The Dual Purpose of Debt Management and Debt Restructuring
By JC Collins
Just after World War Two the United States had a massive debt-to-GDP ratio of over 140%. Today’s debt-to-GDP ratio of 104% seems paltry in comparison. But along with a huge debt-to-GDP ratio after the war, the US also had one of the largest trade surpluses in the world. Much like China does now.
The difference, China’s debt-to-GDP ratio today, for government debt, is around 42%, with a balance of payments surplus of over $60 trillion. This puts China in a very strong position within the multilateral monetary transition which is taking place.
At present time, the US has a large trade deficit, with China being the biggest creditor, and a high debt-to-GDP ratio. The ability of the US to push its debt-to-GDP ratio down after the war had a lot to do with its strong balance of payments position at the time.
Also, the status of the dollar as the international reserve currency gave America the ability to print large amounts of money to fund production and increase exports to a world which was rebuilding. The Triffin Paradox defined the problematic and systemic issues which would arise from such an arrangement. The use of the domestic currency of one specific country, here being the USD, would cause deflationary pressure back home and force the central bank to continue printing money to meet the international demands brought about by the reserve currency status.
The chart below defines how the US debt-to-GDP ratio decreased after the war on the back of robust American production and huge exports. But around the early 1970’s, when the original Bretton Woods agreement was ended by Nixon, the American debt-to-GDP ratio began to increase once again.
There are several reasons for this, but it mainly had to do with the US beginning to build a trade deficit as more and more dollars accumulated in the foreign exchange reserve accounts of central banks. The trade agreements which developed from this US debt accumulation forced western companies to move production to the creditor nations. In this particular circumstance, China was becoming the largest American creditor, and as such, many American factories were moved to China to offset the dollar inflation which was being exported.
With exports decreasing, and domestic consumption increasing, it wasn’t long before the US debt-to-GDP ratio started to increase once again and its trade surplus became a trade deficit, as more and more goods needed to be imported into the country, and more and more dollars accumulated in the exchange reserve accounts of foreign central banks.
America had what appeared to be a free printing press to expand the money supply and fund a large international socioeconomic and geopolitical strategy which would work towards hegemony. But nothing is free in this world, and the internal deficiencies of man, the need for power and control, were leveraged against the western mind. The rampant materialism and false sense of identity which grew from this seemingly powerful position corrupted the western world and created an absurd sense of entitlement.
The chart below defines the balance of payments movements and increases in the US debt-to-GDP ratio. This chart could also be converted to represent the decrease in morality and self-discipline and the rise in entitlements and the false sense of self.
A philosophy based on the metrics perhaps.
As a footnote to this subject, I have previously written extensively about how China is switching from a trade exporting model to a trade services, or consumption based model. This process is well on its way as the private domestic Chinese debt-to-GDP ratio is 207%. Alone this would signify dramatic changes to how the international monetary system has functioned for the last 70 years.
China will not allow its currency to become the sole reserve currency of the world like the USD has been. The lessoned learned by the Chinese will not allow them to convert their trade surplus to a trade deficit and see their governmental debt-to-GDP ratio increase at the rate that Americas did.
With that being said, the monetary system as a whole is changing, and the move towards a multilateral framework will mean that there will be a multi-currency reserve system which will develop and lead into the use of the SDR as a means to balance international payments. Along with this, the goal is to reduce and eliminate reserve accumulation altogether.
This is why it is so challenging for some analysts to correctly interpret what is happening in the monetary and financial worlds today. The framework of the past is changing and the framework of tomorrow will not function as it did in the past.
Many western countries today which have benefitted from the framework of the old system, are now in a subservient position to the international banking interests. The large balance of payments deficits which developed have bonded these nations to a forthcoming process of sovereign debt management and sovereign debt restructuring, both of which will reduce international sovereignty and domestic sovereignty.
America, and the west in general, which originally represented the plans of the international banking interests, have now become more openly subservient to a process of socioeconomic engineering. While China, and other emerging markets, once the subservient partner to the west, are now becoming the representatives of the international banking interests.
For the most part, the western nations have become debtor nations, while the eastern nations, or emerging nations, have become creditor nations. This was not by mistake or accident. The strategy of push and pull to reduce national sovereignty becomes more visible and apparent when we step back and take a more generational viewpoint.
The chart below gives us a snapshot of the trade surplus and trade deficit, measured against debt-to-GDP ratios, of the major economies in the world.
It is very clear that sovereign debt is an issue which will be dealt with through a strategy encompassing a transfer of sovereignty to a super sovereign governing body. This governing body will represent the international banking interests.
There are two methods to deal with sovereign debt which have been developed by the international banking interests. One is sovereign debt management, and the other is sovereign debt restructuring. Both can be used simultaneously to address external debt and domestic debt.
As an example:
A sovereign can:
- Honour external debt obligations, while;
- Restructuring domestic debt.
The purpose of that approach would be for sovereigns with underdeveloped domestic financial markets to maintain access to international capital markets.
A sovereign can also:
- Restructure external debt obligations, while;
- Remaining current on domestic debt.
The purpose of this approach is to mitigate the fallout from defaulting on, or restructuring, claims held by domestic banks and businesses. This would also include state and local governments and intergovernmental debt, such as the Social Security Trust Fund in the US. This would appease sovereigns with advanced financial markets and influential domestic creditors.
Based on what we know from reviewing the above information, I would suspect that America will be implementing a strategy of managing domestic debt and restructuring external debt.
This is where the concept of dollar depreciation comes into play. A depreciating US dollar will increase domestic growth and exports, while creating leverage to negotiate on external debt. Neither the US nor China want to underwrite the losses caused by a depreciating dollar, but China, as the largest US creditor nation, can transfer American debt to the International Monetary Fund in return for a substitution issuance of SDR.
This would in turn make China the largest shareholder in the IMF, and set up the renminbi for additional weighting increases within the SDR basket composition.
The pre-emptive approach to sovereign debt management and restructuring will escalate in the coming months and years. The debt management part is somewhat easier for nations to accomplish with exchange rate adjustments and trade agreements.
The debt restructuring is somewhat more challenging as it requires the coordination of two methodologies. One is debt rescheduling, which can extend contractual payments into the future. The second is debt reduction, which will reduce the nominal value of outstanding debt.
All will require a shared burden between creditor nations and debtor nations. The social justice and economic efficiency mandates may not always be clearly defined, but past revolutions and austerity measures have assured the international banking interests that such confusion and emotion can be leveraged and controlled.
Greece is a prime example of this strategy.
We will soon begin to hear international discussions around Sovereign Debt Tribunals (SDT), as the need to pre-empt sovereign debt defaults becomes more apparent. Such tribunals will be sold as “fair and transparent”, but the outcomes and austerity measures put in place to address both external debt and domestic debt will not feel fair and transparent for many sovereigns and their citizens.
Greece is another prime example.
The United Nations Conference on Trade and Development is putting together its own proposal to address the sovereign debt issue. Whatever strategy comes forth will likely merge and blend with the Sovereign Debt Restructuring Mechanism of the IMF.
The Collective Action Clause (CAC) approach to sovereign debt is insufficient at addressing the “self-organizing” principles and habits of creditors. This is another method of controlling the debt restructuring process which minimizes the position of the creditors while maximizing the position and mandates of the international banking interests.
Some creditors are obviously representative of the international banking interest, while some creditors are not. Any strategy must consider this likelihood and prevent systemic leakage.
As the CAC approach begins to be superseded by the SDRM process, the international language used around sovereign debt will begin to change. We will begin to hear phrases such as the Sovereign Debt Tribunals, and the need for a treaty based approach to sovereign debt which will take into consideration the independent needs of each specific sovereign.
Four key features of an evolved SDRM process will include:
- Impose restraints on litigation – this will make CAC’s irrelevant and limit the recourses available to creditors.
- Procedure for assigning creditor priority – assume that international banking interests creditors will have seniority.
- Statutory Mechanism – allows creditors to vote on terms of restructuring. See item 2 above.
- Process for fact checking information – another way of controlling information surrounding the process itself.
The SDRM will bind all sovereigns and supersede the provisions of private loan agreements and Collective Actions Clauses. The treaty based SDRM methodology will build the architecture for the globalization of central banks and the exchange rate mechanisms required to further develop a true international currency.
The United States lost its domestic sovereignty with the establishment of the Federal Reserve System in 1913. Its international sovereignty was initially lost at Bretton Woods in 1944, and has since been reduced with each dollar that accumulated in the exchange reserve accounts of foreign central banks.
All the entitlements and mass consumption of the west has worked to our own detriment. The fear of a loss of sovereignty is not as palatable as it once was. The socioeconomic engineering which has taken place over the last few decades has built a system of political correctness which has kept the disorganized masses relatively quiet for fear of unfair labeling.
Soon we will see that to speak out against a loss of sovereignty will be tantamount to denying global warming, and not doing your part to prevent it. The mandates of the UN 2030 agenda are aligned with the mandates of the international banking interests. – JC
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