RT: A US debt default could hit on Thursday, and world leaders are second
guessing the dominant role America plays in finance. Regardless of the
final decision in Washington, confidence and credibility in the US has
already eroded.
In an editorial published by the Chinese
state-owned press agency Xinhua, a columnist says the US economy
has ‘failed’ and put many countries who hold state assets in
dollars, at risk.
“To that end, several corner stones should be laid to underpin a de-Americanized world,” the editorial read.
Last week China, the biggest US creditor, started to make preparations for a technical default on loans. The European Central Bank and the People’s Bank of China (PBC) have agreed to start supplying each other with their currencies, avoiding the dollar as an intermediary currency. The currency swap agreement will last for three years and provide a maximum of 350 billion Yuan ($56 billion) to the ECB and 45 billion euro ($60.8 billion) to the PBC.
In a further sign of growing distrust, China introduced a so-called “haircut”, or a discount, on the value of US Treasuries held as collateral against futures trades.
Developing and developed nations are equally concerned, and institutions like the World Bank and the International Monetary Fund (IMF) have issued several warnings.
Christine LaGarde, managing director of the IMF told the US they must uphold their financial promises to the international community and raise their debt ceiling. Failing to do so would put the world “at risk of tipping yet again into a recession,” LaGarde said in an interview on NBC’s ‘Meet the Press’, which aired on October 13.
“You have to honor your signature, … give certainty to the rest of the world,” LaGarde urged the US, a strong supporter of the international lending tool.
The country that has long provided a sturdy backbone to the global economy is now teetering on a mass default. If US lawmakers don’t forge a solution to raising the debt ceiling by October 17, investors with US treasury bonds, one of the lowest-risk assets, could suffer.
“It’s not just China that’s at the mercy of US lawmakers, its everybody in the world that is at the mercy of US lawmakers right now,” David Kuo, Investment Advisor, Motley Fool told RT .
“China is trying to diversify away from US Treasuries,” said Kuo, adding investors “cannot just assume an asset is 100 percent safe.”
China holds nearly $1.3 trillion in Treasuries, Japan has $1.14 trillion, and other big foreign creditors include Caribbean creditors, Brazil, Taiwan, Russia, and European nations.
Other creditors have decided to keep calm.
Russia, ranked the 11th on the list of the US top creditors with the estimated $132 billion in US Treasuries, plans to keep their Treasuries.
"I don't see the need for revising our reserve investment strategy in US Treasuries," Russian Finance Minister Anton Siluanov said at a press conference on October 11 following a meeting of the G20 finance and Central Bank chiefs.
“What’s happening now, I hope, is a fairly short-term situation,” Siluanov told reporters, noting Russia’s investment plan is long-term.
If the US misses the debt ceiling deadline of October 17 and stops paying their creditors, it would be the first major Western government to do so since Nazi Germany under Hitler in 1933, which wasn’t able to pay their debts following World War I.
The US has a bank holiday today in honor of Columbus Day; however, after making little headway on solving the budget gap, both the Senate and the House will hold sessions on Monday.
For Republicans, Obamacare has been a major stumbling block in agreeing to raise the debt ceiling, as they see the legislation as antithetical to their ‘small government’ philosophy.
Source
Ron Paul Proposed A Fed Masterstroke That Can End The Debt Ceiling Crisis At Once!
Seeking Alpha: While the fight on the debt ceiling continues with the White House
unwilling to give in to what they see as extortion (which could set a
bad precedent for future negotiations) and the Republicans unwilling to
walk away with this without at least some concessions, is there any way
out of this?
Well, apart from an epic back-down on either side, there actually is, and it's something we've suggested earlier (albeit not within the context of these debt ceiling negotiations). Central banks can simply cancel part of the debt. Up until the part it has accumulated as a result of QE1, 2 & 3, or roughly $2 trillion.
That sounds like a very easy way out, and indeed it is. With a stroke of a pen, there would be roughly $2 trillion less public debt outstanding, so the debt ceiling would be out of reach for years.
But isn't this debt monetization, stuff that would trigger hyperinflation like it did in the Weimar Republic and Zimbabwe? Well, yes, but here's the thing. The monetization already happened, the Fed already bought those government bonds in exchange for money, and inflation hasn't taken off (in fact, despite many dire predictions, it is still very subdued, and that's no accident, see below).
You might think that the political right will be up in arms against this debt monetization -- we have a surprise for you. Iconic figure of the right (at least until recently) Milton Friedman blamed excessively tight monetary policy for the 1930s depression (and Bernanke famously promised him on his 90th birthday celebration not to repeat those mistakes).
Friedman also suggested Japan to embark on QE at the end of his life, and he was even willing to contemplate more drastic measures, like the proverbial money thrown from helicopters.
What's more, to our considerable surprise, this policy has been proposed by no less than Rand Paul, who seems to dislike almost anything the Fed does as long ago as 2011:
Is there a downside? Well, in essence, this is money that the government owes to itself, so it's basically an accounting exercise. The money for it has already been "printed" and to understand why this hasn't done any harm (like setting off inflation), you have to understand what kind of economic crisis we're in.
In a balance sheet recession, households (and banks) overriding aim is to repair their balance sheets (deleveraging), broken by the implosion of the housing bubble which wiped off $9 trillion of household balance sheets. In order to do that, households started to save more and spend less, and banks lend out less, all of which greatly reinforced the economic crisis.
It's also crucial to understand that it is exactly this private sector deleveraging that makes normal monetary policy ineffective. Even at zero interest rates, households were not induced to embark on borrowing and spending, and banks not induced to lend out. Hence QE, but all that does is stuff the banking system with reserves, which don't get lend out and just sit there, on bank balances as excess reserves.
As long as credit demand doesn't recover fully and the economy anywhere near full capacity, there is virtually no risk of inflation taking off, nor of any bond market crisis as a balance sheet recession is one that generates its own savings, the result of deleveraging. ...Source/Full story
Art by WB7
In an editorial published by the Chinese
state-owned press agency Xinhua, a columnist says the US economy
has ‘failed’ and put many countries who hold state assets in
dollars, at risk.
“To that end, several corner stones should be laid to underpin a de-Americanized world,” the editorial read.
Last week China, the biggest US creditor, started to make preparations for a technical default on loans. The European Central Bank and the People’s Bank of China (PBC) have agreed to start supplying each other with their currencies, avoiding the dollar as an intermediary currency. The currency swap agreement will last for three years and provide a maximum of 350 billion Yuan ($56 billion) to the ECB and 45 billion euro ($60.8 billion) to the PBC.
In a further sign of growing distrust, China introduced a so-called “haircut”, or a discount, on the value of US Treasuries held as collateral against futures trades.
Developing and developed nations are equally concerned, and institutions like the World Bank and the International Monetary Fund (IMF) have issued several warnings.
Christine LaGarde, managing director of the IMF told the US they must uphold their financial promises to the international community and raise their debt ceiling. Failing to do so would put the world “at risk of tipping yet again into a recession,” LaGarde said in an interview on NBC’s ‘Meet the Press’, which aired on October 13.
“You have to honor your signature, … give certainty to the rest of the world,” LaGarde urged the US, a strong supporter of the international lending tool.
The country that has long provided a sturdy backbone to the global economy is now teetering on a mass default. If US lawmakers don’t forge a solution to raising the debt ceiling by October 17, investors with US treasury bonds, one of the lowest-risk assets, could suffer.
“It’s not just China that’s at the mercy of US lawmakers, its everybody in the world that is at the mercy of US lawmakers right now,” David Kuo, Investment Advisor, Motley Fool told RT .
“China is trying to diversify away from US Treasuries,” said Kuo, adding investors “cannot just assume an asset is 100 percent safe.”
China holds nearly $1.3 trillion in Treasuries, Japan has $1.14 trillion, and other big foreign creditors include Caribbean creditors, Brazil, Taiwan, Russia, and European nations.
Russia, ranked the 11th on the list of the US top creditors with the estimated $132 billion in US Treasuries, plans to keep their Treasuries.
"I don't see the need for revising our reserve investment strategy in US Treasuries," Russian Finance Minister Anton Siluanov said at a press conference on October 11 following a meeting of the G20 finance and Central Bank chiefs.
“What’s happening now, I hope, is a fairly short-term situation,” Siluanov told reporters, noting Russia’s investment plan is long-term.
If the US misses the debt ceiling deadline of October 17 and stops paying their creditors, it would be the first major Western government to do so since Nazi Germany under Hitler in 1933, which wasn’t able to pay their debts following World War I.
The US has a bank holiday today in honor of Columbus Day; however, after making little headway on solving the budget gap, both the Senate and the House will hold sessions on Monday.
For Republicans, Obamacare has been a major stumbling block in agreeing to raise the debt ceiling, as they see the legislation as antithetical to their ‘small government’ philosophy.
Source
________________________
Ron Paul Proposed A Fed Masterstroke That Can End The Debt Ceiling Crisis At Once!
Well, apart from an epic back-down on either side, there actually is, and it's something we've suggested earlier (albeit not within the context of these debt ceiling negotiations). Central banks can simply cancel part of the debt. Up until the part it has accumulated as a result of QE1, 2 & 3, or roughly $2 trillion.
That sounds like a very easy way out, and indeed it is. With a stroke of a pen, there would be roughly $2 trillion less public debt outstanding, so the debt ceiling would be out of reach for years.
But isn't this debt monetization, stuff that would trigger hyperinflation like it did in the Weimar Republic and Zimbabwe? Well, yes, but here's the thing. The monetization already happened, the Fed already bought those government bonds in exchange for money, and inflation hasn't taken off (in fact, despite many dire predictions, it is still very subdued, and that's no accident, see below).
You might think that the political right will be up in arms against this debt monetization -- we have a surprise for you. Iconic figure of the right (at least until recently) Milton Friedman blamed excessively tight monetary policy for the 1930s depression (and Bernanke famously promised him on his 90th birthday celebration not to repeat those mistakes).
Friedman also suggested Japan to embark on QE at the end of his life, and he was even willing to contemplate more drastic measures, like the proverbial money thrown from helicopters.
What's more, to our considerable surprise, this policy has been proposed by no less than Rand Paul, who seems to dislike almost anything the Fed does as long ago as 2011:
Downside?Rep. Ron Paul on Monday introduced legislation that would lower the federal government's debt by canceling the roughly $1.6 trillion in debt held by the Federal Reserve. Paul has argued for the last few weeks that the idea represents a quick way to make the growing fiscal crisis more manageable. Under his bill, H.R. 2768, the $1.6 trillion that the Treasury owes to the Federal Reserve would disappear.
Is there a downside? Well, in essence, this is money that the government owes to itself, so it's basically an accounting exercise. The money for it has already been "printed" and to understand why this hasn't done any harm (like setting off inflation), you have to understand what kind of economic crisis we're in.
In a balance sheet recession, households (and banks) overriding aim is to repair their balance sheets (deleveraging), broken by the implosion of the housing bubble which wiped off $9 trillion of household balance sheets. In order to do that, households started to save more and spend less, and banks lend out less, all of which greatly reinforced the economic crisis.
It's also crucial to understand that it is exactly this private sector deleveraging that makes normal monetary policy ineffective. Even at zero interest rates, households were not induced to embark on borrowing and spending, and banks not induced to lend out. Hence QE, but all that does is stuff the banking system with reserves, which don't get lend out and just sit there, on bank balances as excess reserves.
As long as credit demand doesn't recover fully and the economy anywhere near full capacity, there is virtually no risk of inflation taking off, nor of any bond market crisis as a balance sheet recession is one that generates its own savings, the result of deleveraging. ...Source/Full story
Art by WB7
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