Willem Buiter: "Non-Negligible" Risk of Default by US and UK

Willem Buiter takes no prisoners, In his latest post, “The green shoots are weeds growing through the rubble in the ruins of the global economy”, he dispatches the idea that recovery is around the corner (citing Carmen Reinhart and Kenneth’s latest paper on the resolution of financial crises) and points out that the fiscal state of affairs in the US and UK will become sufficiently strained (even making the usual allowances for Keynesian stimulus) so as to make default a possibility (but recognize that Buiter is not saying it is likely). The easiest way to default, however is via inflation, but that also has the nasty side effect of “taxing” all domestic savers, not just the unfortunates who owned government paper. So the fact that Buiter even mentions explicit default is telling.

Buiter also believes that the imbalanced nature of stimulus measures – more than is optimal from countries under financial stress like the US and UK, too little from countries with balance of payment surpluses (China, Japan, Germany) means growth once the acute phase of the crisis is past will be lower than it would be with a better response. He is also critical of the Fed’s version of quantitative easing and is dubious that the commitments at the G20 to provide $1 trillion to the IMF will come through.

He also, in passing, says (without mentioning his name) that Simon Johnsom may be correct in his view that the government is captured by the finance sector, not merely by subscribing to their world view, as he has argued before, but in the mercenary sense.

From Buiter:

This financial crisis will end. … But neither the financial crisis nor the contraction of the global real economy are over yet. As regards the financial sector, we are not too far – probably less than a year – from the beginning of the end…… By the end of the year – early 2010 at the latest – we will know which banks will survive and which ones are headed for the scrap heap. With the resolution of the current pervasive uncertainty about the true state of the banks’ balance sheets and about their off-balance-sheet exposures, normal financial intermediation will be able to resume later in 2010.

Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets. The banking establishment and the financial establishment representing the beneficial owners of the institutions exposed to the banks as unsecured creditors – pension funds, insurance companies, other banks, foreign investors including sovereign wealth funds – have captured the key governments, their central banks, their regulators, supervisors and accounting standard setters to a degree never seen before.

I used to believe this state capture took the form of cognitive capture, rather than financial capture. I still believe this to be the case for many, perhaps even most of the policy makers and officials involved, but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture….

Nothing more can be expected as regards a global fiscal stimulus. Indeed, the G20 delivered nothing in this regard. It would have been preferable to maintain the overall size of the planned (or rather, expected) global fiscal stimulus but to redistribute the aggregate (about $5 trillion over 2 years, as measured by the aggregated changes in the national fiscal deficits) in accordance with national fiscal spare capacity (I believe the World Bank calls this ‘fiscal space’). This would mean a smaller fiscal stimulus for countries with weak fiscal fundamentals, including the US, Japan and the UK, and a larger fiscal stimulus for countries with strong fiscal fundamentals, including China, Germany, Brazil and, to a lesser degree, France.

Furthermore, a likely consequence of the fiscal stimuli we have already seen or are about to experience is a negative impact on the medium- and long-term growth potential of the global economy. The reason is that, if fiscal solvency is to be maintained, there will have to be some combination of an increase in the tax burden and a reduction in non-interest public spending in most countries when this contraction is over. The inevitable effect of the crisis and the contraction is a higher public debt burden and therefore a larger future required primary government surplus (as a share of GDP). Almost any increase in the tax burden will hurt potential output – just the level of the path of potential output if you are a classical growth groupie, both the level and the growth rate of the path of potential output if you are an adept of the endogenous growth school….

In a number of systemically important countries, notably the US and the UK, there is a material risk of a ’sudden stop’ – an emerging-market style interruption of capital inflows to both the public and private sectors – prompted by financial market concerns about the sustainability of the fiscal-financial-monetary programmes proposed and implemented by the fiscal and monetary authorities in these countries. For both countries there is a material risk that the mind-boggling general government deficits (14% of GDP or over for the US and 12 % of GDP or over for the UK for the coming year) will either have to be monetised permanently, implying high inflation as soon as the real economy recovers, the output gap closes and the extraordinary fear-induced liquidity preference of the past year subsides, or lead to sovereign default.

Pointing to a non-negligible risk of sovereign default in the US and the UK does not, I fear, qualify me as a madman. The last time things got serious, during the Great Depression of the 1930s, both the US and the UK defaulted de facto, and possibly even de jure, on their sovereign debt.

In the case of the US, the sovereign default took the form of the abrogation of the gold clause when the US went off the gold standard (except for foreign exchange) in 1933. In 1933, Congress passed a joint resolution canceling all gold clauses in public and private contracts (including existing contracts). The Gold Reserve Act of 1934 abrogated the gold clause in government and private contracts and changed the value of the dollar in gold from $20.67 to $35 per ounce. These actions were upheld (by a 5 to 4 majority) by the Supreme Court in 1935.

In the case of the UK, the de facto sovereign default took the form of the conversion in 1932 of Britain’s 5% War Loan Bonds (callable 1929-1947) into new 3½ % bonds (callable from 1952) on terms that were unambiguously unfavourable to the bond holders. Out of a total of £2,086,000,000 outstanding, £1,500,000,000, or something over 70%, was converted voluntarily by the end of 1932, thanks both to the government’s ability to appeal to patriotism and joint burden sharing in the face of economic adversity and to ferocious arm-twisting and ‘moral suasion’.

I believe both defaults were eminently justified. There is no case for letting the interests of the holders of sovereign debt override the interests of the rest of the community, regardless of the financial, economic, social and political costs involved. But to say that these were justifiable sovereign defaults does not mean that they were not sovereign defaults. Similar circumstances could arise again.

While I consider an inflationary solution to the public debt overhang problem (and indeed to the private debt overhang problem) to be more likely in the US and even in the UK than a sovereign default (or ‘restructuring’, ‘conversion’ or ‘consolidation’, as it would undoubtedly be referred to by the defaulting government), neither can be dismissed as out of the question, or even as extremely unlikely.

Central banks, with the notable exception of the procrastinating ECB, are doing as much as they can through quantitative easing and credit easing to deal with the immediate crisis. Unfortunately, some of them, notably the Fed, are providing these short-term financial stimuli in the worst possible way from the point of view of medium- and longer-term economic performance, by surrendering central bank independence to the fiscal authorities.

When the Fed lends on a non-recourse basis to the private sector with only a $100 bn Treasury guarantee for a possible $1 trillion dollar Fed exposure (as with the TALF), when the Fed purchases private securities outright with just a similar 10-cents-on-the-dollar Treasury guarantee or when the Fed is party to an arrangement that transfers tens of billions of dollars to AIG counterparties – money that is likely to be extracted ultimately from the beneficiaries of other public spending programmes or from the tax payer, either through explicit taxes or through the inflation tax – the Fed is acting like an off-balance sheet and off-budget special purpose vehicle of the US Treasury.

When the Chairman of the Fed stands shoulder-to-shoulder or sits side-by-side with the US Treasury Secretary to urge the passing of various budgetary proposals – involving matters both beyond the Fed’s mandate and remit and beyond its competence – the Fed is politicised irretrievably. It becomes a partisan political player. This is likely to impair its ability to pursue its monetary policy mandate in the medium and long term.

The global stimulus associated with the increase in IMF resources agreed at the G20 meeting earlier this month will be negligible unless and until these resources actually materialise. The statements, declarations and communiqués of the G20, including the most recent ones highlight the gaps between dreams and deeds…. apart from the $240 bn (or perhaps only $200 bn) already flagged well before the G20 meeting, the only hard commitment to additional resources (or to resources that have any chance of being available for lending and spending during the current contraction) is the $6 bn worth of alms for the poor from the sale of IMF gold. That’s what I call a bold approach!….

There are signs that the rate of contraction of real global economic activity may be slowing down. Straws in the wind in China, the UK and the US hint that things may be getting worse at a slower rate. An inflection point for real activity (the second derivative turns positive) is not the same as a turning point (the first derivative turns positive), however. And even if decline were to end, there is no guarantee that whatever growth we get will be enough to keep up with the growth of potential. We could have a growing economy with rising unemployment and growing excess capacity for quite a while.

The reason to fear a U-shaped recovery with a long, flat segment is that the financial system was effectively destroyed even before the Great Contraction started. By the time the negative feedback loops from declining activity to the balance sheet strenght of what’s left of the financial sector will have made themselves felt in full, financial intermediation is likely to be severely impaired.

All contractions and recoveries are primarily investment-driven. High-frequency inventory decumulation causes activity to collapse rapidly. Since inventories cannot become negative, there is a strong self-correcting mechanism in an inventory disinvestment cycle. We may be getting to the stage in the UK and the US (possibly also in Japan) that inventories stop falling an begin to build up again.

An end to inventory decumulation is a necessary but not a sufficient condition for sustained economic recovery. That requires fixed investment to pick up. This includes household fixed investment – residential construction, spending on home improvement and purchases of new automobiles and other consumer durables. It also includes public sector capital formation. Given the likely duration of the contraction and the subsequent period of excess capacity, even public sector infrastructure spending subject to long implementation lags is likely to come in handy. A healthy, sustained recovery also requires business fixed investment to pick up.

At the moment, I can see not a single country where business fixed investment is likely to rise anytime soon. When the inventory investment accelerator goes into reverse and starts contributing to demand growth, and when the fiscal stimuli kick in, businesses wanting to invest will need access to external financing, since retained profits are, after a couple of years of declining output, likely to be few and far between. But with the banking system on its uppers and many key financial markets still disfunctional and out of commission, external financing will be scarce and costly. This is why sorting out the banks, or rather sorting out the substantive economic activities of new bank lending and funding, that is, sorting out banking , must be a top priority and an top claimant on scarce public resources.

Until the authorities are ready to draw a clear line between the existing banks in western Europe and the USA, – many or even most of which are surplus to requirements and have become parasitic entities feeding off the tax payer – and the substantive economic activity of bank lending to non-financial enterprises and households, there will not be a robust, sustained recovery.

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  1. bg

    Buiter is martian smart.

    It is truly scary when he claims the government is bought and paid for. That is normally the stuff of wild conspiracy theories. And then Krugman goes and refers to Buiters gentle metaphors as dance of the seven veils!

  2. Bonesetter Brown

    The unwillingness to inflict pain on the creditors is cited as a sign of “more primal” state capture. I thought the stance vis-a-vis bond default stemmed from a fear of CDS and cascading cross-default or some other post-Lehman-like event. Is that incorrect?


    Do you have insight into the amount of CDS written since end of 3Q08? Assuming it is still going (relatively) strong, do you have an opinion on why so little is being said/proposed about CDS by Bernanke, Geithner, et al?

  3. Anonymous

    Banksters and Treasury (Summers/Geithner) Major Rip Off Of Taxpayers!!!

    So not only have we injected billions of capital into banks, here we are again designing a program that will now take all those toxic assets off the books on the dime of taxpayer. There is nothing remotely resembling a partnership here. A partnership connotes a shared risk/profit in a venture. Again you realize how powerful language is here. “Partnership” or “legacy assets” or “investments.” It is all backwards. Remember Paulson’s bazooka comment? Seems like the bazooka was aimed at taxpayers.


  4. Anonymous

    Fantastic post, once again, Yves.

    There are many parallels to the 30’s, but two things are different this time around.

    1. We had the gold standard to ditch in the 30’s, and

    2. We didn’t have our biggest creditors (China) currency tied to ours.

    As long as the Chinese are able to peg their currency to ours, there is little chance that we can inflate away our problems. I’m sure the Chinese know this very well.

    Hence, the reason for Buiter’s concern about explicit default. I suspect that in his heart of hearts, he thinks the U.S. or U.K. is closer than he’d like to admit to default, but then again who wants to be responsible for a global panic?

  5. Yves Smith

    Anon of 3:00 AM,

    No, I haven’t seen updated stats, which is funny. The press used to be better about reporting on that, and I haven’t gone looking for the source of the older reports.

    As for why, I sincerely think despite AIG, Ben and Timmie see no reason to shut down or limit CDS. They have been persuaded by the dealers that AIG was irresponsible and everyone else is not. And Ben and Timmie are staunch believers in the virtues of financial innovation.

  6. Bonesetter Brown

    But what about the clearing house for CDS? Or a move to standardize terms? Or regulation on naked CDS?

    The silence is deafening.

  7. Anonymous

    Thanks Yves! I agree with the post. We have to fix structural issues (imbalance) to have any healthy growth. We cannot just consume (and not produce enough). I believe it is simple common sense. Oh well not that simple and not that common…

    Also all naked CDS should be undone by just paying back the fees that were paid and may be little interest on that fee. Well current financial mess is not fair to taxpayer so why it should be fair to counterparties of AIG?

  8. Anonymous


    “They” are making too much money, there is no incetive to move these onto an exchange.

    There is also the problem of transparency. Anytime anyone is able to get numbers on this “market” they are even scarier than imagined. Better to keep it all quiet, don’t want to panic anyone.

  9. DABbio

    I just love this euphemism: “I used to believe this state capture took the form of cognitive capture…but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture….”

    I.e., The foxes are guarding the chicken coop!!

  10. Anonymous

    A minyanville article yesterday discussed whether an end to inventory decumulation is a sufficient condition for sustained economic recovery and came to the conclusion that the perception of recovery was enough to change sentiment that a real recovery could ensued. Quite rightly they point out that demand in non discretionary items is unlikely to have fallen by more than 10 percent and so the coming reporting season may not be that bad. I can also perceive some tweaking of statistics to possibly engineer a change in sentiment at this time. This all adds to the current perception that things are getting better and it was all due to bad sentiment.

    The problem is that 10 percent drops in demand volume require cost cutting, either through services and investment or through jobs otherwise pretty much all profit gets eaten up. My back of the cigarette calculation suggest 10 percent demand decline equates to 50 percent profit decline, so expectations of reports of good earnings may be unfounded. Any jobs lost will now be feeding back through to demand and expectations that stimulus or extra spending on behalf of those still in work may outweigh lost demand due to job losses is questionable. It really depends on the velocity of job losses which an end to inventory reduction will help, but not stop without significant stimulus.

    We see Ireland in the predicament that all ideas of stimulus have been thrown out of the window and taxes have been hiked, as government spending has hit the buffers. It is only a matter of time and spending before the US and UK hit that same buffer. We already see QE not really achieving its objectives with long term government debt being sold back to the government readily and new debt still not accruing the amount of interest to raise prices. Suddenly the government looks like crowding out the demand for its own debt.

    Paul de Grauwe at euro intelligence points out that there are four deflationary spirals combining where typically during recent recessions you would only get one or two. Keynesian savings paradox, combines with Fisher’s debt deflation, combines with Cost cutting deflation , combines with Bank credit deflation. Each of these requires different solutions and the combination Paul de Grauwe argues negates FED actions with interest rates and the way to save the economy is to take drastic action with the banks so they can operate almost in an uneconomic way. The other part of the solution is for central banks to take on private debt, but where Paul asserts central banks have plenty of room to increase debt he ignores the fact that governments have manipulated their debt reporting by excluding some temporary debt and excluding outstanding pension and medicare liabilities. Pauls conclusion that failure to act appropriately will cause the sustainability of the government debt to come into question seems in line with what buiter is saying.

    It looks as if the US has squandered their fire power too early with inappropriate actions. While I think the UK will go down the tried and tested inflation route that it has used before, I think the US more likely to default.

    Minyanville Surprises drive rally

    Keynes’ savings paradox, Fisher’s debt deflation and the banking crisis

  11. Anonymous

    “As long as the Chinese are able to peg their currency to ours, there is little chance that we can inflate away our problems. “

    Anon at 3:01, you are betting a lot more than I am on that ‘as long as’. The Chinese still have lots — LOTS — of problems of their own. Domestic unrest is not going to magically go away after the kind of job loss they’ve just been through (20,000,000!!)

    They are mighty, mighty sorry they didn’t diversify their currency holdings, but that milk is spilled now.

  12. Mike Sankowski

    As soon as people start to understand that deficit spending creates net money, the financial system will be much better off. Buiter does not understand this or that govt debt issuance is about setting the yield curve and not quantity, so his logical conclusion is that the U.S. could default. The U.S. cannot default. It is not a matter of opinion. We’ve already spent the money. If we decide over the next 20 years to simply credit the accounts with cash money as the bonds the U.S. has issued come due, we can do this. It will have consequences for the yield curve, primarily that it would cause it to be inverted, but this is far, far different from defaulting on the debt.

    Additionally, he thinks this is going to cause an increase in taxes or a reduction in necessary spending, or some combination of these two. He could not be more wrong about the need for these remedies. While I do not doubt that these will remedies will be enacted, they are not necessary. He does not understand how money is created through deficit spending, so his prescriptions are going to make things needlessly worse.

    Remember, if a bank gets the money back from a loan at some point, their action is about setting price for the asset and not creating quantity. This applies to the U.S. Federal Reserve Bank as well as other banks. If you average the net U.S. deficit over the last 15 years, you will see there has been far too few net U.S. dollars created during a huge increase in the demand for U.S. dollars. The 14% federal deficit he is concerned about is necessary to create enough money to supply the demand for U.S. dollar savings now that bank money is being called in due to deleveraging. We will not face inflation from these large deficits.

    It pains me to see such smart people operating under a wrong paradigm – he is really insightful for the rest of the article. We have been captured by the financial industry, and it has been both intentional and malicious.

    We’ve been starved for net money over the last decade, so we went on a lending spree to attempt to create money. Bank lending does not create net money. This lending results in asset bubbles. Now, that this asset bubble is going away, we are seeing the years of dis-inflation and deflation we’ve been avoiding piled into a short period of time.

    This is where Steve Keen goes wrong – the only place he goes wrong. Steve thinks that through the flow equations, bank lending creates net money. It does not. However, the rest of his analysis is spot on.

  13. Anonymous

    What he said. No, seriously: Buiter summarizes in detail here the kind of scenario which to me has not only been the most likely but one to be feared, and thus in the back of my mind for coming on two years. We’ll get at at best a flopped ‘recovery’ concurrent with the point when the US (and UK) public fisc finds itself caught between the Scylla of s-t-e-e-p inflation or the Charybdis of sovereign quasi-default. Even more likely they try the one and get both.

    And no, the slowing of inventory decumulation will _not_ in the present context lay a floor from which economic recovery can begin, and for exactly the reason Buiter cogently points out in his analysis: large-scale credit intermediation is hopelessly bolluxed in the Anglo-American Entente. It is not that there is not, perhaps, yet capacity in the banking system as a whole to ‘lend up’ a surflet of recovery but more that the rotting zombie major financials have interposed themselves at the center of the financial system such that it can’t function without them but they are themselves incapable of performing this function. ‘Cause, y’know, they’re dead. And sucking up all the spare public money to their rotten, rotting bosoms which might otherwise go into the surviving portions of the banking system for the purposes of credit intermediation. Which is why our public financial authorities are craven and deranged on the basis of their efforts to stuff money into dead zombies.

    On one point, though, I differ slightly with Buiter, tho’ it’s minor. The Fed has been massively politicized for twenty years at least, so there is no question about it’s ‘becoming’ so. And really, when the chips were down the Fed was, is, and will never be willing to cross the Treasury, so it’s putative ‘independence’ of yore has always been a useful myth. Oh, one scrupulously maintained for appearances sake, but in substance the Fed, family quarrels aside, was always going to coordinate its actions with Treasury and White House behind the scenes. That’s my view. There are good reasons perhaps for Buiter to tacitly pretend that the ‘myth of independence’ was real, given where he sits and who he may mean to influence to some degree. All we see now are the grasping, sweating little men behind the curtain grinding guan xi, truth, and robbery in a mill to make the sausage of currency, the curtain rent aside.

  14. DownSouth

    Buiter is right on.

    There will be no recovery until household and business balance sheets are repaired.

    To date the U.S. government has done almost nothing in this regard, and in fact has done just the opposite. By propping up the financial system, it keeps household and business debt intact, delaying or preventing it from being written off.

  15. K Ackermann

    How could there be doubt about government capture?

    Every year the the public role of government diminishes, yet the government get larger.

    It’s a sign that free market capitalism is clicking on all cylinders, and with less and less barriers working against market efficiency.

    What is the logical evolution of the free market? You know damn well what it is!

    Unchecked, The big get bigger, and begin to wield power in ways that seek out unfair advantage.

    Could their possibly be a brighter light for the moths than a government that increasingly fills the roll as facilitator to industry?

    The perversions that result from this charnel pact are manifest. Entire economies have been set up that are designed to surveil the public, on the puclic’s dime, without the public knowing and without any public recourse, and that’s just one thing.

    The free market alone will yield efficiency. The free market driven government will yield shoddy work, corruption, cost overruns, and generally massive inefficiencies because of unfair advantage.

    Where do you think we are at right now?

  16. Stuart

    Buiter is optimistic by saying non-negligible. In the US, debt is being serviced by taking on more debt. In effect, it’s a ponzi scheme model. If you did this with credit cards, always taking out another credit card to pay the interest on earlier credit cards, tell me, how would that end up for you? US debt default is not just non-negligible, it is inevitable, particularly if you factor in funding requirements for trillions in currently unfunded liabilities over the coming few years. Hence the ole expression of “inflate or die”. The central bank will chose to print always believing they can contain the genie in the bottle. They thought they were pretty smart in 1873 too.

  17. fresno dan

    “By the end of the year – early 2010 at the latest – we will know which banks will survive and which ones are headed for the scrap heap”
    I don’t know – there seems to be a willingness to bear any burden, pay any price, etc… to keep Citi, AIG, and BoA afloat.
    I think Buiter is superduper smart, and there are politicians who will do anything for the money that buys advirtizing to get elected. But I still think the problem is people’s belief systems. I think it was Kaynes who said “It is ideas, not vested interests, which are dangerous for good or evil.”
    Our gubermint still doesn’t understand that saving the banks is NOT synonymous with saving the economy.

  18. Anonymous

    Govt debt issuance is targeted at setting the yield curve which is slightly different stance than it will affect the yield curve. QE can also affect the yield curve, especially when investors start to take a different stance to long and short term debt. What Buiter may be hinting at when he suggests a default is that the FED loses control of the yield curve and either over reacts or further down the line needs to renegotiate terms. The yield curve is really a measure of investors appetite and sentiment over time for government debt, which does not have to be rational. Equally the government could skew the yield curve such that it no longer affects the economies interest rates.

    The terms Inflation and deflation relate to money supply, but that does not mean we cannot have inflation in prices during a deflationary period. Currency strength must be looked at in conjunction with money supply and the yield curve to get a proper assessment of where an economy is going. Currency strength most likely will be reflected eventually by fiscal deficit especially when unmanipulated deficits are considered. We should also consider that central bank action can be somewhat negated by central bank actions in other countries. The blinkers need to come off if we are to have anything but tunnel vision.

  19. DownSouth

    fresno dan said: “But I still think the problem is people’s belief systems. I think it was Kaynes who said ‘It is ideas, not vested interests, which are dangerous for good or evil.’ “

    I wonder how much the ideas articulated by Darwin underpin those belief systems.

    Amatai Etzioni in The Moral Dimension did a great job of laying out how our entire neoclassical economic paradigm is built upon the assumption that, when it comes to human nature, selfishness and greed trump all.

    This conviction that human nature is “red in tooth and claw” seems to derive from, or at least be buttressed by, some of Darwin’s writings.

    Joan Roughgarden gave an excellent presentation here questioning whether that part of Darwinian theory is true:


    She has out a new book entitled The Genial Gene: Deconstructing Darwinian Selfishness.

    I haven’t read it yet but am anxious to do so to see what role she believes Darwinian theory might play in all this.

    I am also taken aback by the blatant double standard frequently employed by those who invoke Darwin to justify corporate greed. Reading the comments to yesterday’s guest post, “Checkmate for Pensions?,” apparently seflishness and greed are good when practiced by corporate titans, but deplorable in firemen, shcool teachers and policemen.

  20. DownSouth

    Correction: My last sentence should read..

    …seflishness and greed are immutable human nature when practiced by corporate titans, but deplorable when exhibited by firemen, shcool teachers and policemen.

  21. Richard

    I concur with Down South’s comments and some of the other comments, including Buiter’s own article, cause me to reflect on the class bias one sees in most participants in blogs, who are likely uppper middle class (or higher), whether in current income or at least upbringing. Right now, a partial default is being a championed by a very influential element in the America’s ruling classes, “social security reform” which usually means reducing benefits for current and future social security recipients and thereby in effect “haircutting” the Treasury bonds held in the Social Security Trust Fund. That to me is a partial default, but choosing to impose it on a group who are politically weaker because they have less discretionary income to donate to politicians.

    For people in the upper middle class and higher, SS benefits are rather marginal to their standard of living. But for many in America’s working and lower middle classes, they are the only source of income they will have when the time comes that they can no longer work. So we are talking about the immiseration of a large group of people.

  22. Anonymous

    >I.e., The foxes are guarding the chicken coop!!

    Managing it, actually.

    —a different chris

  23. S

    Mike S…

    “As soon as people start to understand that deficit spending creates net money, the financial system will be much better off. Buiter does not understand this or that govt debt issuance is about setting the yield curve and not quantity, so his logical conclusion is that the U.S. could default.

    This is nonsense. If the yield curve is being manipulated, no maount of issuance matters. isn;t this the Whole Fed./Greenspan mantra. This argument sounds like the 2005 vintage house price argument that prices don;t matter it is only the payment. The banks are findiong out that this sophmoric construction was yet another illusion.Comapnies that generate $1T in revenue and have $50T in debt go bankrupt.

    “If you average the net U.S. deficit over the last 15 years, you will see there has been far too few net U.S. dollars created during a huge increase in the demand for U.S. dollars. The 14% federal deficit he is concerned about is necessary to create enough money to supply the demand for U.S. dollar savings now that bank money is being called in due to deleveraging. We will not face inflation from these large deficits”

    What? the demand was not real. full stop. hence the collective call for debt destruction. That is why we have deflation.

    I have read this comment several times and have no idea what it means or what the conclusion is?

    What is the paradigm that everyone is missing? This paradigm thing isnt really that complicated. Debt funded money. Full stop. Deflation and reset. Gov’t fighting it tooth and nail with more debt. consumers not cooperating. Equity markets baraometer of nothing. FX “markets” a tale of pegs, swaps, lies and national interest. Fixed Income and yield curves perverted by trade sdistoritions, fx, central banks. J6P heretofore, useful idiots.

  24. Anonymous

    I see many comments on numerous blogs along the lines of, China has even bigger problems than we do, their economy is contracting faster, etc. I don’t dispute any of this, but it is important to keep history in mind.

    I wish I could remember the exact quote, but to paraphrase a character from the great book Shantaram (in reference to India, spoken by a Frenchman): “France would tear itself apart long before we would ever get anywhere close to 1 billion people”.

    China emerged from the Great Leap Forward intact, and there were estimated to be between 20 and 43 million famine victims, not mere job losses.

    The US appears to be muddling through its own Great Financial Leap Forward as we speak. Only time will tell if American society has the cohesion to emerge intact.

  25. Anonymous

    “I used to believe this state capture took the form of cognitive capture…but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture….”

    “Cognitive capture?” I mean, really, someone needs to suggest a change of emetics to this guy! Anyone with half a brain knows that our so-called “political system” and those that run and administer it are simply employees either of these powerful interests or their equivalents in the foreign policy arena, i.e. AIPAC. To even suggest that there might be a distinction to be made between comity at the level of outlook and that of what is real objectively is utter buffoonery.

  26. K Ackermann

    @S, thank you for responding to that comment. I was not smart enough to, but I know the smell of rotten meat.

    @Richard, some of the cold responses I am guessing are not strickly along class lines. Ideology is what causes some people to cling to beliefs even in the face of contrary evidence.

    When I visit sites such as Mises, I am often amazed at the level of groupthink going on. Very smart people just hammering each other with the same material over and over.

    As for more open sites such as this one, you have to figure someone is going to write something that gets a Chicago acolyte’s blood boiling, and ideology rears its ugly head.

  27. Anonymous

    Buitner is right about financial capture of the government. I said a long time ago, the government is doing all this wierdness because, ultimately, it is trying to save itself. We could easily let the financial instituions act more as society-serving public ultilies… ie, by transferring the bulk of banking to healthy, regional banks. Ahh but there’s the tax base problem. The government super-sized itself by building itself on top of a house of cards.

  28. artichoke

    @ Sankowski:
    1. Of course Buiter understands about money creation and destruction. He understood this in grade school probably.

    2. Of course the US can default. It can refuse to make payments on outstanding government bonds for example. That’s a nice, egregious example. There are more subtle ways too which Buiter mentions a few of.

    @Bonesetter Brown:
    ICE (an exchange owned jointly by Goldman and Morgan Stanley) has been approved by the Fed to be provide clearing services for CDS. The details of the instruments to be traded need to be defined, but Goldman and Morgan Stanley are good at that sort of thing, having all needed expertise in-house.

    Note that CBOE in Chicago was the obvious choice, got their application in first, and they’re still waiting. Hm, they’re not shareholders in the Fed, think that might have everything to do with it? ;-)

  29. Anonymous

    Mr. Buiter is apparently one more academic pinhead who cannot say what he really means in plain English. So let me help.

    Buiter: “may be due to rather more primal forms of state capture….”

    Translation for the masses: “The Congress and Administration is bought and paid for by Wall Street”.

    Dumb ass.

  30. Anonymous

    Buiter doesn’t make sense:

    “We could have a growing economy with rising unemployment and growing excess capacity for quite a while.”

    No Mr. Buiter, we would NOT have a growing economy if there is rising unemployment.

    On what planet’s institution of higher learning did he get his graduate education?


  31. Anonymous


    Mr. Buiter agrees with you. The politians and bankers will point to the GDP number going up, but it will not be representative of anything good.

    GDP (gross domestic product) is how an economy is measured.

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