How Are the Coupons Redeemed in a Debt-Equity Swap
QUESTION: sure enjoyed your conference via livestream and thank you for your blog site as it is very informative.
I understand the swap of federal debt for equity in the form of coupons. then the coupons will be redeemed as cash from the treasury. what method of funding the coupons will the treasury use? I assume print the money?
gc
ANSWER: That is the very crux of the issue. Debt is the same as money except that this pays interest. There is NO distinction between borrowing and printing if the debt is collateral for anything. There use to be a difference when you could not BORROWusing government debt. Under those conditions, the money supply did not increase. When that changed, hello, where is the difference between printing and borrowing from a money supply perspective?
So honestly, this type of swap would REDUCE liabilities of interest and would therefore reduce the money supply for they would swap the coupons for the debtELIMINATING interest payments. This would contribute to the needed creation of money to fund government without taxation at the federal level. There is no alternative for as long as government THINKS it needs tax revenue it will continue to destroy the economy and create a crater of deflation until we have a revolution.
This proposal will not prevent the business cycle, but it may simply help to temper the swings like Joseph and the Pharaoh.
OTC Derivatives
QUESTION: Hi Martin,
Enjoyed the Solutions conference and am looking forward to the October conference. There was no mention of the over the counter derivatives market. Would a debt to equity swap trigger the swaps creating a much larger problem then the current outstanding debt? Didn’t they try doing a voluntary default with Greek debt before hoping that it wouldn’t trigger the default swaps but it was later ruled that it would technically be a default so they canned that idea?
Is the $700 trillion or so of OTC derivatives a big problem or not?
Thank you,
AC
ANSWER: That portion related to sovereign debt will most likely be closed out at the market. Keep in mind that they wiggled out the Greek liabilities arguing that they covered only a 100% default, not partial haircuts.
The problem with the OTC derivatives is the declining liquidity. That is the real crisis we face – the flash crash the other side of 2015.75. That may force political change. But I do not think politicians will be able to shoulder the banks this time. Tucked in the December bill was language that authorizes bail-ins. The political heat may be way too hot to bail out the banks again with a trillions dollars.
Many people tout this as if the entire market is some single unfunded liability. The bulk of this is hedging – insurance. It is offset against something else. The problem is not that the entire market collapses. this reflects leverage true, but this merely will increase volatility tremendously as things are offset and market-makers are not willing to make markets.
From Greece
COMMENT: Mr. Armstrong, Your solution is unbelievable. Greece’s debt is selling at a huge discount from face just like Mexico in 1986. If we follow your model, this would reverse everything. I agree opening this up for all holders of debt rather than exclusively domestic as they did in Eastern Europe would entice major new investment. My bet China would be buying up Greek debt if it converts to hard assets. That is from the dealing desk view. It would then put political pressure back on Europe and that will force change in the USA. You are correct. It becomes a contagion for the better.
Your friends
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REPLY: Absolutely. Even the German hyperinflation ended how? When a new currency was issued backed by tangible assets being real estate! Bahamas was the last group of islands to expand the tourist trade because they had a law that you needed a domestic partner. If there was nobody there with money, nobody could build a hotel. We must respect international capital flows.
Those in the industry see this instantly. Our problem is opening the eyes of the rest of the world as to how things really function. The politicians will be the last to respond. But they will respond quickly when you crash and burn.
Breakdown of Debt
QUESTION:
Mr. Armstrong, I have been eagerly awaiting your Solution and am trying to wrap my head around it. Can you explain more about the debt to equity swaps? What exactly would the debt be swapped for? PS: In your latest blog, you mentioned repealing the “13th” amendment. That gave me quite a shock until I realized you meant the “16th”!!
RF
ANSWER: Well yes I meant the 16th, but ironically we are all economic slaves from their view anyway so it would abolish our slavery as well under the 13th.
A debt-equity swap is what you do to make a transition. In the case of Mexico, it was a swap of debt types. In Eastern Europe, it was a swap for state owned assets. Poland implemented an extensive privatization program in 1990 and had privatized half of all state-owned enterprises by the end of 1994.Debt-equity swaps were introduced into the Polish process in 1994, primarily for use by Polish banks in converting their non-performing loans into equity stakes in the debtor companies. Foreign debt was not eligible for use in these Polish debt-equity swaps.
In this case, we would swap out the federal debt of $18 trillion into coupons that are redeemable for the purchase of private equity. You would then take the coupons and invest in stock. Since large corps are buying back their shares now, they do not need the money. This will go to entrepreneurship starting up businesses or expanding small business. It would provide a stake in the nation for all for the lower class would actually become investors. The “rich” make money from investment, not wages.
Of course there will be people who criticize this idea. They have no practical solution for there is no other choice. You reach the point of no return. Governments are causing DEFLATION and destroying everything as they hunt money. That will collapse the world economy and they are TOO STUPID to comprehend what they are doing until it is too late. The hard money guys have already sent nasty emails, but their world is precisely what Germany is imposing in Europe. They are handing the people over to the bankers for go ahead, back bonds with gold and how do you pay your mortgage.
There is no practical solution and EVERY debt crisis has involved either a DEFAULTor some sort of haircut. Any way we slice it, the next downturn will present solutions that hand more money to the bankers and you will see revolution next time. We either seriously look at how to end this cycle of perpetual borrowing, or go build a cabin in the woods far from everything. We are rapidly reaching the point of no return.
The city of Mainz was where the Gutenberg Press was invented. That created a economic boom like the internet today. The politicians spend wildly assuming taxes would never end. So they borrowed heavily against expected future revenue. As taxes rose, people left town. Their debt kept rolling as new issues were sold to pay off the last one. When nobody showed up for the next issue, they could not pay. They collapsed and eventually the creditors sacked the city and burned it to the ground. I sup[pose that is a solution.