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A Rope of Sand: Sovereign Debt Defaults and You

The User's Profile Chris Martenson April 10, 2010
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The terminal phase of the game that we are all currently participating in, thanks to your local central social engineering firm (er, uh, I meant central bank), happens to be sovereign debt defaults.

The only open question is whether that default happens suddenly in the form of an actual default (like Argentina in 2001) or occurs a bit more slowly via the back-door default mechanism known as inflation.

You see, the worst-kept secret out there is that it is now mathematically impossible for real debt to be repaid in current dollars, at least not through any hopeful combination of growth and tax increases that a sober person could possibly concoct.

I really thought Jim Rickards of Omnis Research did a very nice job of expressing these ideas in this recent piece (and to whom the title of this report is credited):

Debt denial

April 9, 2010

The sovereign debt crisis has crossed a threshold. It’s no longer about economics. It’s about math and a complex system whose dynamics tell us there is little time to avoid catastrophe and almost no exit. Going forward, elections and policies will matter less as the debt plague takes hold and dictates hard outcomes.

It is the case that real debt cannot be repaid through any feasible combination of growth and taxes. We will soon arrive at the point where it cannot be rolled over. Debt includes contingent liabilities as well as bonds. In the U.S., this means social security, healthcare and housing obligations estimated at over $60 trillion. That does not include unfunded pension obligations of the states whose plans use fanciful 8% growth assumptions to limit contributions. Pension debt grows exponentially; a toxic brew of increased benefits, contribution shortfalls and anemic performance.

Even what we call money is debt. Paper money is a contract between citizen and government. As with any contract, it pays to read the fine print. Embossed on each U.S. bill is the phrase “Federal Reserve Note.” Give the Fed credit for full disclosure; these notes are liabilities. If the Fed’s mortgage assets were marked-to-market the Fed itself would be insolvent. In short, it’s all debt. Wealth is illusory if it involves a claim payable in dollars which are but a claim on an insolvent central bank backed only by its ability to print more debt.

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Top Comment

[quote=Woodman]
In 2009, the US national debt load grew by 18.7%. According to the US government, there was actually deflation to the tune of 0.4%.
 [/quote]
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