Wednesday, August 25, 2010

Morgan Stanley says the D-word is "Inevitable;" Can the US ever default?

Citing the obvious aging populations and difficulties in collecting adequate revenue for the various massive social welfare programs in nations worldwide, former zombie-investment-bank-turned-zombie-"commercial"-bank Morgan Stanley today resurrected the d-word--default! Simply seeing the word "default" in a Bloomberg headline is encouraging in our fight against the banksters...but don't get too excited.

According to a article by Bloomberg, the Morgan Stanley has rendered a prediction that default by certain nations on the debt owed to their bondholders is "inevitable." The bank's debt analysts cite the overwhelming burden on future generations, including even the current generation who is now paying into but not receiving full social welfare benefits: they find that these generations will simply be unable to foot the multi-trillion dollar bill. As more and more workers leave the workforce for retirement and working families have fewer and fewer children--children who would increase the tax base once working themselves--the simple rules of arithmetic are catching up to the pipe dreams of government-funded checks in the dozens of social welfare-based nations worldwide.

On the top of this list are, of course, many European nations. It is mathematically inescapable (a "mathematical tautology") that some nations will be forced to default on the huge amounts of debt outstanding, debts which they acquired largely to fund their current and future entitlement liabilities. Morgan Stanley cites Greece as an example. But there is one little complication that develops when applying this same conclusion to all governments, because some governments need not subject themselves to that silly math stuff. Why, when the principles of mathematics are accepted by humanity worldwide, and when everyone know that you can't get blood from a turnip? Well, easy, silly--because some nations have printing presses! Ah yes, you might not be able to get blood from a turnip, but you can get trillions from a printing press, and if you do it electronically, you don't even have to pay for ink!

Those with well-lubricated national printing presses--including that of US--will always have the magical option of currency dilution and devaluation before outright default. You'll get your dollars, alright, and good luck using them. Morgan Stanley's assessment, therefore, applies most aptly to those nations without the power of the press, and most specifically, to those nations of the European Union. As evidenced by the ongoing Greek debt crisis (see Greek bailout V1 and Greek bailout V2), a nation (ah-em, Greece) without control of the currency in which its debt is repaid (ah-choo! euros) has, basically, three options when the revenue spigot runs dry:

1.) Raise taxes and cut services in an attempt to collect more money, in an attempt to pay off your debtholders, in an attempt to keep them from taking over your nation.
2.) Beg your bankster masters, especially your currency-issuing central bank, to please, please, please print you up some money, and quick!
3.) Call Morgan Stanley. Default.

Greece has tried options 1 and 2, and though like any good drug, these measures worked quite well--for a very short period of time. Also like a drug, of course, the high has diminished rapidly. Today, less than four months since the €110 Billion ($146 Billion) bailout of Greek bondholders, the spread between German bunds and Greek paper is back to its crisis-like spread of over 900 basis points (that's a stunning 9%; during the depths of the crisis just before the bailout was announced, the spread was over 14%). Morgan Stanley is suggesting that the likelihood of option 3 is, well, more than a likelihood for Greece and others, and is apparently an inevitability. The d-word might become a widespread reality.

Our response: we can only hope so!

Default is a good thing. Repeat: default is a good thing! Default is how a real market prevents overzealous financiers from financing ridiculous overexpenditures--particularly from governments who have no money to make promises they cannot possibly satisfy. One of the many reasons the ECB and its bizarre child, the euro, was sold to member nations in Europe as the panacea to economic instability was that both the ECB and euro would end the manipulation of national currencies by each country, manipulations that were usually devaluations. This is ridiculous, of course, because the ECB itself has a printing press, and its bizarre child euro creation itself is the first-ever purely fiat currency on the planet, so if devaluation has ever seen a body, it is the euro. Printing presses, and their electronic incarnations, are all the euro has ever had as parents. The euro itself is a default of the original currencies that were surrendered to it, in the opinion of many skeptics (Bankster Report included). It is a very untrustworthy currency, even among a group of utterly untrustworthy fiats.

And evidence of this untrustworthiness appeared this year. The ECB effectively allowed/precipitated the devaluation of the euro to save the Greek bondholders: check out the euro's move from over US$1.36 in April to $1.19 by June (and no, I'm not blaming this all on the ECB, I'm just pointing out that the ECB, like all central banks, will happily devalue their euro before it lets it reckless shareholder banks get burned). The ECB should have let Greece default in May. Instead, it extended loans to the nation of Greece, and direct bailouts to the bondholders (read: banks) holding the paper, because the ECB cannot stand to have a single investor bank punished for its stupid, stupid, stupid decisions.

You see, if you are a bank in, say Greece, and you're standing next to a Greek politician who is, say, lighting his cigar with a couple of rolled up thousand-euro notes, and you're listening to him promise to provide every Greek citizen with free healthcare and 14 months per year of pension payouts and free this and free that, and he asks you for another couple of k-notes to light another stogie because that first one "didn't taste right," and you open up your billfold and give him three k-notes instead (just to be sure), then, according to the ECB, you were taken advantage of!

ECB: "How dare that Greek son-of-biscuit act so fiscally conservative right before your eyes when he was really a spendthrift crook! Why, we'll teach him to be so reckless with money--we'll steal a bunch of money from other people who aren't even Greeks, and give you more money to give that Greek rascal for his stogie-smoking spending sprees! Yes, we'll teach him!"

Which is why, again, default is good. Had Greek defaulted in May, then their stogie-smokin'-Mediterranean spending spree would have come to a close, and the idiotic financiers of it would have been duly burned. Instead, it continues. So the next question is, what about these United States and our instrinsically anti-parsimonious federal government? Can the US ever default?

The answer is we already have. The United States government official defaulted on debt domestically when Roosevelt signed the Gold Confiscation executive order in 1933 and subsequent legislation in 1934 which magically "relieved" the US government from fronting gold species in return for its issued paper notes. Internationally, the same default happened in 1971 when Nixon ended the dollar-gold peg. So, the US has a history of default, though like any good druggie, we'll deny it. But this, I understand, is not what people mean when they ask the question, "Can the US default?" The question is whether or not the United States federal government will ever be unable to meet the minimum interest payments (debt financing) of outstanding debt, that is usually what people are asking. The answer to this is more difficult to define.

Since the Federal Reserve prints up money at its own prerogative, then technically the US government could always get the Fed to print up more money to lend to Congress to pay off debt holders--even if the Fed itself is the debtholder to be paid off (the Fed currently owns nearly a trillion in US Treasuries--that they admit to owning). Since US debt is quelled in US dollars, as long as something is printing up dollars, then technically the debt can be quelled in. But, of course, only in perpetuity, and only at the cost of issuing more debt, as it is a go-nowhere treadmill because every time the Fed makes up new money out of thin air, it is charging the US Treasury for it. So, since 1913, the US has been an inevitable state of default. If the US took over the Fed and printed up trillions of dollars to pay off all the debt in a year or whatever, then it would be a total tanking of the dollar--a tanking which is, clearly, also an inevitability. So, the United States and other nations that still have quasi-independent currencies under sort-of their own control are in a very different position than the euro nations like Greece. Devaluation, not default, will be the tool of choice for the US.

It is almost pointless to have this conservation, however, because its all made-up money at any rate and by any cut. We can only wish that the future response to national bankruptcy is actual bankruptcy, or default. Only then will financiers take the pain that they helped cause, and only then will this worldwide bankster debt-based fascist-socialism hybrid be discredited and disabled. Even allowing individual banks to default and crumble into bankruptcy would be a nice start, but Congress, at the direct expense of taxpayers and complete benefit of reckless banksters, has been preventing this for years. Debt is now and has always been a poisoned field, and nothing grows of it but more and more debt.

So have a nice day, now!


  1. Keri, Shouldn't the headline read:
    Morgan Stanley says "Government Defaults Inevitable"?

  2. Hey Robert--you're quite right: I didn't know the post was up there, so I must have pressed something before I finished it. Its there now in complete form and with proper spelling--I hope nothing crazy was up there in the meanwhile! :) Thanks!

  3. Your welcome Keri, I thought the headline though misspelled said it all.

    P.S. Just don't touch the big red button. ~MIB 1 HaHa