Friday 8 February 2013

Credible Threats

If the cost to government of servicing its debts is lower than the tax income extracted from the private sector, they can deleverage their debts, given sufficient time. (Assuming the government is able to continue issuing the required debt at sufficiently low rates of interest.)

In the days of yore, when there was a gold standard of some sort, this would be a protracted and painful process to pull off successfully. But it was done.

Fortunately, today, the government doesn't have to rely on the free market to supply the necessary credit (as in the good old days). It can issue credit to itself, in effectively unlimited quantities (but in reality limited by the credulity of the market). In so doing, it is able to suppress the interest rate that it must pay (and also receives the interest paid back as income - so the true cost of debt service is effectively 0%), ensuring that it is able to get the credit on economic terms.

The only way the system of today cannot be deleveraged in this way, more rapidly and painlessly than in past examples, is if the free market significantly rejects the governments currency in payment for goods/services, requiring the government to issue ever-larger quantities of debt to itself in order to cover its expenditures on goods/services, outpacing its ability to service the debts from the tax income it can expect to receive from its citizens over the requisite timeframe. The holders of existing debt instruments may also choose to liquidate and flood the market with these assets, outrunning the governments ability and/or willingness to absorb it all - exceeding their ability to contain the interest rate required in the market and thereby blowing their scheme to deleverage out of the water. Oh my!

It could never happen here!


Ein Gast said...

a) if the free market significantly rejects the governments currency in payment for goods/services

b) ...The holders of existing debt instruments may also choose to liquidate

and with some common sense, we should know be now that this will never ever happen, neither a) nor b).
Not a) because the whole world is completely focused on "nominal" value and there is no serious "alternative" or desire to switch to. If it hasnt happend by now, it never will. Start to get used to it.

Not b) because those holders have already all they want, for what stuff to spend it?

But what's about another option c): goods&services, remember, the physical plane, starts to vanish? Will that happen? I dont know, but in that case my gold&silver wouldnt bring me anywhere anyway :(

Greets, AD

Ein Gast said...

off topic, but I wanted to share to have maybe your opinion:

according to WGC and other sources, "officially"(?) there are 100million people living from gold mining:

On the other hand ~2,5 Mio kg gold are "officially"(?) mined, which means these people would need to live of €1000/yr. Since this would mean the average, some have more (CEO of Barrick...), plenty will have much less.....
I dont know, but somehow this does not fit together: The people would not be able to survive or they really suffer because absolutely nobody wants that stinking yellow.
Even if you double, respectively halfen, the numbers it doesnt make sense.

I'm really confused. Thoughts?
Greets, AD

DP said...

Is the question perhaps "are most of these people really living on less than €1000/yr"?

If so, it's a good question. $1000/yr per capita income is apparently still a "Middle Income" dream to be strived for, according to World Bank.

So I guess "sure, why not?"

DP said...

Some pretty sobering numbers at the bottom of these lists.

Ein Gast said...

I had to really swallow reading those number, although as a deep believer in anarcho hardcore capitalism, I say something is not right about that. :(
Greets, AD

DP said...

Is... is that a tear I see forming at the corner of your cold, hard, stare? :-)

Ein Gast said...

no no, I have a better expanation to make me feel better: These are the official numbers according to "registered money transfers". Subsidarian farmers of bartertown will not pop up in the statistics.
But if you work in a gold mine, you can not farm....hmmm...which leads us where?

DP said...

So your (c) <> my (a)? :-)

Ein Gast said...

Hi, just back from a vacation to the carribean to escape this mad world for some days :-)

Yes, IMHO (c)<>(a), maybe not in terms of accounting on paper (who cares about that anyway), but in real life (<= that's what you should care about, that's what your tokens are good for, regardless of material these are made out of).

Gov. only exclusively cares about to get their real stuff for them and their buddies, not the tokens. I personally see the biggest problem, when this process of misallocation of real world resources starts to hurt the real world growth/efficiency significantly.
As an examples: At the enterance of the exclusive resort I spend my time in the carribean, a sign was posted: "With the financial support by the EU feder fund".

Seriously, dont you think, that german tax payers money collected by the EU with brute force, can be used more efficiently to direct resources on the physical plane better (remember austrian school ;) than to sponsor my vacation or the profits of some belgian hedgefond that owns the resort?
Greets, AD

DP said...

Welcome home. I hope you are returned to us relaxed and with enthusiasm fully restored... :-)

Yes, pretty "funny" that EU taxpayers are helping build a better vacation destination in the sun. :-\

Ein Gast said...

Lucky me, I only noticed the sign, waiting for the taxi for departure, otherwise it would have ruined my vacation ;)

Want some more "funny" stuff of the EU "meritocracy"? At the beach was a sun roof walkway for some shadow, all sides open to the beach and the gardens.... Every 5meters there was a enlightend battery backuped emergency "SORTIE" ("exit") sign with an arrow in case of fire....

See, those little things you experience in life make my head shake when I read this morronic "EUro Robert-Mundell crap" from the FOFOA jerks, never ever left their US mummys basement.

Greets, AD

DP said...


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