Tuesday, August 18, 2015

What Will Happen to all the Sovereign Debt in a Reset?

By now most people are aware that the world has a sovereign debt problem. Leading politicians from both political parties in the US have called the long term debt situation "unsustainable." Those inside the present system have warned about it. Critics of those who are inside the present system talk about it all the time. The idea that it is unsustainable in the long term seems to be the one point where everyone is in agreement.

The obvious question is, if the long term debt situation is unsustainable, how will it be dealt with?


Regarding sovereign debt, there is actually quite a bit of good information available to help answer that question. Most analysts suggest that sovereign debt will be dealt with in one or more of the following ways:

1) the debt will be inflated away by devaluing the currencies of the debtor nations (use money created by central banks to pay off the debt with devalued currency)

2) the debt will be resolved in some kind of default or restructuring where the debt holders will take a loss

3) governments might try to raise taxes to pay off the debt or "try to grow their way out" of the problem (theoretically generating enough revenue to reduce the debt ratio to acceptable levels)

Other more creative suggestions have been put forward, but these are the ones you see mentioned most often.

For the purposes of this article, we will focus on #2 above. The IMF has actually been working on how to deal with sovereign debt defaults for quite some time. They have promoted a program they call the Sovereign Debt Restructuring Mechanism (SDRM). You can get more information on it here

If we arrive at a point in the future where a global debt crisis must be dealt with, we can assume that the SDRM proposal at the IMF will be brought out to deal with the problem. Keep in mind that the biggest creditor in the world is China and the US is the biggest debtor. Obviously they are both going to have a deep vested interest in how a debt crisis might be resolved.

This is where it gets interesting. Recently, I was provided the opportunity to review an article on this topic written by Jared Collins as part of a new course being offered by SDRF University. The title of the article is, "The Sovereign Debt Complex - How China and America are Waging a Quiet War over Sovereign Debt Restructuring."

The article is not written for public distribution, but I do have permission do provide a brief summary of what it talks about. 

Jared has done extensive research on the whole issue of sovereign debt restructuring. His article explains the basic problem and provides some background on how we got where we are today. 

The most interesting part of the article to me describes the behind the scenes battling that is going on between the US and China on this problem. Not only does the article discuss the competing plans the two nations have to resolve the debt, it also ties that into the ongoing unresolved issues at the IMF that we have been following here on the blog. I am talking about the 2010 IMF reforms stalled in the US Congress and the review of the SDR currency basket to include the yuan. 

The article provides a missing piece of the puzzle that offers a very plausible explanation as to why China and the US are behaving the way they are towards each other. It is a different take than I have seen anywhere in the mainstream media or in the alternative media. 

Obviously, I can't explain what the article says in detail. What I can say is that the information presented ties in very well with what we have covered here on the blog about why these unresolved issues at the IMF are very important. It explains why it is critical for the 2010 reforms and the SDR currency basket to be resolved to move forward with a major monetary system reset in the future.

We are all following China and the BRICS to see what their end game may be. This article by Jared Collins offers one very plausible scenario and backs it up with solid factual data and analysis. It also adds evidence that we are following the key issues here.

Added note: Jared recently published this article on his blog site on the move by China to devalue the yuan. The article will show you his thoughts on how this move ties in to his big picture view of the sparring going on between the US and China (mentioned above). Soon after this article was published, Reuters ran this article supportive of Jared's view

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