In the late 1990s, I met a Chinese businessman here at Dallas who knew his business would soon go bankrupt. He concealed that knowledge from his bank and other financial institutions.
In anticipation of that bankruptcy, he applied to 10 different banks for credit cards. Believing his business to be financially viable, the banks issued all 10 credit cards–each with a $25,000 limit. He acquired a collective credit limit of $250,000.
He exhausted his $250,000 credit card limit in the first month after he received the credit cards. He bought TVs, lawnmowers, new clothes and signed up for vacations. Then, he paid nothing on the cards. When each of the 10 banks contacted him asking for payments, he replied that he’d be happy to pay if the banks would simply verify the debts.
Under the federal Fair Debt Collection Act, each debtor was entitled to demand that his creditors verify any alleged debt. Verification meant that someone had to swear under oath that the debt was actually incurred by the particular debtor. As a practical matter, this meant that in order to verify each of the debts incurred on the ten credit cards, the banks would have to find the store clerk who processed each, particular purchase. Then, each clerk would have to remember the dates and time of the transaction, remember the purchasor, and swear to that recollection under penalties of perjury.
The odds that the banks would be able to find all of the individual clerks who not only rang up each purchase, clearly remembered doing so, and would testify to that recollection under oath, were virtually zero. After all, every clerk typically rings up hundreds of purchases in a single day and thousands in a week. No clerk could be expected to remember specific purchases that were made several months earlier—and video records of each day’s check-out counters were largely unknown back then. The cost of finding each clerk and providing a notary to memorialize each oath would also be substantial.
Result? The banks stopped all collection proceedings.
The Chinese gentleman’s business went bankrupt but, before it did, he defrauded ten banks out of with $250,000—and he got away with it.
• I bring the previous story to your attention because it reminds me of what I seem to see among major governments today.
The United States government is so deep in national debt that that that debt will never be repaid and must eventually be repudiated.
Japan’s government is currently printing trillions of more fiat yen in order to inflate their currency and “stimulate” the Japanese economy. The result will be a Japanese national debt that’s too great to ever be repaid. As with the US, much of Japan’s debt will eventually have to be repudiated.
The European Union is planning to print trillions more euros in order to inflate their currency and “stimulate” the European economy. As with the US and Japan, the result will almost certainly be an EU “national debt” that’s too great to ever be repaid in full and must therefore be substantially repudiated.
Thus, although the world’s major governments’ debt are already too great to ever be repaid in full, those governments continue to dive deeper into debt.
Does that make sense? Not at first glance.
Either 1) the economies these governments represent are so fragile that the governments are desperate to keep them functioning by any means possible; or, 2) there may be some other “secret” rationale to justify a bunch of bankrupts plunging deeper into debt.
• In search of that “secret” rationale, I’m reminded of that Chinese businessman who, knowing his business was about to go bankrupt, went deeper into debt for another $250,000. That also didn’t make sense, except that Chinese debtor knew how to repudiate that $250,000 in debt. In essence, the Chinese businessman knew he was about to go bankrupt and therefore rang up an extra $250,000 in debt which would be uncollectible—and he could escape being held liable for fraud by simply demanding that the banks verify his credit card debts. He thereby defrauded the 10 banks that issued him $250,000 in credit.
Good for that debtor; bad for his creditors.
Is it possible that some of today’s largest governments also know that they are about to go bankrupt? Have they (like the Chinese businessman back in the 1990s) concealed the knowledge of their bankruptcy from their creditors (the people of their nations)? Are the governments (like the Chinese businessman) therefore running up as much debt as possible in order to defraud their creditors before they have to admit they’re bankrupt?
Are the US, Japanese, and European governments running up so much debt because they truly believe they can thereby “stimulate” their respective economies? Or are those governments really just running up their national debts in order to enrich and empower themselves by defrauding whichever creditors are sufficiently foolish to lend currency to governments that are already (technically) bankrupt?
• Suppose a global depression occurred. The major government debtors would have a perfect excuse to repudiate their already massive, unpayable debts.
More, in the context and chaos of a global depression, it would be virtually impossible to prove who was responsible for that depression.
American politicians could blame Japan and EU (or maybe China, Russia and the BRICS) for the depression. Japanese politicians would blame the US and EU. The EU could blame the Japan and US. Some politicians might even blame God for causing global depression with failed harvests, exceptionally cold winters, exceptionally hot summers, floods or drought.
It would be virtually impossible to prove who was truly responsible for the global depression and therefore virtually impossible to prove who was responsible when each government’s bonds turned out to be worthless. A “political prosecution” of the responsible government or nation would be as complex and futile as the ten banks trying to prosecute the Chinese businessman. The creditors would have little or no real recourse. The world would pretty much have to simply accept the resulting financial loses.
Knowing that a global depression was coming would be just about like the Chinese guy knowing his business was going bankrupt. Both a global depression and a business bankruptcy could help to excuse a scheme by governmental debtors to defraud creditors.
• If a “natural” global depression that couldn’t be stopped could help governments repudiate most of their debt, what about an “artificial” global depression that was intentionally caused by several of the world’s government?
What if some of the major governments of the world agreed to “pull the plug” on a particular date? What if those government intentionally precipitated a global depression at particular date and time, for the purpose of defrauding creditors around the globe out of additional trillions of dollars? The creditors could include private investors, pension funds, banks and even other governments. The resulting fraud might be a disaster for the people (creditors), but it might be great for overly-indebted governments (debtors).
Therefore, I’m looking at the enormous increase in global, governmental debt and wondering if those governments aren’t implementing a scheme to defraud their creditors that (except for magnitude of the fraud) is just like the fraud perpetrated by the Chinese businessman at Dallas 25 years ago.
If there were any validity to this speculation, you’d have to be out of your mind to lend your wealth to the government or any institutional closely associated with the government.
Major governments are going deeper into debt because either:
1) they truly believe more debt will stimulate and even save their national economies; or,
2) they know their economies will soon collapse, most government debt will be repudiated or “reset,” and governments are trying to take advantage of their ignorant creditors.
Which explanation sounds more likely to you?
Can anyone really believe that going deeper into debt will somehow save insolvent governments from bankruptcy? (Even if that strategy is plausible, what are the chances that it will work?)
Or is it more likely that major governments are running up massive debts knowing that it’s only a matter of time before those debts are repudiated and rendered worthless?
How long do you suppose it might be before we see a global “reset” that cancels virtually all governmental debt?
Hard to say. Six weeks? Six month? Six years?
• Why, incidentally, might we expect to see a global “reset” of virtually all government’s currencies at the same time?
A: To avoid a major war.
I.e., if the US were to unilaterally repudiate all of its debts, that repudiation might make one or more nations who’d lent currency to the US gov-co mad enough to go to war. That war might be “hot” or it might merely be economic. But, what nation wants any kind of war after its repudiated its debts?
Wouldn’t it be simpler and more “hospitable” if all government entered into an agreement to simultaneously repudiate most of their debts with a currency “reset” whereby 100 current US dollars would be revalued to 10 “new” US dollars and 100 Japanese yen would be revalued to 10 “new” yen, etc.? That way, the governments would agree to simply cancel all of their mutual, international debts and have to deal only with their own defrauded people. I.e., if the international debts between national governments and national institutions could be canceled, there’d be no need for international war.
As a result, the US gov-co would primarily defraud only the American people. Japan’s gov-co would primarily defraud only the Japanese. The EU’s gov-co would primarily defraud only the people of Europe, there’d be no call or need for international war. This fraud could be blamed on some unpreventable, unexpected economic catastrophe. But as a result of that “catastrophe,” the governments might lose virtually all of their debts and their peoples might lose much of their paper assets.
So long as virtually all nations (including China) were allowed to reset the values of their currencies in order to repudiate most of their debt, no nation would have a complaint sufficient to justify going to war.
• Nevertheless, if the governments of the nations knew that a “reset” was coming, it would create a “moral hazard” whereby those governments, knowing their debts would soon be repudiated, would be tempted to run up even more debt—just like the Chinese businessman did back at Dallas in the 1990s. If there’s a crash coming that’s guaranteed to repudiate all governmental debt, governments have an incentive to go as deep into debt as they can before the crash takes place.
And that is why I can’t avoid the suspicion that US, EU and Japan may be going deeper into debt: because they know that a moment of global debt repudiation and/or currency reset is fast approaching that will soon repudiate all of their debts. That moment of debt repudiation creates a moral hazard and incentive to go deeper into debt. I suspect that the governments may be succumbing to that temptation.
• Of course, my suspicions could be wrong. It wouldn’t be the first time.
Maybe the world’s governments aren’t planning for a global currency reset and/or global debt repudiation and a massive defrauding of their citizens and creditors. Maybe these governments sincerely believe that they can solve our current economic problems by going deeper into debt.
But, either way, although some of the world’s major governments are already too indebted to ever repay their debts in full, they’re going even deeper into debt. What’s the probability that you or I can get out of bankruptcy by going deeper into debt? It’s not impossible, but it’s not likely. Similarly, what’s the probability that insolvent governments can escape bankruptcy by going deeper into debt?
So, what’s the probability that governmental creditors will recover most of whatever wealth that’s been directly invested in government bonds or indirectly invested in government bonds by means of pension funds?
If government debt is too deep to ever be repaid in full in the US, Japan and the EU, that debt must eventually be repudiated. While we wait for that day of reckoning (or day of “reset”) where should you be saving your wealth? In paper-debt-instruments (promises to repay) or in something tangible (actual payments received) like land, tools, buildings or physical gold?