« Decline in the BRICS Dependency on the Dollar and its Interesting Effect on Gold | Main | The Great Asset Grab is Almost Over »

What Are The Options?

1)  Growth.  Growth is not an option.  Most economists acknowledge that we would need to grow at a rate of 20+% annually to grow our way out of our problems.  This is impossible in a mature economy burdened with an aging populace and a combined "true" public and private debt in excess of 600% of GDP.

2) Austerity.  Austerity is not an option.  Direct federal government expenditures make up 23% of GDP.  Include the indirect (multiplier) effect of government spending that is re-spent into the economy and you are looking at a government-related GDP contribution of 35%.  To balance the budget, the government would have to spend half of what it currently spends - a direct hit to GDP of 10+%, with an indirect effect of 15% (worse than the Great Depression).  To actually amortize the existing debt would take much more.  And this is just analyzing the "on balance sheet" debt of the federal government.

3) Direct default.  Direct default is a very bad option.  Our national debt is held primarily by federal and state "intergovernmental agencies" (60%) , foreign central banks (30%), and banks and other investors (10%).  What would happen to each in the even of default?

1)  Central Bank bankruptcy (no loss there)

2) Social Security and Medicare bankruptcy (social backlash)

3) Probable retaliatory write-offs of all foreign obligations owed to the US and expropriation of all public and private US assets on foreign soil (triggering additional protectionist sentiment if not outright war)

4) Federalization of banking institutions holding sovereign debt assets (both domestic and foreign) in excess of tangible common equity (virtually all banks)

5) Loss of pension and investor capital through outright government default, expropriation of foreign assets, and decline in the value of assets triggered by the ensuing financial depression/chaos (more social backlash)

(Additionally, since the US would no longer be a credible borrower, post-bankruptcy the US would have to balance its budget and re-institute sound money backed by some form of universally recognized (and portable) collateral.  Additionally, the government would need to effectively end all social programs because it would need to keep spending on defense in order to deal with heightened external threats and internal social unrest.)

4) Printing money.   Printing money is also a bad option but a better option than outright default.  Since foreign countries, banks, and investors always had the option of trading treasuries for dollars, they recognize they have nobody to blame but themselves for making a poor choice of investment.  Printing money starts out fairly benign and ends up in social unrest when the Ponzi scheme ends with the Central Bank buying up all the remaining treasuries (thereby releasing a flood of dollars into the economy virtually overnight).  Anti-US sentiment arises from inflation caused by the role of the dollar as the world's "reserve" currency, but you don't see obvious financial retaliation beyond a dumping of US treasuries.  What you do see is social upheaval as that flood of dollars works to find its way into non-financial assets.

TrackBack

TrackBack URL for this entry:
http://wealthshift.org/blog-mt/mt-tb.fcgi/97

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)