US Default: Should We Be Ready to Face the Worst?

According to Guardian, 15th July:

In Europe, a chronic lack of co-ordinated action early in the financial crisis means the very survival of the euro is now in serious doubt. In the US, the crisis is potentially more serious: if Republicans and Democrats cannot agree on a deficit reduction plan by the 2 August deadline for raising the debt ceiling, the world’s largest economy will be in default.

The European mess is undoubtedly serious, but the US economy and its currency are at the heart of global finance. Its $14.3tn of debt is almost equal to its GDP, putting it about 14th in the list of the most indebted countries.

On Wednesday, Ben Bernanke, the chairman of the Federal Reserve, warned of a “huge financial calamity” if a political agreement is not reached. He told Congress a default would “send shockwaves through the entire financial system”, according to Guardian, 14th July

In Europe right now the EU and the IMF have been making “emergency loans” to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months.

But it’s not only USA and Europe who is facing a horrific debt crunch. In Japan, the national debt is now up to about 226 percent of GDP.  Meanwhile, dozens more nations all over the globe are approaching a day of reckoning. All of the bailouts that you are hearing about right now are simply delaying the pain.

In fact, the whole world is headed for trouble. Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet. If even one domino is toppled…

Certainly, also in the past, single governments had problems with debt, but what we see now and what we are going to see, is the biggest global sovereign crisis in the history. There has never been time in history, when almost all states in the world were drowning in debt all at the same time! We have managed to produce such a huge and interconnected web of debts that it is no chance to unwind it in any conventional way.

This sovereign debt crisis can only end with a global financial collapse (the consequences of which we should better not imagine) if the right treatment of the disease will not be implemented in time.

But in order to decide what the right treatment should be, we have to define the right diagnosis.

The right diagnosis is not so difficult to reveal, if you have examined properly the reality and have the correct facts and information available.

However, there is no common understanding of how new money is created, even among bankers, economists or policymakers. There are many various reasons why the leading economists and politicians don’t see the “elephant in the room”.

The economist Galbraith suggested why this might be:  “The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.”

Many naturally resist the notion that private banks can really create money out of nothing. You would be surprised how many ‘experts’ have hazy conceptions of money and how money relates to banking. But that is not surprising, when in economics textbooks are still put forward inaccurate descriptions of the bank lending process.  The schools teach a model of banking that has not applied for a few decades, and unfortunately many policy makers and economists still work on this outdated model.  The confusion comes because the reality of modern banking is complex and partially hidden.

Until there is a common and correct understanding of money and banking, little progress will be made in ensuring that the system is safe and performs to the greatest benefit of society and economy.

Our money supply is created through debt. That’s the fact.
If we didn’’t have debts, we wouldn’t have money – that’s it!
If we don’t want to have debt and we still want to have money, than we have to create money in some other way. Simple, isn’t it?