Darryl_R_Schoon
I have a bad feeling about what’s about to happen. The Great Depression is the closest that comes to mind. I, like most, was not alive during the 1930s when it happened. Nonetheless, what once was feared in private is now being discussed in public. It’s going to be bad. It’s going to make high school seem like fun. This Time is Different: A Panoramic View of Eight Centuries of Financial Crises by University of Maryland‘s Carmen Reinhart and Harvard’s Kenneth Rogoff makes for perfect reading when flying between the US and Argentina.
There is perhaps no better analysis than Reinhart and Rogoff’s on the history of sovereign defaults; and, as such, Reinhart and Rogoff’s paper was ideal reading material when traveling between the US and Argentina , for the sovereign defaults that happened in the past to Argentina will soon be happening to the US .
But a US default will make Argentina ’s debt defaults pale both by comparison and consequence. The US , unlike Argentina , is the world’s largest economy, the issuer of the world’s reserve currency and the world’s largest debtor—and a default by the US on its debt will shake the very foundations of our increasingly fragile global economy.
The power of ambition is extraordinary. The power of ambition transformed the US from the world’s only creditor after WWII into the world’s largest debtor in less than fifty years. Wanting to emulate England ’s 19 th century empire in the 20 th , the US instead has mirrored England decline in the 20 th century here in the 21 st .
Credit and borrowing fueled America ’s ambitions in the 20 th century as it had England ’s in the 18 th and 19 th . During the 1980s, to pay for President Reagan expansion of the military, the US quadrupled its national debt in less than a decade by borrowing three trillion dollars during a presidency pledged to balance the budget.
When Reagan took office, US debt totaled one trillion dollars. When Reagan left office, US debt totaled four trillion dollars. Reagan’s vaunted slogan of fiscal conservatism was just that—a slogan; and while talk is cheap, the debts now have to be repaid.
Just as the costs of WWI forced England to abandon the gold standard in the early 1900s, post WWII military spending forced the US to suspend the convertibility of the US dollar to gold in 1971; and the consequences, e.g. burgeoning trade deficits and global currency instability, are now putting unsustainable strains on a financial system already in extremis .
Ambition has its price and the bill is now due and owing. The question is: how will the US pay what it owes? In Hyman Minsky’s Financial Instability Model, the US is close to “Ponzi status” if not already there since the US is having to roll its debt forward and borrow from others to pay the interest as it can no longer pay down the principle.
In 2006, in an article published by the St Louis Federal Reserve Bank, Professor Laurence Kotlikoff stated the US was “technically bankrupt” as there was no way the US could pay the $65.9 trillion it owed.
Evidently, Professor Kotlikoff was conservative in his estimate or we’re going downhill faster than he knew. Just three months ago, on May 28, 2008 Richard W. Fisher, President and CEO of the Dallas Federal Reserve Bank estimated the obligations of the US to be actually $99.2 trillion, 50 % higher than Kotlikoff’s figures.
Fisher stated: In the distance, I see a frightful storm brewing in the form of untethered government debt . I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.
Fisher should know what the US owes and the danger that sum represents. As President and CEO of the Dallas Federal Reserve Bank, Fisher is a part of the Federal Reserve System—the very system that has indebted America into perpetuity when its credit-based money forced out gold and silver based money in 1913.
But in his speech Fisher said nothing about the role the Federal Reserve has played in America ’s fatal dance with debt, warning instead about the increasing costs of entitlements such as Social Security and Medicare.
Fisher is part of a larger effort to now blame America ’s entitlements as the primary cause of our problems, assiduously avoiding the role his own Federal Reserve Bank has played in sinking our once wealthy nation into perpetual indebtedness.
In truth, the entitlement program that poses the greatest threat to America is—and always has been—the Federal Reserve System. Without the Federal Reserve’s credit-based money whose compounding interest (paid to the bankers) is obliged to be paid for by a possibly unconstitutional US income tax [note: the Federal Reserve Act and Federal Income Tax were both instituted the same year in 1913], the US would not be indebted and bankrupt as it is now.
If Ben Bernanke and Richard Fisher et. al. at the privately owned Federal Reserve Bank resigned and stopped plundering the US for their own benefit at the expense of the public in order to line the pockets of their banker friends with public funds, the US might have a chance of successfully getting out of this mess.
But, of course, they won’t and the now privately controlled US government will continue to indebt the American public so insiders can continue to profit immensely at the public trough. But the question still remains, how will the US pay its unpayable debt? The answer is as clear as it is obvious. It won’t because it can’t. More
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