Trillion Dollar Challenge

Victims are controlled by events. Leaders control events. Entrepreneurs seek opportunity in events. So how do you react when confronted by the overwhelming debt which western governments are imposing on us and our children?

The easy way out is to complain about it, whine about politicians and then leave it to someone else to sort out the mess. That is called hoping to get lucky. But hope is not a method and luck is not a strategy. Instead, why not do something about the debt yourself? Take a lead. In March 2012 I wrote an article in the FT which proposed that we can eliminate $2 trillion of debt in the United States and the United Kingdom. $2,000,000,000,000 is worth something, along as it is not Zimbabwean dollars. The UK alone would benefit to the tune of 325 billion.

Here is How it Works

QE (quantitative easing) is the programme by which the central banks create money and buy government debt. This is Zimbabwean economics: buying assets with money which you create via the electronic printing presses. By QE sounds sophisticated, whereas printing money sounds like Zimbabwe or the Weimar republic.

So what happens to all this debt once the Bank of England or the Fed has bought it? The common assumption is that it will get sold back into the market. And that is nuts. If the Bank or the Fed tried doing that today, there would be a riot with well heeled bankers and economists at the front of the riot. They would all protest loudly that selling debt into the market will raise interest rates (true) and be deflationary (true). The same argument will apply in six months and six years: selling the debt back into the market is both deflationary and raises interest rates. It is the mirror image of QE, and a very dark image at that. No self respecting government will allow this to happen. To misquote St Augustine, each government will say let us sell the debt back, but not just yet.

The honest solution is to retire all $2 trillion of the debt. The central banks would retire the debt and cancel the money they created to buy it in the first place. There are no losers in this. But suggesting this gets technocrats and people who enjoy the arcane world of central bank accounting frothing at the lips with indignation. There is a theoretical risk that the joint stock banks, who sold the debt to the central banks, would ask for their money back. That is a surreal risk. Look at the ten pound note in your pocket: it says I promise to pay the bearer on demand the sum of ten pounds. It is an IOU written by the Bank of England, supported by nothing other than the Banks word. So if the joint stock banks want their money back, they will have to produce the IOUs they have (the ten pound notes) and ask for their money back (more ten pound notes). The greenback puts it more simply: In God we trust, although the display of trust in green bits of paper is even more important for economic survival.

[note color=”#D8EBD4″]The most probable way out of this mess is for the Bank to roll over the debt. This may be achieved by selling the debt back into the market while at the same time the Treasury issues an equivalent amount of 1000 year debt which the Bank buys up. Eventually, the markets will work out that this debt is dead and it will be discounted when calculating the national debt. So each household in the UK gets a nice bonus of about 13,000. That is not money we can spend today, but it is like having 13,000 wiped off our mortgage.[/note]

The eurozone economies are not so lucky. They have not engaged in QE. Their equivalent has been LTRO, which has bought some government debt but has also bought a lot of commercial debt. There is no way to retire commercial debt: that has to be repaid. And the eurozone faces two more challenges. The first is that financing government debt through monetary policy is illegal. That is a trivial objection: the EU has always been happy to ignore the law when it wants to, as with the Growth and Stability pact. And Bank of England has shown how you can circumvent the law: buy longer dated gilts through a special purpose vehicle and you dodge the legal bullet. But the big problem for the EU comes in the form of a question: who benefits? The debt laden countries will argue that they need to benefit; the rich countries will argue that it is their money. You could sell tickets to watch that negotiation.

And finally, there is the question of why no one has thought of this before. Where are all the masters of the universe with brains the size of planets in the investment banks? They worry about massive government debt and write about it, but appear not to think about it. Economists, academics, Bank and Treasury officials also all seem to be asleep on the job. They have all fallen for massive group think: no one has challenged the basic assumptions about QE. In other words, they are showing precisely the same problems which led to the credit crunch: massive group think; lack of challenge or perspective and smug complacency in their own genius.

For the record, this web page was created in April 2012. Right now, what is being suggested here is heresy. As with many heretical ideas, it will become orthodoxy and all the smug dead heads who decry it now will claim authorship of the idea when it becomes mainstream. My guess is that it will take five years for this idea to go from heresy to orthodoxy.


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