{"id":4053,"date":"2016-04-07T15:04:28","date_gmt":"2016-04-07T13:04:28","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=4053"},"modified":"2016-04-07T15:04:28","modified_gmt":"2016-04-07T13:04:28","slug":"the-big-write-down","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/the-big-write-down\/","title":{"rendered":"The Big Write-Down"},"content":{"rendered":"

\"\"History shows us that, when faced with a problem, the option that is ultimately adopted is the one that causes the least pain to the majority in the short term, even if it is not the best, simplest or most rational solution. Conversely, options that are detrimental and more painful for the majority \u2013 even if they are the best or only solutions \u2013 rarely end up being implemented. For this reason, a more than likely outcome to the dead end into which the central banks have \u2013 or rather, have forced us into \u2013 with their endless creation of money and debt, could well be a massive and unprecedented write-down<\/a> or the designed default on that debt. Let\u2019s look at the details.<\/p>\n

The consequences of any unpaid debt result in serious harm to creditors<\/strong>, naturally. And these consequences would amount to a veritable financial and economic earthquake if the volume of unpaid debt were enormous. We start from the premise that the debt levels of developed nations are already absurd and unpayable, and are sustainable only thanks to the endless money-printing by central banks such as those of Japan, Europe, the UK and the US. Only by expanding central banks\u2019 balance sheets to monstrous proportions can the house of cards that is sovereign debt be maintained, and this is precisely what is happening.<\/p>\n

A side effect of this massive money creation by central banks, which are buying up their respective countries\u2019 sovereign debt in vast quantities, is the artificial inflation of the cost of that debt. The distortion has reached such extremes that interest rates are negative across an ever-wider section of the yield curve. This rise in costs and negative yields logically leads private holders of these bonds to gradually offload them. And who buys bonds that are so expensive and offer almost zero or negative interest rates? Well, the only buyer with infinite funds, who isn\u2019t concerned about the yield or the creditworthiness of that debt: the central bank.<\/strong> Indeed, central banks do not aim to make a profit, nor does the fact that they might lose money affect their solvency as a bank. That is why they are not concerned about the creditworthiness of the securities they purchase. It is true that when central banks made a profit, they used to accumulate it in reserves to offset loss-making years without having to resort to printing money to balance their books. And it is also true that in some financial years, when those reserves were deemed sufficient or governments applied sufficient pressure, central banks would pay a \u00abbonus\u00bb to their respective governments so that they might have a larger budget in election years or for the use and abuse of their corruption networks. In this revealing report produced by the ECB entitled \u00abRules on profit distribution and loss coverage for central banks<\/strong><\/a>\u00bbYou will find further details on these asymmetrical and opaque accounting practices between central banks and governments, as well as their peculiar ability to settle\" write-downs or paper losses.<\/em><\/p>\n

The reality, then, is that central banks can lose money indefinitely without this jeopardising their continued existence, their reputation or their mission. They are institutions that stand above good and evil, playing by different rules\u2026 but on the same playing field as the rest of us mortals. Every organisation on the planet, whether public or private, has an obligation to balance its books in the long term. And if they fail to do so \u2013 even whilst on a public lifeline, such as the Spanish banking sector, to take just one example \u2013 they will eventually disappear due to insolvency. When they do, their creditors will have to account for the losses this causes them, and in turn strive to balance their own books in the future. And so on. It is a universal financial and accounting law, a rule of the economic game that affects us all, with the exception of central banks. And what makes these banks different? Well, obviously the fact that they are both judge and jury \u2013 that is to say, they have the ability to create money. It is therefore intrinsically impossible for a central bank to keep its balance sheet out of balance indefinitely, because it will always be able to offset its losses \u2013 as a last or penultimate resort \u2013 by creating out of thin air as much money as its balance sheet, and of course its government and its state, require. These and other practices are sugar-coated with terms such as monetary policy or monetary policy<\/em>. That\u2019s the thing about fiat money.<\/p>\n

Let us now return to that vast and growing mass of public debt that governments are constantly creating to cover their budget deficits and gloss over their insolvency. As we said earlier, the only creditor that does not mind buying this insolvent, expensive debt with a negative yield is the central bank. And the result of this aberrant situation is that almost all of this risky, overpriced sovereign debt is now passing from private hands into the hands of the only player who does not mind losing and who has infinite solvency. The only player on the board who plays by different rules. That is the crux of the matter: If a creditor does not mind losing money and can balance its books by printing banknotes out of thin air, the prospect of default ceases to be a cause for concern<\/strong>. In fact, defaulting on part or even all of a country\u2019s sovereign debt ceases to be a financial Armageddon if practically the unique<\/strong> The creditor is its own central bank. The truly difficult \u2013 and until recently unthinkable \u2013 task was to ensure that all insolvent debt could be concentrated in the hands of the only players on the planet immune to losses, so that default would not trigger a financial earthquake with lethal contagion.<\/p>\n

And there you have it! The financial crackdown that we told you about back in 2013<\/strong><\/a> has brought about the magical side-effect of concentrating the sovereign debt of the most indebted countries ever more within their respective central banks. And this opens the door for China, Japan and the West to a solution which, whilst immoral, is nonetheless practical: Selective\/mass write-downs of sovereign debt held by central banks<\/strong>. It benefits all those directly involved, and the harm to emerging economies does not seem inevitable. Would a partial or total \u00abreset\u00bb of the developed world\u2019s debt not also benefit emerging economies in the medium term? Could similar measures not also be taken in those emerging economies to avoid comparative disadvantage? The extent of the write-downs could vary depending on the criteria that global financial and political leaders choose to apply. Write-downs could be massive, selective or even surgical. And, of course, credit rating agencies could issue ad hoc ratings for this temporary extraordinary situation. The key lies in the universal nature of insolvency and the exceptional immunity enjoyed by the sole creditors<\/strong>, which mitigates most of the collateral damage and knock-on effects that any typical default entails.<\/p>\n

Perhaps this scenario has already been secretly planned for some years now. Or perhaps this is Plan B, following the failure of Plan A, which envisaged writing off the debt through runaway inflation that would erode it over the years. The reality is that the concentration of sovereign debt in the hands of the respective central banks allows for the virtual and actual elimination of that debt by the world\u2019s only balance sheets with infinite solvency. And the balance sheets of those central banks would not even grow, since the issuance of new debt issued ad hoc by governments (to cover, say, 50% of outstanding debt) and financed by the central banks would be offset by write-downs of outstanding, unpaid debt that one might wish to eliminate from the planet (say, the other 50%). In other words, once a significant portion of the debt has been reset, the money supply and the size of the central banks\u00ab balance sheets could also be adjusted to suit the economies of this new era. Perhaps this historic \u00bbreset\u2019 could be shrewdly exploited to abandon the fateful experiment of fiat money and once again peg currencies in some way to a finite and tangible asset such as gold, an intangible one such as bitcoins, or who knows what else.<\/p>\n

It is true that this option could only be used once, because the risks of repeating the manoeuvre would be numerous and unpredictable. And it is also true that, even though the creditor would not be affected and the money supply would be adjusted on demand, the rest of the assets would be affected by such manipulation. And dealing with such an impact would be an uncertain and complex task. But let us not forget that the alternative \u2013 that is, the harsh reality \u2013 is a wall of insolvency that we will inevitably come up against one day. And the scale of the problem of unpayable debt is so massive and global that the majority of the world\u2019s economic weight would benefit from this measure, which would be the mother of all unconventional monetary measures<\/strong>. And let us remember that the options which are the most painful for the majority (budgetary control, debt repayment, public-private defaults\u2026), even though they may be the best or only solutions, rarely end up being implemented.<\/p>\n

An exciting and passionate economic future undoubtedly lies ahead for us investors.<\/p>","protected":false},"excerpt":{"rendered":"

La Historia nos demuestra que ante un problema la opci\u00f3n que se acaba aplicando es la menos dolorosa para la mayor\u00eda a corto plazo, a pesar de que no sea la mejor soluci\u00f3n ni la m\u00e1s simple o racional. En cambio, las opciones que perjudican y son m\u00e1s dolorosas para la mayor\u00eda, a pesar de […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[51,41,37],"tags":[],"class_list":["post-4053","post","type-post","status-publish","format-standard","hentry","category-banca","category-economia-y-finanzas","category-reflexion"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/4053","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=4053"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/4053\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=4053"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=4053"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=4053"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}