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The Next Recession Will Be About Sovereign Debt

53 points by joshuafkon 7y ago

s_Hogg 7y ago
There are a few candidates for a crisis, sovereign debt is one. At this point corporate debt is no less scary. My guess is it won't be about one specific thing, because there are so many interlinked ways for things to jack up at this point.
tim333 7y ago
>What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. I'm not sure that's true - what made it big was the epic borrowing to buy property that pushed up prices to record levels before hand. The Lehman thing was just the pin that popped the bubble. It was going to burst big one day because of the size of the thing. It makes you doubt the rest of the reasoning if the first sentence is incorrect.
- roenxi 7y ago
  Very similar to saying "the cause of the building collapse was the stiff summer breeze". One bankruptcy should not cause a collapse.
- mathattack 7y ago
  It’s a gross oversimplification to pin this collapse on just one item. Just as easy to say “If people didn’t borrow too much” or “If Barney Frank didn’t...” We just don’t know enough to say if any step would avert the crisis or just defer it.
- joshuafkon 7y ago
  Respectfully, I think that Lehman brothers was a major part of why the great recession was the great recession. I’ll quote economist Allen binder: People argue that if it wasn’t Lehman Brothers it would have been something else,” ….“I don’t buy that. I don’t mean everything would have been great if we had bailed out Lehman. We were in a financial crisis before Lehman. But it had a shock value that just caused everything to fall off a cliff. If you look at data on almost anything – consumer spending, investment spending, car sales, employment – it just drops off the table at Lehman Brothers and I don’t think we needed to have that.
  - leftyted 7y ago
    He seems to be saying that if we had known what was going to happen before it happened, we would have been able to prevent it from happening. Well, maybe. But isn't that like saying "if the French had defended the Ardennes, they would have stayed in the war much longer"? That seems like a reasonable guess (as does "rescuing Lehman could have taken the bite out of the Great Recession") but I would say that, actually, no one knows what would have happened in these imaginary scenarios. The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. If we could predict them, they wouldn't even be events. And even if, somehow, these events were predictable, does anyone really think that economists have some theory that lets them make decisions like "who to bail out" or answer questions like "what will the consequences will be if they don't bail X out?" I believe that economists make better calls than a man on the street (me), but I have my doubts.
    - roenxi 7y ago
      > The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. Unpredictability is a dangerous word because it has two meanings here. On the one hand, you are using it to mean nobody could possibly know ahead of time that it would be Lehman and even if they were told that fact it would still have been impossible to pick the date (or the year for that matter). Nobody could argue. On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager. That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. Much like government debt-to-GDP in today's article. The people profiting cheer-lead bad long term decisions and everyone else sits quiet hoping that they won't have to pay for it. Which would be fine if the responsible people were made to pay in the end, but 2008 showed that not to be the case; taxpayers stepped in. The financial bloodbath was not matched by an equal sack-everyone-involved-and-bankrupt-the-investment-banks bloodbath of sufficient magnitude. A failure like that should have reamed out the entire sector; if they weren't ready for it replace them with new blood and ideas. I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that.
- lowdose 7y ago
  You are right and Bernanke was just executing orders of Hank Paulson as a karma payback. Lehman Brothers was the only bank that refused to take a haircut on the bailout of LTCM in 1998. CEO Dick Fuld told Paulson "to drop dead". https://dealbreaker.com/2018/09/hank-paulson-killed-lehman-brothers-cause-karmas-a-bitch https://dealbreaker.com/2018/09/hank-paulson-killed-lehman-b...
- 76hkjfo8jh 7y ago
  Its more complicated than that. US Property prices were rocketing, CDO's were taking subprime mortgages mixing it with prime giving you a "beef pattie" whilst being rated by the agency's as steak. Unlike Europe, the US have plenty more land, a lower population so their housing market growth was unsustainable. The US population taking on massive mortgages helped make the Great Recession, the banks facilitated it and the world suffered. Sure the US banks could have been more selective who they lent money to, but the US financial system was a boom and bust just waiting to happen and it took about 10years to blow up. So who exactly was to blame considering there are various rating's agency's from around the world commenting on matters, various banks from around the world lending to US markets, US legislation and the US population? The buck stops with the president, so which president do you blame considering they all played a part in this as well?
  - r00fus 7y ago
    > The buck stops with the president, so which president do you blame considering they all played a part in this as well? Why are you so eager to pin it on one person, in this case, GW Bush? I think it goes well beyond a single person, and in many cases, the group of people behind the scenes who benefitted from the conditions that caused the 2008 recession did not suffer, but instead are around to create the 2019/2020 recession (but bigger this time!) Like clockwork.
- whenanother 7y ago
  mortgages going bad was just the spark that ignited the forest fire that was the collapse. qe was used to buy time for companies to liquidate their risky assets. but in the end lehman brothers took the fall and we all became poorer. huge debt is once again a symptom to the main problem of people unwilling to let the market decide the winners and losers.
cylinder 7y ago
You can feel the fatigue with central banks all around the world. It's obvious this small group of people shouldn't hold this power and it's clear they have no idea what they're doing and are just moving levers like our lives are their video games. This will not manifest as a revision of the system but rather the changing of who is pulling those levers. The funny money will go to Workers not Bankers and Shareholders and Homeowners next decade (which starts in four months btw!)
persia_hodl 7y ago
Bitcoin fixes this.
- mamon 7y ago
  We need a new version of Goodwin's law for economy-themed discussions: as discussion goes longer, someone will eventually say 'bitcon fixes this' :)
  - goatinaboat 7y ago
    It’s true for every discussion on HN
  - noonespecial 7y ago
    It's like Woody trying to explain to Buzz that he's not a real space ranger... forever.
- Thorentis 7y ago
  No it doesn't. What fixes this, is realising that debt is artificial and an economy of the future needs to realise tangible goods have more value. Why should a country have to borrow money to provide food stamps for people? Just provide the food. Healthcare? Just provide the hospitals. I'm not advocating for communism - far from it. A distributist model of social security and healthcare is what is needed. Not some larpy digital coin that's based on speculation. Speculation is what got us into this debt mess to begin with. Speculation is not the answer.
  - rileymat2 7y ago
    > Why should a country have to borrow money to provide food stamps for people? Just provide the food. Where does that food come from? Government run farms, hospitals? Those takes money to build and staff.
    - dragonwriter 7y ago
      Government may need to pay money, but a government that is the source of its own fiat money doesn't need to borrow it. That's just a product of systematic play acting based on the desire to pretend that fiat isn't fiat.
conanbatt 7y ago
The first one in the line is Argentina, which is about to default the biggest loan the IMF ever gave. Argentina defaulting would not affect any other countries significantly: but it holds over 60% of IMF's financial assets and has the will to default on this debt. The IMF losing more than half its holdings means that there wouldn't be a lender of last resort for sovereign debt issues.
patientplatypus 7y ago
The next recession will be caused by poor crop yields due to environmental destruction. It will also cause famines and wars globally.
Thorentis 7y ago
If we reach the point where global stability depends on whether or not debt by almost every first world country can be paid or not, we will be in a situation where we have to evaluate whether or not keeping that debt around is worth the risk of total economic collapse. Consider - each country can either: a) mutually agree to cancel all debt (or some large portion to mitigate the situation, say 50%) or, b) continue to demand the debt, thus perpetuating the downward spiral of the global economy, thus ushering in an era of civil unrest and large civilizational changes. I'm not trying to sound all doom and gloom, but I think a large part of the economy is very much "pretend money" that works fine with high levels of productivity and economic output, but can very much just be done away with if the alternative is total collapse. The GFC wasn't a total collapse. It was just the loss of large amounts of profit for some large bankers. This had severe consequences for some people (mortgage foreclosures, jobs etc), but wasn't on the scale this article describes, or anywhere close. It's a bit like the worries people (rightfully) have around foreign ownership of land, especially farmland. Yeah it's not ideal now, but you think private property laws will be upheld in war time? If a country ever goes to war with say, China, (a large owner of foreign farmland), you can bet that country will simply seize it all and repurpose it for the war effort before you can say "world war 3". Private property is nice on paper, but when push comes to shove it's just that - paper. Easily rewriten.
- narvval 7y ago
  > each country can either: a) mutually agree to cancel all debt Sovereign debt doesn't mean that countries owe money to each other. Most of the debt is owed to private investors (banks, funds, etc).
  - ses1984 7y ago
    And what gives private banks freedom to operate?
    - narvval 7y ago
      That's an unrelated question isn't it? Of course a country can default on it's debts if they so choose. I'm just describing the nature of the debt, and pointing out why countries' debts don't "cancel each other out" because it's a common misconception.
jbob2000 7y ago
Every recession in history has been caused by two things: an overreaction by the feds, or a screw up by wall street. Market crash in the 80s was because the feds spiked the interest rate, dot com bust was because wall street didn't do their due diligence. Not saying that the upcoming recession will be caused by one of these things, just that I doubt sovereign debt has the power (like overreactions or financial mishaps) to move global markets.
iamasuperuser 7y ago
This site and the links per country makes for interesting follow up reading: https://commodity.com/debt-clock/ https://commodity.com/debt-clock/
- deleted 7y ago
  [deleted]
RobertoG 7y ago
>>"[..] but it has allowed deeply indebted nations like Greece, Japan, and Italy to service their debts." Anyone that put Japan, Italy and Greece in the same page and fail to point that Japan is using its own currency, and the other two are not, don't understand what he is talking about. >>" [..] if the BOJ or the ECB was to simply buy bonds directly from the treasury without removing an equivalent amount from circulation by holding it as reserves it would be massively inflationary. [..]" Why it would be "massively inflationary"? He fail to tell us. >>" As tax revenues fall, debt to GDP ratios will rise. Rating agencies will downgrade nations debt and investors will demand higher interest rates to compensate for the risk. " Why this has not happened to Japan already? They have been done this for years and years. Edit - recommended lecture: "Building bank reserves is not inflationary" (1) 1 - http://bilbo.economicoutlook.net/blog/?p=6624 http://bilbo.economicoutlook.net/blog/?p=6624
- joshuafkon 7y ago
  Japan, Italy, and Greece are in the same category of heavily indebted countries as a percentage of their GDP. But, you’re absolutely correct that a key difference between these countries is that Japan controls its own currency (unlike Italy and Greece). Having a central bank by bonds directly from the treasury is the very definition of monetization. It would add a substantial amount of currency to the economy and is very different from what is happening with QE. As for how Japan has been able to build up debt to their levels without seeing bond yields rise and sparking a crisis - it’s because the Bank Of Japan has used just about every outstanding government bond for QE. But they Japanese in particular are reaching the limit of QE. I go more into this argument here: https://www.cassandracapital.net/post/quantitative-easing-has-prevented-a-debt-crisis-but-we-re-reaching-the-physical-limits-of-qe https://www.cassandracapital.net/post/quantitative-easing-ha...
  - RobertoG 7y ago
    If I understand you correctly, your argument is that QE is not inflationary because the banks don't have bonds in their balance that previously they had, instead they have reserves. First, reserves are not inflationary (1). The quantity of reserves in the system is not important if that money is keep in the Central Bank and it's not spent. As the current QE exercise has show, adding reserves to the system don't make firms and households ask for more credit. If the real economy don't want to spend, you can add all the reserves that you want and nothing will happen (except lowering the interest rate that it's already at minumum). Now, fiscal policy, it's the right tool if you want to stimulate the economy, but, for political reasons, it's not done. Second, please, explain through what mechanism banks don't owning a quantity of bonds equivalent to the reserves in the system will create inflation. All the point of selling bonds (by the central bank to the banks) is to retire reserves from the system. Monetization of the debt don't cause inflation. What causes inflation is spending in the economy. That it's precisely what the politics in, for instance, the Euro-area refuse to do. (1) - http://bilbo.economicoutlook.net/blog/?p=6624 http://bilbo.economicoutlook.net/blog/?p=6624
pjc50 7y ago
The last financial crisis had a large sovereign debt element - but only in those countries where a "bailin" of the local banking industry was inconcievable and there was a bailout transfer instead. If you want to look at debt, look at yields; just the other day we were discussing negative yield bonds in some Western countries. You can't have a sovereign debt crisis and negative yields in the same country at the same time! The most obvious trigger event for the next global recession is sovereign idiocy. The UK's own prediction documents for no-deal Brexit show 5-10% GDP loss within a year or so. The war in Syria rumbles on. The wave of tit-for-tat tanker seizures could continue. Or the trade war with China could escalate.
- AnimalMuppet 7y ago
  > If you want to look at debt, look at yields; just the other day we were discussing negative yield bonds in some Western countries. You can't have a sovereign debt crisis and negative yields in the same country at the same time! I mostly agree with you. But I seem to recall reading that US Treasury auctions had been recently failing, and only appeared not to fail because the dealers stepped in and bought the rest of the bonds. That's what they're supposed to do in that situation, but in a normal auction, they don't have to. So I worry that all is not as it appears in the bond markets, and therefore that your logic might not work. In particular, it might not work for long, because the bond dealers can't keep buying half the issues for long - especially not at the rate the US is having to issue bonds to fund the deficit.
ArtWomb 7y ago
Blackrock is also running a series: "Dealing with the next downturn" https://www.blackrockblog.com/2019/08/20/how-central-banks-might-deal-with-the-next-downturn/ https://www.blackrockblog.com/2019/08/20/how-central-banks-m... Direct stimulus (through universal basic income) may emerge as the best, if not only, innovation for stabilizing aggregate consumer demand.
- geggam 7y ago
  I always wondered why the folks doing QE didnt pump money into the people letting them stimulate the economy by spending / paying their bills. Banks still end up with the money but people would not be screwed quite so during the process.
- cpursley 7y ago
  So, printing more money and creating inflation. Why even both investing and saving any more...
bryanlarsen 7y ago
Negative yields are a pretty strong indicator the people with skin in the game aren't worried about sovereign debt. What might kick off the recession will be the austerity measures countries impose as an over-reaction to debt worries.
aazaa 7y ago
> Already the BOJ has begun to run out of eligible bonds to buy - or swap really - for reserves at the central bank. Ben Bernanke noted in late 2016 that “…constraints on the availability of JGBs [Japanese Government Bonds] were seen in many quarters as limiting the BOJ’s ability to maintain its easy policies beyond the next year or two.” Japan is very close to purchasing all of the outstanding JGBs - at which point it will not be able to continue its QE program. Japan has truly been the pioneer here. Its stock market went supernova first. It experienced deflation first. It implemented QE first. At each stage, Japan showed the rest of the world how this descent from free markets into something else works. Japan was also the first industrialized country to realize the vast potential of direct stock purchases by the central bank. Today, the BOJ is a major shareholder of Japanese stocks: > The BOJ held over 28 trillion yen ($250 billion) in exchange-traded funds as of the end of March [2019] -- 4.7% of the total market capitalization of the first section of the Tokyo Stock Exchange. > ... > The BOJ has likely also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings. It was among the top 10 for 49.7% of all Tokyo-listed enterprises at the end of March. https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be-top-shareholder-of-Japan-stocks https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be... There's always money in the banana stand.
- lifty 7y ago
  Isn't that a slippery slope? If you extrapolate, the market gets used to easy money from the central banks and we end up with most companies being owned by the central banks. Price discovery and risk get totally screwed.
neuromancer2701 7y ago
One aspect the article doesn't cover is that since Japans has been doing this for decades they have effective run out the clock on QE. BOJ has been buying ETFs for so long they are the majority of shareholders in a large percentage of stocks in Japan. I don't think you can do that with swaps so I am pretty sure they had to "print" money to do that. Additionally I have heard that ECB buys corp bonds. Apple can go over to Europe whenever it wants and sell a couple Billion in debt and it will be bought immediately. The question is when does it pop?
jchook 7y ago
Perhaps we all should have gone the route of Iceland in 2009 — let all the banks fail, endure ferocious poverty for 5 or so years, but in that time cultivate a rich humanity that results in: - peacefully firing the entire government - crowdsourcing a new constitution with the help of the Internet - putting the white collar criminals in corrections where they belong (instead of giving them $25M bonuses) - getting women on equal footing in government and business leadership — transitioning to 100% green energy Seems the global economy tried to vomit up all the banksters and corporate corruption but the governments all took a pill to suppress the purge and stay ill.
- andrepd 7y ago
  It's absurd that such a crucial function of society -- control of the money supply and management of debt -- falls on the hands of an unelected, unaccountable, largely hereditary elite. Yet nobody talks about this, when the solution is obvious and in plain view of all: democratise banking.
  - geggam 7y ago
    The democratic process leads to tyranny of majority which is still tyranny but I guess you have better odds of being in the privileged pool.
    - croon 7y ago
      It's likelier to find yourself in an agreeable/livable situation with interests aligned with 50%+ people, rather than ~0.1%. I'd have to agree that those odds are better.
      - geggam 7y ago
        Those 50% soon change into the .1% and with a democratic process you find folks like cambridge analytica who learn how to use propaganda to manipulate the masses. It is a terrible idea but quite common in history, you can also read history to learn why its terrible. Plato wrote in The Republic, “And so tyranny naturally arises out of democracy.”
WilliamSt 7y ago
How can an individual investor profit from the coming sovereign debt crisis?
- conanbatt 7y ago
  Credit Default Swaps.
  - AnimalMuppet 7y ago
    If the counterparty survives...
littlestymaar 7y ago
> What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. Allowing the collapse of an institution that was too big to fail is what started… One could argue that the problem started with the market believing there were such things as an institution too big to fail… Or maybe even earlier, when bankers decided they could lend money to any insolvent guy because the risk was going to be born by others through CDS…

53 points by joshuafkon 7y ago

There are a few candidates for a crisis, sovereign debt is one. At this point corporate debt is no less scary. My guess is it won't be about one specific thing, because there are so many interlinked ways for things to jack up at this point.

tim333 7y ago

>What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. I'm not sure that's true - what made it big was the epic borrowing to buy property that pushed up prices to record levels before hand. The Lehman thing was just the pin that popped the bubble. It was going to burst big one day because of the size of the thing. It makes you doubt the rest of the reasoning if the first sentence is incorrect.

roenxi 7y ago
Very similar to saying "the cause of the building collapse was the stiff summer breeze". One bankruptcy should not cause a collapse.
mathattack 7y ago
It’s a gross oversimplification to pin this collapse on just one item. Just as easy to say “If people didn’t borrow too much” or “If Barney Frank didn’t...” We just don’t know enough to say if any step would avert the crisis or just defer it.
joshuafkon 7y ago
Respectfully, I think that Lehman brothers was a major part of why the great recession was the great recession. I’ll quote economist Allen binder: People argue that if it wasn’t Lehman Brothers it would have been something else,” ….“I don’t buy that. I don’t mean everything would have been great if we had bailed out Lehman. We were in a financial crisis before Lehman. But it had a shock value that just caused everything to fall off a cliff. If you look at data on almost anything – consumer spending, investment spending, car sales, employment – it just drops off the table at Lehman Brothers and I don’t think we needed to have that.
- leftyted 7y ago
  He seems to be saying that if we had known what was going to happen before it happened, we would have been able to prevent it from happening. Well, maybe. But isn't that like saying "if the French had defended the Ardennes, they would have stayed in the war much longer"? That seems like a reasonable guess (as does "rescuing Lehman could have taken the bite out of the Great Recession") but I would say that, actually, no one knows what would have happened in these imaginary scenarios. The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. If we could predict them, they wouldn't even be events. And even if, somehow, these events were predictable, does anyone really think that economists have some theory that lets them make decisions like "who to bail out" or answer questions like "what will the consequences will be if they don't bail X out?" I believe that economists make better calls than a man on the street (me), but I have my doubts.
  - roenxi 7y ago
    > The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. Unpredictability is a dangerous word because it has two meanings here. On the one hand, you are using it to mean nobody could possibly know ahead of time that it would be Lehman and even if they were told that fact it would still have been impossible to pick the date (or the year for that matter). Nobody could argue. On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager. That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. Much like government debt-to-GDP in today's article. The people profiting cheer-lead bad long term decisions and everyone else sits quiet hoping that they won't have to pay for it. Which would be fine if the responsible people were made to pay in the end, but 2008 showed that not to be the case; taxpayers stepped in. The financial bloodbath was not matched by an equal sack-everyone-involved-and-bankrupt-the-investment-banks bloodbath of sufficient magnitude. A failure like that should have reamed out the entire sector; if they weren't ready for it replace them with new blood and ideas. I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that.
lowdose 7y ago
You are right and Bernanke was just executing orders of Hank Paulson as a karma payback. Lehman Brothers was the only bank that refused to take a haircut on the bailout of LTCM in 1998. CEO Dick Fuld told Paulson "to drop dead". https://dealbreaker.com/2018/09/hank-paulson-killed-lehman-brothers-cause-karmas-a-bitch https://dealbreaker.com/2018/09/hank-paulson-killed-lehman-b...
76hkjfo8jh 7y ago
Its more complicated than that. US Property prices were rocketing, CDO's were taking subprime mortgages mixing it with prime giving you a "beef pattie" whilst being rated by the agency's as steak. Unlike Europe, the US have plenty more land, a lower population so their housing market growth was unsustainable. The US population taking on massive mortgages helped make the Great Recession, the banks facilitated it and the world suffered. Sure the US banks could have been more selective who they lent money to, but the US financial system was a boom and bust just waiting to happen and it took about 10years to blow up. So who exactly was to blame considering there are various rating's agency's from around the world commenting on matters, various banks from around the world lending to US markets, US legislation and the US population? The buck stops with the president, so which president do you blame considering they all played a part in this as well?
- r00fus 7y ago
  > The buck stops with the president, so which president do you blame considering they all played a part in this as well? Why are you so eager to pin it on one person, in this case, GW Bush? I think it goes well beyond a single person, and in many cases, the group of people behind the scenes who benefitted from the conditions that caused the 2008 recession did not suffer, but instead are around to create the 2019/2020 recession (but bigger this time!) Like clockwork.
whenanother 7y ago
mortgages going bad was just the spark that ignited the forest fire that was the collapse. qe was used to buy time for companies to liquidate their risky assets. but in the end lehman brothers took the fall and we all became poorer. huge debt is once again a symptom to the main problem of people unwilling to let the market decide the winners and losers.

cylinder 7y ago

You can feel the fatigue with central banks all around the world. It's obvious this small group of people shouldn't hold this power and it's clear they have no idea what they're doing and are just moving levers like our lives are their video games. This will not manifest as a revision of the system but rather the changing of who is pulling those levers. The funny money will go to Workers not Bankers and Shareholders and Homeowners next decade (which starts in four months btw!)

persia_hodl 7y ago

Bitcoin fixes this.

mamon 7y ago
We need a new version of Goodwin's law for economy-themed discussions: as discussion goes longer, someone will eventually say 'bitcon fixes this' :)
- goatinaboat 7y ago
  It’s true for every discussion on HN
- noonespecial 7y ago
  It's like Woody trying to explain to Buzz that he's not a real space ranger... forever.
Thorentis 7y ago
No it doesn't. What fixes this, is realising that debt is artificial and an economy of the future needs to realise tangible goods have more value. Why should a country have to borrow money to provide food stamps for people? Just provide the food. Healthcare? Just provide the hospitals. I'm not advocating for communism - far from it. A distributist model of social security and healthcare is what is needed. Not some larpy digital coin that's based on speculation. Speculation is what got us into this debt mess to begin with. Speculation is not the answer.
- rileymat2 7y ago
  > Why should a country have to borrow money to provide food stamps for people? Just provide the food. Where does that food come from? Government run farms, hospitals? Those takes money to build and staff.
  - dragonwriter 7y ago
    Government may need to pay money, but a government that is the source of its own fiat money doesn't need to borrow it. That's just a product of systematic play acting based on the desire to pretend that fiat isn't fiat.

conanbatt 7y ago

The first one in the line is Argentina, which is about to default the biggest loan the IMF ever gave. Argentina defaulting would not affect any other countries significantly: but it holds over 60% of IMF's financial assets and has the will to default on this debt. The IMF losing more than half its holdings means that there wouldn't be a lender of last resort for sovereign debt issues.

patientplatypus 7y ago

The next recession will be caused by poor crop yields due to environmental destruction. It will also cause famines and wars globally.

Thorentis 7y ago

If we reach the point where global stability depends on whether or not debt by almost every first world country can be paid or not, we will be in a situation where we have to evaluate whether or not keeping that debt around is worth the risk of total economic collapse. Consider - each country can either: a) mutually agree to cancel all debt (or some large portion to mitigate the situation, say 50%) or, b) continue to demand the debt, thus perpetuating the downward spiral of the global economy, thus ushering in an era of civil unrest and large civilizational changes. I'm not trying to sound all doom and gloom, but I think a large part of the economy is very much "pretend money" that works fine with high levels of productivity and economic output, but can very much just be done away with if the alternative is total collapse. The GFC wasn't a total collapse. It was just the loss of large amounts of profit for some large bankers. This had severe consequences for some people (mortgage foreclosures, jobs etc), but wasn't on the scale this article describes, or anywhere close. It's a bit like the worries people (rightfully) have around foreign ownership of land, especially farmland. Yeah it's not ideal now, but you think private property laws will be upheld in war time? If a country ever goes to war with say, China, (a large owner of foreign farmland), you can bet that country will simply seize it all and repurpose it for the war effort before you can say "world war 3". Private property is nice on paper, but when push comes to shove it's just that - paper. Easily rewriten.

narvval 7y ago
> each country can either: a) mutually agree to cancel all debt Sovereign debt doesn't mean that countries owe money to each other. Most of the debt is owed to private investors (banks, funds, etc).
- ses1984 7y ago
  And what gives private banks freedom to operate?
  - narvval 7y ago
    That's an unrelated question isn't it? Of course a country can default on it's debts if they so choose. I'm just describing the nature of the debt, and pointing out why countries' debts don't "cancel each other out" because it's a common misconception.

jbob2000 7y ago

Every recession in history has been caused by two things: an overreaction by the feds, or a screw up by wall street. Market crash in the 80s was because the feds spiked the interest rate, dot com bust was because wall street didn't do their due diligence. Not saying that the upcoming recession will be caused by one of these things, just that I doubt sovereign debt has the power (like overreactions or financial mishaps) to move global markets.

iamasuperuser 7y ago

This site and the links per country makes for interesting follow up reading: https://commodity.com/debt-clock/ https://commodity.com/debt-clock/

deleted 7y ago
[deleted]

RobertoG 7y ago

>>"[..] but it has allowed deeply indebted nations like Greece, Japan, and Italy to service their debts." Anyone that put Japan, Italy and Greece in the same page and fail to point that Japan is using its own currency, and the other two are not, don't understand what he is talking about. >>" [..] if the BOJ or the ECB was to simply buy bonds directly from the treasury without removing an equivalent amount from circulation by holding it as reserves it would be massively inflationary. [..]" Why it would be "massively inflationary"? He fail to tell us. >>" As tax revenues fall, debt to GDP ratios will rise. Rating agencies will downgrade nations debt and investors will demand higher interest rates to compensate for the risk. " Why this has not happened to Japan already? They have been done this for years and years. Edit - recommended lecture: "Building bank reserves is not inflationary" (1) 1 - http://bilbo.economicoutlook.net/blog/?p=6624 http://bilbo.economicoutlook.net/blog/?p=6624

joshuafkon 7y ago
Japan, Italy, and Greece are in the same category of heavily indebted countries as a percentage of their GDP. But, you’re absolutely correct that a key difference between these countries is that Japan controls its own currency (unlike Italy and Greece). Having a central bank by bonds directly from the treasury is the very definition of monetization. It would add a substantial amount of currency to the economy and is very different from what is happening with QE. As for how Japan has been able to build up debt to their levels without seeing bond yields rise and sparking a crisis - it’s because the Bank Of Japan has used just about every outstanding government bond for QE. But they Japanese in particular are reaching the limit of QE. I go more into this argument here: https://www.cassandracapital.net/post/quantitative-easing-has-prevented-a-debt-crisis-but-we-re-reaching-the-physical-limits-of-qe https://www.cassandracapital.net/post/quantitative-easing-ha...
- RobertoG 7y ago
  If I understand you correctly, your argument is that QE is not inflationary because the banks don't have bonds in their balance that previously they had, instead they have reserves. First, reserves are not inflationary (1). The quantity of reserves in the system is not important if that money is keep in the Central Bank and it's not spent. As the current QE exercise has show, adding reserves to the system don't make firms and households ask for more credit. If the real economy don't want to spend, you can add all the reserves that you want and nothing will happen (except lowering the interest rate that it's already at minumum). Now, fiscal policy, it's the right tool if you want to stimulate the economy, but, for political reasons, it's not done. Second, please, explain through what mechanism banks don't owning a quantity of bonds equivalent to the reserves in the system will create inflation. All the point of selling bonds (by the central bank to the banks) is to retire reserves from the system. Monetization of the debt don't cause inflation. What causes inflation is spending in the economy. That it's precisely what the politics in, for instance, the Euro-area refuse to do. (1) - http://bilbo.economicoutlook.net/blog/?p=6624 http://bilbo.economicoutlook.net/blog/?p=6624

pjc50 7y ago

The last financial crisis had a large sovereign debt element - but only in those countries where a "bailin" of the local banking industry was inconcievable and there was a bailout transfer instead. If you want to look at debt, look at yields; just the other day we were discussing negative yield bonds in some Western countries. You can't have a sovereign debt crisis and negative yields in the same country at the same time! The most obvious trigger event for the next global recession is sovereign idiocy. The UK's own prediction documents for no-deal Brexit show 5-10% GDP loss within a year or so. The war in Syria rumbles on. The wave of tit-for-tat tanker seizures could continue. Or the trade war with China could escalate.

AnimalMuppet 7y ago
> If you want to look at debt, look at yields; just the other day we were discussing negative yield bonds in some Western countries. You can't have a sovereign debt crisis and negative yields in the same country at the same time! I mostly agree with you. But I seem to recall reading that US Treasury auctions had been recently failing, and only appeared not to fail because the dealers stepped in and bought the rest of the bonds. That's what they're supposed to do in that situation, but in a normal auction, they don't have to. So I worry that all is not as it appears in the bond markets, and therefore that your logic might not work. In particular, it might not work for long, because the bond dealers can't keep buying half the issues for long - especially not at the rate the US is having to issue bonds to fund the deficit.

ArtWomb 7y ago

Blackrock is also running a series: "Dealing with the next downturn" https://www.blackrockblog.com/2019/08/20/how-central-banks-might-deal-with-the-next-downturn/ https://www.blackrockblog.com/2019/08/20/how-central-banks-m... Direct stimulus (through universal basic income) may emerge as the best, if not only, innovation for stabilizing aggregate consumer demand.

geggam 7y ago
I always wondered why the folks doing QE didnt pump money into the people letting them stimulate the economy by spending / paying their bills. Banks still end up with the money but people would not be screwed quite so during the process.
cpursley 7y ago
So, printing more money and creating inflation. Why even both investing and saving any more...

bryanlarsen 7y ago

Negative yields are a pretty strong indicator the people with skin in the game aren't worried about sovereign debt. What might kick off the recession will be the austerity measures countries impose as an over-reaction to debt worries.

aazaa 7y ago

> Already the BOJ has begun to run out of eligible bonds to buy - or swap really - for reserves at the central bank. Ben Bernanke noted in late 2016 that “…constraints on the availability of JGBs [Japanese Government Bonds] were seen in many quarters as limiting the BOJ’s ability to maintain its easy policies beyond the next year or two.” Japan is very close to purchasing all of the outstanding JGBs - at which point it will not be able to continue its QE program. Japan has truly been the pioneer here. Its stock market went supernova first. It experienced deflation first. It implemented QE first. At each stage, Japan showed the rest of the world how this descent from free markets into something else works. Japan was also the first industrialized country to realize the vast potential of direct stock purchases by the central bank. Today, the BOJ is a major shareholder of Japanese stocks: > The BOJ held over 28 trillion yen ($250 billion) in exchange-traded funds as of the end of March [2019] -- 4.7% of the total market capitalization of the first section of the Tokyo Stock Exchange. > ... > The BOJ has likely also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings. It was among the top 10 for 49.7% of all Tokyo-listed enterprises at the end of March. https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be-top-shareholder-of-Japan-stocks https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be... There's always money in the banana stand.

lifty 7y ago
Isn't that a slippery slope? If you extrapolate, the market gets used to easy money from the central banks and we end up with most companies being owned by the central banks. Price discovery and risk get totally screwed.

neuromancer2701 7y ago

One aspect the article doesn't cover is that since Japans has been doing this for decades they have effective run out the clock on QE. BOJ has been buying ETFs for so long they are the majority of shareholders in a large percentage of stocks in Japan. I don't think you can do that with swaps so I am pretty sure they had to "print" money to do that. Additionally I have heard that ECB buys corp bonds. Apple can go over to Europe whenever it wants and sell a couple Billion in debt and it will be bought immediately. The question is when does it pop?

jchook 7y ago

Perhaps we all should have gone the route of Iceland in 2009 — let all the banks fail, endure ferocious poverty for 5 or so years, but in that time cultivate a rich humanity that results in: - peacefully firing the entire government - crowdsourcing a new constitution with the help of the Internet - putting the white collar criminals in corrections where they belong (instead of giving them $25M bonuses) - getting women on equal footing in government and business leadership — transitioning to 100% green energy Seems the global economy tried to vomit up all the banksters and corporate corruption but the governments all took a pill to suppress the purge and stay ill.

andrepd 7y ago
It's absurd that such a crucial function of society -- control of the money supply and management of debt -- falls on the hands of an unelected, unaccountable, largely hereditary elite. Yet nobody talks about this, when the solution is obvious and in plain view of all: democratise banking.
- geggam 7y ago
  The democratic process leads to tyranny of majority which is still tyranny but I guess you have better odds of being in the privileged pool.
  - croon 7y ago
    It's likelier to find yourself in an agreeable/livable situation with interests aligned with 50%+ people, rather than ~0.1%. I'd have to agree that those odds are better.
    - geggam 7y ago
      Those 50% soon change into the .1% and with a democratic process you find folks like cambridge analytica who learn how to use propaganda to manipulate the masses. It is a terrible idea but quite common in history, you can also read history to learn why its terrible. Plato wrote in The Republic, “And so tyranny naturally arises out of democracy.”

WilliamSt 7y ago

How can an individual investor profit from the coming sovereign debt crisis?

conanbatt 7y ago
Credit Default Swaps.
- AnimalMuppet 7y ago
  If the counterparty survives...

littlestymaar 7y ago

> What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. Allowing the collapse of an institution that was too big to fail is what started… One could argue that the problem started with the market believing there were such things as an institution too big to fail… Or maybe even earlier, when bankers decided they could lend money to any insolvent guy because the risk was going to be born by others through CDS…