Debt Rattle January 8 2016


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    Unknown Charleston, SC, after bombardment. Ruins of Cathedral of St John and St Finbar 1865 • Slowing Productivity Fast Becoming A Global Problem (Leb
    [See the full post at: Debt Rattle January 8 2016]

    Dr. Diablo

    Same as the AEP article, Mish with China burning through reserves:
    Key sentence here was that China failing to support the Yuan would lead to possibly a massive devaluation (in lack of confidence) that would cause cracking “Deflation” in the West, particularly the United States.

    Missed in these articles is, “What if China WANTS to shed all its U.S. dollar Treasuries and reserves?” That is, it’s not “trying to support the Yuan” and losing, but it knows the U.S. is in serious trouble, and if they remain tied to it, the dollar, the system, and the U.S. military adventurism, they’ll go down with the Titanic. Why?

    Because, as TAE so often says, the outcome of astonishing, superlative, inter-galactic levels of debt–all denominated in US$–is astonishing, reality-bending Deflation as the “synthetic short dollar” occurs. Herr Doctor, surely this is crazy talk! No. In economic circles, it’s presumed (although may not be true) that the first nations that dumped the gold standard in the Great Depression recovered first. Why? Roughly speaking, they devalued their currency. Vs gold in this case, the world reserve currency. We are not on a gold reserve, however, we are on a US Dollar reserve. …And exactly so, ** the first nation that devalues out of the US Dollar reserve debt and its Deflation will recover first **. If so, how would China –or other nations — do that? If you said removing ties to the US$ system and dumping their reserves, I suspect you’re right. Yes, it will damage China soundly, but once the bubble is blown there are no choices that * don’t * damage them, only greater and lesser consequences. But the world devaluing will almost certainly will boomerang Deflation on the U.S., hurting them as well.

    Okay, so the US$ goes up dizzily, nations one by one cut ties to its “standard” and the U.S. economy is damaged by the deflation, then what? Again, the only way the U.S. itself can escape is also to devalue, as Roosevelt did in 1934. How much? They actually had a country back then and were in better shape, but the 1934 devaluation was from $20 to $35/oz or 40%. Did it work? Yes, it instantly started price inflation and ruined the one good thing working people had going for them: falling prices. It did NOT end the Depression which famously went on 7-10 more years, ruining more lives. As it stopped the winning streak working people had in their real pay + savings though, it pushed the winning line back towards insiders and finance, preventing the rich from bankruptcy, losses, and the transfer of valuable assets to smarter owners, it’s considered a cracking success and they will do it again.

    So just a thought experiment, is China against the wall, out of control, and losing? Or have they built 40 years of industrial infrastructure with no external debt and are breaking free of external control while poisoning their host? Don’t worry, in a war, even a financial one, all sides take damage, no one walks away. In this story-arc, who’s taking more damage? China now, or the U.S. who has to default on $20-$200 Trillion in National Debt that everyone on earth knows they will never repay?


    Dear Dr. Diablo:
    “… No one walks away …”
    I expect that one day the soup line will not have enough to give even the riches person a bowl of soup.


    Dr. Diablo – Interesting thought experiment.

    “Okay, so the US$ goes up dizzily, nations one by one cut ties to its “standard” and the U.S. economy is damaged by the deflation, then what? Again, the only way the U.S. itself can escape is also to devalue, as Roosevelt did in 1934. How much? They actually had a country back then and were in better shape, but the 1934 devaluation was from $20 to $35/oz or 40%.”

    But….. how can the dollar be devalued against, not gold this time, but the dollar? How can that work? What is the standard. I don’t see it working this time. “They” will have to try something else.

    Otherwise your story of what China is trying to do with its currency makes sense.

    Dr. Diablo

    Correct point.

    The contracts are presently all written in US$, just like all the previous contracts used to be written in gold bullion (although in practice they were settled in cash–the “gold settlement clause” just insured honesty and tether to reality). So all the nations can devalue vs the US$. The US cannot. So there are two options: one is like Cuba and other disgraced nations, to have an internal currency and an external currency, both possibly called “The Dollar”, “Treasury Dollar”, or “Republic Dollar” etc. They devalue one, robbing the people and try to maintain imports by supporting the other. The other is to yes, devalue vs gold again, which has remained the standard among nations and billionaires, just underground and not admitted. Because who among these vipers would trust the other ones? You have to have physical wealth in hand when contracts aren’t worth the paper they’re written on among top lawyers all stealing from each other. A lot that’s oil, or chokehold companies like food or rail or ports, but gold too, which has quite a premium in volume compared to “1oz coin for the peasants” price, rumored at $1650 or higher.

    Either way, you have the same problem: the US either defaults and refuses to pay, disgracing and devaluing the currency –and with it the power of the country– or it devalues vs gold and attempts, badly, to pay, while losing the reserve currency which will be now more commonly understood to be gold than the SDR, Yuan, or whatever. –Which it was before, all along, or else why would central banks have held on to or increased their holdings for the 50 years it was a worthless relic?

    The point of revaluing gold is to re-establish ballast collateral into the system that has now spun debt beyond any existing collateral. Why does this work? Imagine adding collateral by increasing the value of Apple: oh wait, we can’t, it already costs dizzying multiples of sales. No one will buy that story and it’s been tried already. How about oil? 10-fold to $330/bbl? Nope, would kill the real economy as would revaluing food, London real estate, or water. How about that $1 Trillion coin idea? No one will find it plausible. So what we need is something totally worthless, that instills confidence, and isn’t tied to anything in the real economy. A pet rock, if you will. And that is gold. The real world of food and shelter isn’t affected the slightest if it’s $10/oz or $10,000/oz; its value is always 100% sentiment. Nations and billionaires already own it. And they’ve re-stabilized the system a dozen times by re-adding it over the past few centuries, recently in 1980, when the over-printing of the US$ for Guns-n-butter(tm) broke confidence and the gold price stopped at a 10:1 backing to US$ issuance. A $35 to $880 run, 25-fold increase. 25 x $250/oz low = $6250 but they’ve printed a lot more money in the meantime. But the point is, outside of the market and forex, no one noticed or cared because gold is a useless rock, a paperweight, a yardstick. It’s easy and well-practiced to revalue it to back the nation, in effect “devaluing” one’s currency with a flick of a pen. If it fixes the system, the people could care less what it costs.

    But who owns the gold? The people? No, it’s in the basement of some very expensive manor houses, in exchanges owned by those houses, or in governments steered by those houses. That means valuing it upward butters the top insiders and wipes out the nation, which they can then buy up at Argentina prices (see the 2001 default). So why would they resist all that hard? When the financial looting is over (see $23Trillion Fed bailout), pull the plug, burn the casino, and bury the crime scene. Now to restart any system, they have to talk to you since you own both the productive assets (thanks to 0% money) and the gold. That’s what I call win-win.

    Dr. Diablo

    PS, the other way to back a new currency would be with a carbon tax, preferably world-wide. And that currency also wouldn’t have the unfortunate side effect of encouraging honesty and a tether to reality. However, a world-wide energy tax would really, really sack the working people, so you’d need something unusually large and compelling to establish it.

    …If only there were some plausible reason to have a world-wide carbon tax that would back our over-issued currency and continue the corrupt system! But wherever would we find a big enough reason to cripple the common man that he would accept voluntarily?


    But, Dr. Diablo, who is the “20-$200 Trillion in National Debt” owed to?

    Dr. Diablo

    It’s owed to the same people who also own the assets, the politicians, and the system. So why would I care if that debt is erased? If erased, the purchasing power shifts away from my bonds and into my assets. The debt isn’t meant to be paid: it exists solely as a plausible system of control. To hide the control so when you attack the bond market it’s something that “just happens” under a “free-market neo-liberal system,” instead of “ultra-wealthy intentionally killing thousands and destroying nations (like Greece) that don’t come to heel.” Pirate vessels don’t last forever, though, from time to time you have to change to a new one. So when the debt mountain collapses as it must, the nations will have to come to me to create the new system, so I will set that up so I own it too. As in the new EU, perhaps without that annoying representation, but a direct, unaccountable, anonymous bureaucracy. Reporting to me.

    You could change this, of course, but if men don’t yet understand the present system, there’s slim chance of creating a new one.

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