Saturday, September 19, 2015

Should The U.S. Government Default On Its Debt And What Will Happen If It Does

by Phil T Looker

Crushed by debt - Picture source:

The level of indebtedness of U.S. federal, state, and local governments, some corporations has been a concern for Central Banks, The IMF, the World Bank and BIS (The Bank Of International; Settlements aka The Masters Of The Universe) for a significant time now and most people are bored by the topic if they are aware of it at all. Economists have been taking of debt as a problem for so long without anything drastically bad happening they have become the boys who cried wolf. Or have they?

Governments have colluded with bankers and financiers to make their debts appear manageable for so long that like gluttons at a feats, the public think the food will keep coming forever. U.S. government debt has become an abstract; it has no more meaning to Joe Average than the prospect of an asteroid hittinmg the earth in the next thousand years.

Many economists, Krugman their leader, are sure debt does not matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” that trivialize the long term effects on the lives of billions of people who do not spend their lives on a university campus or in a private dealing room in their mansion, of printing money.

Actually, some people owe it to other people. There will be big transfers of wealth depending on what happens. More exactly, since Americans don’t save anymore, that dishonest phrase about how we owe it to ourselves isn’t even true in a manner of speaking; we owe most of it to the Chinese and Japanese.

The fact is that while the US government owes the $17 or 18 trillion of the national debt to the Citizens of the USA, and the British government likewise owes the £1.5 trillion of national debt to UK taxpayers (and so on around the world's debtor nations)these amounts are only the tip of the iceberg.

Another chestnut is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the debt, which is questionable. And at this point, government deficits are likely to balloon, not contract. Even with artificially low interest rates. GDP, the only economic measure quoted these days, is not a measure of the health of an economy but of how much money is churning around in it. So if a government let's in a million migrants, pays them all £ $ or € 300 per week in benefits to fund essentials, they have grown GDP by 300 million a week. But the economy has not grown at all, all that has happened is the government has taken 300 million in taxes and paid it out in benefits.

OK, you see the flaw in that kind of economics, but we are not finished. The million migrants take their £$€300 and spend it on food, clothes, fuel, other stuff and, say 10% is taken in Value Added Tax (VAT is 20% but not all goods are liable), that means the GDP grows by another £$€290 a week.

Then the businesses that the money is spent with must buy replacement stock to keep the shelves full, pay rents, fuel costs, wages etc. By the time the government has taken its cut again, lets say £$€250 is added to GDP which has now grown by £$€840 all without one penny or cent being added to real wealth.

As a former business finance consultant I have been saying since we started The Daily Stirrer in 2009, governments should default on not just some, but all of its debt for three very obvious reasons and a host of more occluded ones. Foremost is we need a debt reset to avoid turning future generations into serfs. Second is to punish those who have enabled the State by lending it money. Third is to make it impossible for the State to borrow so irresponsibly in the future, at least for a while. A nation such as Greece should never have been allowed to get into the state it is in, the USA should have had a ZZZminus rating years ago.

Why you might well ask, if we owe the money to ourselves? The problem is we don't really owe the money to ourselves. Governments raise money by printing bonds and selling them, with the nation's central bank apparently buying most. But if the government's revenue / expenditure account is running at a deficit, the central bank has two options, to print money thus devaluing the currency and destroying savings, pension funds and asset values and causing inflation which reduces the spending power of wages and earnings. Or we can refuse to pay 'ourselves' i.e. the central bank) the interest due on treasury bonds it holds, which means the central bank does not have the funds to pay international banks which hold its debt.

The cycle of borrowing can only go on like this for so long before the interest owed on outstanding debt becomes to great to repay, at that point citizens become serfs, working to pay the master's (government's) debt while having only a subsistence lifestyle.

The consequences are too grim to think about and the timing hard to predict. The USA has been bankrupt for two decades but has stayed afloat because it holds the de facto global reserve currency. Recently however, Russia, China and Iran have recruited many nations totally pissed off with US high handedness to their effort to dump the US$ as reserve currency and creat a new monetary unit based on a basket of currencies. When (rather than if) that happens, the USA is finished and the day of the debtor nation is over.

Perhaps governments can somehow continue to borrow amounts that ought not to be possible. But creditors will look for repayment. Either those creditors will walk away out of pocket (in the case of default), or the holders of dollar denominated investments will be left with worthless paper (in the case of hyperinflation), or most likely the taxpayers’ pockets will be looted (bank deposits confiscated, pension funds dissoves, investment trusts looted), or worst case a combination of all three. Whatever the final outcome, the story will not have a happy ending for Joe Average and his family and friends .


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