Wednesday, February 24, 2010
Sunday, February 21, 2010
Wednesday, February 17, 2010
Tuesday, February 16, 2010
CDS: Credit default swaps 101
From Here:
http://www.zerohedge.com/article/all-you-ever-wanted-know-about-current-sovereign-cds-market-were-afraid-ask-cds-bond-basis-c
http://www.zerohedge.com/article/all-you-ever-wanted-know-about-current-sovereign-cds-market-were-afraid-ask-cds-bond-basis-c
Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report 1will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).
First, in theory...
Market pessimism
Sovereign CDS are the favourite instrument used by investors to target countries with fiscal troubles and debt-rollover problems. Since the global crisis started three years ago, governments’ role has grown exponentially worldwide, thanks to the efforts of all Keynesians. The resulting transfer of risk from private to public sector finally puts a price on government credibility, which is being reflected in the rise of sovereign CDS levels globally. Back in the days when Enron/WorldCom caused a spike in credit spreads to a level implying a 10% cumulative 5y default probability for A-rated firms, few believed that one in 10 US investment-grade companies could close their doors in five years. Not only did historical evidence not support such a view, common sense seemed to go against it. What do we have now? Even after prospects for Europe backstopping Greece have risen significantly, the default probability for Greece is still pricing at 25%. Now, Italy is the new single A, with 10% default probability assuming 40% recovery. There seem to be few “invincible” countries left in the world. The market puts a 4% likelihood of a US default and that ranks the seventh safest in the world. Things go downhill from there with the next level being China matching UK, both at 7% chance of default.
To position for a default, there is little dispute that the sovereign CDS is the most direct and effective instrument. However, it is worthwhile asking what is the real likelihood of a sovereign default. Of all the 57 countries that have sovereign CDS quoted on Bloomberg (SOVR
), the average stands at 203bp, which implies a default probability of 16%, again assuming 40% recovery. We are looking at nine countries out of these 57 to default if the world does evolve according to these metrics. Is the market too pessimistic or are we missing something here? Think about what happened when the US market was pricing in a 10% default probability for all ‘single A’ names back in Enron/WorldCom days and what happened to those investors who bought protection at the peak. Instead of default, may keep printing
No, we are not suggesting investors sell sovereign CDS protection blindly simply because we think the market may be too pessimistic about the world when looking at such high implied default probabilities. Indeed, worldwide government intervention financed by printing money may be so disconcerting that we think the sovereign issue will stay with us for an extended period time. However, there are several things investors may want to pay attention to, and the relative value play does exist.
Although we have seen multiple incidents in the past of sovereign defaults on foreign liabilities, it is quite rare for countries to refuse to make payment in full in nominal terms on their domestic-currency-denominated debt. However, for countries that rely extensively on external financing, there is a chance of default; because you can’t print money to pay back foreign liabilities. For other countries that also have high and increasing debt burdens denominated in domestic currencies, the strategy may be different. We should not expect default; instead, we should form expectations on interest rate levels, yield curve shapes and volatilities. Interestingly, the second camp spans a large set of countries, including those many are familiar with: US, Japan, Germany, China, and many others.
Linkage of rates, volatility and CDS
Interestingly, when an economy starts to emerge from a deep recession, inflation tends to stay low for quite sometime due to the large overcapacity to be absorbed. The absence of inflation supports relatively loose monetary policy. If uncertainty about the recovery persists, the government will also likely err on the side of providing sustained support to the economy through active fiscal policy. Putting the two together, we usually get a yield curve that tends to be steeper to reflect increasing concerns on the government’s fiscal discipline and financing capability. Hence, wider CDS should also mean a steeper yield curve. The correlation between the rate level and the sovereign CDS spread, however, is less certain since a weak economy tends to depress the level of interest rates while concerns over government finance tends to push it higher.
What is more interesting is the relationship between the volatility and sovereign CDS spread. From a theoretical perspective, both capture the value of options. In both cases, one pays a premium and waits until the government runs into trouble with its finances. In this sense, the implied volatility and the CDS spread should see a positive correlation. The positive correlation should also express itself through market dynamics. Wider CDS reflects higher uncertainty which causes the market to whip around on each piece of positive or negative news. The increased realized volatility should also have an impact on the implied volatility. However, the relationship is more complicated. In addition to the usual factors impacting volatility, such as the mortgage dynamics in the US and structured products hedging in Japan, a government’s response to its financing difficulty may drive a wedge between swaption price and the CDS price. As we argued, for those countries with little external debt, printing money is always an option (typically a preferred one) for the government to avoid default. Thus, though interest rates may rise sharply, there may not be the default that allows CDS protection buyers to realize their reward. Thus, the correlation between the volatility and CDS spread may be weaker for these countries. On the other hand, for those countries with more external debt, the correlation should be higher, especially during periods of heightened sovereign risk.
The correlation matrix among sovereign CDS, volatility and volatility skew over the last 13 months reveals some interesting patterns. First, the correlation among the CDS is extremely high, reflecting the potential contagion effect which is prevalent based on historical observation in the emerging market crises of Latin and Asian cases. It also reflects the illiquid nature of sovereign CDS market. One needs to source multiple markets to build meaningful risk for a portfolio of reasonable size, forcing an order-driven correlation. Second, the correlation of volatilities is much lower and less certain. It ranges between -0.3 and 0.5. We try to choose the part of volatility surface which is relatively immune from mortgage and structured-hedging issues to isolate the effect of sovereign risk concerns driven by investor positions. We are not surprised by the dispersion of volatility correlation and believe it simply reflects the fact that factors affecting the volatility are too many to be removed cleanly. What is encouraging is the positive
correlation in 100bp-payer skew. They are all positive, though the magnitude is lower than that of the CDS. Similar to CDS, the correlation reflects investors’ unease over government actions that could potentially cause higher interest rates. What comes out as a surprise is the correlation between sovereign CDS and the volatility skew. They are negative! Even for the CDS spread with its own country/region’s volatility skew. It can be argued that if the sovereign risk rises, the interest rate is much more likely to rise, and there should be enhanced interest in buying high-strike payers to move up the skew at the same time as the CDS widens. However, for this to be true, we have to assume that the investor base is the same and they are equally likely to invest in both. Unfortunately, none of the assumptions seems to be true. The investor base does intersect at the macro camp. Beyond that, the swaption market has traditionally belonged to rates investors, until last year when the field attracted many equity and credit investors who were very concerned about hyperinflation spoiling their feast. The expansion of rates-volatility as an investment choice reflects one advantage the rates market enjoys – liquidity.
Implications
By using a shorter period to calculate rolling correlation, we found that the correlation between CDS and volatility is extremely unstable. For example, the correlation between US CDS and USD 2y30y volatility varies between -0.87 and 0.91 over the past one year. Similar results can be seen from EUR 2y10y volatility and German CDS. We view this as good news and there are some investment implications for both the macro-oriented and relative-value investors.
For macro-oriented investors, if the view leads to the conclusion that moneyprinting is unsustainable on a global basis, it is better to buy CDS protection and buy volatility through payers at the same time. Such a strategy should work even better for those countries with higher external debt dependence. Lack of correlation between the volatility and CDS at normal times would provide diversification benefit when both move sideways. In the event of a spike in sovereign risk, the volatility will rise with the CDS spread and positions will become correlated in favour of better portfolio performance.
For investors who are looking for relative value, however, we think that the default risk may have been overpriced at current levels, especially for countries like US and Japan. As such we would think selling CDS protection and buying payers may be a better trade. In this case, the correlation does not help that much due to the lack of it. However, in extreme cases where these countries face the prospects of immediate default, we expect the volatility will likely move up along with rates to offset the loss in CDS spread.
And now, in practice:
When Germany comes to the rescue
News on Euro sovereigns continued to shape performances in all European asset classes this week. Somewhat more concrete developments on the political front allowed for significant tightening in peripheral spreads as well as temporary pickups in risk appetite. The odds of a complete disaster scenario have declined but nevertheless, concerns regarding the fundamental differentiation between core and non core Europe are likely to subsist in the long term, in our view. In addition, open questions on the exact nature of the support and its implementation (including the resulting cost to be bared by core countries) are likely to maintain pressure on both core and peripheral spreads and keep volatility close to current levels.
The ECB can pursue its gradual exit
While some are hoping to hear about a possible extension of the relaxed ECB collateral rule at the March meeting, the reality is that the ECB is rather heading in the other direction, having already in mind the exact steps to remove its excessive liquidity provision. In comments made on 11 February, Weber provided a more specific description of the “gradual exit”, noting that first the maturity of outstanding liquidity will be reduced then that the “most likely next exit issues will be a gradual return to normal tenders in longer term operations”, meaning 3M LTRO operations will move from full-allotment back to fixed amount/variable rate.His comments suggested on the other hand that unlimited allocation via the 1W MROs should stay in place for longer, inline with our view that liquidity will remain abundant in the system in 2010.
A normalisation of sovereign credit curves is triggered
Inline with the usual positive relationship between spread levels and CDS curve slopes, the substantial tightening of CDS spreads/ bond peripheral spreads following first the headlines on the preparation of a potential aid package for
Greece was accompanied by a steepening (ie normalisation) of CDS and ASW curves.The reduced probability of an imminent default prompted a stronger tightening in short term CDS spreads. The Spanish 3s5s CDS curve has now disinverted, ie the 3y Spanish CDS is now tighter than the 5y, but most impressive is the steepening observed in Portugal and Greece (6.5bp and 4.6bp respectively – see margin table). Going forward, we might see a short term breakdown of the positive relationship between spreads and slopes as the reaction this week from European officials will likely keep away concerns of an imminent disaster scenario and additional spread widening is therefore likely to be greater on the longer end, resulting in a steepening of CDS curves.
Bond ASW curves have also experienced some normalisation, with a stronger ASW richening of short term bonds. The 2y10y ASW curve remains however inverted in Greece (see Chart 14). The shape of ASW curves in peripherals is not only function of the risk assessment but also depends on distribution of coming supply. In Greece, the new 10y to be syndicated by Greece in February is likely to be the next key driver of the curve.
And signs of a transfer of risk can be expected
The next development in our view is a relative widening of German, French and other core countries’ CDS relative to peripheral CDS. If a concrete decision on Greek financial aid is taken at the Ecofin meeting on 15-16 February (not the base case scenario according to latest headlines), a guarantee for Greek bond issuance for instance, we expect the CDS market to react in a similar way as when sovereigns set up guarantees for their banks (see charts next page). The current high risk associated with peripheral countries would be partly transferred to those now deemed safe with the extent of the move depending on the involvement of each country in the rescue package. On the other hand, if no concrete announcement is made, it is also likely that CDS spreads for core countries will continue widening, as risks of a weakening of the overall Eurozone increases.
On the bond side, a concrete announcement would likely result in a compression of peripheral spreads as German bonds would likely sell-off (both due to a return in risk appetite and as a result of speculations on increased German borrowing needs to finance the Greek bailout) while peripherals would rally on lower credit risk.
And dissecting the CDS-bond basis...We sure hope the Spanish spies read this to realize how unfounded their prosecution of CDS traders is
Basis at much lower levels than in Jan-Mar 2009 Although most sovereign CDS spreads broke their Feb-09 record highs in the past two weeks, this did not translate in new highs for the CDS-bond basis. The latter was rather well contained for all countries (see chart 17 with SovX vs cash and chart 18 with single name basis, based on bond spreads to OIS).
The fact that five syndicated auctions took place in January could be one of the reasons behind the strong sell-off in peripheral bonds and therefore the tighter basis compared to Feb-09. Also, this crisis being more driven by fundaments (e.g. high deficit ratios, fears of unsustainable debt) rather than a global increase in risk aversion, it is reasonable to expect a more pronounced reaction in the bond market. Long term bond holders find more reasons to be concerned.
Since 11 January, the basis declined for Greece and Ireland (see Table below) while it increased most in Portugal and also Germany and France. Demand for bonds in the latter two held very well as a result of a flight to quality and liquidity.
Sharp jump in short dated CDS flattened basis curves
Up to the middle of this week, a very strong sell-off in the short end of peripheral curves resulted in a flat bond term structure for some countries (chart 14). However, it remains that the inversion of CDS curves was more dramatic, resulting in a flattening of basis curves across countries. So why the sharp jump in short dated CDS curves? Part of the movement was due to a sudden rush to hedge default risk – some banks were using short dated CDS to cover their country exposure. In market panics, CDS spreads react faster than bonds. Short dated CDS was the easiest (and in some cases the only way) to hedge country risk. As mentioned above, short dated CDS spreads have tightened this week, but for most countries the basis remains wide in the short end.
Trading thoughts
1) Tightening of German basis We believe in a tightening of front-end German CDS-bond basis. If Germany announces a concrete intervention to help Greece, its CDS should widen (see transfer of risk above) but German bonds could suffer to a greater extent. They will become less attractive in the higher risk appetite environments while also being pressured by heavy supply in the 2y and 5y.
2) Cross country: We like to go long Belgian basis versus Italian one in the 5y. Another trade to play a normalisation is to go short the French basis versus the Dutch one. France has cheapened much more than other AAA countries on the CDS side (see Table above), either due to fears regarding the exposure of French banks to Greece or its high rollover risk. Yet if the situation regarding Greek banks deteriorates we believe it should start to impact further on Dutch credit as well, while on the rollover risk, we highlight that Netherlands has a similar 27% of debt to refinance by year end.
Drivers of the CDS-bond basis
Theoretically, both CDS spreads and yield spreads to risk free rates represent premiums received when taking an exposure to the risk of default of an entity. However a basis can exist in practice between CDS spreads and bond spreads.
Difficulty to short in cash market (increasing the basis)
Sourcing of bonds in the repo market could be difficult. Banks tend to buy CDS instead of shorting cash bonds in order to hedge their credit exposures or to express a negative view on a single name. This pushes the basis up.
Difference in relative liquidity (basis increasing with high bond liquidity)
The basis will move in such a way that provides extra compensation for investors in less liquid segment/markets, favouring countries with very liquid bond markets. This is also true, when it comes to sectors; liquidity in CDS market concentrates on maturities in 5 and 10years, whereas in the bond market, liquidity is already high in the very front end and can extend to the 30y.
Issuance patterns (mixed effect, usually decreasing basis for govies)
Banks involved in bonds syndication tend to buy protection in CDS markets during the issuance, causing the basis to widen (mainly observed in the corporate side). On the other hand, new bonds (especially govies) are often issued at a higher yield in order to attract sufficient interest during auctions, depressing the basis as a result. This was for instance the case at the launch of the 5y Greek bond at the end of January and at the Portuguese 10y syndication on 10 February.
Funding issues (decreasing the basis)
Not all investors are able to borrow at repo levels. Some of them may find it easier to obtain credit exposure by selling CDS than by being long the bond. This makes CDS spread relatively low versus bond spreads (to OIS / repo). This is particularly true at year end, when balance sheet reductions are working against cash positions and contributing to the cheapening of the bonds versus CDS (off balance sheet instruments).
Difference in players
The divergence in the types of investors in each market, with bonds mostly taken up by pension and insurance funds, while banks and short term investors are more active in CDS.
- 1. Sovereign CDS are options too, like swaptions; February 12, 2010
Sunday, February 14, 2010
The Math behind the US Deficits?
From HERE: This one is of very HIGH significance:
THE PROBLEM:
All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.
The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,
…the real amount of money spent on interest last year alone nearly equals the total amount of money our government takes in!
Please let that sink in.
That’s right, this is no joke! Yes, that chart from the Treasury is completely misleading – as in deceptive. In fact, when all the money spent buying down interest rates is considered, we are actually spending ALL of our nation’s income, or more, just for the privilege of using our own money system!
Consider that by the end of 2010 we will have $14.3 Trillion just in current debt, just at the Federal level. “Deficits don’t matter,” right? Yet we are seeing debt driven events ripple around the globe. And since the end of 2008 through September of 2009, the U.S. Federal Reserve had committed $6.4 Trillion just aimed specifically at programs designed to keep interest rates low! And that is conservative, in fact it can be said that the purpose of nearly all the backstops and bailouts was to keep the cost of debt low! This would include backstops like the one given to the FDIC to prevent bank panic from spreading… is that not in effect buying down interest rates? Of course it is. Total commitments? More than $11 Trillion as of September 2009.
If that’s too much of a stretch for you, let’s be really conservative and only look at the amount of money actually invested by the Federal Reserve during that timeframe to buy down rates, about $1.5 Trillion! The largest section of this money went directly into buying up mortgage paper through the GSEs.
So, we spent $1.5 Trillion, at least, buying down interest rates, the sole purpose of which is to mask the debt load. This is because debt saturation has occurred and at normal interest rates, the debt load cannot be supported by incomes. That is true on all levels.
If you combine the amount the Treasury spent directly on interest in 2009, $383 billion, and add it to the $1.5 Trillion used to keep rates low, then it can and should be said that the Treasury actually spent at least $1.88 Trillion on interest!
How much money did the Federal Government take in? $2.2 Trillion is all. Remember, comparing debt or interest to GDP is a FALSE argument, a Red Herring. Income is the only thing that matters when it comes to carrying debt.
$2.2 Trillion in income, $1.88 Trillion in real interest expense. How are we looking?
This conservative estimate means that we actually only have about $320 billion to spend on everything else that’s not interest related. States going bankrupt? Roads in disrepair? The value of your retirement falling? Jobs hard to find? People going hungry?
According to www.federalbudget.com, this is how Congress currently spends our money. Note that their Treasury Department expenditures exceed $700 Billion in 2010, and that just the top three budget items exceed the total amount of revenue collected by our government. That’s without any mention of the amount spent to keep rates low.
Have you ever been trapped by logic? When this happens to your brain, it will know it. Oh sure, you may try to weasel your way out, but deep inside you will know you’ve been had.
To those who think this can reverse or that it was a one-off expenditure, you simply do not understand the exponential growth that is occurring, nor will you see the parabolic collapse that is coming.
The collapse of debt has already begun in the private sector, but the government is simply picking up that collapse and creating a parabolic growth phase of government spending and government debt. Here it is presented in the Fed’s own charts… What exponential growth? This exponential growth:
That chart spans more than the past century and is experiencing a classic parabolic blow off move that has gone quite vertical. Parabolic moves ALWAYS collapse, it is just a matter of when. When this curve collapses, it is going to be very painful for many people indeed.
Looking at that chart, is there anyway possible to believe the budget forecasts stating that the deficit is going to start coming down soon? What would that mean to the economy if it really happens at this point? Would the economy still be growing or would it be shrinking? Are those light bulbs I see coming on? Pretty illuminating isn’t it?
Okay, now we’ve seen that our outlays (spending) are skyrocketing, let’s take a look at the collapse of current receipts, again our nation’s income, but this time let’s view it in terms of year over year change. Here you will see a historic collapse of tax revenue on the Federal level:
The chart of outlays has moved into a parabolic blow off phase upwards, while at the same time the chart of current receipts has already peaked and is now collapsing downwards. This, of course, is causing deficits to enter a parabolic move of their own – the Fed refers to this deficit as our “national savings.”
The hollow words “deficits don’t matter” echo through my mind. They are spoken in the arrogant tone of supposedly educated people who continue to spread their debt backed manure. Of course they spread this manure knowing that it fertilizes their returns.
The stench of that manure ripens further as many argue that we can simply print money without debt and that will inflate existing debt away. That is a comical notion if you understand that it requires income to service debt and that the rate of debt expansion is far outstripping the rate of income growth.
If that math doesn’t convince you that change is about to come to our monetary system, then nothing will! Remember the housing bubble? “Real estate never goes down,” remember? I was one of the few who was warning about it early on, but now everyone seems to think they saw it coming. Do you see this coming as well? Or, do you believe that it’s possible to “inflate away debt…” even though your money is backed by debt?
YES, absolutely the rules are going to change, that’s exactly what I’m saying. But I’m also saying that the rule changes will not be simply printing money within the same old framework.
The day after the TARP program was announced in November 2008, I wrote a paper called Death by Numbers. In it, I simply added up all the debts on the personal, corporate, and Federal Government levels and demonstrated how the same people are ultimately responsible for all the debt on each level to the tune of $303,053 per man, woman, and child in the United States – more than $1.2 million just for my family of four, and this did not include the debt on the state and local government levels. People were stunned, you cannot argue the numbers, yet nothing has changed. Besides getting worse that is.
Recently I updated the math in an article called Zombie Nation – The Rise of the Mathematical Plague. In it I added the cost of additional debt, not counting the trillions spent bailing out mortgages in the GSEs, and showed that each worker in the United States is now responsible for $704,530 each! This is an impossible math situation as the average wage simply cannot support that much debt, especially when interest is considered.
Now, through demonstrating how much of our income actually goes to interest on our debt, we are demonstrating the same bad math just expressed in another manner. But let’s have some fun and challenge the sanity of those who believe that adding debt will cure a debt problem by asking a couple of pretty easy questions…
“Is it possible to add money to inflate away debt in a system in which money is backed by debt?”
This is what many people are saying will happen, right? Of course the fact is that almost all of our money is backed by debt. Creating more money means creating more debt. The real question becomes how do incomes keep up with the debt creation? Are they? Of course not…
Next question:“In a system in which money is backed by debt, what happens to the supply of money if you decrease the quantity of debt?”
Of course the supply of money would fall! Do you see the dilemma that is created when you back your money with debt? We can’t pay back our debts without decreasing the supply of debt backed money, and if we do that, then the economy will suffer. But if we continue to pile on debt, then more and more of our money will go to pay interest and our economy will suffer. Those are the choices we are presented with in our current Federal Reserve Debt based system.
Thus we are damned if we do, and damned if we don’t. And it’s not just us who are damned. The entire world is built around the same clearly unsustainable system.
This begs the question, “Why is our system built like that, and to whose benefit was it made that way?”
I think you know the answer to that question – this current system was built around the Federal Reserve Act that was passed in the year 1913, and it took the money power from Congress and moved it to the private banks and bankers.
The very same interests that created this monetary conundrum are telling us “consumers” that we need to spend more to get their credit (debt) flowing again! LAUGH OUT LOUD, that is hilarious! Then they use the money created and the tax dollars that flow to them from us CITIZENS to buy the political and judicial systems! Talk about irony of ironies, the money system doesn’t even belong to them, it belongs to us! We don’t have to pay anyone for the right to use our own monetary exchange system, that notion is simply ludicrous, yet we have all been living under that system our entire lives!
Simply put, our money system was stolen from us. We can either take it back or we can continue to swim in the manure, the choice is ours, not theirs.
The globe is saturated with debt. Adding one dollar of debt now subtracts 15 cents from GDP.
The velocity of debt is zero, the debt saturation point. Adding additional debt will only cause future defaults and falling employment.
This debt saturation is causing default waves that ripple around the globe. Subprime in the U.S., Banks in the U.S., Commercial Real estate, etc. Now the debt bombs are detonating in Dubai, then Greece, in Portugal, Spain, Ireland, and even Japan. The bombs are just waiting to explode in England, Germany, the rest of Europe, and even China. Even if the bombs don’t explode immediately, the debt smolders causing global economies to suffocate. Germany is the latest to report that despite all the efforts to prevent it, their GDP is simply not growing (neither is ours in reality).
Our statistics are not comparable with bygone eras. Debt saturation has caused a phase transition and attempts to cover-up this transition have resulted in huge distortions of the truth. Below is a chart published by SG Cross Asset Research showing their computations of net liabilities to GDP. This includes liabilities that are off balance sheet, and they far exceed the liabilities carried on balance sheet:
Yes, our governments are insolvent. Insolvent being a condition in which you can no longer service current debts. That has already occurred in the United States. That is why we resorted to “Quantitative Easing” and why we use several methods to artificially buy down our interest rates. If we could have continued to borrow more money at normal rates we would have but we didn’t and we can’t as the stress in our debt auctions is now showing time and again.
We can show that insolvency in the math in several different ways. Thus you are a witness to the biggest lie and accounting scandal in the history of mankind. No, that is not an exaggeration, it is a fact, a very sad fact that we are all going to have to face one way or the other and soon.
To all those who point to this (Democrat/ Republicans!) and that (bad assed unions who are ruining our country) and claim the other thing (banks need to lend more, lol) regarding our economy, all I can really say is that your eye is way off the ball. The game of debt backed money with the ever escalating interest going to private individuals is nearing an end… the mathematical outcome of the game was decided before it ever started.
If you view the current situation objectively, you will come to the inescapable conclusion that the rules of the game must change. Who is it that is going to bring those new rules to you? The same people who created the current debt backed system? Have you heard of any solutions that address this root of the problem? Are you waiting to be rescued, or are you hiding in your bunker?
THE SOLUTION:
Yes, printing money without debt is an alternative, but that doesn’t make the current debt go away and it doesn’t bring spending back to match income. The quantities of money required to be printed would be so vast that you would soon find yourself printing trillion dollar bills.
Another solution would be to buckle up, spend FAR less, tax FAR more, and default on current debts. The economy will suffer hugely and for decades as a result, and in the end, with debt backing our money the result would be that eventually the same old cycle would repeat as the next debt bubble builds anew.
The inescapable conclusion is that if you live inside of a debt backed box, our nation and human kind will continue to be held back.
There is only one right answer for the long haul, for the good of our nation and of the world. That answer is to replace the Federal Reserve Act with the provisions of Freedom’s Vision. This will return the money system to Congress and to the People where it belongs. It will cleanse the debts and derivatives to lessen leverage in the economy while restoring balance sheets, not just for our Federal Government, but for States, Banks, Businesses, and Individuals.
Implementing Freedom’s Vision will:1. Avoid the disaster about to unfold – regardless of how we get there, by inflation or deflation, the math of debt that underlies our currency does not work. This would break that math and preempt the negative events that are going to follow should we fail to take action.
2. End the practice of debt backed money for our Federal Government. Lower taxes and more productivity result.
3. Provide direct and immediate relief for people in debt, accomplished in a way that’s fair to everyone including those who are not in debt and without creating excessive price inflation, deflation or a giant “moral hazard.”
4. Provide direct and immediate compensation for those who are savers and have been damaged by past practice.
5. Provide relief for States, almost all of whom are in deep debt trouble.
6. Cleanse the banks and financial businesses of unserviceable debts and derivatives and would ensure that they stay that way. All banks would survive the transition, immediately benefiting from improvements in our citizen’s balance sheets. The same process would be used to cleanse other financial like businesses.
7. Businesses, both large and small, would immediately benefit from our citizens and the banks improved balance sheets.
8. Unfunded liabilities would immediately get better with zero percent price inflation.
9. Limits on special interests would separate their money from politics lessening the pressure to continually increase the quantity of money. This allows long term decision making. Special interests associated with the banking, oil, defense, food, insurance, and other industries would no longer have their huge pull. Thus politicians would not have to focus on spending our resources on special interests, but instead on the interests of the people. Budget pressures would decrease as a result.
10. States would exercise more control over their own destiny. Lower taxes on the state level, more productivity. Low cost money would become available to repair and upgrade current infrastructure and to build the infrastructure of tomorrow’s commerce.
11. The powers possessed by the central banks would be greatly diminished freeing our country and others from their methods of control via debt, now even issued worldwide by the IMF. Countries would no longer be working to pay central banks interest. Instead they would work to develop their own rule of law. Their productive labors could be used to improve their own infrastructure, to feed and cloth themselves, and to build a future for themselves. In other words, they need to be taught how to fish, not simply given a fish and asked to pay it back forever and ever.
12. No price inflation eroding away future savings. People who take on reasonable debt could once again make progress towards paying it off.
13. Massively supports education, underpinning progress so that we may continue to lead the world in innovation and the production of meaningful technologies.
14. Provides a national mission - focused on creating the energy and infrastructure of the future. REAL and meaningful economic growth would ensue and massive new employment would result.
Many argue that such a plan is not possible or is too difficult to implement. Some feel that collapse must happen first while others do not see the threats at all.
As I look back through history, here is what I see: I see that mankind has been making a steady march towards progress. I see the evolution to the Magna Carta, then to our own Constitution. I see the evolution of economic theory, although painfully slow, it has progressed from rudimentary trade, theories of self-interest, to Adam Smith’s Invisible Hand, to an understanding of supply and demand. I see monetary systems and their progression from sea shells, to wooden sticks, to metal coins, to gold, to paper, to digital.
Now THE major hurdle to overcome is how debt backs our money. We CAN and we WILL overcome this obstacle. It is the next step in the progression, a step that will be taken. To think that we will not progress goes against thousands and thousands of years of history. It will happen because the math of debt is forcing it to happen, it is the only logical conclusion. Nature has a way of pointing in the right direction. When that direction is clear, you know it, it is just, the math supports it and therefore it will last and become the next step forward for humankind.
Yes, “it’s the DEBT, Stupid!” It time to get on with Freedom’s Vision!
Friday, February 12, 2010
The Obama banking plan
The Obama banking plan explained
Tom Braithwaite, Helen Warrell and Caroline Nevitt
FT, February 4 2010
http://www.ft.com/cms/s/0/8c6665d2-11a6-11df-bceb-00144feab49a.html
Tom Braithwaite, Helen Warrell and Caroline Nevitt
FT, February 4 2010
http://www.ft.com/cms/s/0/8c6665d2-11a6-11df-bceb-00144feab49a.html
Friday, February 5, 2010
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