The economic news just keeps on getting worse

[unixronin]

Both in the US:

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

[...]

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

And in Europe:

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities.  It must repay – or roll over – $400bn this year, equal to a third of the region's GDP.  Good luck.  The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel.  The budget is based on Urals crude at $95.  Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs.  The zloty has just halved against the franc.  Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story.  As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle.  There is a crucial difference, however.  European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.  En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50% more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51% in January, and Brazil lost 650,000 jobs in one month).  Britain and Switzerland are up to their necks in Asia.

According to the first article, the US has little choice but to monetize its debt — which is a euphemism for "start printing money with nothing to back it" — and according to the second, the IMF is in the same boat.

So this got me thinking (again).  What do we all do, if the entire global economy implodes?  If all the banks fail or stop doing anything but collect money, and the world's governments all start printing money trying to inflate themselves back to paper solvency, and their currencies start chasing the Zimbabwe dollar?

Comments

[lebo-superman.livejournal.com]

Revolution. This is, seriously, the most viable suggestion I've seen. Fire the entire government, form a new government under a new name, and you're no longer liable for the old government's debt. It's the ultimate "hard re-boot" of the system. If we (the US citizens) do it first, we'll virtually force the rest of the world to do it, because those we owe such huge amounts to currently would implode under the weight of the unpaid bills.

But, be ready. If we were to undertake such an action - major foreign powers (like China, who I think holds around 40% of our debt paper) may try to invade to foreclose on the debt.

[ilcylic.livejournal.com]

The other disadvantage of this option is, once you do it, you're on your own. A country that reboots in this fashion may not be "legally" liable for the debt (though, the notions of legality break down pretty badly at the national level, see also your point about invasion and foreclosure on an entire nation) but the creditors aren't likely to forget the default.

Just as an individual who defaults may not be eligible for further loans, so may also a nation who defaults not be extended any sort of credit in the international marketplace.

Now, it's certainly tempting to look at that as a very good thing, given that it's spending money we don't have that got us where we are in the first place. But it may also impact our ability to trade with other nations, which will hamper any attempt to get things moving again.

[lebo-superman.livejournal.com]

True. But, at this point, no path forward will be painless. What Washington is doing currently prolongs the pain for several generations, and by the time my granddaughter is entering the workforce that pain will most likely be felt to the tune of federal income taxes around 55-60%, with no refunds at the end of the year.

[ithildae.livejournal.com]

Won't that really depend on the value of what we are trying to trade? We may not get credit terms, but if we have excess, say, food, we should be able to get something for it.

I really don't want the kind of reboot that revolution requires. I do hope the specter of it keeps our current batch of politicians mindful of the consequences of their actions. Sometimes, the possibility of losing everything keeps enough people honest in their dealings. The banks should be paying attention.

Revolution would be a pretty bad thing. I would only seriously advocate for it if my essential liberties are compromised beyond redemption. If the banks/government manipulate the value of my debt so that it is greater than my potential earnings of a lifetime, or more, that would be an essential liberty. Even the consequences of extranational trade loss would not be as important. That is just my attitude. Not binding on others.

[ilcylic.livejournal.com]

f the banks/government manipulate the value of my debt so that it is greater than my potential earnings of a lifetime

i.e.: revaluing the currency, but not revaluing the mortgage on your house? "Your mortgage was for $100,000 OldBucks, and we've printed NewBucks that are each worth $1,000 OldBucks, but your mortgage is now in NewBucks."

Is that the sort of scenario you're envisioning?

[ithildae.livejournal.com]

Something along those lines, yes.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." -- Thomas Jefferson, 1802

I don't think I am the first to think of it.

[jhetley.livejournal.com]

"Just as an individual who defaults may not be eligible for further loans, so may also a nation who defaults not be extended any sort of credit in the international marketplace."

Argentina?

[ilcylic.livejournal.com]

May have gotten off as lightly as it has due to going first.

We might well do similarly well, simply by being large. But it would really hurt. Especially since we've been selling all our capital infrastructure to China. And we'd probably have to scale back on all the Green Movement stuff in order to be able to re-grow our own economy.

I think it would behoove creditors to consider holding interest at zero, while refusing to make any more loans, in order to have some hope of retrieving their principal. But I dunno if that'd really work, or if the whole system is inflated on the predication of interest payments holding things up.

[unixronin.livejournal.com]

But, be ready. If we were to undertake such an action - major foreign powers (like China, who I think holds around 40% of our debt paper) may try to invade to foreclose on the debt.

One other possibility that may come down the pike is it wouldn't be the first time the US Government has simply repudiated debt. (Which would probably collapse China's economy.)

[jhetley.livejournal.com]

I'm too old for a revolution. Hold it without me, okay?

[ithildae.livejournal.com]

I don't want to hold it, at all. There are some things that are worth fighting for. Freedom from economic slavery is one of them.