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Repudiation of Sovereign Debt as a strategy

Posted by Vinay 8 years, 11 months ago to Economics
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Crony-bankers, who should pay for their sins, do not represent Capitalism in the Greek debt crisis. Greece should repudiate its sovereign debt, and start anew with the drachma, liberalization, and a "balanced" budget. Syriza is incapable of setting the right blueprint however.
SOURCE URL: http://www.thesavvystreet.com/liberals-v-bankers-as-the-greek-depression-ignites/


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  • Posted by xthinker88 8 years, 11 months ago
    I admit I am torn by this issue. How much is the US debt mine? Am I contractually bound to pay a debt incurred by a ship placed on its course 80 years ago by people now dead and kept there by 2 generations of corrupt politicians over which I had no control?

    As for social security, those receiving it now are closer to the roots of this problem than I am and continued to vote for polticians who would not tamper with this ponsi scheme for which I am now paying.
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    • Posted by DrZarkov99 8 years, 11 months ago
      As one of those now receiving Social Security, I can tell you I've voted repeatedly for any politician I could find who expressed an intent to revamp the program, but ironically, it turns out that those in favor of the Ponzi scheme have been strongly supported by younger voters who are now paying for my retirement. Don't blame us retirees (who, by the way, spent all of our working life "investing" in the scheme without any choice), who are more conservative than those who are being currently victimized.

      Do I want to have my benefits cut? I don't think that will be a personal choice. In spite of the perception that government programs are a contract with the citizens, I have no doubt that there will be an excuse for breaking that contract, as there has been with Medicare ($500B of that fund transferred to support Obamacare). Even though I saved my own money in an IRA, I suspect that before long the government will find a way to raid those private savings, as there's no way they can resist the estimated $5T in those IRA, Keogh, and 401K accounts.
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      • Posted by $ jlc 8 years, 11 months ago
        Is there any reasonable way you can get the money out of your IRA and invest it in something tangible and more difficult for the gov to take?

        Jan
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        • Posted by SaltyDog 8 years, 11 months ago
          The short answer is yes, provided by tangible you mean collectables, precious metals or real estate. On a cautionary note, get a lawyer involved...mistakes in this arena are very costly and you'll find that the IRS is not inclined to be sympathetic.
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          • Posted by DrZarkov99 8 years, 11 months ago
            Salty: I'm not sure there's anything that will keep the government's paws out of our savings. Collectables only mean something when there's enough surplus wealth to support a market. Precious metals have been wrested from the hands of Americans before as FDR did, and could easily be done again. Real estate, like collectables, only has value when the economy is healthy, and with the absurd stretch of eminent domain for the taking of property, and explosive growth in all of the regulations that prevent changes to property, it may be a deceptive hedge. Even nominally positive things, like a change to a flat income tax, can have a negative effect on property value.

            The IRS already operates on the principle of "guilty until proven innocent," and sometimes not even then. Trying to outmaneuver government agencies is a task not lightly attempted.
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            • Posted by SaltyDog 8 years, 11 months ago
              Saint FDR was quite the socialist...social security was just the first of many changes he had hoped to implement had the war not intervened.

              During the Depression, he ordered the banks closed, ostensibly to give the banks a chance to catch their collective breath. In reality, it was the opportunity for federal agents to seize gold from safety deposit boxes, which was illegal to own in anything other than jewelry form at the time.

              Executive Order 6102.
              Bears a striking resemblance to Directive 10-289, wouldn't you say?
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          • Posted by $ jlc 8 years, 11 months ago
            Good advice, Salty. I was thinking of the last mentioned in your list, since the first two presume a high level of productivity remains. But while I know that it is theoretically possible to do this, I am not sure of the cost of doing it to DrZ.

            Oxymoron of the day: Sympathetic IRS.

            Jan
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            • Posted by SaltyDog 8 years, 11 months ago
              During the real estate bubble, I recall seeing ads that promised, "you don't need a high priced lawyer! Just download and file our forms for just $99" or some such. God alone knows how many of those blew up when the market collapsed.

              I'm not an expert on these things certainly, but there are numerous caveats such as if it is a rental property, is the rent collected considered a distribution? (Yes). If you're under 59 1/2, you'd owe the tax plus a 10% penalty.

              In short, talk with an attorney.
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  • Posted by Ranter 8 years, 11 months ago
    What ever happened to the idea of the sanctity of a contract? Greece entered into a contract with the bankers, in which the bankers advanced Greece money with the promise by Greece that it would be repaid. I would think that Objectivists would favor the honoring of contracts. Syriza is incapable of resolving the problem because he is a Communist.
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    • Posted by 8 years, 11 months ago
      Sovereign debt has the nature of an unconscionable contract. Politicians who have no moral right to bind their current constituents, let alone the unborn and those not of voting age, have bound them to future slavery. Bankers have been dealing with these obligations with full knowledge that they are only honored by inflating the money supply, from stealing without consent. It is fully within the moral rights of the constituents to repudiate this contract, and declare "not now, never again."
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      • Posted by Ranter 8 years, 11 months ago
        Under the US Constitution, payment on the sovereign debt of the United States is the first obligation of the President when spending money. It must be paid at the expense of all else.
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    • Posted by $ jlc 8 years, 11 months ago
      I agree with the strength of contractual deals. But what contract did I make? Even were I to agree that taxation were legitimate; even were I not to argue that our current rate of taxation were necessary; where is the correlation between 'my money', 'how I think it should be spent' and 'how it actually got spent'?

      A contract presumes power on both sides - to achieve or fail to achieve. I do not have that power, yet I am obliged to pay for the failure to achieve.

      Jan
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      • Posted by 8 years, 11 months ago
        Yes, this is a problem of legal rights that are moral wrongs. A father sells his daughter to a guy in Islamo-land, and under Sharia law, she cannot repudiate the so-called "marriage". But we know that the moral right is to able to simply walk away; the law is wrong, if we can smuggle this woman out safely, we would. The problem is the very allowing of a President or Congress to create debts for the rest of us, we never consented to that.
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      • Posted by Ranter 8 years, 11 months ago
        JLC, the matter of taxation to pay off national debt is a separate issue from the contractual issue of the debt itself. The debt is a contract between the government of a country and its people. Taxation is a matter determined by the contract between the people and the government. In the case of the US, it is the Constitution that sets the contract, based on ratification by the Congress and by the States. Whether or not that constitutes a contract between the US government and me is another issue.
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        • Posted by $ jlc 8 years, 11 months ago
          From the 11thC Muslim poet Omar Khayyam:

          What! from his helpless Creature be repaid
          Pure Gold for what he lent him dross-allay'd--
          Sue for a Debt he never did contract,
          And cannot answer--Oh, the sorry trade!

          Jan
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          • Posted by Ranter 8 years, 11 months ago
            Would you hold that governments cannot issue bonds, because they cannot bind their citizens to pay taxes to repay the bonds?
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            • Posted by $ jlc 8 years, 11 months ago
              Why is the gov issuing bonds? (To finance a particular project.)

              Why is the business of the gov to finance that project? (The individuals who support that project should finance it.)

              Jan
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              • Posted by Ranter 8 years, 11 months ago
                The US government issued bonds first to finance the war for independence. Next, they issued bonds for things like the Louisiana Purchase, the war against the Barbary States, the War of 1812, etc. It is only relatively recently that the government started borrowing in order to pay its everyday bills.
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    • Posted by khalling 8 years, 11 months ago
      the only thing I would add, is that a re-structuring we allow for in US business practice. From the inception of the EU, we all knew this is what what happen. some partners were toxic. They took their poison pill.
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      • Posted by Ranter 8 years, 11 months ago
        The Greek debt was already restructured either last year or the year before. Now, they just want it forgiven -- in other words, the Greek government wants to steal from the banks that hold the debt.
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        • Posted by SaltyDog 8 years, 11 months ago
          And in reality, all the Greeks need to do is withdraw from the EU and default on their debt. They would make the new drachma the only recognized currency and their citizens could either trade their savings into the government at whatever inflated conversion ratio they deem appropriate or they could hold their Euros, in the hope of smuggling them out at some future date. Either way, Athens wins.
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          • Posted by Ranter 8 years, 11 months ago
            Bear in mind that the Communists are in power in Greece. They are highly unlikely even to try to balance their budgets, so they will need to borrow again. After they default, it will be much more expensive to borrow.
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    • Posted by iroseland 8 years, 11 months ago
      I totally agree on this one. Greece go themselves into trouble by living fairly high on the hog for a really long time. They got to the end quicker because their total GDP is like the size of Rhode Island's. They got here by working short days, short weeks and then retiring at an age that no German would ever consider. Yet, when it comes down to it its those same Germans who are working well past the Greek retirement age that the Greeks expect to pay for them to party up and retire early. Screw them.. Greece needs understand that they will need to do a bit more than hope that Olive Oil futures jump to 150$ a barrel to save them.
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  • Posted by $ WilliamShipley 8 years, 11 months ago
    I've often felt that repudiation was going to be the approach taken to Social Security. For many years, the Social Security tax has been a slush fund that government could borrow from and 'promise' to pay back when needed.

    Very soon there will be more money going out then coming in and it will be a burden on the general fund not an asset.

    At this point I expect the politicians to 'reform' Social Security from a mandatory pension plan to a pure welfare one and fund it out of taxes so that the 1% can pay their 'fair' share.

    This may well involved canceling the debt to the Social Security trust fund as part of the reform.
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    • Posted by SaltyDog 8 years, 11 months ago
      I don't recall the exact numbers, but in order for the Social Security schemes work, there had to be something on the order of 23 workers per payee. It functioned correctly for many years. In order for it to continue, three things needed to remain constant or increase.
      1). The death rate had to remain constant or increase.
      2). The birth rate had to remain constant or increase
      3). Wages needed to increase.

      Well, we've violated not one, not two but all three of these conditions. By 2025, it's expected that we will be down to TWO workers per retiree. This isn't some theory folks, this is arithmetic.
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      • Posted by 8 years, 11 months ago
        Yup, Social Security is bankrupt. I shudder to even think about how DC is going to play that storm out. Greece is the word. Greece lightning, Greece lightning, Greece is (will be) everywhere..
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        • Posted by SaltyDog 8 years, 11 months ago
          Washington needn't castigate Greece too badly; we've taken all of the same missteps to a greater or lesser degree. The simple fact is that our economy is so much more massive than theirs means it will take more time, but the end result will be the same.
          The mills of the gods grind slowly.
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          • Posted by $ jlc 8 years, 11 months ago
            That is the part that most people forget. Our infrastructure and affluence are so deep that there is a big lag between cause and effect. This has led to the socialists thinking that their programs were working when all that was happening was that they were in the lag phase.

            Jan
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    • Posted by $ jlc 8 years, 11 months ago
      From the time I was in my teens, it was clear to me that SS was not going to work and that I was probably never going to receive it - certainly not rely on it. Since I am one of the least 'street wise' people I know, I labor to understand why this was not apparent to everyone.

      Jan
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    • Posted by $ jdg 8 years, 11 months ago
      SS is indeed bankrupt, but I don't see repudiation as politically possible. They'll sooner print the money, just as other banana republics do, and let the Chinese scream.
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  • Posted by Herb7734 8 years, 11 months ago
    Everyone with even the slightest training in economics knows the solution, not only to America's financial problems, but the rest of the world's. But the solution is painful. Very painful. And every day that goes by it becomes more painful. It could be compared to a disease such as cancer or an addiction. But until we are willing to submit to that great big hypodermic needle, nothing significant will happen.
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    • Posted by $ WilliamShipley 8 years, 11 months ago
      Actually, the U.S. debt would be relatively simple to solve. It's about equal to one year's GDP, if we can drastically increase the GDP the additional wealth can make it more manageable.

      So, how do we do this? Get the government the hell out of the way of business. Eliminate most of the regulatory load put on over the last 40 years, stop sacrificing industry to save smelt, build the damned pipeline, build power plants, burn coal, make things.

      Take the vast amount of land currently held by the federal government and start slowly selling it off at a good price to people who are going to put it to productive use. Retire debt with the profits.

      I said it was simple, not that it was easy -- or that anyone who believes that government is the solution will do it.
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      • Posted by 8 years, 11 months ago
        The problem is $3 trillion of expenditure rapidly approaching $5 trillion, $2 trillion of tax revenue. Now if you only spend $1 trillion instead and repay $1 trillion of debt from that surplus, it would take 18 years even if rates are kept very low, otherwise much longer. There is also a lot of state, municipal debt plus other obligations.
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    • Posted by johnpe1 8 years, 11 months ago
      yessir, but the pain would hit people like you and me --
      retirees -- particularly hard. . the effect is that the
      overspenders get our value by virtue of inflation.

      it pisses me off. -- j

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      • Posted by Herb7734 8 years, 11 months ago
        Yes!
        Like now, so-called financial advisors tell you not to pay off your mortgage because you're paying on it with "cheap inflated money." B!S! The cheap money also means that your savings are losing value, pretty much no matter what interest rate you can get, which isn't much. Anytime you have one less bill to pay is an indication that you just might be able to survive.
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        • Posted by johnpe1 8 years, 11 months ago
          we have been debt-free for a few years, now, and
          my wife, who had never experienced that since her
          childhood (especially after her first husband left her
          holding the bag on some of his gambling losses) --
          she just jumps for joy every time it is brought up.
          so, we have a little savings, some land, this house
          and some gold somewhere ... but, mostly, we
          have one another. . hiding here and braced for
          the future.

          may it treat you and yours gently, sir!!! -- j

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          • Posted by Herb7734 8 years, 11 months ago
            You sound an awful lot like me and my wife. She is more frugal than me, but I've learned from her. No car or house payments, and screw what the "experts" say. I'm keeping our 10 year old mini-van until the pistons freeze.
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            • Posted by johnpe1 8 years, 11 months ago
              I went past that with saab 900 -- got a "new" engine!
              it wasn't quite as good as the first one, but fine
              nevertheless! -- the $200 per month machine, all
              costs included with 7500 miles of commuting and
              many side trips. . great car!!! -- j

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          • Posted by CircuitGuy 8 years, 11 months ago
            " hiding here and braced for the future."
            Having some wealth and no debt gives you the freedom to go out and make some positive future if you so desire. Hiding and bracing for what comes next, IMHO, are for those with no wealth or lots of leverage. :)
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            • Posted by johnpe1 8 years, 11 months ago
              it's like the hermit in the woods who feels, and is,
              vulnerable to unseen dark forces out of his control --
              we have prepared for the future as best we could,
              and now it is happening. -- j

              p.s. our health makes us more vulnerable, and
              we are dealing with that as best we can.

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        • Posted by CircuitGuy 8 years, 11 months ago
          "so-called financial advisors tell you not to pay off your mortgage because you're paying on it with "cheap inflated money.""
          I agree with this approach. I think they're "right" in the investment sense but wrong in the insurance sense. You should be able to make more return than today's insanely low long-term interest rates, BUT if things turn to worms there's huge value in not having to service debt. If your investments work, you should borrow as much 5% money as they'll lend and invest in things that make a good return. Forgoing the return on that spread is like sending a check to an insurance company on a policy you hope you'll never make a claim on. Having the policy in place, though, allows you to take other risks and survive downturns and investing mistakes.
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          • Posted by Zenphamy 8 years, 11 months ago
            So what do you do if your only source of income is wage or salary that doesn't keep up with inflation. The % and total going out for the mortgage stays the same, but the price of utilities, food, gas, other purchases such as cars, etc go up in inflated numbers, but your wage/salary increases don't match. Sounds a little dumb.
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            • Posted by CircuitGuy 8 years, 11 months ago
              "So what do you do if your only source of income is wage or salary that doesn't keep up with inflation."
              In this case people selling utilities, food, gas,cars, and everything but whatever you happen to produce can raise prices. This is another way of saying the real price of what you're selling is decreasing.
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              • Posted by khalling 8 years, 11 months ago
                Wages generally do not increase at the pace of inflation. Lay -offs do. You advocate opportunistic speculations, which is risky anyway but even more so when a person 's disposable income decreases. Moreover you advocate that inflation is a good thing in the first place.
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                • -1
                  Posted by CircuitGuy 8 years, 11 months ago
                  What is inflation then? If a large sector of the economy doesn't keep pace with inflation, the inflation didn't happen. You're saying if we expand the money supply, labor-intensive industries should see an immediate boost in profits b/c they can raise prices without increasing costs.
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                  • Posted by khalling 8 years, 11 months ago
                    "You're saying if we expand the money supply, labor-intensive industries should see an immediate boost in profits b/c they can raise prices without increasing costs."

                    I would NEVER say that. I advocate for a short term deep austerity. A correction that would be painful but not as painful as what is going to happen. I do not support expanding the money supply. that is theft. Some sectors were spared in the last crisis. they would not be spared if the markets were allowed free movement unhindered by the printing of money. Raising prices due to theft affects everyone except the top of the ponzi scheme pyramid. It is the worst sort of lying and theft. It is racketeering-yet if you work for the government or are an economist who advocates it-you never go to jail.
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                    • Posted by CircuitGuy 8 years, 11 months ago
                      I'm against loose policy too, although not nearly to the extent you are b/c I want stable inflation in the 3% range.

                      I thought you were saying inflation affects everything but whatever you happen to be selling. I now think you were saying any inflationary monetary policy results in inefficiencies that hurt growth. So maybe your wealth grows at 10% nominal, 6% real under a central banking system that tries to smooth the peaks and valleys with monetary policy. It might average 8% nominal, 8% real, I think you may be saying, if the central bank did not pursue inflationary policy. Trying to prevent unused production capacity, you're saying, the central bank allows inefficiencies, like keeping a plant running that would be utilized better if shut down a re-purposed.

                      Am I getting closer to understanding? I don't mean to put words in your mouth; I'm just re-stating in my own words for clarity.
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      • Posted by 8 years, 11 months ago
        Indeed. That's why the pain should be reduced by passing it on to bank equity holders and wholesale creditors, where the idiots agreed to buy these sovereign bonds.
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        • Posted by johnpe1 8 years, 11 months ago
          yet, unfortunately, their lobbyists and lawyers are
          stronger than mine. -- j

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          • Posted by 8 years, 11 months ago
            And they donate millions to re-election campaigns. And they sell the story their bailout is crucial to the economy, even as some retirees begin to shift through garbage bags for sustenance. Don't know how to get out of that one.
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            • Posted by johnpe1 8 years, 11 months ago
              unfortunately, it is fuel for rebellion or worse. -- j

              p.s. if the union was driven out of S.C.,,, maybe
              the threat of something could drive the overspenders
              away? . indefatigable optimism?

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  • Posted by freedomforall 8 years, 11 months ago
    Bravo, Vinay.
    That has been the solution for a long time. In fact the US would likely have been better of if we had done so in the 1930's. That would have terminated the fed and any need for income tax. REAL Capitalism might have sprung from those bankster ashes.
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  • Posted by term2 8 years, 11 months ago
    The greek government IS bankrupt, and should just admit it. No one is going to bail them out- not the banks, not the greek citizens. The government basically just has to close down and be replaced. I am happy I dont live there or Venezuela. I am not so sure I am happy I live in the USA either, as we arent far from the same end game.
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  • Posted by $ jdg 8 years, 11 months ago
    This idea has serious practical problems. It would get them kicked out of the EU at least. But I like the idea.

    I only wish it would mean that nobody would ever willingly lend to a national government again; that may be the only way to stop them from spending the money of future generations. But as Davidson and Rees-Mogg point out in "The Great Reckoning", there are plenty of other bankers out there, eager to do business.
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    • Posted by Ranter 8 years, 11 months ago
      And the more that governments are allowed to walk away from their debt, the more risky government bonds become. In the US there is virtually no risk of government default on the debt, because the President is duty bound by the Constitution to pay the national debt, even if absolutely nothing else can be paid. That's why US sovereign debt is so "desirable" to lenders.
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      • Posted by $ jdg 8 years, 11 months ago
        He's broken every other part of the Constitution, why not that too?

        Actually, the wording in the 14th amendment says the national debt "shall not be questioned." Sooner or later somebody will enforce that by ruling that the country doesn't have to pay the debt at all -- but nobody is allowed to question whether they ever intend to.
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        • Posted by Ranter 8 years, 11 months ago
          I don't have time to look it up now, but the duty of the President is given as to pay the debts of the nation. I think this is in the body of the Constitution, not in an amendment.
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        • Posted by SaltyDog 8 years, 11 months ago
          There is precedent for it. Technically, since the U.S. Treasury is the only organization legally entitled to print currency, that currency is an obligation of the U.S. Government. Now they used to print a bill called a silver certificate. If you so desired, you could walk into and chartered bank and demand a dollars worth of silver. That ended during the Nixon years (I still have a few, as I'm sure most of you do as well). Try taking one of those in and getting your silver now! So effectively, they've defaulted on that obligation. (The truth is the bill are worth more as collectibles, but I digress...)
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    • Posted by freedomforall 8 years, 11 months ago
      They should choose to leave the EU at the same time. The EU would suffer almost as much as Greece. It is a bad model for liberty and productivity, and it has been from the beginning.
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  • Posted by Lucky 8 years, 11 months ago
    The analogy is very good.
    Yes, there is no way out without pain. Earlier, it looked like the fairy godmother was the 'supra-national' institutions and the German taxpayer. But the drunk did not reform.
    In addition the German economy is in decline as they bring in policies to satisfy the greens, economic suicide for their industries. The big unions are waking up, many jobs will be lost as the big motor and chemical corporates pay higher energy costs and higher taxes to pay for green scams. As for Greece, perhaps there can be an even wider reach for more bail out money, perhaps the EU, ECB, IMF and other supras will find a way to intervene in the Greek economy, I suspect it is too late.

    Another point raised by Vinay is interesting- the sanctity of contacts, but when is an agreement not a contract? I suggest that is the case here - when neither party sees the contract as fulfill-able, to both sides it is other people's money - fraud.
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  • Posted by $ blarman 8 years, 11 months ago
    Nice, well-written post. Having lived in Greece for two years, I could see the institutionalized problems there long before the EU offered them membership - which I thought the EU was both desperate and abjectly stupid to do.

    I'm all for repudiation. Let the EU suffer for their stupidity and inability to properly vet a loan, and let Greece pay for its fiscal problems with the inevitable international trade issues that come with default.
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  • Posted by johnpe1 8 years, 11 months ago
    Fascinating, VInay! . looking at Greece as a drunk
    asking for Another Loan, only someone who can
    afford Another Repudiation would be wise to say yes.
    as a retiree, I would say no. . and it is sad. -- j

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