Alarm portfolio: how to protect yourself in case of default. USA: preparing for default The key rate will not save you from default
Evgeniy Malyar
Bsadsensedinamick
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Business Dictionary
Definition of the term, types, examples
Default is a situation in which a debtor cannot pay creditors. It can be declared by both a small company and an entire state.
Article navigation
- What does this word mean?
- Types of defaults
- Reasons for default
- The inevitable consequences of default
- What happens to loans in case of default?
- How to prepare for default?
- Conclusions and general advice
Pessimistic economists and analysts never tire of scaring residents of different countries with the terrible word “default.” This disaster has already happened in some places, including in Russia, but this event happened quite a long time ago and was forgotten. The article is devoted to default, its varieties, causes, consequences and methods of countering it.
What does this word mean?
First, let's talk about what default is. In English, the term is pronounced the same as in Russian, but the translation is more verbose. Variants of semantic meanings – collapse due to someone’s fault (fault), non-fulfillment, non-payment.
In economic dictionaries the interpretation is more specific: Default is a situation in which a debtor cannot pay creditors. It seems that the concept is identical to bankruptcy, but this is not entirely true. The main difference is that default is a temporary and intermediate state. It may be followed by an exit from the crisis or actual bankruptcy, but it is already irreversible.
From all this we can conclude that the word “default” means, in simple language, a short-term period of payment crisis, requiring urgent economic or economic-organizational measures.
Default can affect entities of different scales of activity - from entire states to small firms and even individuals, if they discover their inability to meet their obligations and announce this.
Types of defaults
Based on time, there are two types of default: technical and simple. A simple default is a situation in which the fulfillment of debt obligations is impossible due to a lack of funds. If a business entity declares it, it is often followed by bankruptcy and liquidation, as in the case of Lehman Brothers.
Less often, after the intervention of the state or the community of wealthy creditors, a crisis management team tries to “pull out of the swamp” a bankrupt company by pouring additional money into it. This condition can last a long time. An example is the American corporation General Motors, in which enormous funds were invested, which was combined with organizational and debt restructuring.
Default on a national scale is called sovereign. It cannot cause liquidation. If a country does not have money, it is allocated targeted assistance from international financial institutions (IMF, IBRD) with a mandatory plan to overcome the crisis.
A sovereign default was declared in Russia in 1998. Experience has shown that the right actions, combined with a favorable environment, allow you to get out of this state and pay off all debts.
Technical (corporate) default is expressed by the inability to fulfill the terms of borrowing within the previously stated terms. As Wikipedia says, this condition does not mean a complete refusal to pay, but implies a discussion of further relations between the borrower and the lender. Possible methods of settlement may be debt restructuring, write-off (forgiveness) of part of it, and other ways to overcome the crisis with minimal losses.
Cross or “cross” default is considered as a separate subtype. In a loan agreement, it is a condition for the automatic extension of the inability to fulfill obligations of one creditor to all others. What does it mean? In other words, the debtor cannot be “slightly insolvent.” If a default is declared, then this affects everyone.
There are other types of actual refusal to fulfill obligations arising from the prevailing circumstances. A consequence of the deteriorating demographic situation, and in fact the aging of the population, is a forced increase in the age of retirement in many countries, including Russia. As leading government economists explain, without this measure the pension fund will not be able to be replenished in a few years.
At the personal level, default means the loss of solvency by an individual. An outstanding loan, mortgage or other financial obligation means possible imminent ruin if new sources of funds are not found to replace the lost ones.
State sovereign default is primarily manifested in the depreciation of the national currency. This may be why many citizens do not always understand the difference between ruble devaluation and default. The second is a consequence of the first, as is hyperinflation. However, more on this later.
Reasons for default
Despite the diversity of this phenomenon and its scale, the cause of insolvency is always an imbalance between income and expenses, including those for securing debt obligations.
An ordinary person will certainly go broke if he spends more than he earns. The same rule applies in the state economy.
The 1998 default was characterized by a combination of artificial inflation control and devaluation with excessively high budget expenditures.
The high exchange rate of the ruble was supported by a strict refusal to issue banknotes in the almost complete absence of other measures to revive the national economy. The crisis was aggravated by a sharp drop in world prices for the main export items - oil and natural gas (they are interrelated). The crisis in Southeast Asia also played a role.
Subsequently, a special commission of the Federation Council, which investigated the causes of the 1998 default, identified its “direct cause” - lack of funds. In turn, it was the result of an artificial increase in the yield of government bonds in order to make them investment attractive.
At its core, it was an ordinary financial pyramid. Dividends were paid on GKO-OFZ purchased by foreign investors in excess of their actual profitability in the hope of attracting other “shareholders.” Ultimately, the money ran out and government bond prices fell. No new loans were received.
Three questions arise about this. Firstly, Was default inevitable? Yes, these actions could not lead to other consequences. Any financial pyramid sooner or later ceases to exist.
Secondly, Who benefited from the 1998 default? There were such people, and for them the actual bankruptcy of the financial system did not come as a surprise. How to save and even increase your funds during a crisis will be discussed later in this article. Money, as we know, does not “disappear”. They just change their owners
The third question worries our contemporaries the most: Is it possible that the events of 1998 will repeat in the near future? There are no objective prerequisites for this. The dependence of the Russian economy on external borrowings is not critical, the logistics of export flows have been diversified, a reserve has been created, and measures are being taken to optimize costs. You can read about the probability of default these days.
The inevitable consequences of default
Defaults have occurred many times in recent history, so their consequences can be judged objectively. At the macro-financial level, they are manifested by a decrease in trust in the state and a drop in its international ratings. The processes of external borrowing are slowed down and in some cases stopped. The lack of foreign currency inflow will inevitably have a negative impact on the exchange rate of the national currency.
The consequences of devaluation for the population are all the more noticeable the more the market depends on import supplies. It causes a proportional increase in the price of vital goods and products imported from abroad. Enterprises whose activities are based on the use of foreign components and ingredients are also suffering - they are laying off staff, which leads to a deterioration in the situation on the employment market.
Unpleasant consequences can be largely avoided in the event of a technical default if an agreement on debt restructuring is reached quickly.
The banking system will also inevitably come under attack. Foreign lending becomes problematic. Many accounts receivable become uncollectible. The experience of 1998 clearly shows what will happen to bank deposits in the event of default. Financial institutions are forced to freeze accounts for the period during which savings have time to significantly depreciate due to inflation and devaluation.
For the borrower of foreign currency funds, the consequences were catastrophic: the debt sometimes increased in ruble terms so much that it exceeded the initial amount without taking into account all payments already made.
What happens to loans in case of default?
A default declared by the state does not relieve borrowers from the obligations specified in loan agreements. Considering the systemic nature of the crisis, banks often meet clients halfway, providing, at their requests, various concessions in the form of credit holidays, extensions of terms, refinancing, etc. At the same time, financial institutions, being on the verge of bankruptcy, increase pressure on debtors, which can also be considered a natural reaction.
What happens to the loan if it was taken out in foreign currency (euro, US dollars, Swiss francs) has already been discussed above. A mortgage in rubles looks preferable in this case, even despite the higher rates. The trouble is that ruble solvency also falls during a default: the borrower's expenses increase due to inflation. He may finally lose his job or other income that he was counting on when entering into a loan agreement.
In particularly critical cases, banks file lawsuits in the courts to recover in their favor the property of an insolvent borrower - this is what primarily threatens default for ordinary citizens who have lost their solvency. But even if successful, the creditor's interest is respected very relatively.
The bank is faced with the acute issue of selling alienated assets. Selling them at full price in times of crisis is problematic. At the same time, the financial institution suffers reputational losses: information about its “inhumanity” spreads quickly. For these reasons, the most preferable option is a compromise in the form of amending the existing agreement or concluding a new one.
How to prepare for default?
Continuing the credit topic, we can state that the consequences of any crisis will affect the borrower to a lesser extent if he initially adheres to several important principles.
- Conclude a mortgage agreement for a period of at least ten years. This time is enough to survive the default and “come out of the dive.”
- Take out a large loan only in the national currency. Currency conditions seem more attractive, but you shouldn’t buy into them. It is almost impossible to predict exchange rate fluctuations in the long term. Exceptions may include long-distance sailors and other citizens who receive a stable income in foreign currency.
- Include a repayment schedule in the loan agreement indicating fixed payment amounts.
Using these and some other simple techniques, you can protect yourself from many problems, although it is almost impossible to foresee everything.
On how to save money, experts and ordinary people, taught by bitter life experience, give a wide variety of advice. There are even recommendations to buy more canned food, cereals and other products (fortunately, even the most inveterate pessimists do not remember salt and matches).
For those who simply want to save their savings from inflationary depreciation, several of the most common and practice-tested methods seem acceptable.
Buy currency. Some citizens already keep their household money in dollars or euros - just in case. If the dire predictions of default do come true, these funds will not only maintain their purchasing power for some time, but will increase it. Inflation rates usually lag behind devaluations. Domestic goods are rising in price much slower than foreign currency.
Buy real estate. Of course, we are not talking about panic buying a random object for any amount. But if a significant amount has been accumulated, and the offer really looks profitable, then it makes sense to consider this option. Houses and apartments that become cheaper during the crisis are exactly what wealthy people around the world buy during a default.
Keep money in a bank account. Given the sad experience of 1998, this advice seems a little strange, but over the years the country's financial system has undergone changes that have increased confidence in it. State guarantees of repayment have been introduced, and it has become possible to open multi-currency and gold deposits. There is reason to consider a bank deposit a safe solution to the problem of saving money.
Buy gold bars, coins and other hoarded valuables. When thinking about where to invest free funds, many choose this method. It has its advantages and disadvantages. When purchasing rarities, works of art and antiques, there is a risk of making a mistake in their actual assessment. Bank gold is safer in this sense. The advantage is also that the bars are produced in a wide range of weights and are available to almost all categories of citizens, regardless of their wealth.
The main disadvantage is the difficulty of ensuring safe storage. They should be hidden very carefully at home. The fee for using a safe deposit box can be expensive for a person who is not wealthy. You should also take into account the high commissions for transactions with precious metals.
Investment. The acquisition of securities of reliable domestic and foreign joint-stock companies is considered a very profitable investment, not only in anticipation of default, but in general. The disadvantages of the method are expressed in the difficulties of predicting quotes on the stock market. However, investment safety is a topic for a separate lengthy article.
The main threat in any critical situation is not the danger itself, but the panic reaction to it. In the face of an impending default, you should act quickly and energetically, but without fuss.
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The growing threat of default forces Trump to talk about the prospects of restructuring the US national debt
These conversations did not arise out of nowhere. The total US national debt from $15 trillion in November 2011 grew to $21 trillion in March 2018, that is, it rose 1.4 times in 7 years, while US GDP over the same period grew by only 1.12 times. Consequently, the rate of increase in the country's debts is three times faster than the rate of growth of its economy. This is, in particular, confirmed by the dynamics of the foreign trade balance, which has remained negative for thirteen years in a row.
In 2017, the trade deficit exceeded the $600 billion mark and continues to grow. Based on the results of the first quarter of this year, by another 12%. Thus, fears of a negative forecast for the entire American economy as a whole are growing in the market. In essence, Donald Trump's election platform was based on the promise to solve the debt problem, and his victory proves that these fears are well founded.
Formally, on paper, the US economy still remains the largest in the world, competing for first or second place with the Chinese, guaranteed to overtake the European one and 5.8 times larger than the Russian one. But at the same time, the size of the debts of the federal government alone, excluding the debts of states, counties and individual cities, reached a level of 108.8% of GDP. Its maintenance consumes more than 1.6% of the American government budget.
An analytical report by the Congressional Budget Office directly states that starting in 2028, the probability of default on US government debt is approaching 100%. Is it any wonder that back in May 2016, Donald Trump, in an interview with CNBC, admitted the possibility of its restructuring? Then the news was quickly drowned under a flood of messages on the topic of Russian interference in the American democratic process, but today it is gradually returning to relevance. The question is no longer whether there will be a default or not; only options for the development of events after it are discussed.
However, you should not think that debt restructuring is something unique in the world. Especially when the issue concerns borrowing not by an individual or a company, but by such fundamental structures as the state. Usually, for all large investors, maintaining long-term interest payments is much more profitable than receiving collateral, which then still needs to be able to be sold. Moreover, as close as possible to the size of its assessment, which, as a rule, is difficult even in relatively stable markets, not to mention those completely feverish as a result of the debt default of an entire country.
As previous practice has shown, the most effective solution to this problem in 1989 for emerging markets was proposed by the 68th US Treasury Secretary Nicholas Brady. His idea was a complex combination of a number of interrelated measures. After a complete audit, all debts are divided into categories according to the degree of security, depending on the state’s ability to pay them off with existing assets. The least liquid part was subject to write-off. The rest had to be converted into papers of a different type. Typically, shares were replaced by bonds with smaller coupon payments, but with significantly longer borrowing periods and, accordingly, interest payments. Payment holidays were introduced for some reissued obligations. As a result, the bankrupt received the technical opportunity to maintain its structure and, ultimately, pay off its debts.
Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Mexico, Morocco, Nigeria, the Philippines, Poland, Uruguay and Russia took advantage of the scheme, or the “Brady Plan,” as the idea later became known. It turned out that in addition to money, debtors had to pay due to certain political changes (changes in legislation, changes in business rules, changes in the volume and composition of social obligations, reduction in government intervention in the economy). However, despite partial write-offs, in the end the total amount of payments almost everywhere was 1.3-1.6 times higher than the amount of debt at the time of default. So the creditors did not lose money.
For example, the total debt inherited by the Russian Federation from the USSR in 1993 reached about $73 billion. Including: loans from international organizations and companies - 64%; loans from banks and organizations in Russia - 9 and 11.5%, respectively; bonds in foreign currency - 6%; Eurobonds - 8%; subfederal loans - 1%; others - 0.5%. While due to the reduction in foreign exchange earnings, the country could repay no more than 2.5 billion per year.
According to the “Brady Plan” signed in September 1997 with the Paris Club, from 1999 to 2006 Russia paid a total of $23.7 billion, and the last “Soviet” debt was repaid in 2017. Taking into account the subsequent loans due to the 1998 default, a total of $105 billion was paid over 25 years. At the same time, some debts, such as the rather ambiguous amount of $594.3 million to South Korea, were excluded from the Paris agreement. Their repayment period will occur in 2025.
It is obvious that the debts of the American state will face the same fate. Another question is that the details of the “Brady plan” will certainly be reflected in the specific position of the American dollar as the main reserve currency of the world.
All of the examples listed above, as a rule, concerned small economies, the complete collapse of which the leading financial clusters of the world - the USA, the EU and China - could survive relatively successfully, and their dominance gave creditors the opportunity to put economic and even political pressure on the debtor. Who and how will be able to exert the same pressure on the United States is becoming the most pressing issue today.
There is a theory according to which the United States may allegedly refuse to pay its debts at all. Possessing nuclear weapons, they are able to withstand any military, and therefore political, pressure. But it does not stand up to serious criticism. If the current dollar ceases to exist, then all assets denominated in it will depreciate along with it, and today they account for at least 42% of the world's assets.
Moreover, not only the largest, but still domestic American corporations like General Electric with a market value of $216 billion, are under attack, but also such transnational whales as the Cargill and Koch Industries corporations, which occupy the first two lines of the TOP-100 corporate rating. Moreover, the annual income of Cargill alone is more than $109.7 billion. According to Forbes, the 2017 list of the largest private businesses on the planet includes 225 American corporations with a total annual income of $1.57 trillion.
It is quite obvious that they will be the ones most interested in preserving the solvency of the dollar as such, which means they will use their influence to put pressure on the United States as a state. So, in one form or another, it will eventually be forced to pay its debts, but it is also obvious that as a result, two global processes will be launched, the consequences of which today are impossible to predict with any accuracy.
Firstly, instead of the current US dollar, they will most likely launch some other currency. It seems that the rumors about “Amero” are not without foundation. Such a step will at least make it possible to immediately write off, if not all, then the absolute majority of cash dollars located outside the United States. Their number is estimated at 60% of America's 972 billion cash dollars.
Secondly, at the moment, 21.5% (data for 2015) of the $1.8 trillion of total accumulated foreign direct investment in the world is concentrated in the United States. A sovereign default, as happened in all countries that previously went through it, will lead to a sharp decline in business activity and a domino effect in segments that do not have a direct connection with public debt. First of all, in the field of mortgage and consumer lending, and then in general business as such. For example, a long-term paralysis of US domestic oil and gas production, which has a leverage level of more than 64%, cannot be ruled out. Against this backdrop, the 2008 mortgage crisis will seem like a cute children's prank in the sandbox.
And since the United States is the leading sales market for the EU and China (trade turnover with them in 2017 amounted to about $800 and $600 billion, respectively), the collapse in its solvency will inevitably ricochet across all economic clusters of the planet. During the period of the monetary and financial storm, everyone will have to survive only due to the capacity of their own domestic markets. We are all too economically dependent to hope to safely watch the show from the comfort of our stalls.
When Sergei Kiriyenko was appointed first deputy head of the Administration of the President of the Russian Federation, many shuddered and crossed themselves, although they had never believed in God or the devil. Well, what about: they took Kiriyenko, which means they are preparing for a new default.
There is something rational in this fear - we will definitely have a default. True, not very soon, Kiriyenko has nothing to do with it, and not all of us will be worse off from this.
The essence of default
The essence of default is simple: it is not the end of the world, but the refusal of the debtor to fulfill his obligations to the creditor. There can be exactly two reasons for this refusal: the debtor cannot or does not want to do it.
If an individual or company defaults, that's their problem, because creditors begin bankruptcy proceedings to shake the debtor out of everything he still has left.
But if the state declares a default, then most often the creditors start to have a headache. However, sometimes states have a hard time: after the Mexican government refused to pay its bills, the government of Napoleon III began a real war against this state in the 1850s, and the default declared by the Egyptian government in 1875 ended with the actual annexation of the Suez Canal zone.
Historically, the primacy in the matter of government defaults belongs to the Greeks. The first default in Hellenic history occurred almost two and a half millennia ago, in the 4th century BC, when 13 Greek city-states borrowed funds from the Temple of Apollo on the island of Delos. 10 out of 13 borrowers refused to repay their debts, as a result of which the temple had to write off 80% of its debts.
In the modern history of Greece, when it became an independent state after the collapse of the Ottoman Empire, there were five defaults: in 1826, 1843, 1860, 1894 and 1932. Greece spent 90 years, that is, almost half of the last two centuries of its independent history, in a state of default.
Moreover, the Greeks also hold the record for the amount of creditor losses - $138 billion. For comparison: Argentina, which ranks second, for the last two defaults of 2001 and 2013, lightened the pockets of creditors by 82.3 + 29 = 111.3 billion dollars, and the Russian default, during which Kiriyenko was prime minister, cost creditors $72.7 billion , becoming the third highest result in world history.
Over the past two centuries, the world has experienced five major “default epidemics.” The first occurred during the Napoleonic Wars, the second lasted from the 1820s to the 1840s, the third began in the 1870s and also dragged on for twenty years. The fourth global wave of defaults began with the Great Depression and lasted until the 1950s. The last epidemic swept the world in the 1980s and 1990s.
In France, such a nuisance happened eight times, including four times in the 18th century alone - in 1701, 1715, 1770 and 1788. Abbé Terre, the French minister of finance from 1768 to 1774, generally believed that the state should default at least once every century.
Germany, Austria, Hungary and Poland each defaulted twice. Turkey, Brazil and Peru were insolvent five times each in the last century, Costa Rica and Guatemala six times each. Despite its oil wealth and short history (it gained independence only in 1960), Nigeria, our African twin, has gone bankrupt five times.
Austria-Hungary, despite its status as a great continental power, defaulted five times in the century before last, Spain eight times: taking into account six more defaults recorded in previous centuries, Spain is the absolute world record holder for insolvency.
There are very few economies that have never defaulted on external debt: the USA, Canada, Australia, New Zealand; Scandinavian countries and Belgium in Europe; Hong Kong, Malaysia, Singapore, Taiwan, Thailand and South Korea in Asia.
However, Thailand and South Korea avoided default in the late 1990s only thanks to large-scale assistance from the IMF. And the United States can be considered to have avoided default only with a very big stretch: unless one considers the suspension of dollar convertibility during the Civil War and technical default to be a default.
There have been two instances in U.S. history (1790 and 1933) in which the government did not pay its debts in full, although it did not default in the full sense of the word - in both cases, investors in American securities were forced to agree to pay off the debt at a significant discount.
In 1979, the United States "mini-defaulted" on $122 million in bonds (0.01% of the total debt of $800 billion), falling behind by several days because congressional Republicans refused to accept the Democratic president's arguments. (Jimmy Carter) about the need to raise the level on the national debt. It cost America $6 billion because its borrowing costs rose 0.6% that year.
In general, you need to be aware that no one is immune from default and this is a much more common phenomenon than it might seem.
#Default is ours!
Default is not new for us either. In January 1918, Soviet Russia refused to pay the debts of the Tsarist and Provisional governments. Only towards the end of the 20th century, when these debts were greatly devalued, did the new Russian state decide to partially repay them.
The same thing happened with the Soviet Lend-Lease debt: when the Cold War began, the USSR government stopped payments for the supply of American weapons during the Second World War, and only the modern Russian government recognized this debt.
Russia experienced its last default in 1998, when 37 countries were in default at the same time.
These conditions are simple: if oil drops to $30 per barrel, then we will be approximately 1 year away from default at the current level of reserves. OPEC's dance around freezing oil production will end in November; in the long term, there is no reason for oil to become more expensive, and the economy is not getting better.
All this means that we will either gradually crawl to default without much effort, or we will reach it thanks to our failed foreign policy.
First there was Ukraine (Crimea, DPR/LPR), then the downed Malaysian Boeing, then Syria, and now accusations of hacker attacks on the United States have been added to this. And if until recently, officials of foreign countries refrained from making loud statements, now they have broken through.
A little more and a new round of sanctions will begin, which will end either in a deepening of the economic crisis or in the unilateral refusal of the Russian government to fulfill its obligations to foreign states.
Life before, during and after default
Despite the common occurrence of defaults, they are not without consequences. Most often, countries that fall into default face several troubles at once.
1. A sharp drop in the exchange rate of the national currency (by 50% or more).
2. A sharp surge in inflation (increased import prices push prices up).
3. Decrease in GDP (because production is initially recorded in national currency).
4. Fall in personal income (due to inflation).
5. Deterioration of the investment climate (falling household incomes reduce effective demand).
Of course, this cannot but affect business. We “seemingly” do not have a default yet, except for the freezing of the funded part of pensions as a refusal of the state to fulfill its obligations. Nevertheless, the crisis, the bottom of which we first feel and then break through time after time, is making itself felt.
Over the past year, 16 St. Petersburg entrepreneurs have lost their billionaire status.
Simply put, we are entering an area of continuously increasing risk after a relatively long period of favorable conditions. Many of us will face our own default and an unpleasant experience with the bankruptcy procedure.
Unpleasant, but not fatal. Many successful businessmen and public figures have experienced downfalls.
Abraham Lincoln, the 16th President of the United States, who spoke out against American slavery and went down in history thanks to this, borrowed money at the age of 23 to organize a new business, but went bankrupt that same year, after which he had to pay off the debt within 17 years.
Richard Branson, the billionaire founder of Virgin, was arrested and charged in 1971 with selling records in Virgin stores that were declared as export goods. He settled a legal case with England Customs and Excise with an agreement to pay unpaid duty and fines. Branson's mother remortgaged the family home to help pay the claims.
Donald Trump, who is now running for the presidency of the United States, has experienced four bankruptcies of his companies.
There is no shame in stumbling and falling if you manage to get up afterwards. There is no shame in falling many times in a row if in the end you still find yourself standing firmly on your feet.
Sorry for the banality, but the one who prepares for it in advance is ready for any event. Just imagine that you are on the verge of bankruptcy right now (it doesn’t matter whether you are an entrepreneur or an employee) - your business has collapsed, you have been fired from your job, you have nothing to pay your bills, creditors are knocking on your door.
Do you understand well how our credit system works? What will happen from the moment of the first missed payment until the forced collection of the debt through the court? How long will it take? How to avoid getting caught up in the eternal merry-go-round of paying interest and penalties to pay off your debt? How to save your remaining assets and your nerves? Where to start returning to normal life?
If you don’t know the answers to these questions, it’s time to think about it.
"And again about fatality."
"The Third World War will be provoked
not a fight for oil,
not a new territorial redistribution,
not religious strife - and even
will not become a war between robots and people.
The Third World War will begin because of odious copyright laws,
adopted at the end of the previous millennium
under pressure from global monopolists and solely in their interests..."
As it turned out, most people perceive this passage as banter, as black humor - but nothing more. That’s why I want to add some more considerations to the thesis expressed - in order to break through the tight double-bind approved in the topic of “copyright protection”.
So, the new legislation created a fiscal system alienated from the state.
Within this structure there are financial flows that overlap in scale with any super-profitable areas of traditional criminal business - drug trafficking, racketeering, prostitution, illegal arms trade, etc.
According to its principle and mechanism of action, the functioning of this fiscal system
similar to the protection racket practiced over the centuries-old history of crime
But at the same time, it is absolutely safe and protected by law.
Questions:
How long will such a structure remain outside the control of criminals?
How transparent will such a structure be for society?
Which structural levels of this system can avoid criminalization?
What costs will be required from society if it wants to return control of the situation to the state, taking away this phenomenal source of income from crime, provided that crime does not hesitate in its means when protecting its vital interests?
What is your answer?
35 comments
From: morphism
I think the problem of copyright as a “world evil” is overblown and far-fetched. In Russia, the concept of intellectual property is just being introduced. It has been practiced in the USA for a long time. No particular problems have been noticed with it, at least no more than in other industries. People perceive it normally. There are no associations with crime. We live in a civilized manner. Everything is fine. Relax :)
From: fan_d_or
“There are no associations with crime”
Will you still be confident in this, even when the shooting of competitors begins when dividing spheres of influence in a new type of super-business?
From: morphism
As I said, I don’t see any particular reason for anything special to happen in the creation of this industry, other than the creation of new industries.
Besides, I don't consider it a "super business." Very quickly, the concept of intellectual property is transformed into a principle, into a way of life that will “through and through” pass through (almost) all areas of business and everyday life.
The benefits of this for society are enormous. People are no longer obliged to engage in art as a hobby, and work as loaders during the day to earn money. They can do what they love during the daytime and earn money from it. Great musicians, singers, poets, designers no longer need to be homeless in real life in order to satisfy their creative aspirations. Isn't this wonderful?
From: fan_d_or
“As I said, I don’t see any particular reason for anything special to happen in the creation of this industry other than the creation of new industries.”
For the first time in the history of state and law, a private fiscal service was created - if you do not understand the revolutionary significance of this event, I cannot help.
There were examples of the legalization of crime in history - when the British government chose to accept privateer pirates into public service and thereby obtain a tool for weakening a competing state (Spain).
But this was in a non-globalized era - and crime gained power only in a very narrow domain, infinitely far from the metropolis.
This will have enormous social consequences...
From: morphism
"For the first time in the history of state and law, a private fiscal service was created"
I will be honest - I did not delve into the essence of the law and the essence of what service was created. These are all implementation details. I was responding to the idea that some kind of global cataclysm (World War III) would be caused due to copyright law. This is absurd, IMHO. Copyright law is a right and good thing. If it is implemented incorrectly, then the specific implementation method will be at fault. But this is a completely different topic for discussion.
From: tzirechnoy
>For the first time in the history of state and law, a private
>fiscal service
Oh, don’t make me laugh - such services have been created in history... The entire social system was named after such services - feudalism.
From: vitus_wagner
How can these two phrases be combined?
1 “I don’t consider this a “super business””
2 “Very quickly, the concept of intellectual property is transformed into a principle, into a way of life that will “through and through” pass through (almost) all spheres.”
The problem is that something can only be created based on the perception of the creativity of predecessors. If we start charging for access to existing cultural treasures, then only a few (the children of the richest), who will not always be the most talented, will be able to obtain sufficient training to create at the modern level (and for this it is necessary to perceive tens of thousands of works of predecessors).
The result is stagnation and degradation.
From: fan_d_or
1000
HINT: here it turns out that “March of the Jolly Fellows” is also a borrowing...
From: vitus_wagner
Man generally originated from apes, and his culture came from ape-making.
From: the_arioch
> In fact, humanity already had one civilization that followed this path. Australian Aborigines. Naturally they degraded to the point where they lost navigation technology.
Where does the info come from?
From: morphism
The shooting of competitors is a phenomenon, I believe, not related to the specifics of a particular business. It is associated with the criminal situation in the state as a whole, regardless of what specific people will do.
From: bildich
“shooting” is already happening. example - raiding
From: vitus_wagner
So the shooting is already underway. There have already been several fairly high-profile murders in the sphere of control over the publication of school textbooks (millions of copies).
From: fan_d_or
Well, this is a section of the spheres of influence of ordinary production. Copyright has no side effects here.
We are talking about a showdown between tax collectors...
From: fan_d_or
“In Russia, the concept of intellectual property is just being introduced”
You are very deeply mistaken - the institution of intellectual property is several centuries old and in Russia it was established long before the advent of the era of historical materialism. Do not forget that the industrial development of civilization was based precisely on respect for creative achievements - and this was recorded in patent law.
It is patent law, as an institution for managing intellectual property, that has become an example of the balance of interests of a private individual (“creator”) and society - all the problems of this conflict have been quite successfully resolved there and therefore contribute to the effective progress of civilization.
This is how it was in old Russia, and this is how it was in communist Russia - a balance existed in each case and was adequate to the level of social relations.
But we just need to remember that the correct name of the new legislation, drawn up in a hurry on the threshold of the information age, is not “copyright law” at all, but “law on the right to prohibit copying.”
As they say, feel the difference...
From: morphism
Patent law is only a small part of the principle of copyright protection. The ban on copying is like the next level, opening up much more opportunities. You no longer need to prove that you have invented something uniquely new, correct and meaningful for society in order to protect your rights. It is enough that you created this product. This means that it is impossible to copy it exactly without sharing money with you.
Linguistic difference. I don't see the meaning.
Of course, the copy rights law will protect the author from exact copying, but it will not protect him from the theft of an idea. For this we need a law on patents for inventions. It is ideas that he protects - and to protect ideas it is necessary to prove both the novelty and complexity of the idea (and perhaps even its usefulness). Those. these two laws work together.
As for the cultural part, pay attention to how Russians perceive the concept of “copyright” in LiveJournal. They believe that if they stole, copied, but indicated the real author, then they respected the copyright. As if copyright was invented for empty glory.
From: jef239
Unfortunately, in order to legally allow your post to be reposted, you must sign a WRITTEN agreement with the person who will repost it.
Moreover, RAO will sue - as an organization that was not paid money.
From: fan_d_or
The fact of the matter is that an unobtrusive substitution of concepts has been made - where intellectual property has been an economic category since time immemorial, everything was done wisely: the patent on which patent law is based (in Russian, by the way, called a privilege) allowed legal action in the economic field, without causing chaos and equally protecting the interests of the copyright holder-owner and society. For this reason, a specific registration principle for issuing a privilege (patent) was created - the applicant received the right to prohibit something else only after confirmation of the originality of the IP object by a special group of experts (patent examination). In addition, the IP owner pays for the privilege with a very specific amount (state duty). And if ownership of the rights to an IP object (which, by definition, limits the rights of society to the same object) becomes a burden to the owner and he refuses to pay the fee, the privilege loses force and the IP enters the public domain.
Once again, I will separately highlight the key options:
Registration of an IP object, allowing a third-party consumer to find out what exactly is prohibited
An economic qualification that encourages IP owners to give up small items for the benefit of society
Reasonable duration of the privilege
Progressive tax (duty) scale, sharply increasing towards the end of the validity period
State control over privileges
There are a number of other significant options - but these will suffice for comparison.
It is quite obvious that the modern institution of copyright is completely inconsistent with the interests of society and is beneficial exclusively to large-scale monopolists - at the same time, the true creator of IP is similarly disadvantaged in his interests...
And about the problem of copyright in the public consciousness, a bias has been created quite deliberately (which has the character of an outright double-bind)...
From: morphism
Well, one more thing - copyright works well to protect privacy. In countries with copyright laws, I can demand that a copy of my text be removed, and not necessarily if this copy causes me economic harm. The reason may be non-disclosure of personal secrets, etc. Therefore, the reason should not be formulated within the law. Rights must be protected in any case, the main thing is that there is a recognized author and a recognized fact of copying.
From: bildich
"privacy" is an illusion.
From: vitus_wagner
privacy is a civilized way to cover up fraud. There is a good proverb: “a word is not a sparrow; if it flies out, you won’t catch it.”
Thread started by Life is joy, magic and adventure
From: morphism
Another thought - a private organization performing important functions for the state apparatus, without which it would be impossible to enforce any laws - in general, normal practice.
Again, if a design like this is poorly implemented, problems can arise. But anything in this world can be poorly implemented, not necessarily this particular scheme :)
From: morphism
Let's say, the construction of houses for government institutions. You don’t have to have builders directly subordinate to the state apparatus. Construction workers can work for a private company. A tender is held for the project, and the best (for public purposes) company is selected on a competitive basis. It works! This is an opportunity for kickbacks - yes, of course. But the question is: how to properly deal with kickbacks? If you propose increasing government control, then, mentally extrapolating, we will get a totalitarian society with a planned economy, the Soviet Union. We have already been through this and know well what it is. There are cockroaches there. Life will not get better just by changing the political system.
From: bildich
A private organization performing important functions for the government apparatus
This is an undermining of sovereignty
From: morphism
Would you please prove or at least explain why you think so?
From: bildich
The state has functions that fall within its exclusive competence. Fiscal is one of them. Refusal to perform at least part of these functions is a reduction or undermining of sovereignty.
From: danchenko_07
Thanks for expanding the topic!
I agree with you that the tendencies towards nurturing the monster of copyright, seemingly unnoticed by many today, are scary precisely because of their development, the expansion of the scope of its application..
To finish off the doubters, you can add one more question to the questions you raised: how soon will such structures acquire their own security and fiscal units?
From: fan_d_or
“How soon will such structures acquire their own security and fiscal units?”
The fact of the matter is that they are not needed - since the cover of the law is provided by the use of state security forces: the police have been crushing “pirates” for a long time, and no one is interested in the extent to which such operations are carried out in the interests of dividing spheres of influence.
Fiscal structures have already been created and are operating successfully - “inspectors” walk around the territory and perform their function through soft racketeering: “either you enter into an agreement or receive a lawsuit.” The third possibility - paying the "tax" on the spot in cash directly into the hands of the "inspector" - is not mentioned. Although only a very naive person can believe that this business is carried out exclusively by clean and highly moral citizens, who care exclusively about the benefit of the orphaned and wretched “authors of intellectual property.”
This is the tragedy that the new legislation, inspired by large monopolists in the field of IP, turned out to be an extremely convenient screen for covering up criminal activities of the widest range - from petty territorial racketeering riffraff to the abuses of the power structures themselves. And the opacity of the institution of private ordeal is simply a gift for laundering criminal money.
Although, it is possible that these aspects were not of interest to the initiative lobby, aimed at its top interests, they turned out as if “by themselves” in the process of passing a package of laws through the legislative branch. The fact that power structures are corrupt and criminalized to a sufficient extent is not the biggest news: the pro-criminal hidden lobby is an unadvertised but obligatory element of the structure of the “democratic world order.” And everywhere, all over the world, this hidden lobby acts on the sly - in any of the laws adopted, diligently creating small, but tactically effective holes that make it easier for national criminals to continue to exist.
Therefore, everything happened without a special agreement - the top lobby, acting on behalf of the super-monopoly in the field of IP, introduced a new topic, completely undeveloped by the public consciousness, for which society was not ready and had no immunity. And the standard grassroots pro-criminal lobby stuffed this legislative domain with everything it could - without actually having organized resistance from society.
And it's done...
From: infowatch
Patronage from the law completely eliminates crime. Any crime after such patronage ceases to be a crime. Let us remember the cause of the First World War - colonies, or more precisely, their “unfair” distribution. All colonial policies were within the framework of the current law. But the de jure acquisition of independence by the colonies was illegal, that is, criminal.
From: fan_d_or
That's the point - decolonization was accompanied by a sea of blood.
I’m talking about this aspect of the copyright problem - the current laws are formulated in such a way that they infringe on the majority of society in favor of a smaller part (the monopolist owner of the IP).
Moreover, the losers are not only and not so much the end consumers, but the creators of the new, whose creative ambitions are completely blocked by the new world order system. After all, if such a system had started to operate earlier, then we would not have known not only about Pinocchio or the Wizard of the Emerald City, but there would not have been such a masterpiece as “Smoke on the water,” or a huge part of the musical heritage in general...
From: infowatch
Dialectical contradiction between productive forces and production relations. As always.
From: fan_d_or
Dialectics is dialectics, and historical mathematics is historical mathematics - but here it is more correct to analyze social group contradictions, since they are the ones responsible for bloodshed at all times.
So, new establishments in the domain of intellectual property lead to such a contradiction, which has never happened in the history of civilization. Absolutely and the ensuing consequences...
Comment by freemusic
Agree
Copywriters are already more dangerous than pirates.
From: livejournal
And again about fatality...
User vladimir_krm referred to your entry in the entry “And again about fatality...” in the context: [...] Original taken from And again about fatality... [...]
From: livejournal
Origin of fatality...
User alex_serdyuk referred to your post in the entry “And again about fatality...” in the context: [...] Original taken from And again about fatality... [...]
The risks of a new landslide devaluation of the ruble and default have not completely disappeared
The Central Bank raised the key rate to 7.5% for the first time in three years and hinted at the possibility of its further increase. What does this mean for the ruble? Is a new default possible in Russia in the foreseeable future?
How is September 2018 different from August 1998?
In August, Russia celebrated the 20th anniversary of the default. August and September of this year were marked by a sharp fall in the ruble, which forced Russians to remember the events of that time. Subconsciously, the population, not trusting the authorities’ statements that there is no reason for unrest, is preparing for the worst. Foreign investors are withdrawing funds from ruble bonds and buying foreign currency, causing the ruble to depreciate even more. No one hoped that the Central Bank and the Ministry of Finance would be able to do anything to strengthen the ruble. But the sudden decision of the Central Bank to raise the key rate (analysts were almost unanimously in favor of maintaining it) calmed the markets. The ruble, which had previously, however, already strengthened a little after falling by 12% in a month and a half, won back a little more against the American dollar. Is the Central Bank to blame for this and how long will the strengthening last?
The economic situation now is very different from what it was 20 years ago. And the reasons for the weakening of the ruble are completely different. Then the state ran out of money to pay off its debts. Hopes for growth in export revenues, through which it was planned to pay off this debt, did not materialize, and reserves melted away. In desperation, they even threw out a loan from the IMF to maintain the GKO pyramid, but they failed to put out the fire that had already begun in the financial market. Soon the crisis spread to the real sector of the economy. Inflation, which seemed subdued, revived. And the ruble collapsed sharply, leveling the previously swollen money supply with the commodity supply. And although it seemed that the prerequisites for the crisis were obvious, it still came as a complete surprise to almost everyone.
Sudden shocks are possible
Comparison with 1998, although in favor of the ruble, does not at all guarantee protection from sudden shocks. For example, in the Turkish economy, one cannot say that everything was great, but there were no harbingers of a sharp devaluation. The public debt was relatively low, 28% of GDP, the economy was growing, albeit unsteadily, at an average of 7% per year (Russia's GDP growth rate in 2018, in the most optimistic forecasts, is expected to be about 2%). Inflation was high, 10-12%, but did not gallop, and this is largely the price for high growth. But just one piece of news about duties on Turkish metals, which account for less than 10% of total exports (one can add that the United States is far from being a key partner for Turkey: the United States accounts for about 5% of Turkish exports) - and the Turkish lira instantly lost more than 20% of its cost. And all because the money supply, or, scientifically, the macroeconomic indicator M2, was growing at a breakneck pace. In just one year, the amount of money in the economy increased by 26%, and the amount of goods by only 7%. The bubble has burst, the lira is depreciating, and the crisis threatens to spread to the real sector. Sound familiar?
What is happening now in Russia is not a repetition of the events of August 1998. Now we can firmly say that there is no immediate threat of default . Russia does not pay crazy interest on foreign and domestic bonds (with the exception of certain issues). External public debt is only 13% of GDP. If necessary, it can even be increased by 70% without threatening the sovereign rating. Prices for export raw materials have increased significantly over the past year. Oil costs above 75 dollars per barrel, while the state budget is based on 50 (and exporters will survive at 30 dollars per barrel). Inflation, although showing signs of awakening, is still near historical lows. We can continue to list the reasons why a sharp devaluation of the ruble is not threatened right now. But, as they say, there is a nuance.
What is happening now in Russia is not a repetition of the events of August 1998. Now we can firmly say that there is no immediate threat of default.
There are objective devaluation risks in the Russian economy. The economy is growing at approximately 2% per year. The money supply now amounts to 44 trillion rubles, or about 43% of GDP, and is growing by an average of 10-12% per year (data from the Bank of Russia). And the government will increase debt (this process is also known as “printing money”) because it is necessary to finance new social programs. The trouble is that the 8 trillion rubles that the state, according to the presidential decree, is going to spend on the social sphere will not create many high-paying jobs. That is, the growth of the Russian economy will not accelerate at least to Turkish rates. Even without taking into account external factors, devaluation risks are looming over the horizon of several years.
The key rate will not save you from default
The measures taken by the Bank of Russia - raising the rate and refusing to purchase foreign currency on the open market until the end of the year - do not eliminate long-term devaluation risks. In general, strictly speaking, this is not the task of the Central Bank, but of the government and specifically the Ministry of Economic Development. The Central Bank only brought monetary and exchange rate policies in line with the situation on the markets. Investors are withdrawing money from emerging markets, including Russia. Since the share of non-residents in Russian OFZs was large, more than 30%, and could fall below 20%, sales of government bonds by non-residents put significant pressure on the ruble. Even the huge trade balance surplus, which reached $90 billion in the first half of the year, does not help: exporters have recently reduced sales, holding back the currency, and in addition, with the rise in world oil prices, the Ministry of Finance is buying more and more foreign currency sold by exporters. The volume of purchases in the interests of the Ministry of Finance before the Central Bank stopped buying dollars was about 9% of trade turnover.
The possibility of a further increase in the key rate in Russia, in my opinion, is not excluded. The main motive is the fight against capital outflow. The Fed is raising its key rate, and Trump's tax reform encourages returning money to the United States. US Treasury yields are currently around 3% and will rise as rates rise further. The growth of the American stock market is also due to high business profitability - the profit margin for the top 20 American companies is above 10%. To keep money in Russia, it is necessary to offer investors high returns in the real sector of the economy or in the money market. Now our economy, unfortunately, cannot offer either one or the other. Judging by the GDP growth rate of 1.9%, there are not many people willing to expand their business. Investments in fixed capital this year, according to forecasts of the Ministry of Economic Development, will increase by only 2.9%. There is nothing interesting in the debt and money markets. The yield on government bonds reached 6.5% in the summer. Against the backdrop of a 20% fall in the ruble since the beginning of the year, only those who bought government bonds 2-2.5 years ago made money. Now they take their money along with the profits.
In the current conditions, they, alas, have nothing to offer. The influx of tens of billions of dollars of foreign money into OFZs did not cause an investment boom in the real sector. Two years of a stable ruble exchange rate, even the strengthening of the Russian currency, did not bear any noticeable fruit. GDP is growing three times slower than the money supply, which only increases deferred devaluation risks. Rising oil prices, freezing monopoly tariffs, and the food embargo suppressed inflation to a historic low. But the economy is still growing poorly. Either geopolitics will intervene, or trade wars. Only the mortgage market and demand for durable goods grew noticeably, mainly due to regions where the incomes of the population employed in the private sector grew faster than inflation.
And now the Central Bank and the Ministry of Finance are faced with a serious choice. Increasing yields on money and debt market instruments may once again regain investor interest. And the ruble will return to its strengthening trend. But this time investors will want a return, in my opinion, 10% or higher. Invest in rubles at a lower percentage, taking into account what is happening in the markets of Turkey and other EM countries, as well as taking into account the risk of a worsening geopolitical situation and the fact that the price of oil has already increased in two years (which means that the risk of what will be adjusted), foreign investors are not interested. But the fact is that by raising rates on the domestic market, the Ministry of Finance and the Central Bank risk stepping on the same rake: funds will come to the financial market, the ruble will strengthen, and economic growth will still be low, 1.5-2.5% in year. While the money supply and government debt will grow much faster. And one day, most likely, when the price of oil corrects, there will be a reckoning for the policy of expensive loans. I wonder if this will traditionally happen in August?
The Central Bank, of course, sees these risks, the origins of which, by and large, are beyond its control. So far, the regulator has chosen a soft response policy. It is clear that raising the rate by 0.25 percentage points will not return non-residents’ interest in ruble government bonds. The Ministry of Finance, in turn, is also in no hurry to increase profitability at auctions. If speculative capital does not improve the situation in the economy, then why is it needed? So, most likely, the Central Bank will continue to follow the trends, raising the rate just a little, by one step, as inflation rises and the ruble weakens. And the ruble will most likely depreciate by 5-10% per year. Economic growth will slow to 1.5%. Of course, external factors, in particular the price of oil, will have a significant impact. Its continued growth will push the economy higher, and the rate will not have to be raised for longer. A correction in oil prices, on the contrary, will force the Central Bank to raise the key rate, and the Ministry of Finance will subsequently borrow more expensively in order to ease the pressure on the ruble.
Georgy VASHCHENKO, head of the department of operations on the Russian stock market of Freedom Finance Investment Company, for Ваnki.ru