UBS’ Art Cashin directs us to the Economist’s Buttonwood column for an interesting take post S&P downgrade. The debt in the system has not been eliminated — it has merely been moved from banker to taxpayer:

It is three years since Bear Stearns was pushed into the arms of J P Morgan and the fundamental debt problem has not been resolved. The debt has been moved around but not eliminated. This has undoubtedly bought time and I quite understand the point made frequently by my colleague on Free Exchange that governments and central banks have acted to protect workers from losing their jobs and to prevent consumption from collapsing. In this, they have had a fair degree of success.

But the debt is still there.

It must be eliminated by growth, inflation or default. In the case of Greece, the growth option looks out of the question and the country cannot really generate inflation on its own because it does not control its money supply; default at some stage seems inevitable. Like Greece, Portugal has a competitiveness as well as a debt problem; eliminating the former without depreciating the currency involves force-feeding the population with gruel for many years. At some stage, default may seem the better option.

The US has better growth prospects than most European nations and has the “exorbitant privilege” of issuing debt in the world’s reserve currency, which keeps the cost down. But it resembles one of those Greek myths when the hero’s power is accompanied by a curse; in this case, a political system that is not designed for serious deficit-cutting (the point made by S&P). The world’s dominant power tends to think its financial strength will never drain away. But Spain, having absorbed all that gold and silver from Latin America, still defaulted on its debts in the 16th century; Louis XIV, the sun king whom other monarchs dreamed of emulating, set France on the road to financial ruin; and Britain started the 20th century with a huge empire and piles of overseas assets but was rationing food in peacetime by the late 1940s.”

Great stuff . . .


Negative watch
Buttonwood Apr 18th 2011

Category: Bailouts, Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Debt, Like Matter & Energy, Was Not Destroyed”

  1. socaljoe says:

    This is the nature of debt based money… inflate or default.

    The time may come to reacquaint ourselves with the constitution where a dollar is precisely defined as a specific weight in silver.

  2. Greg0658 says:

    SILVER :-|
    how about muscle Exertion :-)
    or should I find a link to what a muscle is?

  3. Tell Mr. Cashin the U.S. federal debt easily could be eliminated tomorrow, in a 2-step process:

    1. Stop creating and selling T-bills. Why would a Monetarily Sovereign U.S. need to borrow the dollars it already has the unlimited ability to create?

    2. Pay off all outstanding T-securities simply by crediting the checking accounts of all T-bill holders. Since this involves nothing more than the exchange of one form of U.S. money (dollars) with another form of U.S. money (T-bills). Being an even exchange, it has no inflationary consequences.

    After steps #1 and #2, there would be no more U.S. debt, and nothing for the debt-hawks to worry about.

    Oh, did I mention that federal debt is not the total of federal deficits? There is no functional relationship between the two. Federal debt is the total of outstanding T-securities. Federal deficits are the difference between taxes collected and federal spending. The two are separate and distinct. We could have deficits without debt, and we could have debt without deficits.

    Bet you didn’t know that. :)

    Rodger Malcolm Mitchell

  4. peter north says:

    Thanks for posting that Barry – good stuff!

    But I have a question: Isn’t it really a myth that debt can be inflated away? This post at Naked Capitalism ( explained it better than I can, but in essence won’t the bond markets demand a higher interest rate in response to the inflation?

    I guess if we could pay it all off and stop borrowing, that might work, but it would be brutal for the individuals and entities holding treasuries – and frankly, I doubt we could stop borrowing cold turkey anyway.

    I’d love to hear your take on that, since the “inflate our way out of debt” idea seems so widely accepted as plausible. Thanks, BR.

  5. dead hobo says:

    I just read about some doof who works for a Texas university and took physical possession of $1B in gold. He claims it’s a hedge against fx. While he still has a few months to figure out the magnitude of his stupidity, it clearly looks like the apocalypse visionaries are visioning the wrong apocalypse. The big deflation is still coming, although not soon. It won’t start snowballing until mid 2012 and probably later. BB will probably initiate QE3 to prevent the next certain apocalypse. He will fail. Incomes will never rise to inflated prices. Prices will fall to incomes. Printed money will never fall out of favor over gold. Rather, it will be a medium of exchange that reflects relative value. Gold is a valuable trade, but the ultimate sucker bet.

    When the big deflation arrives, what do you think will happen if your liabilities are worth an order of magnitude less than the assets that were purchased with them? If unsure, see housing, circa 2009-2011.

    PS: I think wave 3 of the stock buyer class entered today. Woo Hoo!

  6. dead hobo says:


    When the big deflation arrives, what do you think will happen if your assets are worth an order of magnitude less than the liabilities used to purchase them? If unsure, see housing, circa 2009-2011.

    (I sometimes think in double negatives and goof up when I write as a result)

  7. dead hobo says:

    peter north Says:
    April 20th, 2011 at 3:50 pm

    I’d love to hear your take on that, since the “inflate our way out of debt” idea seems so widely accepted as plausible.

    Not going to happen. The Fed will initiate QE3 and maybe QE4, but prices and values will ultimately fall to reflect income and real value. Cash will only be a medium of exchange that reflects the relative value of the transaction. Income will never rise to the level of current prices.

  8. How does a Monetarily Sovereign U.S., which has the unlimited ability to create dollars, “inflate its way out of debt”?

    Rodger Malcolm Mitchell

  9. wngoju says:

    UK rationing food in the late 40′s. Sheesh. They had almost lost the worst war in history, after having almost lost the previous worst war in history. But they did not default, or have hyperinflation or whatever else the Randian Beckian Paulians want to promote this afternoon. See following for a discussion of UK & other debt (formerly ref’d by BR himself) []

  10. wngoju,

    You are correct. You might find Monetary Sovereignty interesting.

    Rodger Malcolm Mitchell

  11. hammerandtong2001 says:

    Debt was not destroyed?

    Of course.

    It was transferred from the collpased balance sheets of our friends at TBTF to the US taxpayer. And those taxpayers are now faced with generational debts of $3 Trillion incermentally to the pre-existing US debt load.

    And with balance sheets repaired, courtesy of the US Taxpayer, TBTF has returned to business as usual, which includes annual multi million $dollar payouts to executive managements, along with avg bonuses in the $400K range for rank and file at places like Goldman Sachs (that’s AVERAGE bonuses per annum).

    The Road to Financial Ruin, as described, begins with making bankers “whole” — let the rapcious reap their rewards for their idiotic trades —

    I like Iceland. Alot. And Ireland is just a step behind.

    Reneg, clawback, we ain’t paying, good bye banker. Enter new banker.

    (Oh No! You can’t do that — the “people” MUST be saddled with $trillions in debt – don’t you understand?!?).



  12. Mike in Nola says:

    According to Yves Smith all of the debt wasn’t necessarily transferred to us – yet. And there’s new debt being created by the Masters of the Universe just waiting for the next crash. She discusses an obscure part of the S&P downgrade statement that shows as one of the liabilities how much the next bailout could cost: 34% of GDP

  13. M says:

    [quote]socaljoe Says:
    April 20th, 2011 at 2:20 pm

    The time may come to reacquaint ourselves with the constitution where a dollar is precisely defined as a specific weight in silver.[/quote]

    Say what? … I guess I’m missing the joke here. Care to explain?

  14. M,

    quite so, it is, actually, the Coinage Act of 1792 that defines the “Dollar”..

    here: “…Article I Section 8: The Congress shall have Power.

    To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; and To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.

    Article I Section 10: No State shall coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of debts.

    Such was the action of our Founders. Irredeemable paper money is unconstitutional. Only the minting of coins is lawful.

    Coinage Act of 1792

    Our Second Congress (1791-1793) then implemented the Constitutional requirements by passing the Coinage Act of April 2, 1792. It established the U.S. Mint and defined and
    “regulated the coins of the United States.” (The complete Act can be found on the Internet at: Black’s Law Dictionary at the time defined “regulate” as meaning “fix, establish, or control.” The Act established or
    defined the “dollar” as a weight of silver (371.25 grains (troy) of fine silver) and then regulated the value of gold coins to it in a 15 to1 ratio, that is, as 15 grains of silver to every grain of gold. The regulation also included establishing the purity and the various denominations.

    Thus the Coinage Act gave the new nation three gold coins (the Eagle or $10 gold piece, Half Eagle and Quarter Eagle); five silver coins (the Dollar, Half Dollar, Quarter, Dime (originally spelled Disme), Nickel (or half Disme); and two copper coins (the Cent and Half Cent). This is Constitutional money. Moreover, the Act provided all citizens access at the Mint to coin their gold, silver, and copper (free coinage) and established any debasement of the coinage as a capital offense!


    We can now answer our question: What is a dollar? The “dollar of our fathers” is a silver coin weighing almost one ounce. It was never to be debased; it was never to be any weight less than 371.25 grains of pure silver.

    Today our “paper dollar” or Federal Reserve Note, once a silver and gold certificate redeemable into “lawful” money before 1963, and something our Founders hoped to banish from our nation, is an “IOU Nothing.” It is not redeemable into a fixed amount of silver or gold, let alone the Constitutional amount. As a result it can be reduced in value year by year by means of the printing presses. Our 20th century constantly-depreciating paper dollar has become a means to big and bigger government, and to massive income and wealth redistributive schemes – legal plundering – by our politicians, contrary to Article I Section 8 of the Constitution…”

    is a ‘quick read’..

  15. Bill Wilson says:

    I’ve heard it argued that debt has been doubled. Insolvent institutions (or countries) still owe the original debt, and the governments that bailed them out have taken on new debt to fund the bailout.

    Inflating away our debt problems will be difficult. I agree with Mish, that our unfunded liabilities (which are greater than our debt) make that strategy very difficult. If the value of the dollar decreases, medicare and social security will only get more expensive.

    The government could refuse to index entitlements to inflation, effectively cutting there value. That would be a double whammy for seniors. Their entitlements would be worthless, and their savings would be worthless.

    Deflation may destroy economies, hyperinflation destroys countries.