The English publication Telegraph recently published an article by Ambrose Evans-Pritchard entitled “IMF paper warns of ‘savings tax’ and mass write-offs as West’s debt hits 200-year high”.
In that article, Mr. Evans-Pritchard wrote:
“Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.
“The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its ‘toolkit’ for emerging market blow-ups.”
Note the IMF’s use of the word “blow-ups”. The IMF implies that the conclusions and recommendations advanced in their recent “working paper” are ultimately based on IMF presumption that the “Western World” is on the verge of an economic “blow-up”.
“The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point,” said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff.”
It means that creditors “voluntarily” agree to “take a haircut” and accept, say, only 30% of the money that’s due from borrowers.
I.e., if a creditor loaned $1 million, his expected return will be “restructured” to receive, say, only $300,000 as payment in full rather than the $1 million that was originally promised to be repaid.
Q: Why would anyone voluntarily agree to accept a 70% loss on a $1 million loan?
A: Because, if they don’t agree to “restructure,” the government borrower will simply default on the entire $1 million debt. Compelled to recognize that collecting $300,000 is better than collecting $0 thousand, the creditors “voluntarily agree” to “restructure” their loans so as to allow government borrowers to engage in overt theft and avoid admitting publicly that they’re bankrupt.
• Insofar as the IMF admits that “the size of the problem” is “far beyond anything discussed in public to this point,” it appears that the size of the sovereign/national debt problem is much larger than almost anyone suspects. Thus, we have an “official” admission that the true magnitudes of western governments’ national debts have been, so far, hidden from the world.
For example, Obama tells us that the “official” national debt is $17 trillion. But other sources claim that debt is actually over $200 trillion. The IMF report implies that the true size of the US national debt is likely to be closer to $200 trillion than $17 trillion.
• How will the American people and the world react when they learn the true size of their national debts? There’s a potential for panic in those reactions and possible financial catastrophe. So, it’s odd that the IMF would risk those dangers by releasing a report that admits the debt may be enormous. Nevertheless, the IMF implied that the true sizes of national debts for a number of nations can no longer be hidden and may be made public in the near future.
These IMF admissions imply that a financial implosion affecting much of the Western World is at least inevitable, and may be imminent.
• The Telegraph article continues:
“The paper said policy elites in the West are still clinging to the illusion that rich countries are different from poorer regions and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering (‘forbearance’).
“The presumption is that advanced economies ‘do not resort to gimmicks’ such as debt restructuring and repression, which would ‘give up hard-earned credibility’ and throw the economy into a ‘vicious circle’.”
Credibility = confidence = fiat dollar value. Insofar as our government is forced to engage in “gimmicks” to sustain the illusion of its own solvency, government will lose credibility and public confidence, and push the value of the fiat dollar lower (inflation) while the prices of goods, services, and commodities (like gold) go higher.
The previous graph is misleading insofar as it displays the average amount of debt of 22 advanced nations’ in relation to their GDPs. The graph implies that this average amount of debt is now about 250% of the 22 advanced nations’ GDP. The US is bundled into that group of 22 advanced market economies and is therefore individually invisible to the average reader.
If we divide the official national debt of $17 trillion, by the $16 trillion annual GDP, the result is an official national-debt/GDP ratio of about 106%. We owe about 106% as much as we earn each year. That’s not good. It may not even be tolerable. But it’s not terrible. And it’s only about 40% of the 250% average national debt for all 22 “advanced markets”. So, compared to the other 21, we’re doing OK.
However, while the US annual GDP is about $16 trillion and President Obama claims that the total national debt is about $17 trillion, the Congressional Budget Office has admitted that, including unfunded liabilities, the true National Debt is over $200 trillion.
But, if we divide the $200 trillion national debt by our $16 trillion annual GDP, we’ll see that the US is running a national-debt/GDP ratio of about 1,250%—and that is terrible, catastrophic, and unsustainable.
There’s no way that more than 20% of the $200 trillion US national debt can be repaid. US creditors will eventually suffer an 80% “haircut”—and probably a 90% “haircut”.
As I’ve warned repeatedly for five years, What Can’t Be Paid, Won’t be Paid. If you folks read, understood and agreed with those warnings, you did what you could to get your savings out of paper dollars and into something tangible. You avoided paper “promises to pay” and instead acquired actual “payments” in the form of land, guns, bullets, tools, gold or silver.
And now, we have the IMF releasing a study that admits what I’ve told you for years. The national debt can’t be paid . . . so it won’t be paid . . . there’s bound to be a “blow-up” . . . and, one way or another, government’s creditors will be robbed of much of their wealth.
“But the [IMF] paper says this mantra [that advanced economies are not subject to the same economic rules as emerging economies] borders on “collective amnesia” of European and US history, and is built on “overly optimistic” assumptions that risk doing far more damage to credibility in the end.”
The debt problem won’t disappear or be eliminated by a national bout of positive thinking. While government can postpone the day of reckoning, while it does, the problem only gets worse. Postponing the inevitable to avoid some relatively small pain today, will only condemn us to suffer a greater pain tomorrow.
“While use of debt pooling in the eurozone can reduce the need for restructuring or defaults, it comes at the cost of higher burdens for northern taxpayers.”
In other words, by “pooling” the debts of Greece with the debts of, say, Germany, Greek creditors can avoid the need to “restructure” their debts and “voluntarily” suffer massive losses on the assets they’d loaned to Greece.
Hooray for the creditors!
But, for Greek creditors to avoid taking a huge financial loss, German taxpayers will be forced to pay a significant tax increase. By means of “debt pooling” the original creditors will be saved, and the original debtors will be exempted from paying their debts—all by means of finding new “debtors”. I.e., the debt owed by the irresponsible Greeks will be foisted off onto the shoulders of the responsible Germans. The creditors won’t lose but the German taxpayers (who didn’t borrow the original currency or benefit from the original loan) will.
But, no matter how you figure it, the massive national debts will cause somebody to lose big time. The debt can’t be paid. It won’t be paid. Someone must therefore suffer a huge loss. The main question is: Who has enough money to pay southern Europe’s debts who is also dumb enough to do so?
The answer du jour is “northern Europe”.
But will the industrious peoples of northern Europe agree to pay off the debts of the Greek, Italian, Spanish and possibly French party-animals?
I doubt that northern Europe is technically capable for repaying all of southern Europe’s debts. I’m sure the northerners won’t agree to repay much of the southerners’ debts.
But even if Europe’s “northern taxpayers” consent to make good on southern Europe’s debt, they won’t (as the IMF writes) be simply “burdened” by “debt pooling”—they’ll be robbed. Nevertheless, this “debt pooling” will be defined as a “burden” (rather than a a robbery) because the robbery will be sanctioned by governments of the northern (productive) countries and of the EU.
“This [paying the southern countries’ debts] could drag the European Monetary Unit core states [northern countries] into a recession and aggravate their own debt and ageing crises. The clear implication of the IMF paper is that Germany and the creditor core would do better to bite the bullet on big write-offs immediately rather than buying time with creeping debt mutualisation.”
“Debt mutualisation” is just another fancy term for “debt pooling”. They both mean sharing the debts—but not the assets, of course, and certainly not the profits. It means that financial entities that are “too big to fail” (like JPMorgan here in the US or Greece, Italy, Spain, etc. in Europe) will generously agree to share their debt obligations with the “northern countries” who are productive and therefore have some savings. In the end, “mutualisation” is merely another fancy word to conceal a massive robbery and some governments’ bankruptcy.
“The [IMF] paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression—defined as an “opaque tax on savers”—as used in countless IMF rescues for emerging markets.”
Who are these “savers”? They’re the people and nations who are industrious, productive and sufficiently responsible to have saved some of their earnings.
Overly indebted western nations (“borrowers”) are now to be treated like primitive, child-like and irresponsible “emerging markets”—and rightfully so. They thought they were different. They thought they could play the fool and live forever on more and more credit. They thought they were “too big to fail” and would therefore never have to pay their debts.
They were wrong. I know it’s hard to believe, but even the rich and powerful are subject to the same economic rules as the rest of us. Pay your debts or be declared bankrupt.
• Like the industrious peoples of northern Europe, if you’re saving money in a bank account, the IMF proposes to tax your savings and force you to pay someone else’s debts.
Q: Why impose a savings tax?
A: In order to: 1) rob you “legally” (by means of government edict); 2) give your savings to the irresponsible and thereby reward the non-productive; and 3) force you stop saving and start spending in order to stimulate the economy.
1. If the IMF is willing to advocate taxing savers today, you can reasonably suppose that your savings may be actually taxed within the next twelve to twenty-four months.
2. If you’re the kind of person who’s determined to save some of your wealth, you’d better start looking for a means to do so besides using taxable bank accounts denominated in paper or digital fiat dollars. (Hint, hint: you may want to consider purchasing physical gold or silver.)
“The IMF wrote, ‘The magnitude of the overall debt problem facing advanced economies today is difficult to overstate. The current central government debt in advanced economies is approaching a two-century high-water mark.’
If the “magnitude of the overall debt problem in the western economies is difficult to overstate, it will be doubly difficult to ever repay.
If the “current central government debt in advanced economies is approaching a two-century high-water mark.” We can reasonably ask, When in history have total governmental debts ever be higher? And, When in history has such an enormous, international level of debt ever been repaid in full or even by half?
The IMF is clearly warning that the debt problem is unprecedented and implying that the debt cannot and will not be repaid in full.
The IMF is clearly warning that if you dare to continue holding your wealth in the form of paper debt instruments, you will be increasingly likely to suffer a considerable loss.
“Most advanced states wrote off debt in the 1930s, though in different ways. First World War loans from the US were forgiven when the Hoover Moratorium expired in 1934, giving debt relief worth 24% of GDP to France, 22% to Britain and 19% to Italy.
“This occurred as part of a bigger shake-up following the collapse of the war reparations regime on Germany under the Versailles Treaty. The US itself imposed haircuts on its own creditors worth 16% of GDP in April 1933 when it abandoned the Gold Standard.”
Thus, 80 years ago, several western governments had gone so deeply into debt that they couldn’t pay, didn’t pay, and therefore wrote off debts equal to 16% to 24% of their national GDPs. By means of this theft, creditors were robbed and governments were strengthened and enlarged.
Governments have agreed to default on massive debts in the past. There’s no reason to suppose they won’t do it again.
“Financial repression can take many forms, including capital controls, interest rate caps or the force-feeding of government debt to captive pension funds and insurance companies. Some of these methods are already in use but not yet on the scale seen in the late 1940s and early 1950s as countries resorted to every trick to tackle their war debts.
“The policy is essentially a confiscation of savings, partly achieved by pushing up inflation while rigging the system to stop markets taking evasive action. The UK and the US ran negative real interest rates of -2% to -4% for several years after the Second World War. Real rates in Italy and Australia were -5%.
“The weaker eurozone states are particularly vulnerable to default because they no longer have their own sovereign currencies, putting them in the same position as emerging countries that borrowed in dollars in the 1980s and 1990s. Even so, nations [actually, “governments”] have defaulted through history even when they borrow in their own currency.”
Despite government sophistry to the contrary, a fundamental truth remains: What can’t be paid, won’t be paid. Sooner or later, those of you who’ve loaned your wealth to the government in return for mere pieces of paper (promises to pay) are going to lose most of your assets.
Those of you who’ve saved you wealth in the form of gold should at least preserve and will probably increase the value of your assets whenever the day finally arrives when governmental debtors finally admit they’re bankrupt.