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This article ignores the other possibility, which I believe to be the only real solution: default on the debt, wiping out shareholders where appropriate, conver
by sridharvembu 16y ago
This article ignores the other possibility, which I believe to be the only real solution: default on the debt, wiping out shareholders where appropriate, convert debt to equity, thereby reducing systemic debt. Bondholders will have to take a haircut, and the sooner the better.
This would result in a sharp GDP contraction for a relatively short period, a sharp hike in unemployment, but then growth would resume fairly quickly, once the realization sinks in that we are not dead after all.
Government can do two things to make this process faster: 1) make the justice system work faster in resolving the various disputes that will inevitably arise in imposing hair-cuts on bondholders 2) Make sure no one starves, and no one freezes. These things it can do.
The present course of cutting-debt-by-borrowing has a clear destination: zombiehood without an exit strategy. Look at Japan for the best illustration of this. It is becoming increasingly clear that Japan is not going to resolve its problems without a major crisis. It should have taken that sharp GDP contraction in 1991 instead.
- mkramlich 16y agoDefaulting on the Federal debt to China could have a wee bit of a repercussion.
- anamax 16y ago> Defaulting on the Federal debt to China could have a wee bit of a repercussion. They'd seize every US or American-owned asset that they could get their hands on and stop sending us stuff on credit. The former is much smaller than the debt that they hold (so we could compensate private holders and still end up ahead) and the latter is arguably a good thing.
- anigbrowl 16y agoAnd then they would just forget about it and let bygones be bygones, I suppose.
- anamax 16y ago> And then they would just forget about it and let bygones be bygones, I suppose. Not at all. They'd remember and never loan us money again. Given our spending habits, that would be a good thing. Or maybe they would loan money in the future if they decided that was in their best interests. Remember, other countries have defaulted and gotten loans later, some more than once. Why would this be any different?
- anigbrowl 16y agoIn a nutshell, because the Chinese take that sort of thing personally. I do not think you are really serious, if you consider this course of action credible in in either fiscal or strategic terms.
- anamax 16y agoI am serious. You're assuming that the Chinese will be benevolent if we don't default and aggressively malevolent if we do. That's naive. If they're willing to be aggressively malevolent, they'll be so without an excuse so it's absurd to worry about excuses. If they're unwilling, their worst is actually good for us - it will force us to live within our means. BTW - A US-class blue water navy is really hard to build. So, the likely malevolence is nuclear.
- po 16y ago> They'd seize every US or American-owned asset that they could get their hands on That might include coming over to get it by force.
- chrismealy 16y agoWolf didn't ignore default: There are three mechanisms: sale; bankruptcy; and frugality. ... The second approach is mass bankruptcy. In this case, creditors are forced to write down their loans to the value of the asset. That is clearly an important part of any de-leveraging. But since highly leveraged financial intermediaries stand between the ultimate creditors (households) and the ultimate debtors (other households), mass bankruptcy is going to wipe out the capital of intermediaries. That is likely to trigger panic, as losses cascade across the financial system. Organising such a bankruptcy procedure, to allow for a mass adjustment of claims, is indeed one of the necessary conditions for managing a financial crisis efficiently. But it is going to be politically and technically complicated. In the end, however, a substantial part of the debt and the corresponding credit should be eliminated in this way. The big policy decision is how far the state wishes to socialise the losses of creditors. The answer will certainly include some socialisation, since governments insure deposits in financial institutions.