2 thoughts on “The Loan: An Exchange of Wealth for Income

  1. JCAS

    One word: brilliant! Spot on analysis; Keith. Thx.Couple of points / questions; I have these in the supportive kind of way :-)What to with derivatives, futures, swaps, etc.? As you mentioned and explained elegantly, derivatives are a big mess. What is your view? Should derivatives be declared legally void, or do you see other – more effective – mechanisms available to de-cumulate / delever all these "unbacked" paper bets? To add a point on liquidating debt – and I am really curious here – I’ve always liked Luigi Zingales’ "Plan B" (2008). His plan puts forward a step by step plan to deal with excessive mortgage debt and insolvent banks, simultaneously. Globally, monetary expansion or credit, flowed amongst other, into real estate. After public debt, it has become the biggest collateral market – at least in most countries (the BIS published lots of stats lately on this). Collateral that’s loosing value due to collapse in credit. I think this should be addressed alongside the gold approach you presented. What’s your take on this point of excessive private debt? In case you have not heard of Zingales’ approach, it’s definitely worth the read. Key-words? Debt-for-equity swaps, possibly followed by a bankruptcy liquidation regime. Interestingly, these debt-for-equity swaps apply to both the asset side of the banks’ balance sheet as to their liability side. If the US can clean up its judicial nightmare through MERS, it would work.What is of interest to me is that I always considered his approach necessary to liquidate "domestic" or "internal" debt. Gold, on the other hand is the means in "first, last and basically only resort" for governments to liquidate their debt (as you made abundantly clear). I do however wonder about the sequence in using gold in light of domestic and "external" debt. I know that possibility and probability are not one and the same – though of course I hope for the best – but let’s assume for the sake of our inquisitive minds that some countries or blocs will pursue this approach and some actively not, and possibly resist. Where’s the incentive for governments to coordinate so that they can help out each other and arrange for gold to flow internationally? If not all countries or an important bloc does want to join "the gold party", how would this play out? To me, this has been and is one if not the key issue behind the scenes right now. Again, thx for this great read!! kind regards,JCAS

  2. Keith Weiner

    JCAS: thanks for the comments / questions. Let me respond in order:1) Swaps, derivatives, etc. I think it would be extremely problematic to try to cancel them. Not only is one party’s liability another’s "money" in our perverse system, but many of these positions are hedges against something else (or something else is the hedge against them). If the other side is not also simultaneously cancelled, then the party suddenly ends up naked a position he did not intend! For example, when MF Global went bust, Australia decided to cancel certain positions of MFG clients. Imagine waking up one morning to find one’s hedged long Australian gold miners / short Canadian gold miners position half cancelled. Now one is naked short Canadian gold miners!2) The question of private debt is a separate question that I did not treat in my paper. I think part of the solution is rolling up into the government debt problem as governments are taking on the debt from the private sector. I think part of it would be that private debtors would need to also issue gold bonds at some point to replace their outstanding paper bonds / debt. Clearly a lot more work and thought needs to go into this.3) I think the key to any practical proposal is that it has to work for whomever adopts it, even if he goes alone. If it depends on everyone agreeing in advance, then it will never work. If one country adopted gold bonds to pay off its paper debt, then that country would find its economy getting much stronger relative to every other country’s, and it would experience capital inflows. This would be real capital and not so-called "hot money" (hot counterfeit credit). In any case, those countries which don’t adopt this are headed towards a total wipeout.


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