The present mainstream explanation of what has been happening is that there have been gobs of bad private loans that need clearing up. However, the problem apparently goes much beyond that. The private debt has been rising exponentially for decades, and is way untenable. That means the problem is systemic. Steven Keen says that part of the solution is to give everyone money that debtors must use to pay off debts and which non-debtors can use for something else. That way, savers are not penalized because of their self-control. http://www.smh.com.au/opinion/polit...you-aint-seen-nothing-yet-20111011-1litt.html
First, I note that the common explanation for the financial crisis is rejected but no alternative is suggested. (A "solution" is not an explanation.) I think the explanation is, as Alexis de Tocqueville observed in 1831 and then described / explained in Democracy in America: "…Citizens vote for those politicians who promise to use the state to give them whatever they want. …”. This fundamentally explanation for financial collapse became a more a more serious problem when voting requirements were removed (typically the property ownership requirement was replaced by literacy exams but even that requirement was abolished in the early 1900s) Then US went off the gold standard and in 1966 (as I recall) even the silver certificate dollars were abolished. (At the treasury on the last day you still could, I got two bags: a 1000 +100 silver dollars. A few weeks later when in DC for another reason, I went to the treasury again, with a silver certificate dollar and received a small wax-paper envelope with metal dust in it.) By end of 1966 almost all silver certificate dollars had vanished from circulation. Pre 1966 silver coin soon ceased to circulate too. (You can still buy bags of them for a premium over their silver value.) With the arrival of purely “fiat money” in late 1966, all limits on the dollar printing presses were removed and the fundamental flaw De Tocqueville noted* is rapidly destroying the value of the dollar now. More than 5 years ago, I posted a prediction that there will be a run on the dollar on or before Halloween 2014 which is quickly followed (a few months) by the worst ever depression in US and EU, but only a couple of years of recession in China and its suppliers of energy, food stocks and raw materials or other Asian nations which trade with China and thus do not need loans to buy Chinese goods as the US and EU do. For example, Brazil has a trade surplus with China, its major trading partner, but will be come an "economic colony" of Asia as its industries close. ("De-industrialization" is already in progress.) *See this thread: http://www.sciforums.com/showpost.php?p=2573119&postcount=1 ------------- Secondly: Giving out money to cancel debts is not a new idea. In fact it is being increasingly done, mainly by special programs like assistance to under water home owners, first time home buyers, “Cash for Clunkers,” buyers of electric cars, and at least a dozen other programs not to mention billions in farm subsidies that make the cost of food higher and corn based alcohol viable and add to your children's debts. What may be novel about Steven Keen’s idea is to abolish all debt over night. That would make an immediate and huge disaster. The government and many businesses need to borrow money, farmers need to borrow for seed and fertilizer etc. but no one will lend if government cancels debts (or has a policy that make the repayment dollars worthless - the same thing as to cancel). The US population would literality starve to death in less than a year. Those who had lent would be repaid in nearly worthless dollars, and with the collapse of productive economic activity, there would be little to buy even if the dollars by magic had retained their value. I am too lazy to try to find the ratio of total debt to currency in circulation but it is at least 10 to 1. Thus overnight each dollar would drop in purchasing power to be that of a dime or less - perhaps to 1 cent as few would want paper dollars, unless cheaper than toilet paper. Inflation would be rapidly on the way to Germany’s worst as no one would save – another reason why no one could borrow to get seeds to plant etc. Single digit inflation per year is not a disaster, (between 2 and 4% is usually beneficial) but >90% lost of dollar’s value in less than a week certainly is a terrible and immediate disaster.
When a major company goes bankrupt they are excused of all debts they incured during their time of operation and nothing happens to the economy when that takes place. Why is it America can't do the same thing to eliminate all of its debts as any large company can do everyday.
Something that I took away from what Keen has said, probably after listening to him on NPR, is that the reason debt has been becoming a problem for decades is because it has been used too much to finance speculation (I might qualify it as idle speculation.) that does not result in true economic productivity. It hasn't been used to really enhance the general standard of living. The reason I support the wiping out of debt is more out of a sense of justice than fixing things. The banksters and fat cats have been using the people to get rich, aware of what I said above all the while purposely wanting the people to stay uninformed. That is why figuring out how to gracefully and humanely reduce the population numbers hasn't been on the radar for decades. Population growth means more customers to exploit and get rich off of, though the earth is only finite and their party is likely to end sooner rather than later. It's been the same since serfdom, slavery, and the indentured servitude that persists today. The feudal lords are now called the masters of the universe or something.
That is a false premise as anyone holding their bonds (or stocks) or any of their unpaid creditors* (suppliers) will tell you as their wealth and ability to invest, etc. decreases. The idea that holders of Greek bonds should take 25, then 50% and then 75% "hair cuts" has been dropped because doing what you and the OP suggest would terminate any ability to borrow again for more than a decade.** The idea of cancelling debts has been tried and failed - Produced disasters every time! Most recent case was Argentina, about 12 years ago failed to pay a small part of its bonds, mainly those held by Italians, and was without credit for more than decade. Read second part of post 2 (after the ------) to understand more than you (and elte) currently do. * For example most airlines that have gone bankrupted and been re-organized to operate again now must pay for their aviation gasoline BEFORE it is delivered. ** Even the European national banks that last week got billions of Euros from the ECB in three-year, 0.25% interest, loans are not investing in their own country's banks (to help met their "recapitalization requirements" - prevent their collapse in a run). Instead they have deposited the funds back at the ECB to earn 0.75% - exactly what happened in the US with much of the TARP, QE1, & QE2 funds. - Why take risk by lending to shaky economies or governments if safe ECB depositing is available? (The ECB, like the FED, will always pay full face value as it too can print money. National banks can not print Euros so can go belly up as those in Greece will in next few months.) later by edit: here is the amount that has come back to the ECB: "... deposits at the European Central Bank hit a record high EUR452 billion and that the central bank’s balance sheet has expanded to a record EUR2.73 trillion. ... " that is about 100% of the recent historically largest loans (489billion Euros given in one day!) / money printing surge as I recall. Quote from TD AmTrade's market review after CoB today, 28Dec11 (explaining why the market was down so much - i.e. just like the failed TARP, QE1 & QE2, most of the newly created money just returned the bank that made it to collect higher safe interest so it will fail too. Only way to save the full Euro zone is for China to buy its productive assets. Like the recent purchase of 21% of Portugal's power company.
As Billy explained, neither part of that statement is completely accurate. But moving on to your question... Because America is qualitatively different from even the largest corporation. Its government is the world's largest economic entity, and it stands astride the world's largest economy. The U.S. government's debt is one of the largest figures on the world's balance sheet. Banks and other institutions count that debt as a major component of their assets. If that debt were reduced to zero it would destroy much of the world's wealth and plunge the entire global economy into a recession of unprecedented scope. Look at the domino effect that tiny Greece is causing in the European economy. How many people outside the banking industry knew that Spain was Europe's fourth largest economy, and that it's teetering on the edge of catastrophe? The United States is the large domino, the double-twelve as it were. If that domino falls, the game is over.
I am coming around to the idea that 2012 isn't too bad of a year in the sense that the government will probably try to paper over everything for the end of the year election. I do wonder if 2013 may see depression with deflation or depression with inflation. One would think deflation as they surely can't print THAT much money can they??? I'm sort of coming around to deflation. Americans literally HATE Ben Bernanke, I don't think he can print the massive amount of money he wants to print.... not just yet anyway. In 2014 maybe a different story - will he be able to ramp up the printing presses and go ballsout - thus, destroying the dollar. Which may not be a bad thing really. Argentina lived through it, so will Americans.
As Fraggle noted, the US is the world's largest buyer of products* and the financial foundation of the world's savings, which if zeroed means a depression worst than has ever occurred in history. (Back when gold etc. was the financial foundation, the value of savings endured, did not vanish.) Yes most Americans will live thru it, but many will not - Thousands will starve or be killed in the food and other riots. Those that do survive will no longer be living in the American they grew up in. Most likely they will live in a land ruled by the military under their version of Marshall law. Compared to continuous chaos, that is the optimistic scenario. ------------- * Or was. Chinese now buy more cars, cell phones, cameras, laptop computers, and many other modern electronics and refrigerators, dishwashers etc. than Americans do as they have far fewer - most are first time buys not replacements and there are four times more Chinese, many of whom now have more than twice the disposable wealth they had only a year or two ago when many lived "hand to mouth." The CCP is rapidly growing the internal market with double digit REAL salary increases, medical costs cut in half, and some starts at a "social security" like programs for their old age - i.e. no longer necessary to save > 50% of your income for old age. The richer Chinese are opening the new gold bank accounts (You have Y ounces of gold credited to your account, not X yuan.). I forget the exact number but these new accounts held something like 10 billion dollars worth of gold at end of 2010 and they only became legal in early November 2010! The US government cannot allow gold bank accounts to exist as eroding your saving (lowering value of the dollar) is only way US can avoid default on its debt. The CCP has grown tied of lending to US & EU - wants to trade with other Asian nations (its suppliers of low valued added components China's now higher cost labor** can not make) and the suppliers of energy, food stocks and raw materials (including lumber from Canada as well as minerals) like Brazil, Australia, etc. which do not need loans to buy. For example Brazil has a trade surplus with China and now buys more Chinese made cars than US made cars. Same is increasingly true for other industrial products. So has no need of Chinese loans to "buy Chinese." ** To fight rising labor cost and improve production quality, Foxcomm is buying 1,000,000 production line robots! Foxcomm has also moved two of its large production plants to the interior where labor costs are only 2/3 as high as in the coastal cities. I'm not sure what they make, but bet it is mainly for the growing internal markets, so lower shipping costs may have been small factor in this decision. China's rapidly expanding rail system also helps. Also is more fuel efficient and is faster and than airplanes for 800Km (500mile) or shorter trips (city center to city center) as on the modern lines the average speed is about twice that in the US. (China is now testing a super fast train with top speed greater than 500km per hour! and already holds world's speed record at 300Km/H)
OK, some thought experiments: 1) What could lead to a Deflationary Depression in 2012-13 in the USA? (Just some ideas, whatever comes to mind). 2) What could lead to a collapse of the Chinese economy in 2012-13? (again, just think of whatever comes to mind). 3) How could it be possible to have the price of gold at, say, $300/ounce in 2012? (just some possible scenarios). It's always to look at things from various angles.... especially those views opposite to one's own.
