Debt Catastrophe II

This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I'll never look into your eyes...again

                                       The Doors 1967 

After my blog about how the government's debt situation was going to financially cripple us, my brother Jack reminded me that I promised a follow-up explaining what the options were.  Although I wrote at the time there were two options, there are actually three possibilities:

We  default on our debt.  The odds of this happening are slim and none, and slim just left town.  Doing this would of course have some negative consequences.  Just like an individual that can't pay back their debt, their credit rating collapses and borrowing any money is either impossible or has to be done at an exorbitant rate.  Similarly, if the United States government defaulted, nobody would be willing to lend us money at the sweetheart rate we’re getting.  As I discussed here, if the interest rate goes up our cost to pay back our debt eventually makes doing so impossible.  Individual interest rates on our purchases, like for a home or car, would also spike.  Further, we would lose credibility as a financially sound country that always lives up to its obligations.

However, there would be some positives.  We would wipe out a lot of debt.  We would bring sanity back to the free market system that says lending money is inherently risky.  Free markets are not an insurance system; risk can only be adequately measured when it actually exists.  If individual interest rates rise, it's true we couldn’t borrow money as cheaply, but we could actually earn real money on CD’s.  This would lead to less speculative investing and less bubbles.

But it's never going to happen. Why? As the former Fed chair Alan Greenspan infamously stated a few months ago on one of the Sunday morning TV shows, we won't default because we have a printing press.  In other words, he was saying we can just print money out of thin air and pay back our creditors with that.  This is one of the most asinine comments ever made, at any time, by anyone.  Of course we have a printing press.  So does every other country.  Anyone can come up with a machine, some ink, and paper.  Printing money blindly ultimately leads to a serious case of inflation, as discussed here.  I'm not arguing that we  are going to have hyperinflation, like in pre-World War II Germany or in Zimbabwe (in the latter, children would rummage through dumpsters looking for food , ignoring the worthless currency that had been thrown away).  But it is this dovish way of thinking that has led us to the position we’re in now.

We get our financial house in order and massively reduce our expenditures.  I will tackle in another blog whether we should raise taxes, but even the liberals agree we have a major spending problem.  The odds of Congress doing this are slim and none, and they're hanging slim at high noon.  For starters, what do you cut? As discussed here (really wearing out the hyperlink today, I’m like a kid with a new toy), approximately 85% of our spending comes from the military, Medicare/Medicaid, and Social Security.  Nobody is going to seriously cut Social Security, either by paying out less or increasing the eligible age, because nobody wants to make senior citizens angry.  They vote at a higher rate than any other demographic, and the quickest way to an early retirement from a cushy political life is to have the seniors against you.

As to the military, any Congressman who mentions any cuts to the military is accused of being liberal and not adequately protecting our security.  Never mind the fact that we spend more on our military than every single country in the world combined.  Any discussion of reduced military spending is met with stiff resistance.  No politician wants to be thought of as weak on the military, just like no politician wants to be thought of as weak on crime.  Toughness is a virtue.

As to health insurance, this is a bit of a wildcard.  The trend now, at least with Obama as our President, is to greatly expand the reach of healthcare.  Although this could change if the Republicans take the presidency and both houses of Congress, don't hold your breath.  Medicare and Medicaid continue to grow regardless of which party is in control.

We print more money.  This will be one of the causes of the upcoming depression, but this is what I think is going to happen.  I rate the odds of more money printing at 95% to 100%.  Here's how I think it will play out: 

Without free government stimulus (money printing), the stock market will slowly drop.  Home prices will continue to go down and the jobless rate will start rising from the current 9.1%. Our Fed Chairman, Ben Bernanke, will panic.  He will feel like he has to do something.  He will do the one thing that he's good at and that he intellectually believes in; printing money.  He is a true Keynesian who is considered a depression expert, with his thesis being that lack of government stimulation is what caused the Great Depression.  The brilliant Bernanke won't ever let the United States make the same mistake again.  Also, he has an incestuous relationship with Obama.  The Federal Reserve is supposed to be independent of the Presidency.  Under these two geniuses it's been the opposite. Obama will put pressure on him to do something.  As he's already lowered interest rates to practically zero, Bernanke will shoot the only bullet that he has left; a third round of stimulus.

My next blog about money will actually have something useful in it, how to make a fortune off the coming depression.  Have a good night everyone.

                                                JR