America’s Third Rail…

America’s Third Rail…

The benefits derived from the dollar being the world’s main reserve currency constitute the “exorbitant privilege” about which France’s then-finance minister, Valéry Giscard d’Estaing, complained in the 1960s.

The greenback’s worldwide popularity enables the US to project power around the globe – to maintain military bases and facilities in over 100 countries, to keep naval battle groups afloat from the Mediterranean to the Pacific…

-  Trumping the Dollar, by Benjamin Cohen, @Project Syndicate

By J.M. Hamilton (5-28-2016)

Per Bloomberg, the World’s debt to GDP ratio (including public, private sector, and non-financial - corporate debt) has grown to an astronomical 240%; and America’s corporate debt to cash on hand ratio, in 2015, increased 50%.  Looks like global elites are binging on the free money pumped out by the world’s central banks…. Completely the opposite of what the Federal Reserve told us back in ’08.  That is to say, the Fed’s extraordinary efforts were to give everyone an opportunity to right size their balance sheets.  Instead, the American government and the corporate elite have loaded up on even more debt.  (Globally, zombie banks and debt burdened state owned - and commercial - enterprises are propped up by central banks’ printing presses, a la China, Europe, and Japan.)

But central bank largess does not extend to the 99%... for everyone else, there’s austerity.  If Central Bank largess actually filtered down to the people, that might ignite inflation; and so Wall Street banks act as hedge funds to jack up the stock market (all business fundamentals to the contrary), and finance job killing M&A.  Actual old-fashioned bank lending for ordinary Americans (?)… too much risk involved.  The Fed’s money creation must be sterilized, that is kept out of the hands of the American people to keep nascent inflation in check. Hence, parsimonious wages paid for an ever-shrinking pool of jobs, as the Monopoly Economy takes hold.  The net result of which is ever increasing wage and wealth inequality, all aided and abetted by centrals banks.

Meanwhile, the Japanese PM, Shinzo Abe, at the G-7 summit last week, rather cryptically warned his peers of a coming financial calamity (aka a Lehman event).  But the other G-7 leaders weren’t having it, all facts about the world’s growing addiction to the debt driven global economy notwithstanding. 

Who knew the Japanese PM was such a buzz-kill?  Shut up, Abe… just shut up already, the other G-7 leaders seemed to be thinking.  Poor Abe was sent to the time out chair, and his dire warning was excluded from the G-7 joint communiqué.

For students of economics and politics, and keen watchers of central banks, it’s interesting how the dialogue on debt always unfolds.  Notice here, the key dichotomy among the global political elite and their owners - the billionaire class - in all matters concerning debt.

Debt is good under certain scenarios:  Government debt, and debt monetization, to extend America’s global empire, protect world trade, finance frivolous MIC spending, and wars w/out end receive rave reviews from the Washington establishment.  Debt to finance tax cuts for the wealthy, and offshore tax havens…. Wonderful, the billionaire class loves it.  Debt for Wall Street bank bailouts, ahem… good.  Corporate debt to finance job killing M&A and financial engineering (aka stock buybacks) … if it makes the stock market soar, have at it!  Debt to finance privatized prisons and mass incarceration, and the new Jim Crow…. The elite are highly accepting of it.  There’s money to be made in jailing millions of people, and their subsequent disenfranchisement keeps democracy in check.

Debt, per the elite, is bad under alternative scenarios:  Whenever debt it mentioned to finance infrastructure improvements, job creation for the 99%, expanding the safety net, public financing of college education, or much needed fiscal stimulus to jump start the economy, the elite and their minions - the GOP and more than a few Dems – say, “pass.”  

 No mas!

In short, debt financing for the elite:  good, particularly when U.S. taxpayers are left holding the bag (that’s because the elite often pay no taxes).  Debt financing for programs favoring the 99%:  pound sand!  In fact, it’s America’s ever spiraling national debt that is repeatedly used as an excuse to shut down all conversation about fiscal stimulus or using government expenditures to assist those most in need, the 99%.  The same arguments extend across the pond to Europe, where the German owned and operated E.U. continues to mandate that Southern periphery nations adopt, repeatedly, nasty doses of fiscal austerity.   (Austerity that is strangling the economies and citizens of these Southern European nations.)  All the better to bailout German and E.U. banks, who recklessly lent money to these nations in the first place.

Enter one, Mr. Donald Trump.   Mr. Trump always keeps it entertaining, and as a novice to the political world, and a bit of an expert on bankruptcy, recently shared some insights into America’s national debt.  Fortunately, Mr. Trump was not told in advance that professional American politicians don’t venture where angels and demons fear to tread, that is in discussing on the campaign trail American politics’ third rail, our colossal corporate and national debt.  Mr. Trump knows that debt can weigh down a troubled commercial enterprise, and even nation states.  Possibly w/ the best of intentions, he suggested that America renegotiate some of it long-term debt. 

We can see where The Donald was going w/ this.  If America is freed up of some, or part, of its national debt, the political establishment’s objections to fiscal stimulus begin to vanish.  Mr. Trump – an admitted crony capitalist (and presumably a closet Keynesian) - knows that in order to make America great again, he’s going to need government spending - and government debt - to employ Americans (particularly with the pending world economic calamity Mr. Abe warned us about at last week’s G-7).

Predictably, the outcry over Mr. Trump’s proposal - from the academic, economic, and political establishment - was deafening.  Mr. Trump was deemed a neophyte, and a threat to America’s role as a world leader.  If America renegotiated our debt, how would America’s elite enjoy the exorbitant privilege that comes with holding the world’s fiat currency?  Our 800 to 900 military bases around the globe, war w/out end, tax breaks for the wealthy, and general looting of the federal government by the elite…. Might be placed in jeopardy.  How dare Mr. Trump even suggest such a thing.  Our heavily mortgaged global empire might crumble.

But Mr. Trump, who your humble blogger disagrees with on many things, maybe onto something.   America must address its third political rail, and so must world leaders.  The global economy is stalling under its crushing debt burden.  (And the elite & academics are delusional if they think this debt will ever be paid back; and if the debt is paid back, it will be on the backs of the poor and the shortened life spans of same.)  Moreover, global central banks have suppressed interest rates, often with negative yields, to mitigate debt service payments for nation states and corporations leveraged to the hilt.  One can see this spiraling on for decades or more - see Japan and its lost decade(s).  Seems that Mr. Abe is very much in the know, as is Mr. Trump, who’s gone through several bankruptcies himself.

What to do?  What to do?  And as important, how to protect America’s perks associated with possessing the world’s fiat currency?

Well, if we have learned nothing in the last eight years, it is this:  If all the central banks are engaged in a race to the bottom, simultaneously, through all manner of financial chicanery or fraud, then it’s really a zero sum game.  Isn’t it?  In other words, what we’ve learned is - despite debt monetization, smoking up the central bank printing presses, expanded central bank balance sheets, QE uber alles, and suppressed interest rates - as long as all central banks are doing it, the U.S. dollar, seemingly, suffers no harm.  America’s dollar, in fact, remains preeminent, despite the abuse heaped upon it by the Federal Reserve.  It’s interesting to note that despite the BOJ adopting negative yields, the Japanese Yen, counter intuitively and against all economic understanding, actually grew stronger recently.  Alas, financiers and the carry trade could give a rat’s ass about current economic dogma.



 
Photographer Steven Siegel:
A daredevil kid poses on the tracks kneeling above the infamous third rail for Siegel at Whitlock Ave subway station, The Daily Mail.

So how do we get rid of this debt hangover, and kick start federal spending again and boost aggregate demand, preferably for the 99%?  Global central banks with expanded bank balance sheets, should – multilaterally – agree to take a debt hair cut on their respective government bond portfolios.  That is to say, in order to get rid of this massive debt hangover, globally, central banks – in a coordinated fashion - must all agree to write down some of their massive holdings of government bonds.  In this manner, the debt disappears, and governments are free to spend again.  If all central banks do it, incrementally, no single currency or country is advantaged, or disadvantaged, over its peers.  Hell, create a SPV, and dump the bad debt there.  It’s monopoly money anyway, w/ faith based value.  If all currencies/central banks are engaged in the same practice, it’s not like the citizens of the world are going to migrate to an alternative currency.

In short, America’s exorbitant privilege is protected, if all central banks are doing it.  Start small, coordinate, and go from there.

Japan, China, European southern periphery nations, and the U.S…. all could use a considerable write down.  And the nations that don’t need a write down, such as Russia and its ruble, are hardly in a position to become the world’s fiat currency.  JMH doesn’t give Mr. Trump much credit, but for jumping on America’s third rail… kudos and accolades! 

Both Democratic Candidates should be entering into this discussion, as well.  It’s probably the key issue of our times, and it took a political outsider to bring it up.  No wonder Americans are fed up with the establishment, career politicians, and biz as usual w/in Washington environs.  Apparently, group think abounds among the Ivy grads, who run our country.

The world's global debt problem is crushing the world economy, and it must be addressed before it comes to a very bad end.  If the debt itself, doesn't bring us down, think of the hundreds of trillions (notional value) in derivatives and swaps products that are used to insure and gamble on world debt?  Mr. Abe was right... a possible Lehman event is drawing nearer.  In order to the make the proposed central bank write downs feasible, some derivative and swap bets will need to be unwound.

So a few vulture capitalist and predators do not make a killing on the write down.

Copyright JM Hamilton Publishing 2016