More than a state: US foreign debt

This article aims to continue the discussion initiated by the article “More than a State: British East India Trading Company” and is the personal opinion of the author.

Viva las vegas

For many, it is obvious that playing with a casino is unprofitable. Based on the rules established there and having a small understanding of the theory of probability, it becomes clear that with a sufficiently large number of attempts, the average value of the gain will be close to the expectation of the gain. The casino overweight in European roulette (with one “zero”) is 1 - 36/37 = 2.7%, which for a player means a loss on average of 2.7% of the bet.

In addition to arguments about positive or negative expectation, it should be understood that different rules of the game will be characterized by different variances. In practice, it turns out that with a limited number of tests a player can quickly lose or get a big win. However, in the first case, continuing to play "for your own" will not work, and in the second, excitement or greed can lead to a quick loss of winnings. Such life lessons quickly give an understanding that “the road to a happy life passes by the casino”.
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It's not just the casino. Institutional analysis of the development of economic systems allows us to see the rules of the game, which are created and changed by people.

Institutions are the “rules of the game” in society, the man-made restrictive framework that organizes the relationship between us.

1. Institutions reduce uncertainty by structuring daily life and reducing risks. You know what needs to be done to get something concrete and expected from the whole society or its part. And it seems to be good if the rules of the game are fair, and you, playing according to them, definitely will not be the loser.
2. Institutions define and limit the range of alternatives that each person has. It turns out that a person endowed by God with free will is limited to alternatives established by other people. It seems that it is also permissible if the people who established the social law were fair.

Institutional equilibrium (stability) is a situation that means that given the relative costs and benefits of changing the game that participants in contractual relationships lead to, it is not profitable for them to change the game .

And what if not? What if a social institution enshrined in stereotypes, habits, and agents of institutional change is not fair to many “players”? After all, the “rule of the game,” which has passed from generation to generation, for people in the present may seem to be “fundamental.” It turns out that for the new generation the power of the “rules of the game” is underpinned by the authority of the “founding fathers”, and in case of ignorance of the history of the occurrence, it may seem like a mystery or a miracle.

The dollar as a reserve currency is one of such rules. In order to understand the fairness of these economic relations, we will need to go back 80 years and start from the zero level for this phenomenon.

21 trillion dollars of debt

During World War II, the beginning of the military economic situation was laid in the USA. Before the start of the war, the United States did not completely recover after the crisis of 1937-1938, when every fifth worker became unemployed. From the fall of 1939 to the fall of 1943, the industrial production of the United States increased almost 2.5 times. Tanks for the Soviet Union are provided under Lend-Lease, although it assumed a "free" loss of their equipment in the struggle for a common world.



Part of the world destroyed by the Second World War. The contribution and losses of the United States relative to the size of the country were disproportionate to the contribution of the Entente.

As a result of the Bretton Woods Conference, held at the resort from July 1 to July 22, 1944, it is decided to form the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). There are fixed exchange rates for the currencies of the member countries to the key currency (US dollar).

The dollar, a currency convertible into gold, became the base of currency parities, the predominant means of international settlements, reserve assets and at the same time world money. In fact, this led to the emergence of the Dollar standard of the international monetary system.

March 17, 1968 installed a double gold market. The price of gold in private markets is set freely in accordance with supply and demand. According to official transactions for the central banks of the countries, the dollar is reversible into gold at the official exchange rate of $ 35 per troy ounce.

March 16, 1973. The Jamaican International Conference has subordinated exchange rates to the laws of the market. Since that time, exchange rates are not fixed, but change under the influence of supply and demand. The system of solid exchange rates has ceased to exist.

Situation development

To further describe the course of events, we move from a historical to a more logical level.

1) The dollar was secured by gold, but after obtaining the status of a standard of the international monetary system, by decision of the officials, it completely lost its dependence on providing gold reserves and the solid exchange rate for precious metals.

2) Having preserved and developed the economy during the war and having the largest gold reserves, the IMF and the IBRD formed part of the funds accumulated during the war at an interest rate corresponding to the credit risk of the borrowing country.

3) The institution of borrowers reliability rating is developing. Standard & Poor's, along with Moody's and Fitch Ratings, form the “big three” international rating agencies. The rules for calculating the rating allow the US economy to receive a maximum triple A (AAA) credit rating for many years and receive the status of “the most reliable economy in the world”.

4) The Fed issues as much emission money as allowed by Congress and is requested by the government, which receives the money for the exchange of government securities and obligations. The Fed does not have foreign exchange reserves either in dollars or in gold or in any other currency.

In fact, a conditional Fed official, having received a decision on the issue of cash or non-cash money, writes this debt into the account of the US government. Just from the air, "pressing the keys" in the office creates 1 billion or any requested amount of money. In exchange, the Fed keeps a receipt of the government about the debt.

Try to write yourself a receipt that in a year you will earn and pay yourself 1 million rubles. Then imagine that you try to buy on this receipt of goods for 1 million rubles. It is on the receipt for the payment of debt to himself, and not to the new holder of your debt. Will you succeed? Probably not. A rather unique opportunity for the Fed and the US Government to make money out of thin air. For further understanding, it is important to remember her.

5) Later in the formation of free funds in other economies of the United States begin to borrow and accumulate foreign debt. Almost every year, the government has to issue treasury bonds and other types of debt securities in order to close its budget deficit. It places part of such securities domestically, but a good half has to be sold to foreign investors. Among them, the first place is taken by the official institutions of other countries (central banks, ministries of finance and other government organizations, for example, sovereign funds).



It can be argued that the ratio of public debt to GDP is not at a critical level and the United States can service its debt. However, it is worth remembering that GDP as an indicator reflecting the market value of all final goods and services includes everything that was bought and with borrowed money too.

What is the result? The Fed creates $ 1 trillion “out of thin air” against the receipt of the government, and the government is investing this money in the economy, raising this year’s GDP by about the same $ 1 trillion. This is how the US economy grows or swells. This is a policy of quantitative easing, which is stimulating the economy now at the expense of future generations, of course, if it is planned to repay debt.

6) The Rating Institute eventually led to the emergence of the rule-stereotype about the lowest risk of investing in “treasuries”, which also means the highest reliability of the borrower. In the theory of corporate and public finance, this creates the opportunity to borrow at the lowest percentage.

It's not just a matter of rating and risk assessment. Together with the possibility of unlimited emission for debt servicing, if necessary, the US can increase the rate of return for its debts by increasing the power of the “money vacuum cleaner” from other economies. This is a consequence of the ability to pay interest on debts and service any debt, printing money.

Cost part

Money must somehow be invested in order to show a high absolute indicator of GDP and its growth.

Speculative use of external debt. Simply, a loan from other economies at low interest rates for triple A and loans to other economies at high rates. This so-called arbitrage is the purchase of a commodity or other asset on the market, where its price is low, and its simultaneous sale on another market at a higher price. Such operations are not associated with any risks. "Global financial casino" with negative consequences for borrowers and low dispersion.

Possessing an unlimited economic reserve of capital, the United States invests in research and development, weapons and living standards, including social protection.

The absence of restrictions reduces the will to the effectiveness of investments. The United States has a high density of high-tech companies, but how much revenue does each dollar of investment have? The electric car turns out amazing, but for 6-15 million rubles. Any car on the market for 6 million is amazing in its own way. There are jokes that Tesla has become a profitable company. So the real cost of the cost is higher. The United States poured fire inefficiency capital.

Production of weapons in peace is a one-time investment. However, technology has a shelf life. In addition to spending on military exercises, the United States sees the opportunity to use these weapons on the territory of other states. Without resorting to a political assessment of their actions, it is worth noting that, for example, in the framework of the Oil-for-Food Program, in addition to humanitarian aid, significant amounts were spent on reparations to participants in the Gulf War (25 percent of Iraqi oil sales worth over 65 billion dollars).

Economic growth requires constant new ways of investing capital. US investors are almost always in search of new ideas. The level of viability of startups receiving investments in the USA can be assessed by everyone independently.

An excess of goods and services creates a consumption economy with a steady demand for continuous improvement in the quality of life. Unsecured obligations of the USA to social security systems (promises of presidents) exceed 100 trillion dollars. This means that in order to fulfill the promise of citizens on social programs, the US government needs to borrow more than 100 trillion. Abandoning this game is very risky for the current or next president.

Potential for capital investment

Governments of economically unstable countries are struggling with dollarization (against the use of the dollar for settlements within the country). A well-known problem with time finds effective solutions. Taking the momentum into the digital sphere, which is poorly controlled by the governments of poor countries, it is possible to derive part of the economic benefits from the monetary system of such countries.

Where is the logic that binds the transfer of funds to a cryptocurrency, for example, Bitcoin, and the strengthening of the dollar standard?

The logic is simple. The speculative maximization of the bitcoin price leads to the conditional “burning of the planet” for electricity. Calculations necessary to obtain the current number of mined coins could be performed on a network of two computers.

Bitcoin security is created based on the strength of the Bitcoin brand and demand. Anyone can release their own brand of altcoin and develop it. The only option is to provide cryptocurrency security with an active promise of exchange for the national currency or other value. By creating demand from buyers in the United States , Bitcoin is formally secured by the dollar. The dollar, in turn, is provided by the US state.

Using bitcoin for everyday calculations is very difficult. So the purpose of owning it is an investment for profit with the subsequent exchange for the US dollar. Cryptocurrencies created an opportunity for outflow of excess money - a new way to invest dollars.

Having no stable exchange rate, Bitcoin was not suitable for mutual settlements. Hearing the market, the rate has stabilized and holds at the level of 7000-9000 dollars. After some time, having received the status of a stable means of payment, we can expect a speculative price increase. This may lead to this sub-dollar market of new "players".

How far has it gone?

The USA is every citizen and the entire population in combination with achievements and material values. The public debt of the United States on April 26, 2018 more than 21 trillion. dollars or 64,500 dollars per capita . The total debt of the US is 70 trillion dollars or 213 thousand dollars per citizen , 836 thousand per family.

www.usdebtclock.org - US National Debt Counter.

In conjunction with the unsecured obligations of the United States to social security systems, the total debt may amount to more than 200 trillion.

Today, the entire national treasure of the United States is estimated at 138.5 trillion dollars . On average, each family has $ 4,000 in savings, and to service its debt, the United States pays $ 8,000 per person, issuing money in debt.

The economic institutions of society are such that financial theory has no limit to this debt. Unrestricted loans at home, the most profitable percentage, based on the risk assessment of the "big three", and the subsequent investment in its own GDP create the conditions for maintaining the ratio of Gos. Debt / GDP at an acceptable level.

What is the logical limit of the loan?

How much can a citizen actually pay using his knowledge, labor, capital and land?

With high probability the logical limit is passed. First, unsecured obligations to social security systems will need to cover or get popular discontent.

If you begin to pay the debt, will begin to compress the GDP, which is growing on borrowed funds. A fall in GDP will affect the rating. The structure of the economy is such that it earns on cheap loan capital. How to make money if you repay debt and the loan will become more expensive? How to provide AAA if the economy shrinks?

Payment of debt with the execution of huge unsecured obligations is difficult compatible.

Is it profitable to change the game?

Standard & Poor's has published a report on the prospects for the development of Russia in the light of the demographic situation in the country. The forecast is extremely disappointing: in 2050, the country is waiting for an increase in public debt to 585% and a decrease in population by 24 million people. However, as the rating agency believed, if the Russian government is able, as planned, to balance the budget, then a catastrophe can be avoided.

This is hardly institutional balance. These rules of the game and predictions on them were invented by people about 70 years ago. Why play on them live?

We will conduct a logical experiment by developing new rules on the example of Russia.

Provision of the ruble

The path to the dollar standard was started with gold security. After achieving this goal, a solid exchange rate was canceled. This led to the separation of the price of the dollar from its logical value.

Why the Government of the Russian Federation will not borrow any amount of money from the Central Bank of the Russian Federation, based on the above scheme? The problem is that in certain conditions the inflation tax and seignorage are equal.

Seignorage (SE) is the revenue earned by the government as a result of its monopoly on printing money. The size of the issue minus the cost of "paper".

Inflation Tax - capital losses incurred by owners of funds (the population) as a result of inflation.

In accordance with the conclusions of the problem of Ricardo-Barro, the current national debt is nothing but taxes that we and the next generations will have to pay in the future. How are taxes going now? The main factor of the Russian economy is land, and more precisely, the extraction of mineral resources.

Hence the decision about the need to introduce the security of the ruble with a bill of exchange for minerals mined or to be mined.

The provision of the ruble can be a raw material equivalent: X grams of gold = Y barrels of oil = Z Cube. m of gas = N kg of aluminum = ... closed list.

Countries buyers of Russia's resources should be able to store the ruble, convertible into minerals under the public obligation of the Russian Federation. The ruble can be an alternative reserve currency for importing countries. Such currency can be used to purchase the resources they need in the future.

The population has money “on hand”, which means that it is necessary to introduce an equivalent from the understanding of the insecurity of the high value of the ruble by trade. A society should get rich when it is morally ready, and the economy has to be effective. The ruble exchange rate may differ significantly from the current one, but it is necessary to understand the responsibility to future generations. In practice, this means sustainable development or planned replacement of mining with alternative sources of income for the state and future citizens. From the lessons of the 2000s oil well-being, a reasonable conclusion must be made.

The currency of China is provided with labor of the population. In terms of the exchange of material goods between China and Russia, there is no need to use the currencies of third countries provided that the ruble is provided with mineral resources. The dollar standard began with a solid exchange rate for gold. Alternative rules of the game can get similar opportunities.

Short term measure

To slow down the dollarization of the Russian economy in an unstable exchange rate, it is necessary to prohibit the registration of transactions in the traffic police and Rosreestre, paid for in cash.

The ruble is only formally the only means of payment on the territory of the Russian Federation. In fact, in conditions of instability, the population accumulates dollars "under the pillow" for subsequent exchange for apartments and cars.

By prohibiting cash payments for large transactions, the state will enforce the law on payment in rubles, and the bank spread (transaction costs) will reduce the number of speculative transactions.

For the execution of the law on registration of transactions only with non-cash payment through a state authority (traffic police or Rosreestr), a payment order for a bank transfer to the seller’s account will be required.

The tax inspectorate will be able to better control the size of transactions and charge additional taxes on unreasonable benefits. The speculative car market (dealers) may become more civilized and will require registration of an IP or LLC for regular resale of the vehicle.

Crypto Ruble

The cryptocurrency of Russia can be equivalent to the usual ruble and in fact be a token (issue instead of mining). The Russian national payment system MIR can be the basis for the exchange of tokens for non-cash rubles and payment for goods and services. In addition to the card, the MIR payment system can have an alternative in the form of a hardware wallet for cryptocurrency.

findings

I would not like Standard & Poor's forecast of Russia's development prospects to start coming true. The rules of this financial game are hard to call fair. Need to leave this "casino".

Has the USA begun to repay foreign debt borrowed from other countries? Yesterday and today - no. Ask tomorrow. US national debt counter .

The author of the article is economist Vladimir Samarin, marketer of cloud provider Cloud4Y