The New York Times reported in “I.M.F. Shifts Its Approach to Bailouts” that,
“ The International Monetary Fund, convinced that Europe erred in forcing debtor countries like Greece and Portugal to bear nearly all the pain of recovery on their own, is pushing hard for a plan that would impose upfront losses on bondholders the next time a country in the euro area requests a bailout.”
First, what does the IMF mean by the word “countries” in the phrase, “forcing debtor countries like Greece and Portugal to bear nearly all of the pain of recovery on their own”?
It means that the people of Greece and the people of Portugal are the only ones being forced to suffer the costs associated with repaying the relevant debts. The IMF implies that the words “country” and “people” are synonymous and the “people” are responsible for their “countries’” debts.
But is such implication accurate, fair or even reasonable in relation to national debts?
Who rang up the original debt? The “country” (the “people”) of Greece? Or was it the debt incurred by the government of the country of Greece? Are the “people” and their “government” one-in-the-same?
Who is the real debtor? The people of Greece or the government of Greece?
What is the legal and/or moral obligation of the people of Greece (or Portugal, or even the United States) to make good on the debts incurred by their governments—especially if those debts are unreasonable, irrational or even the based on lies?
For example, here in the United States, our government claims the “national debt” is about $17.2 trillion. But is that claim truthful? Or is the true national debt closer to $90 trillion (as claimed by Shadowstats.com) or, if we include unfunded liabilities, even over $200 trillion (as claimed by the Congressional Budget Office)?
Is the “national debt” truly the debt of the “nation” (people) or is it the debt of the national government?
• Some might argue that the American people are responsible for the “official” national debt of $17.2 trillion. Maybe so. But who should be responsible the “secret” or “unofficial” debt incurred above $17.2 trillion?
In other words, if the true “national debt” is over $200 trillion, and the “official” (publicly known) national debt is $17 trillion the American people might be responsible for $17 trillion in debt, but are they also responsible for the other $183 trillion that essentially hidden from public knowledge?
Similarly, did the governments of Greece and Portugal run up excessive debts without their people’s knowledge? Is it reasonable or fair that the people of Greece and/or Portugal should be held liable for government debts which were negotiated without the people’s general knowledge or approval?
More, if the benefits of the enormous debts incurred by the governments of Greece, Portugal or the United States primarily accrued to the people of those countries, then it would be fair to require the people to repay the resulting debts. But what if the benefit of the government’s debts primarily accrued to special interests rather than the people at large of each of those countries? Should the people of each country nevertheless be held liable for the debts incurred by their governments on behalf of special interests?
I don’t think so.
• Second, if the IMF is “pushing hard for a plan that would impose upfront losses on bondholders the next time a country in the euro area requests a bailout,” who are these “bondholders”?
They’re the people, private institutions and even foreign governments who loaned money to the “debtor countries” by purchasing those nations’ governments’ bonds. They are the government’s creditors.
But what did the governments often do with the funds received for government bonds? They gave those funds (especially, here in the US) to private institutions (primarily banks) that were deemed “too big to fail”. These private banks were the special interests that received the primary benefit of funds received from the “bondholders”/creditors.
These “interests” are particularly “special” because they’re not required to repay the debts from which they benefited.
• So, we have four different classes of persons in this story:
1) The bondholders/creditors who lend money to national governments;
2) The national governments who sell bonds to acquire funds;
3) The special interests who acquire those funds and the benefit thereof from the national governments; and
4) The common people (a/k/a the “chumps”) of each nation who will be “legally” compelled to somehow repay the bondholders (Class #1) for the bonds that were sold by the governments (Class #2) and used to benefit special interests (Class #3).
Thus, the IMF recognizes that a bail-out program that imposes government debts only on the people-chumps (class #4) is morally wrong. Therefore, the IMF is pushing for a new-and-improved bail-out program wherein the debt-burden on the people-chumps (class #4) is reduced by forcing the creditor-bondholders (class #1) to accept the loss of some or all of the funds they loaned to governments.
The IMF recognizes that it’s immoral to rob the people-chumps of Class #4. Therefore the IMF advocates that we also rob the bondholders-creditors of Class #1.
But note that the IMF does not suggest that the governments (Class #2) who actually borrow the funds, or the special interests (Class #3) who receive the benefit of those funds, should be held liable for repaying those funds.
• The New York Times continues:
“Scarred by its role in misjudging the depth of the Greek recession and rebuffed in its attempt to get European governments to write down their Greek loans, the I.M.F. is advocating a more aggressive approach to debt restructuring to try to ease the rigors of German-style austerity.”
In the previous paragraph, the “European governments” are creditors (Class #1) to Greek and Portuguese debtor-governments (Class #2).
“Debt restructuring” means the legal reduction of payments due on bonds. I.e., if a creditor (Class #1) loaned $1 million to the government of Greece and that government (Class #2) got into financial trouble, the creditor could be forced by law to agree to take, say, only $500,000 as repayment for his $1 million bond. By passing new “debt restructuring” laws, governments could write off their debts whenever they liked.
“Debt restructuring” is a polite term for legalized robbery. If the debt due a creditor (Class #1) from a government (Class #2) were legally “restructured,” then the creditor would be legally deprived of some or all of his wealth and thereby robbed.
“Debt restricting” is a polite way for overly-indebted, technically-bankrupt governments to avoid paying their debts without admitting they’re bankrupt.
If bankrupt governments can avoid admitting they’re bankrupt, they can avoid suffering a massive reduction in their credit rating. So long as debtor-governments can retain the illusion of solvency and most of their credit ratings, they may still find more creditors who are fool enough to lend them even more funds. At minimum they can continue to operate as if they were a vital, solvent entity rather than a civilly-dead bankrupt.
The New York Times used the term “austerity” to refer to the economic conditions that’ll be imposed on the “people-chumps” (Class #4) of the various nations who didn’t receive benefit of funds acquired by selling government bonds but who will nevertheless be held liable for repaying those borrowed funds. The result of imposing the bond-debts on the “people-chumps” will be higher taxes, less government services, rising unemployment, a lower standard of living and a likely reduction in life expectancy. That’s what they mean by “austerity”.
Note that while “austerity” will primarily afflict the people-chumps (Class #4) but will have little or no direct effect on the government (Class #2) or any effect whatsoever on the special interests (Class #3). The bondholders-creditors (Class #1) may not be plunged into “austerity” but will see their net worth diminished by however much “debt restructuring” (robbery) they’re required to accept by law.
Unfortunately, “austerity” is the driving force behind public demonstrations by the people-chumps (Class #4) who march in streets and sometimes toss fire-bombs at government buildings to express their displeasure at being subjected to higher taxes and a lower standard of living.
The IMF doesn’t want to tax the people-chumps so much that they riot. Therefore the IMF proposes to reduce the degree of austerity imposed on the people by “restructuring” the governments’ debts and thereby also rob the bondholder-creditors.
Lesson? Riots work. At least to some degree. If you’re a member of the people-chumps (Class #4) being over-taxed and robbed by your government (Class #2) and you riot and perhaps even threaten to harm some government employees, officers or property, government will “feel your pain” and start to rob the creditors (Class #1) as well.
Government will not “feel your pain” to a degree sufficient to stop robbing somebody. They won’t “feel your pain” enough to stop enriching the special interests who pay bribes/political-campaign-contributions to the legislators who legalize the “debt-restructuring” and other forms of robbery. Under the proposed restructuring laws, governments will merely “feel the pain” of the people-chumps enough to start robbing their bondholder-creditors.
• However, robbing creditors creates problems:
“But the I.M.F. proposal . . . is encountering stiff resistance, not just from the powerful global banking lobby, but also from European policy makers, and more recently, the United States government, which is the I.M.F.’s largest financial contributor.
“Indeed, despite tough talk on both sides of the Atlantic about making bond investors [Class #1] share the cost of bailouts with taxpayers [Class #4], the world’s largest economies seem to have accepted the dire warnings advanced by investors and bankers that the I.M.F.’s proposed new approach would badly roil still-fragile credit markets in Europe.”
Ahh, yes. We dare not “roil” the “still-fragile” credit markets.
But how might this dastardly “roiling” take place?
Well, insofar as the IMF proposes to legally “restructure” the debts owed to bondholder-creditors’ (Class #1) in order to ease the plight of debtor governments (Class #2), then many of the bondholder-creditors will wake up and realize that if they lend funds to a debtor-government, the risks are high that they’ll never be repaid in full or perhaps even at all.
Thanks to legalized “debt-restructuring,” creditors won’t merely lose money to artificially low interest rates or high inflation rates—they might even lose a big chunk of their original principal to “restructuring”. I.e., if you loaned $1 million to a debtor-government, you might count yourself blessed if you recovered $500,000 and you might not be surprised if you only recovered $200,000 under “debt-restructuring”.
Given that virtually all western governments (especially the US) are debtors and technically bankrupt, once debt-restructuring were legalized, where would governments find an adequate supply of suckers to keep buying their bonds? If bond-holders could be legally deprived of their principal by debtor governments, then bonds would degrade from the status of loans to the status of gifts or even outright confiscations. If you bought a bond, odds would be high that you really bought a gift for a debtor government.
Once “restructuring” were openly legalized, bondholder-creditors (Class #1) would stop lending anything to debtor-governments (Class #2) on the long-term and might even stop lending short-term. That might mean no funds for special interests (Class #3) and therefore no bribes (political campaign contributions) for legislators.
And, surely, we can’t have that—can we?
The only option would be to raise taxes on the people-chumps—but if the people are already ready to march and throw Molotov cocktails at government buildings, that’s out.
Oh,wait! There is one more option: The debtor-government (or its friendly central bank) might simply start printing more and more paper dollars to give to the special interests. (We might call this program something like “Quantitative Easing” and claim that it would “stimulate the economy” by giving money to “special interests” that were “too big [too special] to fail”.) Eventually, those paper dollars would enter into the economy and cause significant inflation (perhaps even hyper-inflation) that would rob all of the bondholder-creditors (Class #1) and all of the people-chumps (Class #4) while empowering the government (Class #2) and enriching the special interests (Class #3).
Ta-da! Problem solved.
Better “restructuring” through inflation.
•The New York Times concludes:
“‘The [IMF] has been bruised and abused,’ said Susan Schadler, a former I.M.F. economist and the author of a recent paper that argues the fund broke its own rules in lending to near-bankrupt Greece. ‘But in the end there is no trade-off between austerity and debt restructuring — you have to do both,’ she said.”
First, the people of Greece weren’t “near-bankrupt”. The government of Greece was bankrupt—it couldn’t pay its bills. The IMF loaned money to the Greek government to avoid admitting that that government was bankrupt. If the governments of Greece and then Portugal were allowed to admit they were bankrupt, the world’s creditors might wake up and stop lending to all technically-bankrupt governments. Then the whole governmental racket might collapse on a global scale.
Can’t have that.
What does Ms. Schadler mean by saying that there’s no trade-off between “austerity” and “debt restructuring”? She means that there’s some minimum amount of funds that must be robbed from somebody in order to repay most of the government’s debts. Thus, an undisclosed transfer of wealth must take place from the people-chumps (Class #4) to the debtor-governments (Class #2) to shield the governments from admitting they’re broke.
“Austerity” means that the people must be surieties for the government. “Austerity” means that the people subject to a government must accept higher taxes and a lower standard of living as a consequence of their government being technically bankrupt.
“Debt restructuring” means that the bankrupt governments’ creditors must accept losing some or all of their wealth—but without using the “B-word” (“bankruptcy”).
Who wins under debt restructuring?
The debtor governments. They raise taxes on people and legally refuse to completely pay debts owed to creditors. Governments grow more powerful by going into debt and bankruptcy at the expense of the people and the creditors.
• But even bankrupt governments aren’t penniless. Governments have assets, including buildings, the marble on the walls in federal court houses, treasures in national museums and gold bars. The US government owns half the land west of the Mississippi River. Some of these government assets could be sold to pay for government debts.
Governments have employees. Employees could be fired to cut costs and apply the savings to repaying government bonds.
Government employees are often overpaid. A Rand Instituted study concluded that the average federal employee paid double he’d receive for doing the same work in the private sector. It wouldn’t be easy, but government could cut their employees’ pay and apply the savings to paying off the government’s bond debts.
Government employees are often entitled to retire after just 20 years of employment and start collecting retirement pay around the age 40. Retirement benefits might be postponed until the employees turn 65 and apply the savings to paying off the government’s bond debts.
Government employees have pension funds . . . . Well, you get the idea.
Governments have assets that could be sold or costs that could be cut to pay off their bonds. There’s no reason why the burden of repaying government bonds should lie solely or even primarily on the people-chumps (Class #4), or even on the bondholder-creditors (Class #1) and not be shared by the debtor-government itself (Class #2). If the people must accept austerity, so should their government.
And then there’s the special interests (banks; Class #3) that received funds acquired by means of government bonds. Since A.D. 2008, many of those special interests just sat on those funds rather than lend them to the people-chumps in order to stimulate the economy. So, why not tell those special interests we want that money back? Loan it or lose it, hmm? If the special interests don’t comply, charge their boards of directors with treason for robbing the American people and thereby giving our enemies “aid and comfort”. Let those high-rollers be judged by a jury composed of the people-chumps and see how many are found guilty and sentenced to be hanged.
• The IMF are foolish. Don’t they understand that if we legalize “debt restructuring” now, we’ll eliminate virtually all future bondholder-creditors dumb enough to lend to government?
Can’t have that, can we?
That’s why the US government opposes the IMF debt-restructuring proposal—not because “restructuring” is bad for the people or even for the creditors, but because, ultimately, restructuring hurts governments by eliminating the future suckers on whom government has come to rely.
Of course, when the time comes for the whole house of paper-debt cards to collapse, government will restructure the debts due bondholder-creditors (Class #1) and rob them blind. (I doubt that the bondholder-creditors will, on average, recover more than 20% of the debts due them.) But that debt restructuring will be deemed “necessary” under the pretext of an economic “emergency” rather than “legal” under a pre-existing law that allows “debt-restructuring”. It will be promoted by government (and probably accepted by the people) as a shocking surprise rather than a long-term plan.
And why not?
Creditors (Class #1) who are dumb enough to invest their funds in bonds issued by overly-indebted, technically-bankrupt governments are fools. Why shouldn’t they be robbed? It’s been axiomatic for centuries that “a fool and his money are soon parted.”
If the IMF’s proposed restructuring laws are enacted, the fools and their money will soon be “partible”—and inevitably, “parted”—by law.