Monday, November 16, 2009

What If?

The US Government spends approximately $338 billion dollars a year on interest payments on the US debt.

What does $338 billion buy? I don’t really know and I don’t feel like mindlessly googling to find it out, but I do know that $338 billion buys a lot of teachers, policemen, Joint Strike Fighters and a host of other programs and entitlements without raising taxes. When you combine federal taxes, state taxes, city taxes, social security and whatever other things are withheld from your pay check, you’re damn near paying European style taxes, yet we reap only a fraction of the benefits. Think of this along the lines of the homeowner who is in over his head, walking away from his mortgage. Same thing, except that you and I aren't on the hook, its China who takes it on the chin.

Obviously, a bold move like this doesn’t come without consequences. However, at this point, you have to wonder if it’s not worth a roll of the dice. The Federal Reserve isn’t going to foreclose on Delaware or Virginia. China isn’t going to come over here and repossess California and Oregon, not that many of us would miss California at this point in the game. Just kidding.

The dollar as a currency would be shot which would have some consequences. Some would have some nice silver linings.

Oil would become prohibitively expensive, but so what, US lawmakers have been trying to coerce consumers into using less, this would achieve that goal as well as spur investment in alternatives like electric cars, fuel cell technology and other green technologies. And no sham legislation would be needed, like Cap & Trade.

Imports would be very expensive, that would be a boon to besieged US industries, like the automakers, whom we are all invested courtesy of obama’s largess in bailing out Chrysler and GM. Not to mention, many imported cars are actually built on US soil, like Toyotas built in Georgetown Kentucky or Mercedes Benz’s built in Tuscaloosa Alabama.

Although my wife would beg to differ, we’ll all survive without Gucci handbags and Godiva chocolates. Coach and Hershey will do just fine.

US exports would become wildly successful. Talk about a jobs stimulus, this would actually create real jobs unlike the farce which is obama’s stimulus. The rest of the world would get a taste of what they have been doing to us for decades. The party is over.

Global clout? Who is really interested in listening to us these days, unless they are on the business end of an M1A1 or a B2 Stealth bomber?

So what if no one will ever lend to us again? Then what, we have to live within our means? That’s not tragic. Texas manages to do just this while having its economy thrive in one of the worst US economies ever. Texas is the 15th largest economy in the world. California is the 8th largest economy in the world. Look at what living outside of its means is doing to California for a contrast and perhaps a peek at the future. Why continue to throw billions if not trillions down the drain.

The US probably accounts for about 20% the world economy, I am guessing that the rest of the world will adjust and pay their tab, which I believe they have been dodging for generations. Conventional will not work anymore; it’s time for some revolutionary thinking.


Hushashi said...


Christopher said...

Though the idea of defaulting on US debt is not revolutionary.. the act would be.

The systematic devaluation of our fiat currency is a much more effective tool then the atom bomb approach aforementioned.

But your "What If?" only fills the clueless mind, not the true effects on the economy.

Bob W Jackman said...

The $338 billion in interest paid on the debt is for FY2009 alone. If you look at FY 2008, it was a whopping $451 billion. In the past 20 years plus, the interest paid on the debt is well over $6 trillion dollars, enough to abate income taxes for EVERY AMERICAN for 4 years in today's dollars.

BERNANKE, the FED chairman, is lying when he tells America that he wants to keep low interests rates in order to jump start the economy. The low rates have had absolutely no effect on creating economic activity.

The low rates have fully benefited primarily the US government and the banks. As we can tell from the figures in this post and the data above, the federal government is paying substantially less interest on the debt than it did the year before even though the debt level has increased by almost 20% and now even more. Banks have enjoyed a silent recovery of their inept depletion and squandering of reserves and do so on the backs of the nation's savers who now get jack all as a return on their deposits. Banks can borrow the money for 0% interest, the FED borrowing rate, and invest it in carry trades overseas.

Why would any bank want to take on risk in America when you can make easier money overseas? A bank can borrow a billion or even more at 0% interest and, in the weakest sense, buy a Bank of New Zealand CD for 4.3%. That's $43 million dollars a year in profit with almost no downside risk (currency fluctuations) in quick profit and you don't need hundreds of loan officers trying to check credit and backgrounds on hundreds or thousands of American customers that want to borrow.

If one did not know better, it seems like Congress has received the doomsday briefing and were told that the United States is in way too far to ever pay back debt so the best survival tactic is to just start increasing the debt levels beyond proportion in order to inflate our way out of the mess. For 95% of our society which is debt laden to no end, it's not too painful. As for the nation's savers, our money will soon collapse.

Only in one lifetime. It's here.