The template
of over-indebtedness as a response to soaring obligations is scale-invariant,
and it always ends the same way: default.
When you
can't pay your bills, you can either cut expenses, borrow money or if you're
extraordinarily privileged, print money. If you borrow money without cutting expenses, the
interest on the borrowed money piles up and you can't pay that, either. Then
not only do you have a spending crisis, you have a debt crisis, and so do those
who lent you the money.
Because the
funny thing about borrowed money is it's a debt to you but an asset to the
lender.
Not only is your debt listed as an
asset on the lender's books--it's collateral
that supports whatever financial leverage the lender might engage in.
If you default on the debt, not only is
the lender's assets impaired--all his leveraged bets built on the collateral of
your debt are suddenly impaired, too.
The preferred
solution nowadays to a spending/debt crisis is to borrow your way out of the crisis: if you can't pay the interest and debt
that's due, just borrow more to cover the interest payments and roll the old
debt into new loans.
In a variation that we can call The Japanese Solution, the lender
decides not to list your defaulted loan as impaired--he places your loan in a
special zombie debt
column--it's neither a performing loan nor a defaulted loan; it is a zombie
loan.
The other solution (again from Japan)
is to roll the defaulted debt into new loans at near-zero rates of interest
that allow the borrower to pay a nominal sum every month, just to maintain the
illusion of solvency. If you owe the bank $10 million, the bank loans you $11
million at .01% rate of interest and you promise to pay $100 a month.
There--problem
solved! The loan is
now performing because the borrower is once again making payments. But is
either the borrower or lender actually solvent? Of course not.
Another trick
is to guarantee the borrower is solvent. It's all smoke and mirrors, of course, but the empty
guarantee is enough to smooth things over and maintain the illusion of solvency
right up to the moment when the house of cards collapses.
Debt and all
these tricks to mask insolvency are scale-invariant, meaning they work the same
on household debt, corporate debt and national debt. Many of these scams were used to mask
the subprime mortgage debacle, and they are being routinely applied to private
and public debt.
Why? To avoid
the consequences of losses being forced on overleveraged private banks and
other lenders. Were those
losses to be taken, those entities would be insolvent: their assets would be
auctioned off, their shareholders, bond holders and creditors would receive pennies
on the dollar (if that) and the lender would close their doors.
The losses to
the Financial Aristocracy, pension funds, etc. would be immense. So rather than deal with the realities
of an insolvent, overleveraged, over-indebted and intrinsically corrupt
financial system, everyone plays shadow games to maintain the illusion of
solvency.
If you can't
print money or slash expenses, you have to borrow more money. The more you borrow, the greater the
odds that in the next downturn, you won't be able to pay your bills, the
interest on the debt, and roll over debt coming due into new loans.
That's the
template not just for Greece, but for many state and local governments in the
U.S. As Gordon Long
and I discuss in GREECE: A US State & Local
Template?, state and
local governments share key characteristics with Greece: they have soaring
pension, Medicaid and employee healthcare obligations, but their tax revenues
are either stagnant or prone to boom and bust cycles--and the current boom
cycle is now entering the inevitable bust phase, when tax revenues plummet but
the obligations just keep piling up.
The template
of over-indebtedness as a response to soaring obligations is scale-invariant, and
it always ends the same way: default, more financial tricks to mask the default, and
eventually, insolvency, bankruptcy and massive losses being distributed to
everyone foolish enough to choose financial trickery over dealing with reality
back when the pain would have been bearable.
As for
printing your way out of a spending/debt crisis: that's just another form of financial
trickery that keeps the illusion alive for a few more years.
GREECE: A US State & Local
Template? (27:46 video, with Gordon T. Long)
http://www.zerohedge.com/news/2015-07-12/greek-finance-america-pensions-medicaid-entitlements-will-bankrupt-state-and-local-g
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