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(email exchange)

>   On Wed, Nov 12, 2008 at 11:37 PM, Morris wrote:
>   The Muni stuff is more interesting… See the data…if the USA loses AAA.,
>   what does that make states with Budget Gaps of over 10pct of GDP and
>   NO capability for a funding mechanism to print money????

Dependent on the US government/banks for credit, like the rest of us- (we may now need both a payroll tax holiday and a trillion or so of revenue sharing for the states).

And restoring growth and employment is no big deal, actually, if government sustains demand at reasonable levels, which it always, readily, can do.

We sent men to the moon 40 years ago, cram mind boggling technology into cell phones, do robotic surgery, and don’t understand how a simple spreadsheet called the monetary system works.


US May Lose Its ‘AAA’ Rating

The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

Yes, that may happen, as ratings agencies have no clue how it all actually works.

“The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system” and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

With government spending not constrained by revenue, any such event would be an unnecessary political response.

“In the United States there is already a funding crisis,

Not for government.

And a close look at actual monetary operations shows government best thought of as spending first and then borrowing or collecting taxes. Any constraints are necessarily self imposed (debt ceilings, no overdraft at Fed provisions, paygo policy).

and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off,” Hennecke told CNBC.

No, the Fed government sells bonds after they spend, not in order to spend.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

No, to stem the slowdown the US has to increase its deficit- increase spending and/or cut taxes.

Fortunately, this is already underway via the ‘automatic stabilizers’ as tax revenue slows and transfer payments increase.

Unfortunately we still don’t have the good sense to do this proactively.

>   On Thu, Nov 13, 2008 at 6:53 AM, Morris wrote:
>   Your theories are quite interesting- why wouldn’t the G20 announce
>   this sort of massive WW stimulus package of say, 10 trillion dollars to
>   restart all local economies?

They might.

Two points:

1. Deficits need to be ongoing to sustain the financial equity that supports credit structures. It’s not just a matter of ‘jump starting’ though that certainly doesn’t hurt.
We got into this mess by letting deficits get too low. We have yet to recover from the surplus years of the late 90’s that reduced private sector financial equity by maybe a trillion USD, back when that was a lot of money.

2. Any nation is better off by doing it unilaterally in sufficient quantity to restore output and employment. The last thing anyone needs is foreign consumers competing for scarce resources.


20 Responses

  1. Yes, I saw this article yesterday and was commenting about it on my radio show. If it wasn’t so damaging (in that it its widely believed and fosters policy consistent with these myths) it would be comical.

  2. Why would the ratings agencies (the same ones who issued AAA ratings on subprime junk) feel the need to rate fed bonds?

  3. More to the point, why should rating agencies actually have any role or responsibility in “rating” treasuries? Put another way, why should a private enterprise, beholden to and supported by a currency… have a role in rating and influencing the value of instruments denominated in that currency and issued by the same entity issuing the currency itself? Seems backwards, and more than a little kooky. Kinda like me going to my employer and asserting that I have re-assessed the value of my paycheck, and have decided it is only half as big as stated.

    The concept that the government, issuer of the currency of exchange… is in some way beholden to a private interest… which could in some way bring about the “bankruptcy” of the government seems almost ludicrous on its face.

    “Bankruptcy of the government is not out of the realm of possibility” – please! To which authority would the government of the united states appeal for said proceeding? In which court would this bankruptcy be performed? Who would adjudicate?

    Honestly, I’m surprised by the fact that these concepts get written down and promulgated. People seem to think that the government of the united states is a corporation that can be forced into bankruptcy by its creditors. These ideas are so absurd they almost don’t bear up under even their own weight, much less some actual critical thought.

  4. Regarding local government. Why can’t a US state become an issuer of sovereign currency so they can operate like the FEDs. Why can’t florida just print floro’s to pay its employee’s and collect taxes in floro’s

  5. This just in!! Fed’s forex swap lines increase by another $41 billion in week ending today (Nov 13). Total now stands at $615 billion. This comprises nearly 30 percent of the Fed’s assets on its balance sheet.

    Where’s the media outcry over this? Congress?

  6. Dave, right, math error, 1969 was only 30 years ago!

    Jim, states can and have done that, sort of. cal issued some kind of script a few years back that it accepted for taxes when it couldn’t fund itself in dollars.

    And I’ve recommended it to Michigan and the USVI.

    They just don’t seem to get it.

  7. “Bankruptcy of the government is not out of the realm of possibility” – please! To which authority would the government of the united states appeal for said proceeding? In which court would this bankruptcy be performed? Who would adjudicate?

    It’s easy to imagine a country going bankrupt. The creditors would invite the representatives of the bankrupt country to appear before a tribunal created for the purpose of dealing with sovereign bankruptcies. (I’m not sure if such a tribunal exists currently.) The creditors would then decide what to do with the debtor country. For example, they might decide that the citizens of the debtor country would have to spend 10 hours a week, for the next 10 years, performing some sort of unpleasant and unpaid labor, for the benefit of the creditors, in order to work off the debt incurred by the debtor country. If the debtor country refuses this court judgement, then the creditors would proceed to cut off the food supply of the debtor country or bomb it until the citizens of the debtor country became more cooperative. Of course, this only works if the creditors have more military power than the debtor country. Might makes right. The strong do as they wish, the weak suffer what they must.

    Given that the United States has the world’s most powerful military, for it to be involuntarily forced into bankruptcy is indeed inconceiveable. By contrast, voluntary bankruptcy, in the sense of repudiating debt (either explicity or implicitly via inflation and/or heavy taxation) is definitely a possibility. The United States has previously repudiated debt (it inflated and taxed away a lot of debt since World War II, for example) and will probably repudiate debt again in the future. But I don’t expect more repudiation in the future than in the past, and thus I see no reason to lower the credit rating. Maybe Moody’s has more insight into what the politicians and Fed will do in the future than me?

  8. Fred, reread warren’s paper.

    Where did these creditors get the dollars they lent us? Didn’t they have to be printed first? The US government can’t run out of dollars, it’s the source of all dollars. We can always “pay back” our creditors.

  9. Vipul: read my post more carefully. I said nothing about running out of dollars. Anyway, printing more dollars is effectively repudiation, via inflation, especially if we inflate and tax in such a way that only the foreign holders of dollars get screwed, not the voting citizens.

    What you and Warren both fail to understand is that people don’t like being screwed out of their money. Now suppose I am a London banker and I lend a lot of money to the Russian Czar in rubles. And then the Revolution occurs and the Leninists crank up the printing press and pay me back in worthless inflated currency. What do I do? Accept my losses? Hell, no! I demand military intervention. And if the politicians and generals happen to be shareholders or bondholders of my bank, they’ll probably jump on the case pronto. That’s how the real world works. Because of our military power, the United States can get away with repudiation now, and indeed I hope we do repudiate our debts soon. Financialization and deindustrialization is not healthy, when the industry is moving to Asia, and repudiation is a good way to stop financialization and deindustrialization. Industry moving to Canada or Mexico is fine, but not to Asia. Not if you care about the future of this country.

  10. Fred said something about “imagine” (It’s easy to imagine a country going bankrupt.)in the reality of his military comment(the United States has the world’s most powerful military). I learned what the gold braid emblazoned on the edges of the former flag of the United States of America meant in the courts of our land when I prosecuted my civil actions in re twenty dollars. I learned quickly and pulled back into my hole. Anyone else know the meaning of the ensign of military rule in the courts? Bon voyage!

  11. lets look at what routinely happens when tsy bonds mature if you are a foreign holder of tsy secs.

    1. the fed debits your securities account there for the proceeds.

    2. the fed credits your reserve account there.

    end of story. maturing bonds causes the fed to change some numbers on its spread sheet. this process is not a source of default.

    can the tsy default? yes, if congress decided to not pay. this happened in the early 1930’s when congress devalued the $ while on a gold standard, and bondholders got less gold equiv than they were originally promised. but that doesn’t apply with today’s floating fx policy.

    What can happen is that congress can just decide not to pay for political purpose. while this is a ‘self imposed constraint’ we get on the brink all the time. for example, each vote on raising the national debt limit is a vote to not defalut. and congress actually ‘voted’ to default when Rubin was tsy sec. he told them he had no funds left to pay bills unless they increased the debt ceiling. congress delayed passage presumably to force default as some kind of lesson in fiscal discipline. rubin ‘found’ the funds and paid the bills until the passed the increase shortly after. Rubin should have gotten the ax for lying to congress and not allowing the govt to default as congress intended, but it didn’t happen.

    if the us doen’t pay it could get sued. but even argentina when it defaulted in $ a few years back wasn’t pressed very hard by the world’s legal system to pay, best i can tell. They offered a few cents on the dollar last i heard and most creditors took it.

  12. Warren your arguments are valid. Words are meaningful to you fine citizens of our same country. You properly correct one another as to your text in its context, etc. But when the serious man of finance moves into the sovereignty of Maritime Jurisdiction, in all USA courts, he finds that the decades-long foreclosure on the American people actually proclaimed by the Ensign of Military Rule, he is, to use my old navy term from WW2, dead in the water.I have had debates with folks that take great issue with what I have said, they dogmatically say the constitution is the law and the government is outside the law. I wish they were right, but they fail to see or understand that the American people have been conquered, unknowingly, but conquered all the same. That is why a judge will tell you not to bring the Constitution into his court, or a law dictionary, because he is the law, not the Constitution. You have only to read the previous Senates report on National Emergency, to understand the Constitution and our Constitutional form of government no longer exists. I will post my European telephone number for anyone who desires to communicate by email from USA direct dial 011 380 612 63 67 69 – just respect the 7 hours difference from EST. God bless the true American!

  13. you may be missing the point. the US govt can readily, operationally, honor all it’s promises to make payment in $, as all that’s required is that it credit your account at the Fed.

    It has no further obligation nor are there any further expectations of what constitutes ‘good payment.’

  14. Warren you are the headmaster here and I respect this reality. You have written above about a legal issue should the U.S. fail to do such and such:
    >”if the us doen’t pay it could get sued”

    Pure speculation absent the fact that The Crown Corporation of London owns all realty of continental USA and Canada. Even the Queen of England must obtain permission to communicate with this Corporation, legally, under British originated Maritime Jurisdicrtion, domiciled within a section of London likened to the Vatican not being Italy. Search it out. Every individual issued a USA birth certificate is ipso jure a vassal to The Crown Corporation. The basic question in contemporary economics: “Who rules?” The reason:
    “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 grow up around them will deprive the people of all property until their children wake up homeless on the continent they conquered.” Thomas Jefferson

  15. the Fed’s computer is programmed to debit securities accounts and credit reserve accounts when securities mature.

    it would be way hard to figure out how to reverse the software even if they wanted to.

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