Here’s the real problem that they aren’t reporting. Back when our annual deficits were around $400 billion, there was enough capital on the world’s markets to absorb it every year. When 0bama came to power, his $1.6 Trillion annual debts exceeded the world’s capacity to absorb it.
Why is this a problem? I like to illustrate it by comparing it to how the two sides financed World War 1. The British financed the war by bundling the French and Russian war bonds with their own, and selling them the only place in the world where there was enough money to finance the staggering costs of the war; New York. By 1916, American bankers had so much European debt that America was bound to enter the war on the side of Britain to ensure the Allies won. The Germans, whose war effort cost just as much, were frozen out of the New York bond market. So they sold their debt to themselves. In five year notes. When the notes came due in the early 20s, nobody bought them. They lost the war. So the German people took their money home in wheelbarrows as the Weimar government paid off its own debt in worthless currency.
When we went from $400 billion to $1.6 Trillion, we went from the British model to the German model. Only we call it “quantitative easing.” By putting it into the stock market, the Fed is betting that it will stay there for a while and not be released into the economy at large to fuel Weimar-style turbo-inflation. They have inflated a stock bubble that is bound to burst.
The longer we stay on the German model, and not on the British one, the value of the debt held by Japan and China will diminish in real terms. And with it, will also go their desire to continue to prop us up financially. They will lose their “stake” in the US economy. At some point, they will write off that debt as worthless, and the dollar will cease being the world’s reserve currency.
It will make 2008 and 1929 look like the good old days.
Yeah, we’ve seen more recent examples of weimar economics of course. Also done by ooga-booga africans, like Mugabe.
The longer we stay on the German model, and not on the British one, the value of the debt held by Japan and China will diminish in real terms. And with it, will also go their desire to continue to prop us up financially. They will lose their “stake” in the US economy. At some point, they will write off that debt as worthless, and the dollar will cease being the world’s reserve currency.
Walking away from, or diluting out through money printing, the Japanese and Chinese debt will not benefit the U.S. Beyond the Greenback losing international credibility, the gain from 'default' will still leave $200 trillion or so of unfunded liabilities, all of which are either literally or effectively indexed for inflation (SS, Medicare, Medicade, Obamacare, etc.). Those who think that they are being smart about this will be proven incorrect. The denouement will likely occur in a similar time frame to your German example: five years or so.
True.
There is no easy way out.
Best way out of this that I can see is in fact a couple of years of hyperinflation, followed by a “revolution”, or rather a general political change of heart, followed by a rational and parsimonious government.
Thats more or less what the Germans got in the 1920’s BTW, they were doing much better by 1930, until the Great Depression screwed everything up again and eventually gave them the Nazis.
That optimistic scenario doesn’t seem likely in our case. Argentina has been in this boat many times and has never recovered.
Thanks for the clarity.