Arnold Kling  

One Scenario for Sovereign Debt

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Robert Samuelson writes,


as economist Arvind Subramanian of the Peterson Institute makes clear in an open letter to IMF Managing Director Christine Lagarde. What the IMF should do is organize a huge rescue fund -- at least $1 trillion to $2 trillion, says Subramanian -- to backstop Europe in case more countries lose access to private credit markets.

Of course, the IMF does not exist separately from its members. Some countries will have to supply this $2 trillion. Will they be content to leave European sovereignty alone? I doubt it. Instead, I imagine something like the DC Financial Control Board being put into place, with the power to override national budget decisions.

In fact, it is not too much of a stretch to imagine a scenario in which Europe, Japan, and the United States all lose their sovereignty in the next few years. We could all be subject to financial control boards under the auspices of the IMF.


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COMMENTS (9 to date)
effem writes:

Couldn't we solve the credit crisis and boost NGDP and retain sovereignty? Just print $2T and hand it to Europe. Problem solved.

Matt C writes:

Ah, but what happens next after that?

Perhaps this will be the incentive that finally gets us in contact with extraterrestrial aliens, who the super-IMF can then beg for a bailout.

John Voorheis writes:

When the IMF has nuclear weapons and a standing army I'll worry about loss of sovereignty.

Hitchhiker writes:

Well Matt, a Super IMF would be the logical next step to provide another imaginary source of free money, just as the super committee is necessary to deflect anger and accountability.

I'm just a used car salesman but, every customer with a 450 Fico score I talk to also feels entitled to maintain access to private credit markets. They also have a hard time understanding why creditors charge them such usurious rates when they are no different in terms of their rights than the 750 Fico score customer. We are all equal, right?

Pop the damn car and stop throwing good money after bad. They're not going to use the money to fix the transmission. They're just going to piss it away and put off the repo man one more month.

Nathan Smith writes:

Bring it on. Ever since Obama got elected, I've been envying the treatment that East Asia got after their crisis. They got austerity and surged back to prosperity within just over a year. We got "stimulus" and we're still in a rut.

mick writes:

Or the military could take over and renounce the debt. This has happened dozens of times in the last few decades...

Georges de Redmont writes:

Recently, Paul Krugman suggested an ECB bazooka approach to bail out Eurozone countries(monetization of sovereign debt). Well, so are all investmentbankers. Is the future of democracy the "full political circle", that is to say, the final link-up of the gauche caviar and hypercapitalism? In fact, we`ve been in that since Clinton, Blair and Schroeder.The bankers wanted to move on and inflate assets, while the new left wanted banks to sell and buy sovereign debt for their Ponzi scheme. It´s as simple as that. The thing that makes people like Krugman so utterly disgusting is the fact that the left believes to have a genetic right to teach everyone on justice. But, it`s been Schroeder who finally broke the labour movement`s neck by introducing the Hartz IV reforms. The fact that labour does not have the power to trigger cost-push inflation anymore, does not mean that QE is inflation neutral. If you look at the internally produced papers of the Bank for International Settlement in Basle, Switzerland, (the Bank that acts as an asset manager to central banks), it becomes quite clear that the real danger of QE is asset price inflation and, consequently, BIS staff made a case for incorporating asset price inflation into official inflation targeting - as early as 2002/2003! However, this discussion went largely unnoticed, because starving children in Africa (as a consequence of a financially engineered increase in food prices), might give the present financial system a final blow. The issue is too hot for the political and financial debt-junkie camarilla - and also for mainstream media which is infatuated by narcisst aloofness to keep everyone entertained. What the whole European political class did instead is to endorse the populist Tobin tax scheme, for tax has allways been the perfect synthesis, both supporting self-serving bureaucrats (fiscalisation of power) and playing the tunes of center to leftist political propaganda (traditionally, the mimetic target of the left has always been the "rich" as the enemy of justice, but since the Daily Telegraph and Frankfurter Allgemeine Zeitung joined the chorus, the political class has become a Girardian amalgam of solidarity with a common crucification cause). The future of democracy is that there is no democracy. The unification of hypercapitalism and political leftism, as exemplified by Krugman`s advocacy for throwing on the ECB printing machine, amply shows that democracy, as it is known today, is nothing but an organised system of multilateral and systemic theft, where political colours do not indicate moral values and principle anymore, but just flag out the gang in power that steals from the general public to serve themselves and the clientele that financed its election.

John Fast writes:

John T. Reed wrote:

The world bond market has the power to put the U.S. into a crude form of receivership where the bond market would decide which entitlement programs, if any, continue. Sad to say, but Americans would probably be better off being run by a receiver than a democratically elected Congress and president.

mick wrote:

Or the military could take over and renounce the debt. This has happened dozens of times in the last few decades...

Well, if the United States went through the equivalent of "Arab Spring," we would be ruled by the U.S. military and a bunch of Christian fundamentalist clergyment. (See GURPS Cyberworld for one possible scenario.)

Georges de Remont writes:

In his De Mutatione Monetarum (Treatise On The Devaluation of Money), medieval scholar and Bishop of Lisieux Nicolas Oresme (1330 - 1382) writes: "Just as any commonwealth of people should not allow the sovereign prince to exercise the droit du seigneur (ius primae noctis), it should also not cede its natural right to control the monetary system which, in the hands of the sovereign prince, serves nothing but his personal profit by devaluation."
Economics only knows two relevant equations: Money bought (1) and money sold (2). You either buy money for goods and services, or you sell it for same. Now, just as feudal power (from Phillipe Le Bel right through Henry VIII) violated equation 1 by reducing the nominally indicated content of bullion or silver from coins in circulation, a democratically elected government does just the same thing by monetising sovereign debt. Either by creating inflation, or by final currency reform, if the debt overload proofs unrepayable.
In the hierarchy of law following the social contractionist tradition (Hobbes, Locke, Hume), any (unwritten) social consent has a higher power than any executive order signed by government and endorsed by (enslaved) judicative power (as a consequence of a multi-partisan setting within a realm of vested organised interest). This is particulary true if any (unwritten) social consent (like the ban to pursue inflationary policies, including asset price inflation that leads to higher cost of living, not to speak of currency reform as a consequence of unpayable debt)touches natural law in the sense of Lockian existential rights.
Based on this analysis, the monetisation of sovereign debt as practiced by the Fed and the Bank of England is absolutely illegal and the people of the U.S. and Britain should take immediate action to re-establsh their natural rights by taking control over the financial system.
Of course, A Hayekian private currency model cannot be the answer. For, sovereign debt is, to some extent, the expression of unresolved distributional conflict. In this sense, today`s market economies only focus on equation 1. Money buys goods and services, yes, but goods and services do not necessarily buy money (otherwise there would be no unemployment). So, giving the control over the monetary system back to the people is just more than privatising a currency. It entails an obligation. The job that needs to be done is to remove distributional conflict that causes excessive deficit spending, that is to say, to remove unemployment and excessive income disparity from the market system w i t h o u t government intervention. Is society ready for such a voluntary act? Well, there is one thing that seems to be sure. The present financial crisis is, at its heart, the greatest socio-political crisis since WW II. The challenge seems to be to rethink society as a whole. So, giving "money back to the people" in a globalised economy means the end to centralised nation state government and global self-responsibility for all exchange partners. Seems like "Age of Enlightenment II."

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