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Greek debt bought up by US and British banks?  I don't think I buy that; the debt is allegedly at the ECB via the various machinations undertaken over the last few years in Europe, and as far as I know there is no "put" provision allowing the ECB to forcibly throw it back.  The BIS table Bill cites is from late 2014, and in any event it's a small amount -- which supports my primary contention (which is that most of the trash is in fact at the ECB at this point.)  However, a capital call by the ECB against the members of the EU were the Greeks to hold a bonfire with their bonds on the steps of Parliament is certainly not going to go over well, and the potential for mass-defections from the EU and ECB should such an event occur is very real.

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Heh heh....

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2015-07-06 15:31 by Karl Denninger
in Other Voices , 116 references

Ok, fair enough (and it was I who posted the critique.)

But, two points.

First, there's no interest to compound if there is no debt.  Therefore, if we stop deficit spending there is no debt to service and thus no interest to compound.  If One Dollar of Capital is implemented in the banking system then private banks cannot play their games in the private sector and devalue the currency via that method either, so the issue is effectively neutered.

Second, if you have a debt-free currency and issuing nations are free to issue it as they wish deficit spending can be simply printed into existence.

This is nearly as evil as debt-financed deficit spending.  The reason is found in arithmetic -- when you issue more "moneyness" into the economy irrespective of how you do it the devaluation takes place right then and there -- it is immediate.  While in a debt money system there is a second order effect in the form of compounding interest (which is inevitably financed, and thus gets rolled into the devaluation over time) it is a small percentage of the devaluation.  By the time it compounds sufficiently to become the primary issue destruction of your economy has already taken place in the gross sense (as is shown by Greece; the problem isn't the interest, it's the €300-odd billion principal and its refinancing-or-principal-payment requirement!)  It is deficit spending itself that is the major element of the problem because it expands geometrically in order to "keep pace" with the size of the economy that is being goosed by that act while the compounding interest expands as a percentage of that geometric expansion.  By way of example if your blended interest rate is 5% and you have a $15 trillion economy the point at which 10% of your economy is consumed by interest payments doesn't occur until you have $30 trillion in debt accumulated -- way beyond the "event horizon" of your economic destruction as you will be in permanent negative real GDP territory before that time arrives as a result of the direct exponential devaluation.

Therefore, yes, we must prohibit deficit spending because it is always and forever mathematically unsound and if practiced will always and forever eventually blow up your economy and nation's fiscal health.

But to be clear, it must be prohibited irrespective of the means by which it occurs, whether through "debt-free money" issuance or borrowing.  The sole instance where it can be justified is in true national extremis (e.g. during a declared, actual war such as if you are being invaded) as if you fail to prevail in that case there will no nation left to repay the debt or absorb the devaluation anyway.

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Oh Bill! BILL!  Deficits, whether "printed" or borrowed, in excess of GDP expansion (or contraction, if it's contracting!) always blow up in your face.  This is mathematics, not politics, and there is nothing you can do about it.  We will never solve the economic issues that face us, nor deal with the boom/bust/bigger boom/bigger bust problem until we cut that **** out.


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