Trust, Confidence and Debt
OK. The 2008 Financial Recession was an example of Dollar redundancy saving the day. The Federal Reserve replaced the impending losses from bad debt from the Sub Prime Mortgage Crisis that could have collapsed the entire western banking system, by creating even more debt. However, this was debt with a difference.
The Federal Reserve created hundreds of billions of dollars of new debt to cover the default of the bad debt. Debt exchanged for debt. The debt created by the Federal Reserve had a single over-riding feature: it was debt that was trusted by investors and consumers. The debt had the confidence of billions of investors and consumers.
New debt replaced the lack of confidence in the bad debt owned by embattled banks. High confidence exchanged for lack of confidence. Trust exchanged for mistrust. Trust and confidence are the platform for all value in economics. Trust and confidence are the new gold standard.
Now, this new debt provided by investors in US treasury notes and debt instruments, replaced the hundreds of billions of dollars of bad debt that was a millstone tied to western banking and finance. The preceding was at root bad debt held by consumers with their mortgages under water.
The Federal Reserve created new debt value to replace the lost value from the bad debt. The new debt possessed the trust and confidence that the old bad debt lacked. The new debt was a get out of jail free card on the Monopoly Board for banks and businesses in ‘’hot water’’ from the Sub Prime Mortgage Crisis.
The new Dollar debt possessed a high degree of investor trust and confidence. It had the stamp and mark of approval of the Federal Reserve and the US Treasury Department. American Might, in the form of the Federal Reserve and related Federal Agencies, backed the newly created debt and gave it its value.
Investors trusted the new debt. Investors were willing to spend hundreds of billions of dollars to buy the bonds and treasury securities the new debt represented, and that offered a guaranteed return on that debt. Again, trust and confidence ruled.
The new debt came in the form of the hundreds of billions of dollars injected into the US economy to save the banking system and subsequently myriad giant corporations- Quantitative easing. It was cash from investors, domestic and international, entrusted to the Federal Reserve. That cash in turn went into the banking system to save the day after adoption by the Federal Reserve.
Investors who expect a return, own all debt stock. In that equation - the debt to returns matrix - debt is no different from any other product that offers investors and businesses a return or profit. Global debt rests upon trust and confidence in a Dollar produced by the Federal Reserve.
The redundancy value – the ability to absorb shock- of the newly printed Dollars saved the west from economic oblivion. Economic Collapse averted, by injecting these Newly Printed Dollars as shock absorber. This redundancy was essentially confidence and trust in the action of the Federal Reserve from investors and consumers in the form of hundreds of billions of newly minted Dollars. That confidence in the Dollar and its redundancy value saved the day.
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8 Responses to “Trust, Confidence and Debt”
Dickson, talking about the economy is great, for we need to know about the economy. But most of us don’t give a rat’s @%$ about it. We are convened about our week to week pay check, the high cost of living, mortgage or rent, car payment, etc. I would humbly suggest we KISS things.
Ok. That said. The US has had three major crashes in the 21st century, viz, 1) Dotcom, 2000, 2) subprime 2007, and 3) Bank, 2008. Agree with Stealth that the banks were bailed out, for they were too big to fail, and that the taxpayer bailout was corporate welfare. The lil man would not enjoy such a bailout. Nonetheless, their taxes paid for the bailout. The Feds print money but if we’re not backed by taxpayers, it would not be able to print money like there is no tomorrow. Here is a news flash. The rich and wealthy like debt and taxes. They use both to avoid paying little to no know taxes. They also like crashes, disasters and other adverse events, for they boost their bottom line. Twisted but it is real.
Moreover, he who owns the gold makes the rules. A wise sage notes, “ Give me the control of a nation’s money and I care not who makes the laws.” As such, some may wax that it makes little difference which party is in power and in control. It makes a difference. Agree with Stealth and Bush Professor that taxpayers are the drivers of The Fed being able to print , print money. The Fed can only create dollars , for the dollars are backed by US taxpayers. Consequently, no tax system, no creation of dollars.
From what you saying , the rich don’t give a rat’s a$$ hardly who is power, for they will use their financial influence to get laws passed in their favor, so that they use the tax laws to pay little or no tax. One-tenth of the top one percent has more wealth than the bottom 90%. Staggering, scandalous . The tax laws make rich richer and the poor and middle class poorer.