Holy Diver

List of countries by external debt - Wikipedia, the free encyclopedia

So, if almost every nation on Earth is in debt and the US, and EU carrying the lion's share...

who, if anyone, would benefit from all debt to be wiped clean, and credit to be outlawed? Seems to me thyat national paranoia would be fed the same way by massive debt than would personal paranoia.

I often talk with a few of my wall street friends about whats our nations biggest problem, and they always say "credit".

What nation on Earth is NOT in debt?

PatsFanInVa

Okay good post... 2 things...

Thing 1, you outlaw credit (I'm assuming you mean industry as well as individuals,) you are looking at huge job loss and dislocations. We'll assume you mean something that gradually takes hold, with lending capital replaced with something else.

The machine doesn't work that way, not at present... what are the new gears? The old gears of capitalism include capitalizing businesses from corporations to mom n pop shops by gambling on their future prospects, and a company starting up, growing, or even in trouble, often needs to borrow. You can start up a one-guy desktop publishing shop in your home, with the extra money you save from your day job for hardware/software. You can't very well put up a factory that way, or even a modest-sized restaurant.

Thing 2, there actually is a natural feature of capitalism that erodes debt. Unfortunately it also erodes assets. That feature is inflation. It's one of the only leveling features in the system... and we have forced it to low rates for decades, a sort of Carter hangover. At present, we have stated a policy of keeping lending rates artificially low for at least a few more quarters.

That's the ultimate de-leverager. It's started at the mass level: higher food/fuel/etc. costs. At the corporate level, we have to keep money easily available.

PFnV

Holy Diver

If everyone is in debt....who owns it all?

Its kinda what me and my wall street peeps always come back to. That there is more $$ being traded and moved than actually exists.

they throw out the figues in quadrillions, saying that 4QD exist and 8QD are being traded/moved at all times.

how is this sustainable?

mcgraw_wv

The easy answer is the practice of fractional lending. Banks only need 10% of the cash they lend. This creates money out of thin air.

As well, the printing presses from the fed reserve create money, and lend it as interest, therefore inventing new debt. What blows my mind is with this practice, you see how it is literally impossible to ever payback the central bank, since they are the only ones who can create money, the government always has to pay back more then exists... Therefore needed to borrow ever more.

its why the founding fathers were so against ce tral bankers, and why we as Americans have ended 2 central banks previous to our current 3rd federal reserve.

PatsFanInVa

Fractional lending doesn't mean you print your own money and give it to somebody else, with only (say) 10% of "real money" somewhere in a vault.

It means that a lot of people need loans, and you only keep a portion of that as reserves.

So if you borrow $1 million from the Fed, they give you $1 M in either legal tender or some instrument accurately representing legal tender.

The trouble is that they (private banks) lend out most deposits, which can be defaulted on, and only keep (say) 10% in reserve.

However, if your deposits are also borrowed, then something else happens, counterparty risk.

Since the big banks do in fact borrow from the Fed, that puts the Fed on the hook.

Let's say you borrow a bunch of money to lend it to someone else. You lend it to that someone else and then the person who lent to you (the Fed) wants their money. Fine you say, I have thousands of revolving accounts, many of which are due to be repaid today. I will take what comes in today and pay what I have borrowed.

So if 10 of the commercial bank's customers default, meh. If 20 default, meh. If 100 default, oh-oh, sort of. The big problem: of those thousands, what if 1/2 default? Then you can't pay the people who lent to you, and your risk you took on by lending that money gets transferred to whoever lent to you -- in this case, the Fed.

Furthermore, you probably borrowed from other sources, or made bets depending on other banks. If all of them out-borrow their ability to pay bets and make loan payments at one time, that's the systemic risk scenario we've so recently experienced, right?

Now let's look at the same question from an even "loftier" point of view, that of capitalism as an institution.

Using a "real economy" example, think of what a P/E ratio is. You buy a stock not because that stock and company are "worth" your fractional investment today. It's not. You buy with an expectation that the P/E ratio will get you more than your investment back.

Let's say the P/E ratio is 7. So in 7 years, the earnings of that stock should total the value of that company.

You also have the raw value of all the stuff the company has today to parcel out to shareholders in this calculation. So in normal times, you should be able to buy today, sell tomorrow, and, if the stock hasn't moved, probably get back about the same you paid, minus any fees.

In reality, in day-trader and "quant"-land, you'd also get 1 day's worth of movement in the stock, which is beside the point. The movement in the stock is from someone else calculating what the future prospects of the stock are.

Now back to buy-and-hold guys. They buy stocks with uncalculated P/E ratios (startups and vaporware) as well as established issues. In other words, in either scenario, they take risks based on future returns.

What gets out of whack -- and what we continually call for, this administration included -- is the call again and again for looser money (easier lending,) which regardless of your political party, is considered an absolute necessity to get enough liquidity into the system to capitalize new growth and new startups.

Long story short, if you don't like capitalism in general, inveigh against the features of capitalism, and propose an alternative... but all investment shares the underpinnings of the fractional lending scenario.

More money is out there than exists because people borrow and lend on future expectations; loaned money is not realized money. If I lend you $1M I might record on my balance sheet that I have $1M plus interest on my books, and that I have 1,000 similar loans. But some will default, and if they all default at once (or a sizeable proportion,) my balance sheet is just wrong.

In other words, everybody's rich until the music stops. The goal becomes for the music to be able to start again at some point, whether the music re-starting means two or three people trying to wedge onto one chair, or whether it means people don't have chairs, or whatever.

But a system dependent on future expectations of returns and rewarding of risk depends on money being loaned... so I am not so clear on how we correct this, without correcting our way into some new banking system I have not yet heard of (?)

I'm all for tweaks to the current state of affairs but I definitely need to know what they are (having large banks mutually insure each other is a start, if you make them pay into the mutual insurance fund at a substantial enough amount to actually address systemic risk.)

What do we do if systemic risk is so inherent to the model that it's a binary choice, of Capitalism or "Whatever else you can dream up"?

PFnV

mcgraw_wv

Great post, but I still believe the idea of fractional lending creates money out of thin air. If I only have $10.00 and I give you $100.00, that $90.00 has to come from somewhere, which is usually the Fed, and since the Fed doesn't generate wealth, they only invent new money, that's $90.00 more money added to the money supply.

Now that's not such a bad idea since the money supply was expanded on growth, due to a loan. But as you say, when the money supply is so dramatically expanded on what turns out to be a bubble, we end up with higher prices because what we essentially did was inflate the currency on what we later discovered was false growth.

mcgraw_wv

I disagree with that, I would rather them not pay into any insurance, as well ensure there is enough healthy competition in the industry which can absorbed failed banks by acquiring their assets via bankruptcy. I feel the insurance requirements are a drain the margins, and therefore is just one more reason why Banks push further into risk in order to make that money back.

I don't think the banking industry is healthy, and not simply because of the recent issues, but because of the acquisitions each bank goes through in order to get bigger, to attract a higher stock price... Banks should almost not be allowed to be listed on NYSE, and they're values should be directly based on the rate of return and dividend.

We are weak when we have too few mega banks, and not enough regional banks. We allowed our major banks to grow too large, and now they have become too big to fail, and that in itself is un-American, and kills the financial industry, as the entire valuation of banks are set on the size of bailout it will demand, and how much the government will support it.

Holy Diver

Debt fueled economics sounds like a shell game...

3 card 'Monty Burns'

mcgraw_wv

It is, and it all comes from the Central Banks. There is a ton of wisdom in the writings of the Founding fathers, and earlier presidents when it comes to their fears of bankers, and central banks. It's worth reading, and it's tells you everything to why were in the situation we are in now.

This system will only continue to work as long as the rest of the world prefers to perpetuate it. True, many countries stand to lose a lot when the dollar falls, but it will happen, and people will grow tired of supporting our citizens lives with their blood and sweat.

Holy Diver

McG...


well said.


The saddest part of all of this, seems to be the loudest fringe of the networks seem to be protecting the criminals who keep taking our money, then taking it again, then getting bailed out, then taking more money...

Its like they think the founding fathers were writing about capitalistic facism, instead of democracy...

Herman Cain, for instance, was dissing the OWS protesters, because they were "against capitalism"....


?


seriously?