Guest Post: Spreading Insolvency Around Does Not Create Solvency

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Spreading Insolvency Around Does Not Create Solvency

The central illusion of Central Planning everywhere is that distributing insolvency will somehow magically create solvency.

I recently received a brief but powerful summary of the global financial system's intrinsic instability and unsustainability from correspondent Ray W., author of A Change in the Weather.

One key point is that spreading insolvency (debts that will never be paid back, debt based on totally phantom assets) over a populace does not somehow conjure up a solvent financial system or State. Distributing insolvency only destroys the last remaining islands of solvency in a bankrupt world.

The entire global financial "recovery" engineered by central banks and Central Planning is based on the absurd notion that if we spread unpayable debt over the entire body politic (be it a nation or regional entity such as the European Union) then that distribution will somehow make the debt payable and the phantom assets real.

The debt remains unpayable and the assets (collateral) remain stubbornly phantom. As for adding more debt (selling Eurobonds, Treasury bonds, etc.), please note the diminishing return on additional debt: it is now negative.

Here is Ray's commentary:

Not only the US Federal Reserve, but the EU collectively and its members individually are blowing another bubble with artificially suppressed interest rates inducing a flight to equities. It may not look like a bubble because values are climbing so slowly and uncertainly, but that is just an indicator of the structural weakness and exhaustion of petrocapitalism. In terms of thermodynamics, the engine is just too big to run on the same fuel without serious retooling.


The debt from the past three decades of bubbles--finance, dot-com, real estate--is still largely unrepaid, and won’t be. Whether nefariously intended are not, the current payback scheme, focused as it is on sanctity of contract, is to keep the bond holders from absorbing any of the losses (the Greek haircut notwithstanding). Modern economics is all about trust, so if contracts are no longer reliable, then the whole system--which depends 100% on credit--functions much less efficiently and much more expensively. It begins to look medieval.


The hope is that the states can titrate these losses into the general population, where they will be diluted and absorbed like pollution. But like climate change, we’ve simply reached the saturation point. The world can no longer be a sump, economic or atmospheric.

Thank you, Ray. Diminishing returns define the flailing financial system: the return on petrocapitalism is declining (how many barrels of oil or equivalent does it take to extract and process one barrel of shale-derived oil?), the return on more debt has turned negative, the yield on "saving" bankrupt States is marginal, and so on: spreading insolvency to the taxpayers does not magically create solvency, it only distributes insolvency to every nook and cranny of the economy.

All the debt remains painfully real; it is only the collateral that is illusory.

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lolmao500's picture

No but it creates comparative solvency, which works for a time.

ZerOhead's picture

Spreading Insolvency Around Does Not Create Solvency

Ironically this reminds me of the time when people infected with AIDS in Zimbabwe thought they could cure themselves by having sex with virgins...

I don't think their money printing experiment to stimulate economic growth turned out too well either...

LMAOLORI's picture




More like it creates comparative slavery

Chicago Fed President the whole world should print

Robot Traders Mom's picture

"Keep your hand on your gun" because this is all going to wash out...My new favorite vid:


Doubleguns's picture

We can rehypothicate the collateral to create more to cover the debt.... dont ya know. /s

StrawberryBlonde's picture

Exactly! Thanks for reprintingg, TD! :-)

realtick's picture

Look at the chart of Morgan Stanley Capital International Europe, Australasia, and Far East.

We are on the verge of a serious market crash:



canadiandollar's picture

havent seen that many examples of head and shoulders since my last outbreak of dandruff.

NEOSERF's picture

Great headline and point BUT the one thing spreading insolvency around does do is hide the true magnitude of the issue and buys a bit of time.  This time of course has been frittered away hoping for growth to return vs. writing down the debt in a concerted way and thus you can 100% count on a collapse when these schemes end. 

malikai's picture

I agreed with you 100% until you brought up the whole "Climate Change" thing. Are you sure you're not a statist yourself?

Id fight Gandhi's picture

When you're stuck in a hole, dig UP.

AldousHuxley's picture

spreading shit around just makes everything stink.

keep shit contained and flush it.


flush insolvent banks down the toilet along with banksters in it.

adr's picture

BALDERDASH!!!! When everyone is insolvent nobody is.

Didn't you get them memo?

Turin Turambar's picture

All your debt are belong to all of us.  ;-(

blindman's picture

it is control fraud. that is all.

sodbuster's picture

Assets can disappear or vaporize overnite- debts NEVER go away.

blindman's picture
20 August 2012
Bill Black On Wall Street Control Frauds and Moral Hazard
" Lack of Justice Department and regulatory prosecutions for Wall Street fraud creates incentives for more control frauds and climate of lawlessness." jca
arguing about this is like complaining that the guy
who is stealing your car is not doing a good job
washing the tires. yea, he ain't washing your car
my friend, he is stealing it !
oh well, i'm sure he will return it washed when
he is done.

blindman's picture

eyewitness news is on the case....
Bonnie & Clyde: Couple steal puppy from pet store

michael_engineer's picture

A lot of what you have in the macro now is just a rolling over of bad paper while trying to reassign the stuckees and trying to manipulate the perception to make it appear to be BAU.

falak pema's picture

As someone said pushing debt under the carpet doesn't make it go away. Dust is dead, but debt is organic and debt interest grows and grows, even under the carpet. 

What is a debt jubilee, can it be obtained without default? Seems a better solution. If its doable.

Or else let the market adjust assets to market value in the big reset. One or the other.

No half way measures under the carpet. 'Cos that is criminal.

It resolves nothing and condemns those who are young to debt serfdom; even unborn generations! 

Backspin's picture

Anyone know where an updated version of that chart might be found?

EmileLargo's picture

Just as packing 30 types of crap mortgages together is not going to create a high quality asset pool to issue bonds - as we learnt from painful experience. 

kevinearick's picture

imploding the global middle class in a MAD attempt to save their own useless hides.

GWinNZ's picture

Every debt is eventually repaid, if not first by the debtor, then ultimately by the creditor.....