentioned by Bob Prechter at Elliott Wave. If for instance the 30yr Treasury bond defaulted you might get shares in a closed up Chinese factory, since China holds trillions notionally, of these bonds in their reserves.

I know what you are thinking, shouldn’t China be making a claim against US assets in the event of default, closed up U.S. factories? The laws on these things are written in such a way that your deposits in a bank are categorized as a loan. China did not pay for those bonds in currency, they were issued in lieu of the balance of trade payments, to effectively “sterilize” the effect that putting all that buying power, in US dollars, into the hands of Chinese consumers.

So the US Treasury cannot confiscate their deposits, there is no money, and what money there is, we owe to them. In theory anyway that deferred obligation is a deposit, and they do have a claim on the assets those bonds represent, money they were not allowed to spend on US goods, because there were none, and we would not sell them what they really want, sensitive technology. While you as a depositor would lose money, they have real skin in the game.

As a bond holder you are no different in regards to taking less money on your principle in the event of default than any sovereign government who also bought the same bonds. It seems reasonable that we would pay the Chinese in freshly printed dollars at some fraction of the face value of those bonds, but first the depositors have to be bailed in, as it was, and their assets made part of the distribution. To return to the principle of deposits as loans, the Chinese owe us a whole lot in the event of a default in our 30yr Treasury bond.

To get to the notion of the price of Gold relative to the stock market, remember that in any ratio measure, you can get an upward, or favorable outcome, and still lose money nominally. So Gold may outperform the stock market, while both Gold and stocks lose value.



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