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Does Fiat Currency Make Fiat Debt and Fiat Debtors?

26 Apr

Fiat Dollars make Fiat Debt? [courtesy Google Images]

Fiat Dollars make Fiat Debt?
[courtesy Google Images]

The New York Times published,“Greece Flashes Warning Signal About Its Debt”:

 

“As Greece now gropes for a resolution to its current financial problems . . . Athens might still be holding out hope for a restructuring [defaulting on most] of its debt burden of 303 billion euros, or $327 billion.

“. . . the eurozone braced for the prospect of a default. . . . Repercussions of such a default are so difficult to predict that European officials have spent the last five years trying to avoid one.”

 

I agree that the “repercussions” of a Greek default are “hard to predict”.   But that difficulty doesn’t necessarily mean that all of the possible outcomes of a Greek default would be catastrophic.

Most people assume that a Greek default could precipitate a Greek depression, EU depression or even a world depression.  All of the possible repercussions seem grim, but could it be that this Greek tragedy is really a black comedy?

What about central banks?  Could a Greek default ultimately hurt the central banks more than the Greek, EU and global economies?  Have central banks and creditors extended the Greek bankruptcy for five years just to protect little Greece?  Or, was it to protect the EU and global economies?  Or—have central banks strung Greece along for five years for the primary purpose of protecting the central banks and the world’s confidence in fiat currencies?

Could it be that, from the perspective of central banks (whose only products are fiat currencies), the primary danger in a Greek default might not be that the creditors won’t get paid, but rather that Greece suffers no significant harm?  If a Greek default was largely painless for Greece, would the world realize that there’s little real adverse consequence to defaulting on debt denominated in fiat currency?

 

Iceland

If the previous question sounds silly, there is precedent.  Iceland was overly indebted between A.D. 2008 to 2011.  Banker-creditors wanted Icelanders to accept “austerity” to repay the debt.  Icelanders refused austerity, told the bankers to “stick it,” and expressly refused to pay their nation’s debts.

The world was shocked.  Everyone assumed Iceland would suffer a catastrophe for defaulting—and Iceland did have a difficult 18 to 24 months after the default.  But they survived and went on to quickly rebuild their economy into one of the West’s most prosperous.

What if Greece defaulted and, like Iceland, its default turned into a non-event?  What if Greece refused to pay its bills and the world didn’t come to an end? What if Greece defaulted and was back on its feet within two years?  How many other debtor nations would begin to wonder if they could also default on their debts without being doomed to a prolonged economic collapse?

I’m not arguing that Greece could default without experiencing a sharp, national depression.  But I am arguing that, as with Iceland, the duration of that depression might be brief and the subsequent recovery might be remarkable.

I’m reminded of reports over the years of Americans who filed for bankruptcy being subsequently deluged with new credit card applications since they couldn’t file for another bankruptcy for seven years.

Something similar might also be true for Greece.  They default, wipe out most of their existing debt, and the world’s creditors—knowing that Greece couldn’t easily default again and is now debt-free and therefore likely to repay new debts—might be inclined to lend Greece enough currency to restart their economy.  (As a creditor, would you rather lend to a debt-free Greece, or the overly-indebted United States government?)

 

Cui bono?

All of which makes me wonder whether Greece is involved in “extend and pretend” for the primary purpose of:

 

1) protecting the Greek people from the adverse consequences of default;

2) protecting Greece’s creditors from losses if Greece defaults; or

3) protecting the world’s central banks and their fiat currencies from the world realizing that a default on a debt denominated in fiat currency might not result in catastrophe.

 

We live in a world where fiat currency can be “spun out of thin air”.  If the Greek default is really as potentially dangerous as some fear, why not have the European Central Bank simply print an extra 300 billion fiat euros, pay the Greek debt and be done with this seemingly endless drama?

I suspect that the answer to that question may be that the illusion of fiat currency value must be maintained by pretending to be uncompromising in the collection of debts denominated in fiat currencies.  (The same answer might also explain the primary purpose for the income tax:  to maintain the illusion that fiat dollars (monopoly money) have real value worth fighting for.)

Has the Greek default drama been dragged out for five years to support the illusion that fiat debts are “real” and must be paid or economic catastrophe will necessarily follow?

 

Fiat Debts?

Given that a fiat currencies aren’t real money, are debts denominated in fiat currencies real debts—or could those debts be more accurately described as “fiat debts”?

What would happen if a Greek default showed the world that the adverse consequences of defaulting on a fiat debt were both brief and easily survived?  Would other debtors and debtor-nations also want to default?

We’ve already seen little Iceland openly default on its fiat debts and come to little or no harm.  What if a second, slightly-larger nation like Greece also defaulted and was back on its feet within two years?

If Greece were seen to have defaulted more-or-less painlessly on a fiat debt, would people around the world begin to realize that fiat currencies not only have no real value as assets but also have no substantive value as debts?

If the currency is fiat and therefore fictional, does it follow that debts denominated in fiat currency might also be fiat and fictional.

If the idea of “fictional debt” seems absurd, please explain “derivatives” which are said to represent somewhere between 1 and 2.5 quadrillion dollars in debt?   That works out to about $350,000 for every man, woman and child on the planet.  Can such a debt possibly be real?  Or must such debt necessarily be fictional?

Do fiat currencies produce fictional debts?

Do fiat currencies produce fiat debtors?

We all know that when the banks “spin” fiat currency into existence to be loaned to borrowers, they don’t also “spin” enough currency into existence to repay the loan.  That means the resultant debts can’t be paid in full and must result in larger and larger accumulations of unpaid debt.  If it’s impossible to repay a debt, is that debt still real?  Or is it fictional?

If fictional debts do exist, what are the substantive repercussions if people fail to repay those fictional debts?

What’s your legal obligation to repay a fiat/fictional debt?

Are we enslaved to central banks by our mere belief that our fictional debts must be repaid?

What would happen if the world–like little Iceland and perhaps Greece–lost its belief that its fictional debts must be repaid.

If the world refused to repay fictional debts, would the world escape fictional debt-bondage and become more free?

Are creditors and central banks preventing a Greek default in order to prevent the world from learning that a default on fiat/fictional debt could be largely insignificant?

 

 
15 Comments

Posted by on April 26, 2015 in Debt, Fiat Currency, Fictions, Money, What Can't be Paid

 

Tags: ,

15 responses to “Does Fiat Currency Make Fiat Debt and Fiat Debtors?

  1. Roger

    April 26, 2015 at 3:26 PM

    > If the idea of “fictional debt” seems absurd, please explain “derivatives” which are said to represent somewhere between 1 and 2.5 quadrillion dollars in debt?

    Whoever said financial derivatives represent debt is at least an ignoramus, if not an outright fraud. A derivative is not a debt instrument.

    I suggest finding a more trustworthy source for financial information than whoever made such a basically erroneous, and even potentially hazardous, statement.

     
    • Adask

      April 26, 2015 at 6:03 PM

      A derivative is a debt instrument in the same sense that a bet at a race track is a debt instrument. Under certain conditions, the race track might pay off 5 to 1 or even 100 to 1 on that “bet”. That promise to pay (if a particular horse wins) is a debt. In the same sense, a derivative is a promise to pay if certain economic conditions occur. Those promises to pay (under certain conditions) constitute a debt.

      If derivatives do no represent promises to pay under certain conditions, what do they represent? If derivatives are not a debt, what are they?

      Somebody paid to buy those derivatives on condition that, under certain circumstances, the derivative would be repaid by whoever sold the derivative in the first place. The original payment was made in return for someone to assume a debt obligation.

      In any case, I asked for an “explanation” of derivatives, not a denial of the premise. Where’s your “explanation” of derivatives? Do you have have a credible explanation/definition for derivatives that disproves their status as debt instruments?

      Also, while I may be ignorant concerning the absolute nature of derivatives, I’m not alone. Back about A.D. 2007, Ben Bernanke had to ask one of the major Wall Street financial entities to explain “derivatives” (a relatively new creation) to him. Most people are “ignorant” when it comes to the nature of derivatives. But there is no doubt that under certain conditions, someone will be obligated make payments to whoever is holding those derivatives. If derivative can result in payments, derivatives are debt instruments.

      If you’re implying that I am “an outright fraud,” for having “said financial derivatives represent debt,” I suggest that you are an incompetent reader. If you look at the relevant paragraph where I wrote about derivatives, you’ll read:

      “If the idea of “fictional debt” seems absurd, please explain “derivatives” which are said to represent somewhere between 1 and 2.5 quadrillion dollars in debt? That works out to about $350,000 for every man, woman and child on the planet. Can such a debt possibly be real? Or must such debt necessarily be fictional?”

      Note that the paragraph includes one statement (as evidenced by the period at the end of the statement) and three questions (as evidenced by the question mark). The use of three question marks implies that I recognize that the fundamental premise concerning “fiat debt” is debatable. There is no intentionally false statement included in that paragraph. The paragraph is intended to elicit contemplation. It contains no fraud. It is only intended to illustrate that some debts already exist that are so enormous that they can never be repaid and must therefore be fictional and arguably “fiat”.

      If you are suggesting that I am acting fraudulently in writing that article, I suggest that you prove or retract that suggestion, or stop visiting this blog.

       
      • Henry

        April 26, 2015 at 6:40 PM

        Hey Al, Roger’s “at least an ignoramus if not an outright fraud” comment was meant to describe the source you quoted. It’s not your fault you were given erroneous financial info by someone who pretends to know better.

        As to derivatives not being debt, we have this from the Bank for International Settlements:

        Financial derivatives are not debt instruments. In general, no principal amount is advanced that is required to be repaid, and no investment income accrues on any financial derivative instrument. Nevertheless, an overdue obligation on a financial derivative contract is classified as an account receivable/payable (as the claim becomes a debt instrument).”

        So we see that the “between 1 and 2.5 quadrillion dollars” worth of derivatives don’t represent actual debt, though each derivative contract does correspond to a potential future debt under certain circumstances.

         
      • Roger

        April 26, 2015 at 7:42 PM

        @Alfred

        You stated that derivatives are “said to represent somewhere between 1 and 2.5 quadrillion dollars in debt”. I quoted this statement to make it clear that my criticism was directed toward the charlatan who “said” this and whom you trusted to be an honest and qualified source with no undisclosed conflict of interest.

        I wasn’t clear enough, evidently. Apologies for the misunderstanding.

        @Henry

        Thanks for chiming in.

         
    • john patterson

      April 27, 2015 at 1:01 AM

      If a derivitive is based on a mortgage I.e. mortgage backed derivatives, is that not a debt instrument? There is no financial instrument today that is not based on debt.

       
      • Adask

        April 27, 2015 at 3:40 AM

        If I say “$2.5 trillion,” what can that mean? It could signify $2.5 trillion in assets, or it could signify $2.5 trillion in debts. It might even signify a relationship where one party was entitled to $2.5 trillion in assets based on a second party’s $2.5 trillion in debt.

        Thus, to me, it seems that the term “$2.5 trillion in derivatives” must signify that the derivatives are either assets or debt, or perhaps a relationship where a creditor and debt share the two “sides” of a monetary relationship denominated as $2.5 quadrillion shared as an asset by the creditor and a debt by the debtor. But, unless “$2.5 quadrillion” signifies something other than an asset and/or a debt, what can a derivative be besides an asset and/or a debt?

        If so, I can’t see how describing a “$2.4 quadrillion derivative” as a “debt” or even “debt-instrument” can be easily dismissed as an act of ignorance.

         
      • Henry

        April 27, 2015 at 10:41 AM

        If a derivitive is based on a mortgage I.e. mortgage backed derivatives, is that not a debt instrument?

        No, a derivative is not a debt instrument. A derivative is a contract for managing risk. You can think of a derivative as a risk instrument, a type of insurance (though derivatives are also used by speculators to deliberately increase their exposure).

        Because a dollar figure is associated with a derivative, one might naively assume that the derivative somehow represents either an asset or a liability. This is incorrect. The dollar figure associated with a derivative is only conditional.

        Most derivatives expire worthless without any money ever changing hands. And this is not because anyone “defaulted”, rather it’s because the market conditions under which the derivative would have become a debt instrument were never met.

         
      • Adask

        April 27, 2015 at 12:21 PM

        If a 10-year U.S. bond is a debt instrument, isn’t it also “conditional” on both lender and debtor being alive and solvent in 10 years? Isn’t the U.S. bond a kind of “insurance” that guarantees that your money will be safe for 10 years? But, will the U.S. be solvent in ten years? Will the U.S. “reset” the value of the dollar in the meantime? If the U.S. bond can’t be guaranteed to repay the original loan in full in terms of purchasing power (not just nominally) is is really a debt-instrument or is it really a scam–or perhaps even a derivative?

        If a 30-year mortgage is a debt instrument, isn’t that also “conditional” on the bank and borrower being solvent in 30 years? Isn’t it conditional on the price of the house growing fast enough to avoid being “underwater” and watching the debtor walk away from the loan?

        I don’t see how “most derivatives expire worthless without any money ever changing hands.” Surely, all derivatives required money to be paid to purchase the derivative in the first place. Money does change hands. And while it may be true that derivatives can “expire” without the party that sold the derivative/”insurance” repaying any money to the purchaser–prior to the expiration, that derivative is still a promise to pay something to the purchaser under certain conditions. It may be that after “expiration,” a derivative is not a debt-instrument, but until the derivative expires, it seems that it is a debt-instrument.

         
      • Henry

        April 27, 2015 at 2:43 PM

        > If a 10-year U.S. bond is a debt instrument, isn’t it also “conditional” on both lender and debtor being alive and solvent in 10 years? Isn’t the U.S. bond a kind of “insurance” that guarantees that your money will be safe for 10 years?

        A derivative and a government bond are similar in that way. On the other hand, a derivative is different than a government bond because explicit terms are often written into a derivative contract such that the derivative is likely to expire worthless, similar to an insurance policy.

        Government bonds are designed to pay every time, and thus meet the definition of debt instruments. Derivative contracts are designed to pay only some of the time, when specific conditions are met, and thus don’t qualify as debt instruments.

        > I don’t see how “most derivatives expire worthless without any money ever changing hands.” Surely, all derivatives required money to be paid to purchase the derivative in the first place. Money does change hands.

        This is not what financial jargon means by a derivative contract “expiring worthless”.

        When someone says there are two quadrillion dollars worth of derivatives, they’re talking about the total “notional value” of all those contracts. But most derivative contracts expire worthless, without their notional values ever changing hands – which is why financial derivatives are not debt instruments.

        The money that obviously does change hands is the transaction costs incurred in setting up all those contracts. But this is a trivial fraction of the notional value of the derivatives.

         
  2. kanani

    April 26, 2015 at 4:18 PM

    If you sign the contract…well you know.

    Just this week, did some home loan research. Taking roughly a home loan of 200k would have me paying back the 200k principle + 237k in interest over a 30 year mortgage. That is buying more than two homes…anyway I don’t I think want a home that bad.

    Quit signing contracts & taking oaths you do not comprehend.

    Stay a slave.

     
  3. wholy1

    April 26, 2015 at 4:56 PM

    Is fiat “currency” the “real” issue or the more elemental issue f it being issued as a loan with the accruing interest coupon portion NOT being issued? Is not asset stripping/consolidation and war usually the bankster’s final solution to the “mother of all pyramid schemes”.

     
  4. palani

    April 27, 2015 at 6:07 AM

    A derivative may or may not be debt. Certainly it depends upon whose obligation it is and who is the one the debt is owed to. For there to be an obligation by me then there must be an “original” document that exists as a monument to that debt. If brought to task for any obligation real or imagined I would suggest just asking to see this original document. If one can be found and presented I would immediately plan on flipping it over and endorsing it. The public side of the document (the front) may or may not be valid but nobody could dispute the endorsement on the private side and that is the one that represents the creditor.

     
  5. Adask

    April 27, 2015 at 12:09 PM

    Given that we have a “debt-based monetary system,” it appears that all things denominated with the “$” dollar sign may be, technically, a debt instrument.

     
    • palani

      April 27, 2015 at 5:54 PM

      Debt and voluntary servitude being synonymous? Law requires substance but that is only when specific performance is demanded. Equity requires no substance but with equity you are likely to be left with two halves of a baby rather than a whole one.

       

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