Ch11 Leverage Debt Reduction &
Much of the Feds ‘new’ debt has been geared to this kind of ‘Deflationary Refinancing’ as discussed in previous chapters. Here’s something even more interesting: duplicate debts or Phantom Debt.
The banking bailout is a great example of duplicate debt. The federal gov’t bought real estate securities from the banks. This was called the banking bailout. They bought about $4 trillion worth of these real estate securities. This means the feds issued one debt (Federal deficits) created against another debt (housing securities). This is pointed to by critics as something of a scam. The original intent of duplicating one debt upon another debt may have been crafted by a devious mind indeed, however, they ended up creating a new dynamic with an amazing upside.
Here’s the upside: Once these real estate securities are repaid, both debts are settled. Pay-off the securities and you just paid off the fed’s deficits too. We call this ‘Leverage Debt Reduction.’ Two debts are paid when just one of them is paid off. Paying off the real estate securities will pay off the federal deficits (used to buy them). Here’s the interesting thing about this:
These give the appearance of two separate debts:
a) Real Estate securities liabilities;
b) Federal debt/deficit.
But it’s not actually two separate debts as such. It’s something of the same debt that’s just been counted twice.
The Double Write-down
Now for the great news: A duplicate debt works in reverse. Paying off one debt automatically pays off the other. It means that if this one (securities) liability is paid off, the other (gov’t deficit) would be paid off too. It creates a double write-down once either of these is paid off. Hence our term: Leverage Debt Reduction. The ‘alter-ego’ debt is cashed out with the first debt. We refer to this second debt as the Phantom Debt. The Phantom Debt is just a mirror copy of the first.
The Phantom Debt is as a shadow of the ‘true debt.’ This Phantom Debt can be retired once its counter-part is paid. Today’s system of leverage financing (or financing debt multiple times) can create a (half) dozen Phantom Debts from the same asset. Below we demonstrate 3 sets of Phantom Debt (homeowner, gov’t & banks). In reality, we identified about a dozen Phantom Debts once we include Credit Default Swaps. Credit Default Swaps is basically an insurance policy to refund the bank should the homeowner default on their mortgage. There was the equivalent of five such insurance polices against every home mortgage in America. Therefore, paying off the mortgage retired all five of these Credit Default Swaps too. Most of the debt we see on Wall Street is likely made of this Phantom Debt. As such, it looks as they we don’t have an economic crisis so much as one big accounting mistake.
Pay-off $8 Trillion w/ $4T
Here’s a simple example to the upside of Phantom Debt. The gov’t spent $4 trillion buying these real estate securities. This now gives us two sets of liability. We have the $4 trillion in real estate securities still listed with Wall Street as ‘Toxic Loans.’ Meanwhile, we also have them listed again as $4 trillion in ‘federal deficits’ (which was used to buy these securities). Our national ledger shows a horrific $8 trillion in liabilities. The ‘good news’ is that 50% of this is actually just a Phantom Debt or rather, the second half is just a shadow of the first.
America’s Great Phantom Debt Crisis
Here’s the fascinating part:
- paying off the $4 trillion in securities pays off the feds $4 trillion in deficits too. It takes just $4 trillion to payoff $8 trillion in economic liabilities. The gov’t can retire $4 trillion in debt (used to buy those securities) once those securities are paid. Welcome to Leverage Debt Reduction. Behold America’s Great Phantom Debt crisis and the simple solution to it.
When the fed’s purchased these securities, it gave the appearance of doubling our debt. However, there was really something else at play here. This purchase simply shifted the liability from the banks and transferred it over to the US gov’t. It’s a not a transfer of debt for the debt still remains with those real estate securities, but rather, it is transferring over the liability for these debt to the gov’t. It’s a Liability Swap rather then a ‘new’ debt per say.
Liability Swap – Triangle of Support
We call this a Liability Swap wherein the debt remains with the first party, but it’s liability is transferred to a third party. This fed bailout/purchase created something of a financial alter-ego. Hence the term, Phantom. The mortgage securities and the fed debt is backed by the same asset: the home. The opposite of this is that the banks and feds both stand as a guarantee to this real estate asset. It’s a triangle of financial support rather then one of new debt. It’s quite ingenious actually.
Once the HOME is paid off, the mortgage security and fed debt are also paid off.
Or, if you pay off the SECURITIES, it could be transferred to pay off the home mortgage along with the gov’t debt too.
Or if you pay off the GOV’T DEBT/DEFICITS, you could in principle retire the securities liability and the home mortgage that was used to back them.
3 Faces for 1 Debt
In other words, each of these three debts are interchangeable because they are simply a duplicate obligation of the other. Each of these three can be the Phantom Debt depending upon which is being paid or not paid. This leaves them to appear as a much larger presence then the actual ‘True debt’ would be as a stand alone liability. You have 3 faces for 1 debt.
(Paying off the deficits or securities does not necessarily guarantee that the home mortgage is paid off. However, if the home mortgage is paid, the securities and deficits will automatically be settled. The homeowner is therefore the best - if only - approach to the problem.)
3 Stories for Same Debt
Contrast this Phantom Debt discovery against today’s news cycle. The broadcast reports to us about the distressed homeowner. The news then cuts over to Wall Street blaring about the ‘trillions in toxic loans.’ The final report gives us the run down on the ‘growing’ federal deficits. It looks dreadful as we now have 3 sectors of the economy weighed down with this ‘out-of-control debt.’ In each case, however, these debts are little more than the same liability being listed by three separate entities:
- Wall Stree/bank
- Federal Deficits
It appears to be 3 times larger with 3 times more debt then we actually have. And yet, if you simply paid off one, the other two debts are also settled. We only have a fraction of the total debt we think we have as a country. Hence, our claim: this whole crisis is just one big accounting mistake.
Trillions in Equity
Recognizing this will instantly change the sense of gloom and doom and reset markets booming. Investors will realize we ‘hit bottom’ a long ago. We are sitting on trillions in equity ready to be cashed in.
True of Derivatives too
This principle is true for trillions worth of ‘debt.’ The derivatives market and Credit Default Swaps have this same double write-down to them as well. Real estate securities can also tap this principle of Leder: Leverage Debt Reduction.
Lower Inflation then Would be
We have ‘trillions’ with the look of added debt but some how, we don’t have the corresponding inflation jump. Why not? Such a massive flood of cash should have drowned the markets and left us with SUPER hyper inflation like we saw of Russia, Mexico, the Asian Tigers and others. This Liability Swap is one reason we have been able to sidestep this hyper-inflation so far. It’s something of an accounting issue more then the typical role we see when large capital flows are poured into the market. This ‘debt’ did not have the same impact upon inflation that massive infusions would normally have. This Liability Swap explains some of the reason for this.
Phantom Debt Calculus
Phantom Debt and Liability Swaps are two economic dynamics the ‘experts’ failed to accounted for in their analyst on inflation. As such, they grossly over estimate the country’s actual ‘true debt’ in contrast to this Phantom Debt. This leaves us with all the hair-raising predictions of imminent collapse that is always just days away as it has been for the last half decade. Phantom Debt and Liability Swaps recalculates our inflation measures with a more accurate projection and yet, by those projections, we are nearing the end of their role to temper inflation further. Time to activate the Leverage Debt Reduction program before we cross a tipping point and trigger the worse imagined predictions of doom.
Democrats pushed for the banking bailout but the Republicans voted for it as well so they both get the credit. Such bailouts are more representative of liberal principle, but for this effort, both parties came together. Democrats also had a better sense to the value behind these banking bailouts. Tapping this Leverage Debt Reduction is only possible because of these bailouts. Had this Leverage Debt Reduction program been recognized earlier, we could have paid off this entire crisis for just a fraction of the money spent on the bailouts – years ago. This is covered in our article about Derivates. Again, with my best efforts, I could not get either party to give this a more serious consideration
Here’s what the banking bailout did. It took the banks liability and created a mirror liability against it. The feds provided this bailout as a safety net to it. This in turn gave the appearance of introducing twice the amount of money in our system, but it wasn’t. It was more a swap of responsibility. It was a Liability Swap. The feds are taking over the banks liability rather than creating a whole new addition of it.
Guarantee of Debt vs. New Debt
The banking bailout is the fed standing in to back the banks until the securities regain their market value. That will happen as we tap the ‘time value of money’ as explained in the previous chapters. The feds refinanced these securities to demonstrate that they are both safe and fully guaranteed by the US gov’t. This is a case of replacing the liability of one debt holder for another rather than having two unrelated debts added to the economy. It’s a Liability Swap as apposed to a new debt.
Two Liabilities; One Debt
Here’s a simple example. Let’s say the feds bought a $100,000 worth of real estate securities. The feds now have this $100,000 ‘debt’ on their books called ‘deficits.’ Wall Street still has those same securities listed as a $100,000 in ‘toxic’ mortgages (even though the gov’t bought it from them). It looks like we have two sets of liabilities for $100,000 each: one is in Feds Deficits and the other is in Wall Street securities. Meanwhile, the homeowner is listed as having a whole other $100,000 mortgage. All three of these (homeowner, securities & deficit) are actually the same ‘debt’ – the home.
Same Liability Counted Twice
This shows up in economic reports as $300,000 worth of debts shared between federal deficits, Wall Street liability and the distressed homeowner. But it’s not. These three debts are the same liability counted three times, under three different names. Why do this? Simple. The feds are just a back-up - guarantee - of that first debt (of the securities).
More Equity Than We Think
Leverage Debt Reduction offers to pay off trillions in duplicate debt. Put another way, we actually have trillions less debt then we have showing up on our books. We have so much more equity then we realize. Raghu-nomics suggest that most of this economic crisis has simply been an accounting mistake. Check out our Video:
‘Leverage Debt Reduction'
If there is a problem with the link, go to Raghunomics.com. The video is also there on the home page of Raghunomics.com.
True of Derivatives too
This is true for trillions of dollars worth of ‘debts.’ The derivatives market and Credit Default Swaps have this same double write-down to them. Real estate securities also offer this same Leverage Debt Reduction benefits too.
$4 Trillion in Deficits Paid
And now for one final caveat of great news. Solving this securities issue will pay off $4 trillion of our federal deficits. It will also do one more thing. The impact of ‘Leverage Debt Reduction’ will remove duplicate amounts of capital & liability from our system. In our example above, the $100,000 mortgage found a mirror ‘debt’ in our federal deficit. Once paid, we can pay off this $100,000 fed deficit too. This means we also removed $200,000 worth of capital ‘inflation’ from the economy.
We paid off the $100,000 mortgage securities, but removed $200,000 worth of inflation. Leverage Debt Reduction has twice the deflationary impact at half the cost of total debt. Our example here shows only one duplicate copy of the debt. In realty, there is between 3 to as much as 10 duplicate copies of each real estate debt. Greater the number of duplicate copies, greater the impact of Leverage Debt Reduction. The more copies we have of Phantom Debt, greater the number of liabilities are paid off upon paying off the ‘true debt.’
Trillions of Inflation Removed
Leverage Debt Reduction offers to erase trillions of liability from the economy. This will reset the value of our currency as trillions in access capital is removed from the economy overnight. Each repayment pays off multiple debts. Leverage Debt Reduction offers a simple solution to America’s coming hyper inflation and currency collapse. At the same time, the urgency to implement this quickly can not be overstated.
This is covered in several articles. Here’s the main two:
‘Real Estate Crisis is Big Accounting Mistake: 5 Areas of Mistakes’
This following article was geared to make sense of the $350 trillion Derivatives market and how we could solve it. It deals with much the same issues of the Leverage Debt Reduction principles so include it here as well.
‘Solving the $350 Trillion Derivatives Market Time Bomb’