I’ve heard this argument a lot since the U.S. debt can’t possibly be paid back and no one is accountable for the debt. However, assuming the U.S. dollar fails and the government defaults on everything, it does matter to individuals because all of their wealth (most of which will presumably be U.S. dollars) will be gone except for actually assets like houses, etc.
Isn’t the failing U.S. dollar a reason to promote consumerism instead of saving since at least physical property can be sold after the failure?
It’s curious to note that a couple of days ago the European Central Bank actually said not only National Debts do matter but the situation is getting out of control.
While it’s out of question the debts themselves are so enormous there’s very little hope of repaying them in full, “servicing” them is becoming a pressing issue. In the past few days interest rates for “subprime” lenders like Ireland, Spain, Portugal etc have all risen considerably, reflecting an increased default risk. All these countries have serious budget issues and it’s becoming clear to everyone except the mainstream media GDP increases do not reflect their real economical health. That means Ireland, Spain, Portugal etc will have to dig deeper into their pockets to pay increased interest on their debt. They cannot inflate as much as they’d like to monetize the debt and they cannot default. They are trapped. They are left at the mercy of the ECB (meaning Germany).
The US is in a similar situation: defaulting is absolutely out of question. If the US defaults its debt the whole system will come down. Monetizing the debt is possible but it’s a high risk game. Bernanke may look like the idiotic General Melchett from Blackadder Goes Forth right now but he’s fully aware of what he will unleash by purchasing that mountain of debt. It will buy the US some time it desperately needs but will cause even more instability. Instability isn’t good for long term growth but politics isn’t about long term planning. Bernanke is fully aware that it will bring about price inflation but remember he, like all economists, just looks at the doctored CPI. If the CPi stays around 2-4%, they think it’s well worth it. It doesn’t matter that most people rarely (if ever) buy the junk making up 70% of the CPI. It doesn’t matter if fuel and food, which make up the bulk of everybody’s bills, skyrocket: let politicans put the blame on Global Warming, speculation, whatever they want. It’s not something that matters to macroeconomists. To have a measure of the instability I talked about look at the US dollar: it had a mini-rally early last week, then tanked, right now is rallying again. Is this synonimous with a healthy monetary policy?
My belief is that this debt purchasing will succeed, in the short term. But it will send shockwaves in all directions. Right now we are only seeing the small fries (like ourselves) at work: buy gold, buy silver, buy solid mining stocks, buy new tooling while inflation is still manageable. Anything but US dollar denominated assets. Speculators are just getting started. But next year we will see how the huge investors (both private and institutional) will react. There are two possible outcomes: either they will start to run away from the US dollar or they will follow the Fed.
Hemingway used to say that one goes broke slowly then all of a sudden he wakes up under a bridge. That’s exactly what’s happening.
The way I see it, there are two issues here. First is the debt not being repaid. Second is the fall of the dollar. They are not the same thing.
The value of the dollar depends on two things: 1. How many dollars are out there. The more the govt prints [or quantitavley eases into existence] the less it’s worth. This is just the law of supply and demand speaking. The greater the supply, the lower the price. 2. What can be bought with dollars. If the USA has great cars or computers or oil or whatever that everyone wants to buy, they will need dollars to buy with. Here again, it’s supply and demand having its way. The more demand there is for dollars, the more they are worth. Neither of those two things are directly affected by the govt defaulting on its debts.
Of course, there is a way they are related. If the govt decides to repay its debts, but doesnt have the money, they might [=very pprobably will] print print print new dollars and use them to pay their debts. This will of course affect factor 1. above, and will lead to the fall of the dollar.
QE2 is not about repaying debts. It is about something worse, piling on more and new debt. The govt has a thirst for more and more money. Until now, those suckers in Chin and Japan were providing the money. But now they are wising up. Just as people realised that Greece has no way to repay, now people are catching on to the fact that the USA has no way to repay [except by printing dollars and using them, which will make the repayment and all existing dollars worth much less. So they will get their money back, but it will be as useful as Monopoly money].
So with the rest of the world reluctant to lend the US govt any more money, the govt has turned to the one source it can always rely on: itself. It tells the Fed to print more money, and lend the money to the US govt. This is called QE2. Everyone is happy except those who wil suffer from inflation, like you and me and the Chinese [who have a trillion or two of dollars that will lose value].
And indeed with inflation at the gates, the time to buy tangible things is now. Get rid of as many dollars as possible, including things that are denominated in dollars, like American stocks and bonds of all sorts. Soem US stocks may retain their value when hypoerinflation comes, but one needs a true expert for advice on that. It’s a tricky subject that few understand.
OK, now for the next topic. What if the govt defaults [instead of printing its way out]? Who suffers? What happens? As you said, whoever lent money to the govt will not get it back, ever. Another sufferer will be the US govt, because no one will be willing to lend them money again. After all, why lend money to someone who doesn’t pay back? So that the govt will be hard pressed to pay for all the things it needs, like huge armies and huge socail security payments and medicare and who knows what else. They will then have a choice: cut down on spending [which is the path Europe is choosing, at least verbally], or tax people insanely, or, as they seem to have decided to do already QE2 their way out.
We ought to keep the Bush tax cuts plus repeal the corporate tax, not print any more money, and pay off ~25% of the Federal debt by cutting spending, then default on the rest, then pass a balanced budget amendment or go back to a modified Articles of Confederation.
We shouldn’t pay the whole national debt back because not everyone who would be paying it down caused it. Deficit spending is taxation on future generations and future generations shouldn’t have to pay for what the preceding caused.
If the whole system comes down and we’re forced to get some kind of new dollar system, will the gold in the treasury be distributed to citizens in terms of how much money they own in U.S. dollars, or will people already be expected to own gold, silver, etc.?
I really want to buy gold, or at least tell my parents to do so since I’m too worth too much money while in college, but I don’t know which companies to trust or how to go about doing it. Any advice?
Why would we even both paying back 25% of the debt if we plan on defaulting in the end?
I am not a seer. If I were I would be crying all the time because I would know the time and manner of my demise.
Seriously, I think before the US will default on its debt something more radical will happen. Perhaps the Asian economical powers will institute a new “reserve currency” which will soon take over the world, perhaps the UAE dirham or the Swiss franc will become the new reserve currency of choice, perhaps we will use mirrors and glass beads as currency. I just don’t know. All I know is that the debasement of the US dollar will continue and instability will grow. And I wouldn’t be too sure about all that gold at Fort Knox: remember the Bank of England secretly “clipped” its gold ingots without bothering telling anybody.
Want a suggestion about gold? If you can take a trip to Canada and walk into any post office. You can buy freshly minted gold and silver coins there, straight from the Canadian Mint. I got silver Maple Leaves that way this year. No intermediaries, no fees and fully guaranteed.
This is a horribly simplified account but think about it this way: When the state uses its power of the printing press (thus raising the debt) it destroys real wealth through distortive spending. However, if the state would default on this debt, the only thing that would be destroyed is the value of the paper dollars. All the real wealth would still be there, though there would be a painful adjustment period as people scramble to find a new way to manage transactions. Thus it’s in our best interest the debt grows as slowly as possible and is defaulted upon as soon as possible.
Brian Anderson: I use Bullion Direct to buy my precious metals. You can buy from their catelog or their exchange. Their prices are decent, especially if you just want to get your hands on investment bullion. I have done a number of buy and sells through them and have never had any issues