As I have noted in prior posts and comments, our national debt has reached a point where we can no longer pay back the debt by taxation alone, even with robust economic activity that would result in higher revenue and even if any health care reform is revenue neutral (the former is not guaranteed, and the latter is highly unlikely). If we cannot pay our debt via additional revenue, whatever form that may take, there remains only three options.
1) Drastic program cuts, including military, social security, medicare, pork, infrastructural investments, and so forth.
2) Hyperinflation. This means we inflate our currency so as to reduce the value of our debt, thereby making it easier to make payments.
3) Default. This means the US government would renege on interest payments and maybe even principal.
#1 is unlikely to happen. In the end, politicians are self-serving and are mostly incapable of thinking beyond the next election. Cutting popular programs, though they be unwise, takes courage that few politicians have, and certainly not in a large enough number to make the necessary cuts.
#2 is most likely in my opinion. It is what most countries do to stave off disaster. However, our debt is so large that the inflation would have to be considerable and the Chinese and other creditor nations would be more than just a little annoyed, they would be angry and who knows what actions they may be inclined to take to protect their interests?
#3 is hard to conceive, but anything is possible. Refusal to pay the debt would hurt the US image and interests very badly. In fact, creditor nations could begin to impound or take over US assets abroad while assigning whatever value to the assets that they deem proper. This would result in a national crisis the likes of which we have never seen. The magnitude of such a disaster is hard to imagine.
In my opinion, #1 is the safest and wisest route, but for reasons described above, I can't see it happening.
I worry about #2 constantly because I wonder what it would mean to the well-being of my family. Money will have far less value and prices will be higher. Ultimately, the living standard of my family and the nation as a whole would change dramatically. Nevertheless, I think this is the most likely outcome.
#3 would likely cause us to rethink our form of government and hard decisions would have to be made by those on the left and the right. Our relationship with creditor nations would irreparable. The desired form of government of the left and the right are at risk, so both the left and the right should be able to agree that default is out of the question.
My advise: Start preparing for inflation, whatever that may entail (I am still researching the best options). Hyperinflation may not happen right away, but I think it is inevitable.
2 comments:
Wow...Yikes.
Alan's presentation is probably quite accurate. I agree with most written. It appears to me that the most important thing to do, always, is pay off debt as fast as possible and create a food supply that can help buffer impact.
A radical change in government from either end of the spectrum is what I fear the most. Financial crisis is nearly always a precursor to government upheaval and very unwise decisions.
There will always be the rich, the profiteers, the carpet baggers. The rest of us will indeed see a different way of life.
Let us remember that the value of money and access to the materialism that we have all grown accustomed to has not always been so. Think back to the lives our grandparents lived as young people in rural areas. America has seen very sparse living conditions before. Could we as individuals and a family do it again? Alan seems to believe that it will be inevitable and he may be right.
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