J.E. Dyer wrote: “It’s increasingly clear that our way out of this hole will be political, and involve repudiating debt instruments.” Yesterday, Nassim Nicholas Taleb and Mark Spitznagel, wrote in the Financial Times:
The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option.
Debt is the storied 800 Lb gorilla. We are clogged with debt in in every aspect of our economy, our government,and our society. In the middle ages,every fifty years there was a Debt Holiday,which freed up the feudal economy. All debts were forgiven in the Jubilee Year,have we brought ourselves to the same condition as a medieval serf?
What Taleb has put on the table is far more radical,not just a forgiveness of Debt,but a conversion of the Nation’s debt into equity. He could well argue that if the Guv and the Fed,can produce Trillions with their wand,why can’t we use the same wand to rid ourselves of debt? (an irony is that the rewriting of the bankruptcy code in 2005 has made the discharging of Debt near impossible,and this has added to the overall engorgement of debt on eveybody’s balance sheets,Unintended Consequence.) Is our Debt mess the contradiction built into capitalism that will assure its demise?
Our situation has caused Marx to stop rolling in his grave,and has reenergized Marxist-Socialists everywhere. What I haven’t seen in almost three years of crisis is a Conservative that is willing to think creatively to free our system from this stranglehold. At least Ms. Dyer has the nerve to bring this ugly fact out into our Forum. We have to balance our books:we either do it by erasing Trillions in debts or adding Trillions in assets. Taleb’s suggestion accomplishs both at the same time. He’s the Author of “The Black Swan”.
Comments 33
“The only solution is the immediate, forcible and systematic conversion of debt to equity.”
Would this mean, like, giving Colliforrrneeea to China in return for their Treasury holdings?
July 15th, 2009 at 11:31 am
Sully’s question implies the most important one, as I posed it at the original “Trillion Box” post:
How do you convert public debt into equity?
What do you give the creditors equity in?
With private debt and real estate, the answer is obvious. With public debt — what? A lease on Mt. Rushmore? A 50% stake in Hawaii?
The Constitution prevents the feds from equitizing private assets as a means of settling public debt. And we had better continue to agree on that, if we know what’s good for us.
So as much as I agree with the gentlemen on equitizing private debt, I don’t see how it’s to be done with public debt.
July 15th, 2009 at 11:39 am
JED, I’ve mentioned this in other contexts before, but there are excellent historical examples – such as all those mountains of gold and silver in the New World being shipped directly to Spain’s creditors.
We’re already exporting chunks of our manufacturing base to other countries – I believe that part of our recent payoff to China specifically included new closing GM plants here to build new ones there.
Not hard to imagine those offshore oil platforms finally being built up and down the California coast – with someone else’s flags on ‘em… Nice of us to keep ANWR is such pristine shape for its future owners… Elsewhere, we may someday learn the Chinese words “strip mining.”
Truth is I think we’ve got a long way to go before such a situation, but we could get there by inches, and it often seems that our governing elites are determined to rush the journey as fast as possible.
July 15th, 2009 at 11:58 am
Another GREAT alternative would be a tax on assets – i.e., direct expropriation of privately held wealth. Didn’t Argentina just do a “one-time” asset tax?
As I suspect most of you are quite aware, the Roman method was simpler and more comprehensive. Our future dictator might want to look into the practice of proscription.
July 15th, 2009 at 12:06 pm
CK, Roman proscriptions consisted of a formal Diktat that the proscribed be deprived of “ignis et aqua,” of “fire and water.” I think what JE is wondering is: CAN the United Sates government alienate, en gross, an active volcano like Mt. St. Helen’s (ignis) from the State of Washington(?) or, say, Lake Michigan (aqua) from Michigan and pack them off to China? Who would bear the freight charges, which easily must equal the size of the original debt? Details, details, I understand, but they nonetheless demand attention
July 15th, 2009 at 12:19 pm
Joe NS,”Details, details, I understand”
I remember something about Napoleon selling us some land,and somebody sold us Alaska,(I guess somebody who needed cash),and as the US needed more land,somehow we secured what is now Texas,California,and the Southwest by waging war on someone else,so what is new now?,We’ve always done what we have to do to grow and to survive.
July 15th, 2009 at 12:33 pm
CKM — what do you think are the odds that the US federal government could really get away with selling oil/gas concessions in ANWR and off our coasts to foreign interests?
Our existing form of government would already have passed into history, before that could happen. Not even Texas would agree to selling off California’s offshore oil that way — because it might happen to Texas next.
That’s where the painful reality comes home that even this nation of yeoman farmers is more likely to wage wars of conquest against our creditors than to sell ourselves off to them, piece by piece.
If we’re going to invoke ancient Rome, we have to look at the whole history.
July 15th, 2009 at 12:46 pm
RCAR, here is a question for you that you, perhaps more thasn anyone else posting here, may be able to answer. Bear in mind I know little about economics so the question might seem as both silly and unnecessary to someone who does.
My untutored understanding of at least one of the reasons that the gold standard was abandoned was that gold, or specie in general, was not and cannot be mined on, say an anual basis, in quantities sufficient to keep up with annual increases in wealth, however one defines such a concept, from country to country. I mean that, if say productivity increases and goods and services increase dramatically, as they have since the 19th century, but gold mining and smelting and casting into bullion just plods along at a petty pace, aren’t the consequences for healthy trade and exchange disastrous, especially since the supply of gold in the world is so unequally distributed? One quantity, goods and services, is increasing geometrically, yet the standard for valuing such increases goes up arithmetically. Up until a couple of hundred years ago, economies in, say, Europe, increased their real wealth very slowly, a lot less than 1% annually, If I recall Paul Kennedy aright. Gold production could more or less keep pace with that. In other words, aren’t the days when the amount of gold in a country’s vaults could be a practical, rather than an ideal, benchmark of monetary security long gone and likely never to return?
I realize it’s a naive question but it is asked sincerely.
July 15th, 2009 at 12:57 pm
Details, details.
When I put on my little Prophet Beanie, I’m much more optimistic than RCAR, but in the bad future history under Obamaism All-Triumphant, Black Swans in Flocks, Debt Above All, we have to imagine a largely supine and dependent populace at most glancing up from its interactive torture porn as whatever number of their former betters are proscribed and expropriated, whatever assets are sold off, and whatever recalcitrant Yeomen are subjected to the counterinsurgency manual’s twisted domestic sequel.
July 15th, 2009 at 1:03 pm
Joe NS,Good Question with a simple answer,
If there’s not enough Gold use Silver also,use Platinum,use Vodka,use Titanium,it doesn’t matter,the only point is that governments don’t want to be accountable for their use of society’s money,and the only practical way to control their spending is to make them pay,and pay hard for their use of our money. Everbody has limits,I can’t buy a mansion in the Hamptons,but if you give me your credit card with an unlimited line,I’ll max it out,which is what we’ve done since 1971.
July 15th, 2009 at 1:04 pm
PS: RCAR, I read sometime somewhere – can’t say for sure, so it might be BS – that if you were to design a vault to hold all the gold that the entire world had accumulated up to antiquity (i.e., up to the 3rd cent.), and built it, and then went on to provide storage for all the gold mined and refined since, you would only two more vaults of comparable size If that’s true, what does that say about the utility of gold as a measure of value?
July 15th, 2009 at 1:06 pm
RCAR, I’m relieved it was a good question. I really didn’t know. But your answer, especially when you include vodka, sems to undercut the notion of a hard standard, and not just because vodka’s hard nly in the sense of hard liquor, but because its (relative) rarity is impossible to maintain. Gold was valued for its scarcity, so long, I stress, that scarcity didn’t extend to its being all but impossible to acquire, as well as its durability and imperviousness to tarnishing. With platinum and titanium, isn’t the situation not a whole lot better and possibly worse. Silver is another matter, but I still don’t think the world is exactly drowning in silver, and the point I’m struggling with is that it’s the (relative but not unreasonable) scarcity of the medium that makes it suitable as an asset. Precious metals worked for a long time because of some ineluctable facts about the physical world; they were scarce, durable, and pretty. If they’re scarce, then we’re back to the problem question I raised in my initial post; but if you make them less scarce, then it sems to me you’re cutting off the branch on which you’re sitting.
(I really do need to go back to school and figure this out.)
July 15th, 2009 at 1:21 pm
Joe NS,
Anything is better than paper which is worth less than the Ink printed on it. The reason I mentioned vodka,when Russia emerged from the USSR in the early ninties with its own brand of Fiat Paper money,the Swiss tried to get Russia on the Gold Standard,which Russia refused,the witty Swiss then suggested Vodka and Oil to back the Ruble,but Russia was committed to an all paper currency,like everyone but Canada and Australia,the two best currencies on the planet,at the moment.
July 15th, 2009 at 1:56 pm
Could we not sell off, say, the Pacific Northwest, Georgetown and the Upper West Side? Like Alaska in reverse.
July 15th, 2009 at 2:13 pm
So what’s Chinese for “I’ll take Manhattan, the Bronx, and Staten Island, too…”?
July 15th, 2009 at 2:19 pm
RCAR, it seems to me that, at least internationally, a country’s currency is valued if that country produces something, anything, that the rest of the world wants, since to buy it they must at some point buy it in your currency. I will be the first to admit that the US has not been an entirely pathbreaking nation when it comes to producing desirable exports. Leave out, agriculture, entertainment, and computer design, there’s not much else I can think of that other nations want and can’t get better or cheaper somewhere else.
But, if so, doesn’t that imply that what backs a nation’s currency is much less important, perhaps even unimportant?
July 15th, 2009 at 2:22 pm
Joe, I think you’re 100% wrong – especially in the historical view, but even today.
July 15th, 2009 at 2:31 pm
Joe NS,”Joe NS wrote:
RCAR, it seems to me that, at least internationally, a country’s currency is valued if that country produces something,”
Under our current system,currency is valued as a ratio to another nation’s currency. The Dollar is the world’s “Reserve” Currency. But that status is being challanged due to our nation’s debt problems. The other problem with the dollar as the Reserve currency is that other nations are holding Trillions of US dollars,which they’re using fast,they’re on a worldwide shopping spree because they believe the Dollar is going to tank. This is a Ponzi scheme,and the last guy standing,the one holding all the dollars,is the biggest loser. The floating currency system,which turned our currency into a CDO,has destabilized the world economy.
July 15th, 2009 at 2:50 pm
CK, whoops, historically we were WAY ahead and for a very long time, too. I left out some crucial qualifier, that’s for sure.
But, you know, look at automobiles, furniture, machinery, from milling machines to power generation, communications devices, on and on. It’s very depressing. Don’t you agree?
July 15th, 2009 at 2:50 pm
Not really, Joe: We’re still the world’s leading exporting and manufacturing nation, even after we perform RCAR’s preferred adjustments subtracting financial services.
The period of adjustment to a breakdown of the current dollar-backed international financial system might be extremely difficult – extremely unpleasant for us, but fatally devastating for many more . For geopolitical reasons we’d very likely come out on top. Which is the reason why our creditors have been crediting themselves and us to the edge of the abyss, I believe.
July 15th, 2009 at 3:05 pm
CK,”Not really, Joe: We’re still the world’s leading exporting and manufacturing nation”
Ck you’re kinda half right,we’re the biggest manufacturing nation if you count the US goods manufactured elsewhere,and resold in the US markets as US goods. The problem is that those #s are skewed because they don’t take into account the costs of buying these Foreign made US goods in order to be able to resell them. More Accounting sleight of hand.
As far as exports, we are behind Japan and China,and if you take away Boeing,the military,and Agriculture,we really suck.
July 15th, 2009 at 3:14 pm
When you say still the world’s leading manufacturer and exporter, CK, do you mean exclusive of agriculture? Why can’t I find ANYTHING in a store that’s made in the USA. Believe me I explicitly look for the label. I’m not talking about Kmart or Walmart. Let the Chinese manufacture the trillion-and-one whatsits and whatnots. I don’t care because I don’t buy that sort of junk. I’m talking about quality, value-added items, which all seem to be made in Germany or Japan or Scandanavia or Holland, things like appliances and firnishings.
Every time that commercial comes on – and it comes on a lot – about the amazing Adjustable Sun-Liner! – which at least costs $300 a pop, but is neither high-tech nor high quality, I wince when the actress says “And Sun-Liners are ASSEMBLED in America!” Big whoop, says I.
July 15th, 2009 at 3:16 pm
RCAR @21, you’d have to give me an authoritative breakdown into relevant categories for me to accept that counterargument. Happen to have one on hand?
JOE @22: Consumer items of the sort you describe have high visibility to the average citizen, but there’s a lot more being traded in the world than cell-phones and t-shirts. You seem to me like the kind of guy who likes to research such matters for himself. There’s widely available info.
July 15th, 2009 at 3:42 pm
That’s the upside of inflation. Debtors love it, at least if their debt is set at a fixed rate. Then they pay with cheaper dollars than they borrowed; that is, their real interest rate declines.
So fear not. The market will take care of it.
Heck, in a few months, you’re going to find out that the recession ended today.
Capitalism is far more robust than you give it credit for.
July 15th, 2009 at 3:45 pm
Joe NS,”Joe NS wrote:
When you say still the world’s leading manufacturer and exporter, CK, do you mean exclusive of agriculture?”
Joe we have huge problems in the reporting of economic metrics. The following basic measurements are too inaccurate to discuss seriously,manufacturing output,exports.imports,GDP,unemployment rate,amount of Government debt,financial debt,even the true cost of the Vietnam war is mired in inaccuracy. Total Tax Collections are down 34% from a year ago,that means the entire economy has siezed up,but pundits are still saying our GDP is at 14 Trillion,that isn’t possible. It has to be shrunk to around nine Trillion by now.
July 15th, 2009 at 3:46 pm
CK,you were right in 2006 about our rankings,but things are changing fast,in about a year we’ll get today’s #s,but here is the latest I can find,China is 4x what she did in 2006,because she includes the sales of American Mfg. subsidiaries from China to the US in her figures,we account for those expenses in a different way.
http://en.wikipedia.org/wiki/List_of_countries_by_exports
July 15th, 2009 at 3:55 pm
Quill, We’re in a Deflationary,Debt Crisis;this might turn into an inflationary crisis eventually,but not for several years to a decade,the debt has to be leeched from the balance sheets to release the Inflation.
July 15th, 2009 at 3:57 pm
PPI for June accelerated to almost 2% from about flat in May. It was a broadbased increase. CPI, which also came out today, showed a similar jump.
Stocks are up 3% today on good news from Tech and Banking, which suggests an improved earnings outlook.
Deflation is fading as a risk. By this time next year, I think people will be more worried about inflation.
Now, as far as debt on balance sheets goes, I think there’s maybe a 15-point avg. difference between book value and market value of debt, which should be impounded already in stock prices.
Things are not rosy. But you are overplaying your hand. Embrace your inner bull.
July 15th, 2009 at 4:25 pm
Quill,”But you are overplaying your hand.”
I hope so,but until they start hiring,i’ll be growling. We have a small difference in how we look at toxic assets,I see an 80% difference,it could be 100% if the government wasn’t propping up those assets. What you’re not counting is the “off balance sheet” toxic assets which,in my opinion,are 2x what is on the sheets. If I’m wrong,you tell me how much they’re trying to hide.
July 15th, 2009 at 4:36 pm
OBS liabilities are not nearly the problem they used to be, IMO. Enron was probably the high water mark. Accounting rules have changed to eliminate the awful merger rules that existed 10 years ago. I don’t think Mortgage Backed Securities called into question all asset backed securities, or derivatives. For the most part, companies know how much debt they have and can assess its market value.
When you are talking toxic assets, you really are just talking about banks. And that’s still a work in progress.
Hiring, however, is a lagging indicator. So, if that’s what you are waiting to see, you will have missed the inflection point. Stocks will rally well before you see unemployment improve.
Of course, my crystal ball hasn’t been the same since it rolled off the kitchen table.
July 15th, 2009 at 5:01 pm
Quill,Here’s your homework:
http://www.bloomberg.com/apps/news?pid=20601109&sid=ajsCDAWaoANg
http://www.counterpunch.org/whitney07132009.html
http://www.realclearmarkets.com/blog/06%252030%252009%2520-%2520More%2520Power%2520to%2520the%2520Systemic%2520Risk%2520Generator.pdf
http://business.theatlantic.com/2009/07/exclusive_interview_what_is_shadow_banking_and_how_did_it_fail.php
July 15th, 2009 at 5:09 pm
Hiring and the economy are not necessarily in lock step. Yes stories of the US manufacturing demise is overblown. All developed or strong developing countries are losing maunfacturing jobs due to efficiency gains. China is losing them just as fast, so don’t worry. If we would just decide to grab the energy wealth we have right now the big scary trade balance numbers that everyone likes to cry about would at least look better to every one.
For unemployment, it has little to do with macro economics on issues of debt, etc. The problem is that no business is willing to hire. With work hours down we have plenty of straight time hours to put towards any increased needs, and that is before any overtime is considered. With a very uncertain regulatory climate, no business is going to hire right now. The healthcare bill recently announced will result in a 5 to 10% reduction in employment just to cover the payroll tax penalty for firms that don’t offer healthcare. It is a little more complicated than that, but business abhors uncertainity, and this current government is creating that product with great skill. Washington’s stimulus and budget bills were horrible macro economic policies which have long term issues to damage our economy. But to be fair, the regulatory and tax outlook is doing its best to short circuit anyone hiring unless they really have to.
July 16th, 2009 at 9:09 am
Jem,Cutting through your comment,in 2007 70% of GDP was consumer driven,Debt has strangled that 70%,with that sector collapsed,companies are shedding workers due to declining sales which leads to more layoffs, consumer debt expands ,classic deflationary cycle,for the present.
July 16th, 2009 at 9:28 am