Guest Post: Fifty Ways To Leave Your Lender

Tyler Durden's picture

Submitted byTerry Coxon of Casey Research

Fifty Ways to Leave Your Lender

It was Otto von Bismarck who explained that “politics is the art of the possible.” We can thank him for that much, but he didn’t tell the whole story. I’ll give you the rest of it. Politics is the art of the possible fictions you can get away with.

Politics is mostly dissembling, and the dissembling is mostly about dodging personal responsibility for the messes governments make. It works out that way because making messes is most of what governments do. So when we ponder how the U.S. government will go about defaulting on its debts, a good way to approach the question is to consider how a default might be presented.

At this point there is no room for doubting that the government will renege on the commitments it has made to give people money. The $9.2 trillion in Treasury securities held by the public is just the tip of the iceberg. Estimates differ, but if you add in the unfunded obligations for Social Security and Medicare, it’s hard to avoid getting a total that exceeds $80 trillion. That works out to $260,000 for every man, woman, and child in the country, including the two-year olds. It can’t be paid, so it won’t be paid.

But don’t expect any clarity about the matter. Whatever happens, you can count on it not being called a default. No one in the U.S. government is going to say, “Tough luck, Treasury bond investors. We’re not going to pay you another dime. Go pound sand.” And no politician is going to tell the 51 million Americans on Social Security, “If you’re fit enough to pump that rocker, you’re fit enough to work.” It will all be done far more diplomatically.

Entitlement Euthanasia

Defaulting on Social Security is a lesser public relations challenge than defaulting on U.S. Treasury securities because the promise of a monthly Social Security check has always been a promise in flux. Payout rates have been raised repeatedly and now are indexed for inflation. On the other side of the ledger, the rates and ceilings on FICA tax have been raised repeatedly, as have the eligibility ages. It’s easier to renege on a quid pro quo when neither the quid nor the quo is ever allowed to come to rest.

Also helping to make a default on Social Security politically manageable is that each participant has been promised something different. Some people are owed a lifetime annuity right now. Others are owed something that isn’t scheduled to start until 40 years from now. So the politicians have a way to focus the default on the groups who aren't inclined to complain too much – the people who are aren't expecting to receive anything soon.

One way to focus the default on the far tomorrow is to steadily increase the eligibility age. For example, the eligibility age could be raised by one month every calendar year.

The government already has some practice at this. When the program began, the age for eligibility was 65. Now the eligibility age for full benefits depends on when a person was born. If you didn't open your eyes before 1960, your eligibility age is 67.

A secular rise in the eligibility age would shrink the government's Social Security debt to whatever size the government is actually able to pay. It could even be used, with little pain, to eliminate the program altogether. You could call it euthanasia for Social Security, although your congressman surely won't.

The trillions in unfunded Medicare promises can be shrunk to a manageable size in much the same way – gradually raise the age for eligibility. And it all can be done in the name of "protecting the system so that the elderly can count on receiving every dime they have been promised."

Shrugging Off Treasury Debt

Defaulting on U.S. Treasury securities while denying the fact is a bigger challenge, but it can be done.

One avenue would be default through inflation. Pay all the dollars that have been promised, but make those dollars smaller and smaller in purchasing power. That would be simple to accomplish if all the Treasury securities outstanding were 30-year bonds. Over a period of 30 years, a price inflation rate of just 10% per year would vaporize 94% of the purchasing power of a 30-year bond. Poof! No more debt problem.

But in fact the trillions in U.S. Treasury securities aren't all 30-year bonds. The average maturity of Treasury debt (bonds, notes, and bills) is only six years. As debt comes due, it can be refinanced only by issuing new bonds, notes, or bills at then current interest rates – which would be rising to match the market's experience with inflation.

So for the government to default on its debt through inflation, it wouldn't be enough for the Federal Reserve to engineer a high inflation rate and stick to it. The default would require progressively higher and higher inflation rates, to outpace the rise in interest rates that the preceding year's price inflation would constantly be fueling.

Eroding the dollar's value may turn out to be an important element in shrugging off debt, but given an average debt maturity of just six years, the shrinking-dollar strategy couldn't accomplish enough without pushing inflation rates toward triple digits. To rely on inflation as the primary means of default without going near triple-digit territory, the government would first need to lengthen the average maturity of Treasury debt, for example by replacing maturing T-bills with long-term bonds. The cover story would be about the prudence of issuing long-term debt with a fixed, known interest cost, rather than being subject to the interest rate volatility of the T-bill market.

Another maneuver to lengthen the maturity of Treasury debt, in preparation for a slow default through inflation, is for the government to announce that while it is committed to paying everything it owes, it just can't pay it on time. But not to worry, because the government will continue to pay interest – at whatever rate was promised when the security was issued – for as long as the delay persists. That would in effect turn T-bills and Treasury notes into long-term T-bonds. That seems heavy-handed, but it still leaves room for denying the fact of a default. And it's been done before by a number of countries, under the label of "rescheduling."

A Political Triple Play

If the government decides to take any of these approaches to a deniable default, it would be politically more advantageous to stiff foreigners rather than U.S. investors. That would require getting most of the outstanding Treasury securities into the hands of foreigners. It could be done.

The U.S. imposes withholding at a rate of 30% on dividends and other types of investment income paid to non-U.S. investors. But there is a very broad exemption for interest payments. So under current rules, foreigners can invest in most types of bonds issued in the U.S. without losing anything to withholding.

A simple way to stick foreigners with the pain of a default would be to extend the withholding system to cover corporate bonds but not Treasury bonds. Non-U.S. investors would then have a compelling motive to replace their holdings of U.S. corporate bonds with Treasury bonds. T-bonds would flow out of the U.S. and corporate bonds would flow in. Most of the portfolio adjusting would be done within a year or so. Then the government would change the rules again. Withholding would be extended to Treasury bonds, at 30%, or at some higher rate, say 40%.

Most of the value (and most of the debt burden) represented by a long-term bond is in the interest payments, not in the principal. Imposing withholding on the interest at a rate of 40% comes close to a 40% default on the debt. It would be done in the name of balancing the budget (everyone’s for that) and as a counterattack on tax havens (where devious rich people hide their money), and it would be done to foreigners (many of whom are Chinese exporters that have been taking advantage of the U.S. for far too long). A political triple play.

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mynhair's picture

Lengthen maturity, bitchez!

Hope it all goes away.

In Fed We Trust's picture

How about 50 ways to embezzle money out of the country and into foriegn owned banks.

6 String's picture

The triple--withholding income tax on treasuries--won't happen. China and Japan will fuck us first if we try to screw them over on their T holdings. They, China, might fuck us anyway.

On the other hand, the first two--Social Security and Medicare--will certainly fuck most Americans under 45 that have been paying into it all their lives. No question. Fucked.

Dapper Dan's picture

Breaking:  Social Security is now "cash negative" not to be confused with "broke, insolvent" or "upside down"

Bob's picture

So we should be thinking about redeeming those "Treasury IOU's" held by the Trust Fund before we default on the rest of it.  One has to wonder what the yield is on those, btw . . . or whether it was an overly friendly handshake between unequals. 

This looks like a planned default.  It's no surprise that the advantaged class is leading the parade. 

But, the brilliant exclamations of "ponzi" nothwithstanding, let us remember that the whole financial system--yes, we all know it--is a freaking ponzi.  I'm really tired of hearing that term thrown around as if it is especially meaningful in the context of SS.

downwiththebanks's picture

What a shock - steal from the till for decades, allow the rich to avoid paying into it like real people do, and give tax breaks in which SS taxes are collected.

Bang!  Now you've got some good propaganda.


jus_lite_reading's picture

Relax. The Fed, and by extension the whole world financial system, is "unsinkable..." There is literally no amount of money thay can not "print"- not even ink and paper are restraints any longer and digi dollars can be dreamed up out of thin air and given to the banks that need it. "Unsinkable..."


Sound familiar?

DosZap's picture

If this happens, its inevitable their will be an absolute declaration of attacks on the govt, and esp the personnel responsible for the call.

After the years of waste,theft, living high on the hog, special pay,retirements,medical whores and living above the law, payback will be first and foremost on the agenda.

If just 10% take actions, it will be a fkin nightmare.

150 million plus folks are not going to sit still for this.

At the first sign of ANY mobilization, movements of the .gov, w/regards to the LE groups, Mil, the SWHTF.

topcallingtroll's picture

It will be gradually taken away from you in ways that are difficult to figure out. Hence, no riots. In the future when the doctor doesnt do an mri on a senior citizen, or says that medicare patient with a hip fracture is too risky for surgery, how will you know you have been robbed? The government is incentivizing medicare health care accountability organizations to withhold unnecessary care. If your ss check buys less crap 20 years from now how will you know?. Blatant defaults are unnecessary

Buck Johnson's picture

I couldn't agree with you more, I explained to someone on a forum about how govt. will cut your benefits without saying it's cutting.  And thats by obfuscation and paperwork.  As you said they will incentivize the doctors and/or the hospitals to withhold care.  Another thing to consider is SS and people trying to get it early or are hurt and can't work.  They will make it harder for them to get it by burying them i paperwork, it's already happening now.  One of my coworkers family member has been trying to get SS because they can't work because of ailments and they have been trying for 5 years and still are bogged down by denial and appealing and waiting etc. etc..  Also what hasn't been said is the pensions of state and federal workers, there going to get screwed also. 

The US will never come out and say that they are defaulting on their promises because it would be like a cattle prod to the rest of the world.  And as for us screwing over China and other countries that have our Treasuries, it won't happen.  For one, many countries and state organizations outside the US (and some in the US but they don't count) need and use that return to fund this or that or leveraged it to other financial items.  So by saying that we will change the deal on the Treasuries can have catastrophic effects for them.  Two believe it or not, defaulting or not, we still need investors to buy our Treasuries and Muni's (he left that out didn't he).  If we just buy all the Treasuries and all the Muni's and have no country buying our debt anymore because of us saying that we change the rules, we will have hyperinflation sooner rather than later in the US.

And thats because the velocity of the money and how far it travels would've been shortened to moving from one side of an American street to another.  Also we aren't an island of just ourselves, we still need things and items and resources in other countries.  And even our fair weather friends wouldn't sell us anything unless they got paid in gold, silver or some form of barter.  So what I see happening is that they will slowly default on the obligations (why do you think Bush and even Obama was so quick to get the martial law provisions into US law) to the US citizens because they can be controlled easier.  And during the slow default they will make excuses and pass blame to other things and people and such in order to play out the clock essentially. 

They can't blow off the international community and still want to play like they are a superpower in finance or military.  What may be demanded and pushed is that a new currency will be used for international trade based on I suspect a basket of minerals and resources (like gold, silver, food (possibly), etc. etc.).  And the US will still use the dollar but for internal use (to help pay some of those obligations in depreciated paper.  Believe it or not we don't have to many choices, either this or we will just collapse and break apart into separate countries.

jus_lite_reading's picture

I agree with all of you but action will be taken before that occurs.

serotonindumptruck's picture

The only way American citizens will riot is if they are hungry. By that I mean physically hungry for nutritional sustenance. Once access to the local grocery stores have been restricted (by force of arms), then, and only then, will TSHTF.

dark pools of soros's picture

SNAP cards will be handed out - people will eat crappier, cheaper food-like items

topcallingtroll's picture

See my answer above as to why you may be wrong on number one and see my answer below as to how your second paragraph will be carried out so joe sixpack doesnt notice.

pan-the-ist's picture

They will never default on Social Security.  There would be a revolution.  The country would fall apart first.

Jerry Maguire's picture

They will certainly default because it is unpayable.  The question is how and when.  They won't pay in cash, they'll just round up the poor ones and put them in camps and won't acknowledge that they're defaulting.  But that's a default.

jus_lite_reading's picture

Did you not receive the memo? The Fed/EU/UK complex is "unsinkable..."

as in the Titanic is "unsinkable..." so relax and grab a drink at the bar with the captian, have a nice cuban in the smoking lounge and if you have some time, grab that bottle of brass polish and a cloth and start polishing the brass on your way down to the boiler room...

Yes We Can. But Lets Not.'s picture

My Gubmint is a DeadBeat.  A ScumBag.  A Loser.  A Cheat.  A Liar.

Dick Buttkiss's picture

Right on all counts, except that "We the People" are the losers. It's how government works, after all.

downwiththebanks's picture

Dumb because they keep insisting on paying interest on debt held by banker-gangster created out of thin air.

Dumb, dumb, dumb.

Time to hang the banker-gangsters in the public square and expropriate their wealth.

Flakmeister's picture

  A somewhat heuristic example based on energy reserves:

1 trillion bbls of oil    ~ $90 trillion

4 trillion tonnes of coal ~ $100 trillion

6.3 trillion mcf NG   ~ $20 trillion

This is for the world...

Anyone see a problem??

Logans_Run's picture

If  we give thebenbernank long enough all of the Treasuries will be held by the f'in FED!

downwiththebanks's picture

Then Uncle Sam seizes the banks and expropriates their assets.

Problem solved.

hampsterwheel's picture

Good read - but not likely, the author's premise is time and a lack of market intel. Stiffing John Q Public is easier because unless he decides to go postal - he is stuck, whereas if you start screwing the Chinese, Japan or hell even France, they'll one see it coming and they won't give you the time to complete the screw job. They have too many ways to hurt you back - economically and geo-politically - you want troops for Afghanistan to replace an American pull out - screw you. You want help with North Korea - want us to intercept dollars intented for Osama's crew - nah...pass... oh we so sorry, the PRC just Nationalized GM's China division - ooops ...... the world isn't static - it changes and adapts on a dime - that is what governments or futurists don't seem to get -

topcallingtroll's picture

If the chinese and others continue to let us hold them by the short hairs as they seek mercantalist advantage they will continue to buy our bonds and glumly accept their punishment. After all they have to hide things from their people too. It is far easier to hide a hidden usa subsidy than the closure of a chinese plant. They are paying in reduced standard of living and we need to yank on those short hairs as hard as we can. Indirect is china and most of asia now as they all pretend they are cutting back on treasury purchases.

pan-the-ist's picture

Ever heard of the Chinese game Wei-Chi?  The Chinese have an exit strategy.

dark pools of soros's picture

I've heard of Pai-Gow and I can never get a seat in any casinos here...

jmc8888's picture

This guy and all his education and spiffy titles and yet still has never heard of Glass-Steagall? Nor what implementing that standard would do?

Man what a dipshit.  Not good for someone at a company with retread...I mean 'research' in the name. (and he trust's gov't statistics? wow! especially on inflation, wow.)

Once again people supposedly in the know, think 50 years ahead down the wrong monetarist path (just about the worst one) when Glass-Steagall teleports you to a completely new place, rendering all that is to come as a result of the bullshit path we're currently on null because the catalyzing agent isn't there to create what he fears. 



BigJim's picture

Your faith in the transformative power of Glass-Steagal is touching.

topcallingtroll's picture

I try to explain to people there is no lockbox and when ss pays out more than it takes in that is new spending whether the government sells a bond out of the " trust fund" or a new freshly printed bond. Oh well. To some degree ss and medicare will be partially needs based whether done openly or hidden in the tax code, and the 106,000 or so ss cap will disappear. It is easy to make yourself look poor on paper, and the day they raise the cap is the day i dive deeper into barter and take lots of time off. Fuck those assholes. The IRS still hasnt figured out a way to tax my free time yet. I see more vacation more aggressive deductions more barter discounts in my future.

downwiththebanks's picture

Uncle Sam has been stealing from Social Security to kill Black and Brown people for 4 decades.

That's why it's going broke.

hardmedicine's picture

AMEN. I am looking into it right now with regards to the more time off, cash and barter. 

The fact is that the top cap has been raised by $16,800 since 2005 alone.  And it has tripled since 1987.  So, they are doing flipping the numbers as fast as they can right now.  That is how it's being done and will be done.  People need to be willing to go all the way NOW.    I'm getting there.  Have started selling everything I own.  One way or the other I will be free. 

serotonindumptruck's picture

"One way or the other I will be free."

I've known a couple of people who have tried. They were both unsuccessful.

Here is what is essentially required:

Make a public declaration (local newspaper) as to your SOVEREIGN STATUS. Declare yourself as a Sovereign Citizen wherever you go and to whomever you meet.

Surrender your state driver's license. Take advantage of the opportunity to surrender your federally issued Social Security card as well. (Best to surrender these documents by mail)

Prepare to be arrested. (The criminal charge is largely irrelevant)

Prepare for a relentless level of State/Federal harrassment for the remainder of your time in this world.

Just sayin'. (Cuz I know)

Encroaching Darkness's picture

I agree with the general idea, that the government can and will eventually choose to default on its obligations - but I expect that events will move too quickly to allow them an orderly retreat.

When the dollar collapses and oil can't be bought without gold, OVERNIGHT, it will be too late to debate whether to stifle entitlements, stretch Treasuries or change withholding rules. It will be OVER, and we will have to figure out how to live within our means again, with or without a Federal structure to impose more debts on the survivors.

topcallingtroll's picture

No need for a hard collapse. A soft default on our liabilities will accomplish the same thing without the mess.

Tydown4fun's picture

Folks - ABC national news just showed a JPM Ms. Murdick apologizing for JPM going after US military members serving overseas about their mortgages, which is illegal.  One person serving in Korea was harassed even tho payments were current.  WTHO?

ILikeBoats's picture

Remeber, the govt will tell you what they want to you know, AND, what they can no longer conceal.

Josh Randall's picture

I just hope all of your countries in the ZH comunity, don't provide safe havens for our US crooks when the SHATTNER Hits The Fan. Because we have some volutures that will need feeding...its a shame now how many exiled puppets and killers the US has harbored over the years. Mubarak better not decide he needs to retire in Arizona

Rusty Shorts's picture

"discretion" is the opposite of "obligation"

Huck T's picture

Thanks - I needed you to clear me up on the Iron Chancellor. 

A "promise in flux"?  Put the bong down, home boy.  Or do you just make this up as you go along?

Speaking of messes: If it wasn't for the gov'mint, you'd be gutted in the street.

StychoKiller's picture

Speaking of messes: If it wasn't for the gov'mint, you'd be gutted in the street.


An armed society is a polite society.

Sokhmate's picture

One way to focus the default on the far tomorrow is to steadily increase the eligibility age. For example, the eligibility age could be raised by one month every calendar year.



How about one year every calendar month?

New_Meat's picture

That was Paul Volker's original proposal.  But he got put aside for the new boss.

JustPrintMoreDuh's picture

Time to scam an injury and call Binder & Binder to see if I can't recoup at least some of what I've paid into S.S. for the past two decades.

F.U. right back govt crooks. 


downwiththebanks's picture

At this point there is no room for doubting that the government will renege on the commitments it has made to give people money.

I call bullshit, TD.  Most of that debt is funnymoney owed to the banker-gangsters simply because Uncle Sam chooses to be so.

Fuck the banker-gangsters running the Fed, and a good percentage of the problem goes away.  Then nationalize it.

The rest can get taken care of with a 1 ... 2 ... 5 ... 10% Robin Hood tax on derivatives speculation.

All 'debt' owed to banker-gangsters is illusory. 

pan-the-ist's picture

Hmm.. Put down the coke straw.

The government is the instrument of those in power.

Those in power are the "banksta gangsta's"

Therefore the government will not be nationalizing anything but the "bangsta ganksta's" debt.

downwiththebanks's picture

I know.  I'm only pointing out how easy this problem is to solve in theory.  The whole 'debt crisis' is scare mongering and utter bullshit, really.

It's the natural product of a fractional reserve system.  

The banker-gangsters can all go kill themselves, and the world would be better off.  In fact, everyone would sing and dance.  

But you're right:  to carry it out in practice requires our own Tahrir Square.

johnnynaps's picture

Man, judging by the article, my 31 year old ass will........never retire! Good thing I'm technically unemployed right now! I'd hate to be enslaved paying 15% of my wages to something that won't pertain to me (amongst other taxes that have no direct benefit either)! Now, time for another SoCo!