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Zero Hedge posted an article that asks an interesting question. Every European
country owes money to other European countries. This creates a web of
cross-linked debt. Instead of each country laboring under the full
nominal amount, why don’t they just cooperate and cancel out everything
but the net debt? This remainder would be very manageable for every
country.
Anyone with
“common sense” should be able to grasp one thing about this
supposition. Each country borrowed, and hence got itself into debt, to
run a budget deficit for many years. This means each country consumed
more goods and services than it could pay for by tax revenues. Does it
make any sense that this accumulated debt over many years or decades could be
eliminated by a simple trick?
As with many errors in
politics and management, the fallacy becomes obvious if one eschews the
“big picture view” (i.e. woozy floating abstractions) and dives
in to the details.
I read the paper on
the site linked in the piece on Zero Hedge. It was not clear to me if
these numbers include only the sovereign debt of each country’s
national treasury or if it includes banking system debt. To make this
simpler, let’s assume only sovereign debt. This makes our case
harder to prove, but stronger once proved.
The paper discusses
the problem of maturity and acknowledges that its simplistic method of
putting all debt into three categories (short, medium, and long) was not
realistic. It notes that the fact that the true amount of debt at each
maturity is withheld by the central banks is telling.
What the paper
neglects to address is that, in our worldwide regime of irredeemable
debt-based money, debt is the basis for “money”! Each
central bank that buys this debt uses it on the asset side of the balance
sheet against which it can issue money on the liabilities side. Anyone
who takes this asset away would be pulling the rug out from underneath the
central bank! The central bank would either keep the liability but
witness the value of its currency crash as this would effectively be massive
money printing in the true sense of the word: naked, unbacked paper created
ex nihilo. The affected currency would collapse, and prices of goods in
terms of this currency would skyrocket (while they were quoted in this
currency at all)!
Or it would have to
somehow call the liabilities, i.e. pull money and hence liquidity out of the
markets. How would this work? Our system is based on (exponentially)
growing amounts of credit and debt. Every time the economy slows and
begins to liquidate the malinvestments, the only antidote is to issue
ever-greater amounts of fresh credit.
So, how can this
article blithely suggest that all of this credit could be pulled? That
would bring about a deflationary collapse, wherein every kind of debtor
except the sovereign cannot get its hands on cash no way, no how. The
wave of defaults that cascaded through the economy would ensue until no debt,
and no money, remained.
One of the
perversities of debt-based irredeemable paper is that it does not survive
balance sheet consolidation. The writers of this paper, and Zero Hedge
failed to understand this simple (but unobvious) fact.
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