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The No Banker Left Behind Bill (Chuck D., September 29, 2008)
I have been mulling over the proposed bailout bill (which I have decided should be called the No Banker Left Behind Bill). I have the feeling that no matter what they do, something big this way is coming. I just don’t know what form it will take.
I suppose it could be a terrorist “event”. That would prove very distracting from the financial mess. And it would ultimately be as arguably “convenient” and conspiratorial as 9/11 can be made out to be.
If the bailout bill passes as it appears it will, then I think the odds of this drop until if/when it becomes apparent the bailout has not worked.
However, I suspect it is much more likely to be an economic event. What we have seen so far is a prelude to the bigger main act. I can think of three possibilities that I will explain below. I have no clue whether any or none of them will come to pass. Before I explain them, some background is in order.
First, at this point we have basically screwed over the rest of the world with our financial wizardry swindle. We have left them, as intended, holding the bag by cleverly passing the risk on to them without telling them about it. They our creditors cannot be too happy about this.
Second, while Wall Street foisted this scam upon everyone, Messrs. Greenspan, Bernanke and Paulson stood by and did nothing. They cheer leaded. They told us how sound everything was when anyone who looked at this for even a little while could see where it was going to end up. (Warren Buffett comes to mind for one.) They appear to be corrupt, incompetent, liars, or riddled with conflicts of interest or all of the above. The regulatory system that was supposed to prevent such things from happening either looked the other way also or was never given the tools it needed to effectively deal with the new circumstances presented by these new exotic tools of Wall Street’s devising.
Now the rest of the world sees these guys and the Congress running around like chickens with their heads cut off scrambling to do something, ANYTHING. And what’s going to be the result? The boyz of Wall Street who created this scam and unfortunately got caught in it by their own greed get bailed out from the consequences of what they have done while being overseen by people who appear to be conflicted, incompetent liars. They our creditors have got to be even less happy about this.
As usual, our friends in Congress as well as Mr. Bernanke and Paulson or the Presidential candidates have never bothered to explain where all this money will come from. They seem to be assuming that the resources of the Federal government are infinite. But they aren’t for reasons I will explain below.
As far as I can see, there are only two choices to finance this.
One is to borrow the money. But from whom? I don’t believe you have to think of this in terms of high international finance. I think you can reduce it to basic common sense experience on an individual level and it will be the same thing. If I borrow a huge amount of money from Charles Hugh Smith or anyone else reading this blog, and then they discover I have swindled them in order to get it, you think they are going to line up to let me have more money if I go ask them for it?
The other choice is to monetize this debt it by creating the money to pay for it out of thin air. But why would our creditors put up with this? It inflates the money supply and therefore reduces the value of the dollar. They our creditors get their loans paid back in money that is worth less than it was when they made their loans. In effect they take a loss on the part of the loan that was inflated way before repayment.
Confronted with this possibility, the temptation is there to cut their losses instead of doing nothing. What can they do to cut their losses? I can see three possibilities. Unfortunately none of them are good.
(A). A run on the dollar
They could effectively make a run on the dollar by selling off/dumping their Treasury bonds. As with any rush for the exits when the building is on fire, those who get to the exits first have the best chance to get out alive. The later you get there the less chance you have of getting out in one piece. Not a pleasant prospect for those creditors who get there last and discover there is no more water to put out the fire blocking the doorway. As for us the debtor, it doesn’t matter which creditor gets to the door first. The effect will be the same. The dollar tumbles. Everything we import becomes more expensive while everything we export becomes less expensive and more competitive – unfortunately since we import far more than we export, consumers and the consumer economy have a problem. Foreigners can have a field day buying up America at distress sale prices.
The creditors committee is to me by far the scariest option of the three because it is effectively the forced default of the US Treasury Bond and the revelation for all to see that the U.S. is truly a bankrupt nation. Again skip the high international finance and think in common sense terms. Creditors have the ability under bankruptcy law to force a debtor into bankruptcy. They have this ability because they need a way to cut their losses when they are in the position of having an insolvent debtor who will continue to generate additional losses for them if they have no way of stopping him from doing so.
By inflating away the value of their loan it seems to me we put them in this same position. And if this is so, what is to prevent an international committee of creditors from appearing on our doorstep and announcing they are here to liquidate the country? Let’s face it. We owe a ton of money to folks like China, Russia, India, and others. Some of these nations are not our friends.
“Mr. Bush, we’re your committee of creditors. We’re here because we have become concerned about the value of our loans and we have decided it is our best interest for us to help you reorganize your country so we can better assure our repayment.”
“I can’t do anything like you ask. There is the Constitution, and I have to get Congress to go along with this, and I know they won’t.”
“Now, Mr. Bush, please don’t be difficult and make this unpleasant for all of us. From what we’ve observed, you act as though the Constitution is just a piece of paper. You and your colleagues act as though you all are above it, and above the law in general, what with your signing statements, and refusal to honor Congressional subpoenas, and declaring anyone you want an “enemy combatant” and holding them indefinitely without trial. Besides, you already have executive orders in place and Congressional authorization to suspend the Constitution and rule by decree in emergencies. And if you don’t, you can do like you have been doing and make up an Executive Order now. Otherwise, we have to stop extending any additional credit or loans to your country immediately and it and you will be out of business in about a week. Your other choice is to start printing up money like mad. You will end up resembling Zimbabwe and you will be out of business in about a year or two. The result will be the same. It will just take longer, that’s all.”
“Now, Mr. Bush, that’s better. See how simple this can be? To assure some immediate repayment we would like as you Americans put it, to “cherry pick” some things. We’d like to start by having you nationalize Microsoft and turning over all their proprietary information to us for our own research and development.”
There are those who would argue that this couldn’t happen, that the U.S. is “too big to fail.” This is not only a wrong perception; it’s somewhat irrelevant. The real question is whether from the creditors’ point of view they can afford to take whatever loss they incur by turning off the spigot better than the debtor nation can afford the loss of the ongoing loan of funds and default.
If the answer is “yes”, then we are not “too big to fail.” If the answer is “no,” then we might be. But it could also be for any other reason that exists at the time.
The third choice of competitive currency devaluations might happen where our creditors decide that for whatever reason, they do not want to take the loss they would have to incur by accepting repayment in inflated dollars. They might decide to debase their own currencies as fast we debase ours, so that the value of any money loaned or repaid remains unchanged relative to each others’ currencies.
The problem with this approach is that it ultimately spreads misery among all parties involved. I find it hard to believe that a country in a stronger economic position that we are would set out to deliberately weaken itself to keep up with us as the Joneses. However, considering what we have done to ourselves in the last 30 or so years, I suppose there is no reason why they couldn’t do likewise. If that is the case then the inmates truly will be running the world economic asylum, and all bets are off as to what will happen.
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