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Thread: Is a U.S. Default Inevitable?

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    Is a U.S. Default Inevitable?

    Chronicels Magazine

    Fits well with the other tread I had opened. But deserves discussion on it own I think.

    by Patrick J. Buchanan
    January 15th, 2010 • Related • Filed Under

    [Subscribe online to Chronicles: A Magazine of American Culture. Click here for details].

    We were blindsided. We never saw it coming.

    So said Goldman Sachs CEO Lloyd Blankfein of the financial crisis of 2008. He likened its probability to four hurricanes hitting the East Coast in a single season.

    Blankfein was reminded by the chairman of the Financial Crisis Inquiry Committee, Phil Angelides, that hurricanes are “acts of God.” Financial crises are manmade. Yet Blankfein was backed up by Jamie Dimon of JPMorgan, who said, “Somehow, we just missed . . . that home prices don’t go up forever.”

    The Wall Street titans thus conceded they did not foresee the housing bubble ever bursting and they did not consider the possibility of a collapse in value of the sub-prime mortgage securities piled up on their books.

    Backing up Blankfein’s plea of ignorance and incomprehension is this: The crisis killed Lehman Brothers and would have killed every one of them had not the Treasury and Fed, neither of which saw it coming, either, intervened with hundreds of billions in bailout cash.

    Yet there were those who warned a housing bubble was being created like the dot-com bubble; others who predicted the Empire of Debt was coming down. As, today, there are those warning that the United States, with consecutive deficits running 10 percent of gross domestic product, is risking an eventual default on its national debt.

    The warnings come from the Committee on the Fiscal Future of the United States, chaired by Rudolph Penner, former head of the Congressional Budget Office, and David Walker, former head of the Government Accountability Office and author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility.

    With that share of the U.S. national debt held by individuals, corporations, pension funds and foreign governments having risen in 2009 from 41 percent to 53 percent of GDP, Penner and Walker believe it imperative to get the deficit under control. Unfortunately, it is not possible to see how, politically, this can be done.

    Consider. The five largest elements in the budget are Social Security, Medicare, Medicaid, defense and interest on the debt.

    With interest rates near record lows, and certain to rise, and back-to-back $1.4 trillion deficits, this budget item has to grow and has to be paid if the U.S. government is to continue to borrow.

    Second, with seniors on fire against Medicare cuts in health care reform, it would be fatal for the Obama Democrats to curtail Social Security or Medicare benefits any further this year. Next year, they will not only lack the congressional strength but any desire to do so, after their anticipated shellacking this fall.

    The same holds true for Medicaid. The Party of Government is not going to cut health benefits for its most loyal supporters. Indeed, federal costs may rise as state governments, constitutionally required to balance their budgets, cut social benefits and beg the feds to pick up the slack.

    This leaves defense. But the president is deepening the U.S. involvement in Afghanistan to 100,000 troops, and the military needs to replace weaponry and machines depreciated in a decade of war.

    Where, then, are the spending cuts to come from?

    Can the administration cut Homeland Security, the FBI or CIA after the near disaster in Detroit? Will Obama cut the spending for education he promised to increase? Will he cut funding for Food Stamps, unemployment insurance or the Earned Income Tax Credit in a recession? For the near term, the entitlements are untouchables.

    Is this Democratic Congress, which increased the budgets of all the departments by an average of 10 percent, going to take a knife to federal agencies or federal salaries, when federal bureaucrats and beneficiaries of federal programs are the most reliable voting blocs in their coalition?

    What about tax hikes?

    Obama has promised to let the Bush tax cuts lapse for those earning $250,000 but has pledged not to raise taxes on the middle class. Any broad-based tax would be politically suicidal for him and his increasingly unpopular party.

    But if taxes are off the table, Afghan war costs are inexorably rising, and cuts in Social Security, Medicare, Medicaid and entitlement programs are politically impossible, as pressure builds for a second stimulus, how does one reduce a deficit of $1.4 trillion?

    How does one stop the exploding national debt from surging above 100 percent of GDP?

    America is the oldest and greatest constitutional republic, the model for all the others. But if our elected politicians are incapable of imposing the sacrifices needed to pull the nation back from the brink of a devaluation or default, is democratic capitalism truly, as Francis Fukuyama told us just two decades ago, the future of mankind?

    What the looming fiscal crisis of this country portends is nothing less than a test of whether this democratic republic is sustainable.

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    Again though it goes round in circles. Who do we owe debt to? Ourselves- the federal reserve. And to those nations that bought our debt. No they would just print their way out of debt causing inflation. What you will see is a general decline in economic power of the united states. As it declines obviously there will be less trade and less overall wealth held by the country.

    Well we would see a big shift actually. Places like China will stop loaning us cheap goods on credit. Prices of everything will sky rocket up. You would have a situation like the former soviet union- low salaries and high prices along with high inflation and a low value of the dollar.

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    They can not keep on printing money for ever. Because like you said it will lead a strengthening in inflation. And this will make other nations more reluctant to lend money to the US government. Or they will ask for higher interest rates to protect themselves against the treat of ending up with a huge pile of worthless dollars.

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    They've just done a number on our money over the years. Our money is no longer minted in precious metal and is no longer backed by a precious metal: gold. So they've created a situation where they're no longer limited in the amount of money they print up and because oil is traded in dollars and because our money is not de-minted and once upon a time had actual value we still see some value to our money at least in theory. I remember someone said this whole money mess we're in boiled down essentially to "human nature" and I thought that said a whole lot with very little.

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    I wonder if we stop trading with everyone,starve out all the nations who cant feed themselves like parts of Europe,Russia and China since the Great Plain region is known as the "Bread Basket Of The World" and rebuild our manufacturing center,switch to running all automobiles on Natural Gas,start mining Kerogen,which is basically flammable shale rock that can be cracked into oil and the US has more proven reserves of this material than any other country and it would solve our energy needs for a long time,don't buy foreign oil,let Israel and Europe worry about their own problems,threaten to nuke China when it gets its whole military right in the middle of the ocean if it ever tries to reposes any thing in America,start shooting wetbacks who don't follow immigration rules,reinstate public hangings for public officials and members of Wall Street when they decide to get greedy,impose a term limit on Senators,Reduce the amount of Lawyers,impose imminent domain and build that massive wind farm that Boone Pickens wants and do not allow any more commercial aircraft into our country.I say we say goodbye to the rest of the world and only worry about ourselves.Any body who has a problem with it can try to cross either ocean and fix it.And when they do their whole Army will be vaporized by a few of our Atomic friends.
    I think that this would be the right way to get America back on track.

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    Default is inevitable, though it will probably come in the form of the printing press which will wipe out the value of any US issued debt. That is the advantage of having our national currency as the world's reserve currency.

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    I think a collapse is indeed inevitable but it is also avoidable. There is a big difference between a gold backed currency and a fiat one. The gold is finite making it an economy based on scarcity opposed to fiat currency which is based on the ideal that wealth and work are never scarce. With scarcity you have only two scenarios, either someone eats or someone does not and gets eaten. People exchange in either ingots or dust. There really is no middle ground. With fiat currency everyone eats as long as they work.

    The fiat currency that people wrongly believe is backed by nothing is basically backed by the world stock exchange. That is, the collective business and labor of the people bought and sold every day. The people are the real wealth of any state not shiny metals. When there is a scarcity in either business or labor the value of the stock falls. The same is true for the dollar.

    I think the real problem with the currency is that not enough people are willing to work for an honest wage or worse won't work at all. In a fiat system there has to be enough work to support the currency, if not the value drops and drops. The question then is, how to create work?

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    What would happen if all the creditor nations (or at least a big one like China) decided to call in our debts? How could we pay? Real estate. Like Sun Tsu said, land is the foundation of the state. Our bills would be worthless, and our national resources are not "stockpiled" just under-developed. We have only land as collateral, that and more trade agreements.

    Fiat money is based on the asumption that other nations will believe that our credit is good. Just like one of us and the banks, when they think we are over-extended they will "do us a favor" by not lending us more. Real money is based on something of intinsic value, like gold, silver, copper, nickel, whatever. Why would a massive creditor nation like China be stocking up on gold? Because China at least has had a long enough history to have tried and failed with fiat currency itself. It historically fails because more is printed out of need than out of value.

    Anyone who doubts this should take paper money and hide it in a mattress: if the dollar devalues (oh, I'm sorry... if the economy "inflates") at a rate of 14% per year, how is converting most of you dollars to gold (which has appreciated at a rate of 44%) a worse idea?

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