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Wed Oct 24, 2012, 06:59 AM

 

Suddenly, Everyone On Wall Street Is Taking The 'Red Pill' Of Economics

On Saturday, we wrote that more and more people are starting to wonder if central banks like the Bank of England and The Fed can just "rip up" the debt that they've bought via Quantitative Easing, and reduce the national debt of these countries with the stroke of a key.

Asking this question, and thinking about the implications of it, is the equivalent of taking the 'Red Pill' of economics. The Red Pill, of course, is what Neo took in the Matrix, and it exposed his mind to an entirely different view of the world that was far less comfortable than the one he inhabited. If you start thinking about the possibility that the central bank could just rip up a government's debt, with few negative ramifications, then you might start thinking about government finances in a totally new way that makes you uncomfortable.

You might start to realize that this whole construct of a broke government, deeply in hock to the Chinese (and everyone else) is an illusion, that complete distorts the realities of sovereign finance.

But it's too late. More and more people are taking the red pill, and thinking about this question.

Want proof? In her latest note, SocGen economist Michala Marcusen reveals the #1 question that clients are asking.

Read more: http://www.businessinsider.com/top-client-question-can-central-banks-just-cancel-sovereign-debt-2012-10#ixzz2ADH313BQ

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Reply Suddenly, Everyone On Wall Street Is Taking The 'Red Pill' Of Economics (Original post)
HiPointDem Oct 2012 OP
geckosfeet Oct 2012 #1
Egalitarian Thug Oct 2012 #8
geckosfeet Oct 2012 #12
Egalitarian Thug Oct 2012 #14
PoliticAverse Oct 2012 #2
quaker bill Oct 2012 #4
WinkyDink Oct 2012 #16
quaker bill Oct 2012 #20
WinkyDink Oct 2012 #15
quaker bill Oct 2012 #3
randome Oct 2012 #6
PoliticAverse Oct 2012 #7
quaker bill Oct 2012 #19
xchrom Oct 2012 #5
reformist2 Oct 2012 #9
bemildred Oct 2012 #10
leveymg Oct 2012 #11
Egalitarian Thug Oct 2012 #13
ProgressiveEconomist Oct 2012 #17
Zalatix Oct 2012 #18

Response to HiPointDem (Original post)

Wed Oct 24, 2012, 07:12 AM

1. Yep. New lobby groups will spring up that reccomend a "restructuring". No need

for corporations or the mega rich to pay for the bounty that they have reaped over the last forty years - heck it wasn't even their idea back then. Just erase it all, throw millions more out of work, destroy a worldwide
socio-economic eco-system and let the rabble fight it out in the next round of wars for raw materials and technology. Yes just sit back on that pile of wealth, milk the teat of the military industrial complex and wait it out in a luxury bunker.

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Response to geckosfeet (Reply #1)

Wed Oct 24, 2012, 08:04 AM

8. One problem with that, there would be no pile of wealth to sit back on.

 

Nobody and no government is more dependant on keeping the existing system of graft and fraud going than the rich. That is specifically why it is designed the way that it is, to provide a perpetual 'leaking' that ensures that no matter what else happens, those with more will always get more. Sometimes it is a little more and more often it is a lot more, but it is always more.

Should the system collapse, no one would own anything other than what they can hold and keep. Obviously this is a major problem for any person or organization that owns lots of stuff spread all over the world and even worse is that so much of what is owned does not exist at all except as intangible accounts. Bill Gates is only the richest man in the world because he has pieces of paper that say he owns a big chunk of a company that itself makes nothing with any physical existence.

Overnight the richest people on earth would be those that live on and can hold land and equipment. The rest of us are fucked.

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Response to Egalitarian Thug (Reply #8)

Wed Oct 24, 2012, 08:15 AM

12. Agreed. But accumulated wealth can be used now to amass items that will be of value

in the post-apocalypse.


Overnight the richest people on earth would be those that live on and can hold land and equipment.


Land - not so sure. Land can be over run militarily if not defensed properly. But yes - land is required to grow food etc. and is surely of value.

I would say hard skills, education and a touch of technology should get you by. Warehouses of equipment for trade may help.


The rest of us are fucked.


No question.

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Response to geckosfeet (Reply #12)

Wed Oct 24, 2012, 08:43 AM

14. Not really, that's why the current system was accepted. More than one Lord learned the hard way that

 

mercenaries cannot be depended on to protect assets. Why take $1000 dollars to protect $100,000 when you can have the $100,000?

This leaves only one method of keeping accumulation, large families or their equivalent, and that brings us back to the basis of civilization, community. The problem with community for the over-ambitious is that you can't take more than everybody else and maintain the community, which is the only way to have something to take.

The fact that this is being discussed by economists and published on Business Insider is certainly indicative that there are more than a few people beginning to recognize that we cannot go on this way forever and that a breaking point is looming. Any system that creates a few thousand with more than can possibly be used while billions have nothing will collapse.

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 07:32 AM

2. Did people think all the money was going to be paid back by taxing the rich...

instead of being paid back by the tax of inflation ?


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Response to PoliticAverse (Reply #2)

Wed Oct 24, 2012, 07:38 AM

4. A bit of inflation is not a bad thing

wages usually go up compared to debt which loses value.

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Response to quaker bill (Reply #4)

Wed Oct 24, 2012, 08:46 AM

16. Read "Nickel and Dimed" and get back to us on that inanity.

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Response to WinkyDink (Reply #16)

Thu Oct 25, 2012, 10:03 PM

20. Take basic economics and get back to me

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Response to PoliticAverse (Reply #2)

Wed Oct 24, 2012, 08:45 AM

15. Taxing billionaires down to centimillionaires is a good starting point. Ask small communities.

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 07:36 AM

3. We "owe" ourselves trillions in the currency we print

Could we simply decide to forgive ourselves? I think so. There is risk in this in that the money we created from thin air to buy our debt will simply remain in circulation. If done suddenly, there would be a risk of inflation. However, if done over time the risk subsides.

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Response to quaker bill (Reply #3)

Wed Oct 24, 2012, 07:44 AM

6. And if every bank agreed to this, would there be no net loss?

Debt only exists if we believe it does. If everyone cooperated in believing the debt vanishes, does it in fact vanish?

It's an intriguing idea.

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Response to quaker bill (Reply #3)

Wed Oct 24, 2012, 07:49 AM

7. Will we be forgiving the $2+ trillion we 'owe to ourselves' in the Social Security 'trust fund' ? nt

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Response to PoliticAverse (Reply #7)

Thu Oct 25, 2012, 06:57 PM

19. It is all "notional" anyway

How were we going to "pay back" the two trillion? By paying benefits in money we "print" for this purpose. Of course it just gets stranger when you understand that most of the real money out there ink never hit paper to create. Most of it is just mouse clicks anymore. The actual stuff printed on paper and stamped in metal is truly just "spare change" used to keep the system portable. It is provided as a convenience and custom.

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 07:39 AM

5. Du rec. Nt

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 08:08 AM

9. Never mind the red pill... The rich need to swallow the "bitter pill", and start paying more taxes!

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 08:09 AM

10. Ya think?

Money is not real, it hasn't been real since the 70s, at least, it's ARBITRARY.

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 08:12 AM

11. Isn't that the way that Fed debt and borrowing from the SS Trust Fund have always worked?

It's just a shifting of accounts, and so long as T-Bills continue to be traded with market value, there's no reason to be alarmed by the size of the debt.

This is kinda stating an obvious point that most economists understand, but others would rather for political and fiscal reasons the public doesn't.

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 08:23 AM

13. This article points out an obvious and well hidden-in-plain-sight fact about our modern world.

 

If the central bank’s government bond holdings are simply cancelled, this would amount to pure and simple debt monetisation (formally prohibited in the case of the ECB), and would in our opinion risk soaring inflation expectations as trust in the monetary system breaks down.


The entire global economy is based, not on production or the value of material goods, but on faith that those who promise will deliver. If the last 20 -40 years have shown us nothing else, it is that those who make these promises don't always deliver and frequently make those promises with no intention of ever delivering.

Food for thought.

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 11:31 AM

17. WAY too late--With QE, the US already has taken "the red pill"

in high doses, since interest on "public" debt held by the Fed (beyond the Fed's payroll and other expenses) already is returned to Treasury at the end of each fiscal year. This is where the Fed always has gotten its funding. I don't know about the UK's central bank procedures, but maybe the SocGen economist should be advocating the middle road between debt cancellation and interest-paying quantitative easing the US already took long ago.

Since there is no limit on the Fed's holdings, and all but a tiny fraction of US debt held by the Fed has an effective interest rate of ZERO, why bother canceling US debt held by the Fed? Just let it grow and, when interest rates go up, allow the Fed to sell low-interest Fed-held paper to the world to fund future administrations cheaply.

For a crystal-clear laymen's explanation of Fed=held debt, see a SF Fed "Dr Econ" post with 2005 numbers at http://www.frbsf.org/education/activities/drecon/2005/0507.html .

For more advanced ruminations about QE and monetizing debt from a progressive economist's perspective, google +"monetizing the debt" +"Dean Baker" at http://www.google.com/search?q=%22monetizing+the+debt%22+%22Dean+Baker%22&hl=en&ct=clnk

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Response to HiPointDem (Original post)

Wed Oct 24, 2012, 11:35 AM

18. Can we inflate our way out of the debt like the US did in 1947?

 

Or will we have DOMESTIC hyperinflation?

I seriously doubt the latter will happen. At worst we'll have serious import-price inflation.

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