Monday, April 13, 2015

So if we're not going to pay down the debt...

I've discussed the national debt on multiple occasions. It's very clear that we as a people are far too childish and needy to do what must be done to take responsibility and pay off the debt, and even if we weren't a bunch of overgrown babies, our attention spans are too short to work towards a 100 year goal. There's more - there is the consideration of the growing population, and the effect on the world that would occur if we started to pay down the debt. There's the fact that if interest rates rise, even a little, our government wouldn't be able to handle the increased cost.

So yes, I think it's safe to assume that we are not going to pay down the national debt. So what does that mean?

It must mean that the FED will continue to create money and suppress interest rates. In other words, QE Forever.

The US government cannot let interest rates rise, and must continue to try to extend the rollover of the debt as far as possible. This is something the whole world is trying to do. Recently Switzerland issued 10 year debt with negative yields. Mexico indicated they would issue 100 year debt! The US will keep pushing longer yield times and lower interest rates, to try to buy more time and keep the cost of the debt down. Meanwhile this will increase the magnitude of the debt, but stabilize the interest we are paying each year.

This near decade long easy money policy has already created asset bubbles and massive malinvestment. The NASDAQ has more than tripled since the last market correction while the housing sector, which crashed so spectacularly with the "Great Recession" and which is generally considered to be a strong indicator of the health of the economy, has taken 6 years to recover to a mere 45% of its former heights. The last time the housing sector crashed this hard was during the Savings and Loan Crisis, which, incidentally was followed up by the.. drum roll... Dot Com Bubble. Yes, the markets are soaring on waves and waves of easy money, created by the FED and pumped in by their asset purchases. Everyone is wearing rose colored classes and loving the euphoria - they're addicted to it.

Does anyone think the FED can uncreate the monster it has created? Unwind the asset purchases and tighten the money supply without creating an international firestorm? I didn't think so.

So again, what does it mean?

I think it means, and maybe someone else will dissuade me, that the FED will be forced to hyperinflate and destroy our currency and our debt along with it. It's happened before, and will happen again. The only question is how much damage will it cause when it does happen. Of the $18+ trillion in US debt, over $5 trillion is intragovernmental - social security, medicare, pensions, etc. That will all be gone. Another $6.5 trillion belongs to Americans, individuals, 401ks, IRAs, businesses, banks, etc.; only about a third of our debt is foreign. So when it gets wiped out, so does the capital/savings of an enormous number of Americans.

I don't know if we will really end up carrying heaps of worthless cash in a wheelbarrow to buy a loaf of moldy bread, but again, it's happened before. I hope we can avoid it somehow.


  1. Honestly, I think the government will make a move to move towards a 100% digital currency for all transactions, requiring every transaction to be monitored and ultimately taxed.
    It's at that point the government will strike with hiding the debt inside the electronic heap with information overload and, voilà, the debt is manageable.
    Also, I have my suspicions that they'll start preventing people leaving the country for good without paying their 'share'.
    Selling up to move to another country? Before you leave please hand over your share of the debt. Can't pay? Can't go.

    1. I would not be surprised to see a bill coopting the bitcoin into US Government hands. Certainly they don't want any markets outside of their control.

      As for the exit fee, it already exists:
      The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to US citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes. Different rules apply according to the date upon which you expatriated.