A naive question on economics

[Brian Ellis]

Greece sells its bonds and receives money from other countries, such as the UK, Italy, USA, etc., essentially a loan, to be repaid when they reach maturity (forget their haircut for the moment)

Italy sells its bonds and receives money from other countries, such as the UK, Greece, USA, etc., essentially a loan, to be repaid when they reach maturity

The UK sells its bonds and receives money from other countries, such as Greece, Italy, USA, etc., essentially a loan, to be repaid when they reach maturity

And so it goes on with Germany, France, Luxembourg, Dubai, Switzerland etc,, etc., etc. all holding bonds of all the other countries and all owing much more money than they are owed.

In other words, perhaps Macau, Brunei, Taiwan, Liechtenstein and Palau excepted, practically the whole world owes more money than they are owed, just like the toxic debts generated by the US mortgage scandals with negative equity collateral.

It would seem that the dollar, the euro, the franc, the ringitt, the rupee, the rouble, the rupiah and every other currency are all unsustainable. If every country tried to call in the money owing to them at the same time, there would be a global bankruptcy because there is no overall collateral. As a first approximation, my guess is that the overall hole would be at least $60 trillion, not counting unpaid interest. This money simply cannot exist and never has. If I rang up debts on such false promises, I'd be joining Mr Madoff with a somewhat barred view out of the window. This appears to be the Ponzi scheme par excellence with a difference that nations can print money and to hell with the subsequent devaluation and inflation.

I am, in no way, an economist, as you will have gathered, but please explain to this naive mind how such a system can arise?

[dZeus]

Greece sells its bonds and receives money from other countries, such as the UK, Italy, USA, etc., essentially a loan, to be repaid when they reach maturity (forget their haircut for the moment)

Italy sells its bonds and receives money from other countries, such as the UK, Greece, USA, etc., essentially a loan, to be repaid when they reach maturity

The UK sells its bonds and receives money from other countries, such as Greece, Italy, USA, etc., essentially a loan, to be repaid when they reach maturity

And so it goes on with Germany, France, Luxembourg, Dubai, Switzerland etc,, etc., etc. all holding bonds of all the other countries and all owing much more money than they are owed.

In other words, perhaps Macau, Brunei, Taiwan, Liechtenstein and Palau excepted, practically the whole world owes more money than they are owed, just like the toxic debts generated by the US mortgage scandals with negative equity collateral.

It would seem that the dollar, the euro, the franc, the ringitt, the rupee, the rouble, the rupiah and every other currency are all unsustainable. If every country tried to call in the money owing to them at the same time, there would be a global bankruptcy because there is no overall collateral. As a first approximation, my guess is that the overall hole would be at least $60 trillion, not counting unpaid interest. This money simply cannot exist and never has. If I rang up debts on such false promises, I'd be joining Mr Madoff with a somewhat barred view out of the window. This appears to be the Ponzi scheme par excellence with a difference that nations can print money and to hell with the subsequent devaluation and inflation.

I am, in no way, an economist, as you will have gathered, but please explain to this naive mind how such a system can arise?

I think technically this is only a Ponzi scheme if the average interest rate on all outstanding debt is higher than the inflation rate, as more interest-bearing debt needs to be created to repay the loan.

So if there's way too much debt outstanding, which cannot credibly be repaid, then there are several ways to deal with it. One of them is to create the highest level of inflation tolerated by its users; this can be done by monetary expansion with government spending, and under-reporting the inflation rate by not taking into account dropping living standards, excluding items like oil, energy, housing, food, etc. from official inflation figures. Eventually creditors will get rather upset about it, and savers/workers too as their wealth is shrinking.
Another option is to let people default on debt they cannot repay, which if done without restraint can cause a deflationary spiral like during the great depression. This also leads to lower living standards, very high unemployment, etc.

[Umfriend]

I think you are assuming that countries issue debt which is bought by other countries.

That is typically not the case, rather, the private sector in various countries will hold the sovereign debt issued (banks, individuals (whether or not directly or through investment funds etc), pension funds. The "collateral" that backs sovereign debt is their power to tax. Indeed, there is typically no hard collateral that can be foreclosed upon. Hope this helps a bit.

edit: In fact, the current crisis is a sovereign debt crisis. Italy as a whole may well have a net equity position, just not the public sector.

[cjolley]

...If every country tried to call in the money owing to them at the same time, there would be a global bankruptcy because there is no overall collateral...

Also, this is not an unusual situation. No bank on earth holds enough reserves to survive a run, it would be a terrible waste of resources.
And few mortgage holders have enough cash to survive having their mortgage called, otherwise why borrow the money?

That's part of why a money system is so much more useful than a barter system.