Debt Deal: Our Policymakers Are Driving Us Off An Economic Cliff

Did the middle class get sold down the river in the budget deal? After all, the working man will go back to paying 2% more. The rich were hit harder and now face tax rates that are 5% higher. Problem solved, right? 

In the enormous, earth-shaking, stunning debt deal recently reached the most extreme, draconian sequestration cuts we faced would’ve slashed $1.6 trillion from the $16 trillion debt.  10% in ten years. That’s 1% per year. Ooooh, that’s impressive. Sadly, even the paltry debt reduction of the sequestration never happened. Instead, we were handed a package that adds $4 trillion to the debt. What were they thinking? The threat that scared us into fabricating the “fiscal cliff” was “fixed” by making the problem worse and charging us higher taxes to do it.

In the tidy, cliché, blue and red world it is the small government Republicans who are tight with the purse strings while the Democrats are tax-and-spend liberals. Of course, many of us have awakened to the truth that Mr. Bush and Mr. Obama each presided over a $5 trillion increase in the public debt. Mr. Obama just amassed his more quickly. The combined $10 trillion they added to the debt has pushed us to the brink of financial collapse; a brink that neither party seems to have the political will to avert.

Even though we raise $125 billion by increasing the pain for the working class, this amount was quickly spent in the same legislation on things that worsen the situation. Revenue from increased tax brackets is also trivial in its effect on the debt, which continues to soar while many in Congress argue for getting rid of the debt ceiling.

When I see pundits trying to explain through accounting sophistry how there is no real problem, I smile. The lapdog financial wizards of the ruling structure are so adept at hand waving and smoke and mirrors it’s hard not to be comforted and distracted by the spectacle they perform in the popular media. When I run into one of these fakirs online or in person, I like to begin by asking them: “Is it a sustainable practice for an entity to spend 50% more than they take in? Can you at least admit there’s some point beyond which it must end?” This is usually met with a confused muddle of theories. Mainly: “The U.S. dollar is exceptional since it’s the reserve currency of most of the world’s central banks. We can pay our debts by creating dollars since investors will always buy Treasury debt.” Or; “Economic growth which is created by all of this spending will pump up tax revenue to pay off the debt.” These are both a special kind of lie that carries a profound corollary truth.

How big of a worry is the debt? Well, let’s think about the debt service; the load of paying interest on what is soon to be a $20 trillion I.O.U. If no one was watching, we could continue to pay our monthly Mastercard bill by charging it to our Visa card. Unfortunately, to maintain our borrowing privileges (i.e., convince investors to keep buying Treasury paper) we have to do two things; maintain creditworthiness — the impression that we have the ability to make good on our paper promises, and we must offer a rate of return that is adequate to induce them to purchase our debt instruments.

Who are these benefactors whose good grace we must stay in to avoid having our credit cards cancelled? Surprise! It’s not the scary Chinese that hold our fate in their hands. China owns only about 9% of U.S. public debt. Japan is a close second with about 8%. The vast majority of U.S. treasuries are owned and regularly renewed by the U.S. itself. Besides the Federal Reserve, which now buys 8% of the treasuries, there is a whopping 60% plus that are owned by us; our investment brokerages, commercial banks, insurance companies, retirement funds, and private investors of all kinds. These are the very investors who will not be able to sustain Treasury buying in the event of a spiral of inflation and the ensuing disruption of the U.S. economy.

So what could possibly go wrong? Um, about a dozen things, just off the top. Anything that makes that borrowing process less attractive to investors by affecting our credit rating or by introducing a superior competing investment opportunity could send the whole scheme crumbling to the ground. It could be a turn for the worse or for the better. If the U.S. credit rating is downgraded due to poor economic output or political ineptness we’ll have to pay higher interest to entice debt buyers. If the economy improves and inflation whips up higher interest rates in the economy at large we’ll again have to offer higher rates of return on our Treasury debt in order to sell bonds. Another war would also do the trick. Or a terrorist attack. Or the rumored emergence of a replacement for the dollar as the world’s preferred currency (the Chinese renminbi, soon to be backed by rumored gold reserves of 6000+ tons is already beginning its ascent) could also cheapen the dollar. In brief, if we are barely hanging on by our fingernails with interest rates at record lows, how are we going to pay our debt service when rates pop upward?

The gurus in charge of U.S. fiscal policy are beyond the genius level.  They are brainiacs of the highest order who use sophisticated computer models and intensive studies to predict and steer our economy.  How could such an elite brain trust fail to warn the president and Congress if a tsunami of fiscal collapse was coming? Why would our leaders and financiers continue on a path to certain destruction by failing to tax enough or cut enough to make a real difference in the outcome?

My short answer is that the bankers and politicians have been alerted and are aware and perfectly content to let it happen. An ancient maxim of economics is that net debtors win in a time of inflation. If you owe $200,000 on your mortgage and inflation and money printing kills the value of a dollar so much that a loaf of bread costs $200,000 you can now pay off your mortgage with a loaf of bread. The ruler elite have charted a course that takes this reasoning to the national level. Having bought political power on borrowed money by handing out goodies to entitlement recipients and defense contractors they couldn’t work their way out of the trap without a violent reaction when those benefits were withdrawn. So why not simply allow hyper-inflation to wipe out the U.S. debt rendering the $20 trillion we’ll owe insignificant in dollar-denominated terms?

Since 2008, the money supply (M-2) has increased on average at a rate of 10% a year. By 2015 there will be twice as much money as in 2008. By continuing to grow the money supply (a.k.a. inflation) we’re right on schedule to join the Japanese and others in a recently-begun currency devaluation spree.

Wouldn’t that strategy cause untold suffering and disruption in the country; starvation, privation, and civil unrest if it got out of control? Sure. But we have plenty of new laws that allow, without trial or attorney, for indefinite detention, assassination, and torture of U.S. citizens, as well as seizure of private assets, all enacted in the past few years. They’re all set to weather the storm.