Two ways out of the coming global depression

[Makalakumu]

Great article about what we are facing and what can be done to fix the mess...

The Two insoluble problems that will lead to a depression and ultimately the final USD collapse

• Deleveraging cannot be stopped, there is too much
• The USD is only supported by a healthy world economy and is subsidized

The world is deleveraging in totality and we have a breaking world finance bubble. I estimate that way over $1000 trillion of world financial markets alone are deleveraging. That number is calculated by adding up all the leverage out there, and the biggest one is the derivatives of all types that are really only big HUGE leveraged bets. They are nothing more than that. The BIS states that world derivatives alone are over $1 quadrillion worth – that’s 1000 trillion.

Even if central banks move heaven and earth with their now $7 trillion of infusions to every market imaginable now, that’s a drop in the bucket compared to what’s out there. So, the deleveraging will continue relentlessly this time.

Why did that happen? Quite simply, the Western consumers got tapped out. They borrowed more than they can sustain a return on. So, for example, we see the housing bubble collapse and then all the mortgage bonds collapse, and then all the banks collapse – get the idea? Then all the credit disappears everywhere and we get an assured economic depression. And that will lead to 20% unemployment or worse in the entire world – mark my words.

The overall picture is that the world economic/credit bubble since 1945 has just burst before our eyes since August 07. That is one huge bubble.

Here are the solutions...

How can we get out of this mess?

Well, first I have to say I don’t think we will avoid a long, possibly ten years, depression. But there are some ways it might be avoided.
First, if the US abrogated the $60 trillion of promises to Social Security and Medicare, maybe that would save the USD. But that won’t happen. Probably, what the US will do is just pay it all, but with worthless dollars.
The second thing that might get the world out of this impending economic depression and a collapse of the USD later would be to forgive all debts. Possibly that would wipe out the USD too anyway. But that would set the stage for a huge world economic recovery.

The trouble with debt forgiveness is it never seems to happen. Believe me, I am not talking hogwash about debt forgiveness. The Bible, for example, talks about how every 7 years and every 70 years there is to be total debt forgiveness. It’s called the Jubilee. The idea is a legitimate concept that can work and has worked.

You don’t think that’s viable? Well it can work because all that happens is that the lenders who offer credit have to factor in either payment in full or forgiveness over a 7 year period. This can be done and would actually result in the biggest sustained world economic boom ever imagined.
The thing that causes world economic depressions are debt and financial bubbles. The two go together.

I'm putting this out there for discussion because as far as the depth of the mess we are in, this is the only article that I've seen that really outlines the problem. Also, I think the solutions to this problem that they outline really could work. Read the article and let us know what you think. IMHO, I think its something to consider.

 

[Makalakumu]

Whoops, here's the link...

http://www.learcapital.com/marketcommentary/6802.html

 

[CanuckMA]

The trouble with debt forgiveness is it never seems to happen. Believe me, I am not talking hogwash about debt forgiveness. The Bible, for example, talks about how every 7 years and every 70 years there is to be total debt forgiveness. It’s called the Jubilee. The idea is a legitimate concept that can work and has worked.

You don’t think that’s viable? Well it can work because all that happens is that the lenders who offer credit have to factor in either payment in full or forgiveness over a 7 year period.

Problem with that is that's not the Biblical definition of the Jubilee year. The Jubilee year occurs every 7 years, on a fixed schedule. Debts are not forgivenb AFTER 7 years, they are forgiven at the arival of the Jubilee year. Which means that AT MOST a debt will be carried for 7 years. At worst, you're looing at a few months.

Worked great 3,000 years ago. Not so much now.

 

[grydth]

Maybe the author believes that the US won't 'abrogate' its responsibilites as far as Social Security, but I fully expect them to. As a "baby boomer", I expect to collect little or nothing.

I doubt the government will bluntly do so.... no, it will be a subtle carrot and stick thing where the qualifying age is gradually lifted higher and higher while the benefits decrease.

Was it a great system for prior generations? Probably yes. But for us it will mean having the government tax the pizz out of you for 45 years while you're trying to raise a family.... only to find a way to sleaze its way out of paying you anything once you're old.

A deal like this only my government could give me! Well, at least now they can claim they solved the coming depression by stealing from us...

 

[jks9199]

Social Security was always a Ponzi scheme. The money collected today wasn't really banked or saved; it was (and is) paid out immediately to those collecting today. I've got problems with the government running a numbers game (AKA Lotto), or telling folks to rely on a pyramid scheme as a retirement or disability safety net. Especially when the "safety net" becomes a primary support, not a means of catching those who fall through other methods.

 

[Makalakumu]

Worked great 3,000 years ago. Not so much now.

Why not? Consumer America is the engine that drives the world. If the consumer is cash strapped, then the whole world takes a dive.

And when you couple this dive with all of the bad decisions that were made in regards to the USD, you've got a full blown currency crisis. The USD really could lose all of its value.

In the end, all debts will capitulate. People won't be able to pay them with money that is worth nothing.

 

[Phoenix44]

I personally would like to see a little more creativity and a little less greed.

If I made a dumb loan which the borrower would really like to repay but can't do so on current terms, why wouldn't I renegotiate if the only alternative is default?

If I owned commercial property and my tenants are going out of business, why not offer different terms, maybe like renting the property on an hourly basis?

As a physician, I'd like to offer my services to poor people for maybe $5.00/visit, but I couldn't possibly do that because of the cost of malpractice insurance. Why not offer deep premium discounts to people who treat the poor? Or a "good samaritan" exemption?

If the auto companies (or anyone else for that matter) wants a "bailout" why not insist they retool for what the world needs, like energy efficient cars? Why not limit CEO salary/perks to no more than, let's say $300,000? The President of the US earns $400,000, why does the president of a company need to make more if we're assisting the company?

So much of this is rigid, antiquated, and patently absurd.

 

[CanuckMA]

Why not? Consumer America is the engine that drives the world. If the consumer is cash strapped, then the whole world takes a dive.

And when you couple this dive with all of the bad decisions that were made in regards to the USD, you've got a full blown currency crisis. The USD really could lose all of its value.

In the end, all debts will capitulate. People won't be able to pay them with money that is worth nothing.

Who would loan money in the year preceding the Jubilee year? Don't get me wrong, I'd love to buy a house 1 month before the Jubilee year and have my mortgage erased.

 

[Makalakumu]

Whether there is a jubilee year or a currency crisis, the end result in regards to debt is the same. It's gone. Nobody can pay because the value of the dollar is worth nothing. Effectively, it doesn't matter anymore. Whose going to lend money a month before a jubilee year? It doesn't matter. If the value of the dollar drops to zero, how can you "owe" anything?

Which points out the major flaw in the do nothing plan. The value of the USD drops to zero and all economic activity as we know it ceases.

 

[BrandonLucas]

I think if all debts are forgiven once, that would be the best bet. I don't think a rotating grace period would be the answer, since you would have people who would simply not pay until the grace period or would purchase a house or something on credit just before the start of the grace period.

If all debts were forgiven, say, as of right now, and we started over fresh, just imagine what kind of economic boom we would have right now. People will still buy things on credit, and forgiving their current debts right now would free up more money to put right back toward the lenders.

But that probably won't happen, because it would mean that a few people at the top of the food chain would lose some of their profit or profit margins...but it's nice to think about.

 

[jks9199]

I don't like the idea of forgiving all debts. Just like many aspects of the real estate bailout seem to be rewarding people for being irresponsible about their mortgage (in the amounts borrowed, the terms it was borrowed under, and in repayment terms) And if it's done and the credit remains -- then you have a real problem. We'll be in the same mess, a few years down the road. Only worse, because now even more people will simply expect problems created by their irresponsibilty to vanish.

I think we really need to move off of the credit based economy. Money needs to be backed up by something of worth; that can be work, or goods... but it needs to have real value.

 

[BrandonLucas]

I don't like the idea of forgiving all debts. Just like many aspects of the real estate bailout seem to be rewarding people for being irresponsible about their mortgage (in the amounts borrowed, the terms it was borrowed under, and in repayment terms) And if it's done and the credit remains -- then you have a real problem. We'll be in the same mess, a few years down the road. Only worse, because now even more people will simply expect problems created by their irresponsibilty to vanish.

I think we really need to move off of the credit based economy. Money needs to be backed up by something of worth; that can be work, or goods... but it needs to have real value.

I agree with this...but, let's say the debt was forgiven, just for the sake of argument. Now...if someone were to borrow money from a bank for a mortgage after the debts are cleared, wouldn't the money be available at this point to borrow?

I could be wrong on that, and I probably am...I guess I'm just trying to get a better understanding of the situation.

 

[Makalakumu]

This is all good in theory, but it will never happen. Whether you forgive debts once or on a rotating basis, this policy would destroy the demand for credit. No one would ever issue it again. People would be forced to actually use money they saved in order to buy things. The banks would never allow it to happen.

On the other hand, maybe we really need to look at ways we can destroy credit. Credit is what causes these messes in the first place. In a world where credit doesn't exist, we don't find these huge bubbles bursting everywhere we go. We find some semblance of economic stability because we are immune from artificial time bombs.

So I say screw the banks. Forgive the debt. It might just be better for society as a whole to just start over and make a new money system.

 

[Tez3]

We've been told that borrowing is the way out of the depression, we've also been told inflation is dropping and that's bad.
I wish I knew what they were talking about.