Ratcheting to Ruin (The U.S. government moves closer to a debt death spiral)

The U.S. government moves closer to a debt death spiral. Arguably, we are already in the beginning phase of this spiral as this rather scary observation points out:

The nation's debt leapt $166 billion in a single day last week, the third-largest increase in U.S. history, and it comes at a time when Congress is balking over higher spending and debt has become a key policy battleground.
The one-day increase for June 30 totaled $165,931,038,264.30 - bigger than the entire annual deficit for fiscal year 2007 .... The figure works out to nearly $1,500 for every U.S. household, or more than 10 times the median daily household income.

With no spending restraints, the economy moves inexorably toward its date of collapse.

The excesses and imbalances created by the explosion of debt over the last thirty years virtually ensure a depression, regardless of what policy actions the government chooses. That was determined before Obama took office. His spending only accelerated the debt spiral, never had any chance of success and sped up our date with economic destiny.

The tipping point of debt that Ludwig von Mises warned against was passed long ago:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

Our political leaders do not have the fortitude to abandon spending. So-called austerity measures represent little more than lip service for markets. Government economists and the political class have never implemented such measures on anywhere the scale now required. They will not willingly do so now.

What Mises termed a "catastrophe" will eventually result. The chaos that creates will eventually force action. We know the ending is not good. We don't know its timing or its form.

It is likely the government will continue on its spending path until market forces terminate this behavior. The first sign of market pushback will come in the form of a failed Treasury auction. Perhaps such an event has already occurred, albeit covered up by primary dealers buying the shortfall amounts or other slight of hand practiced by the Fed. Regardless, the deficits are so large that at some point, a shortfall will be too large for chicanery to cover. Once this happens, the government will have two choices.

One choice is to allow interest rates to rise so that markets will buy the additional government debt. The interest rate rise will further choke off what little economic activity exists. Without dramatic reductions in spending and deficits, the rise in interest rates would likely be substantial.

The other choice is to employ overt Quantitative Easing (printing money). The Treasury would order the Fed to use QE to cover the deficits. It is unlikely the Fed would or could resist. This choice might hold interest rates down, at least temporarily. Once the policy became known, fear of inflation would eventually affect currency exchange rates, interest rates and prices.

Based on the last fifty years of government fiscal and monetary policy it is not difficult to forecast what the government will do. The second alternative is likely. It defers somewhat the timing of the economic Armageddon, but not for long. It also makes the final pain that much worse. The last fact will not influence the political decision. They will try to escape the reckoning day for as long as possible. Deferring pain today is always their preferred choice, no matter the pain tomorrow. Let someone else worry about tomorrow.

Regardless of what the Fed does or does not do, our future was determined by past policies. A depression is now unavoidable. The first choice is less harmful than the second but will produce the depression sooner. The latter choice will result in massive inflation, if not hyperinflation, before the depression. It will wipe out the purchasing power of most savings and fixed income.

Which flavor poison do you prefer? After all, "in the long run we are all dead."

Monty Pelerin blogs at www.economicnoise.com

If you've read the following post on another thread, please ignore. It does, however, relate to the subject of this thread and Jefferson's wisdom and foresight are absolutely spot on!

Today's jobs situation is the result of departure from our constitutional foundations. It has been brought about by the so-called "progressives'" takeover of the reins of government.

There's a lot of talk about "job creation,"--just think about it. The most successful "experiment" in job and wealth creation is the one which began in 1776 in America, was protected and "secured" by a written Constitution that severely limited government, and it thrived for over two centuries. It provided an example of more liberty and opportunity, more productivity, and more goods and services than the world ever has seen.

It happened under what James Madison called "the benign influence of a responsible government."

While Europe struggled with oppressive government intervention, the genius Founders of America recognized enduring truths about human nature, the human tendency to abuse power, and the possibilities of liberty for individuals. Richard Frothingham's 1872 "History of the Rise of the Republic of the United States," Page 14, contained the following footnote item on the condition of citizens of France:

"Footnote 1. M. de Champagny (Dublin Review, April, 1868) says of France, 'We were and are unable to go from Paris to Neuilly; or dine more than twenty together; or have in our portmanteau three copies of the same tract; or lend a book to a friend: or put a patch of mortar on our own house, if it stands in the street; or kill a partridge; or plant a tree near the road-side; or take coal out of our own land: or teach three or four children to read, . .. without permission from the civil government.'

Clearly the government of France laid an oppressive regulatory and tax burden on citizens, robbing them of their Creator-endowed liberty and enjoyment thereof. Frothingham observed that such coercive power constituted "a noble form robbed of its lifegiving spirit."

Thomas Jefferson warned Americans:

"To preserve [the] independence [of the people,] we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. If we run into such debts as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses, and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account, but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers." --Thomas Jefferson to Samuel Kercheval, 1816. ME 15:39

Note Jefferson's very last thought here. He declares that when government taxing and debt have reached certain levels, in order for individuals to survive, then their chosen "employment" becomes "hiring ourselves to rivet their (the government's) chains on the necks of our fellow-sufferers."

Consider: in 2009, where are America's levels of employment highest? Is it in the once-thriving private sector, or in the ever-increasing government sector?

Have we reached that final phase of what Jefferson described as a logical end to what begins as letting "our rulers load us with perpetual debt"--a state where we actually become participants by "hiring ourselves" to make slaves of our fellow citizens?

Where to, America?

How to spot a "crackpot conspiracy hypothesis"

It is likely the government will continue on its spending path until market forces terminate this behavior. The first sign of market pushback will come in the form of a failed Treasury auction. Perhaps such an event has already occurred, albeit covered up by primary dealers buying the shortfall amounts or other slight of hand practiced by the Fed. Regardless, the deficits are so large that at some point, a shortfall will be too large for chicanery to cover.

In the age of the Internet, the number of people that would have to collectively agree to suppress "such and event has already occurred" is beyond imagination.

Go back to Adam Smith. Economic actors act in their own greedy self-interest. The collective acting in ones own self-interest is the best ingredient for a robust economy. No one from the POTUS on down is excluded for the club of people acting in their own greedy self-interest. The basic economic problem occurs when someone (or a group) makes others act in concert with that former group's own greedy self-interest; thus, unbalancing the system.

WAS ANYBODY LISTENING ?

The following is a narrative taken from a 2008 Sunday morning televised “Meet The Press’. The author (Dale Lindsborg) is employed by none other than the very liberal Washington Post!!

From Sunday’s 07 Sept. 2008 11:48:04 EST, Televised “Meet the Press” THEN Senator Obama was asked about his stance on the American Flag.

General Bill Ginn USAF (ret.) asked Obama to explain WHY he doesn’t follow protocol when the National Anthem is played. The General stated to Obama that according to the United States Code, Title 36, Chapter 10, Sec. 171...During rendition of the national anthem, when the flag is displayed, all present (except those in uniform) are expected to stand at attention facing the flag with the right hand over the heart. Or, at the very least, “Stand and Face It”.

NOW GET THIS!! - - - - -

‘Senator’ Obama replied:

“As I’ve said about the flag pin, I don’t want to be perceived as taking sides”. “There are a lot of people in the world to whom the American flag is a symbol of oppression..” “The anthem itself conveys a war-like message. You know, the bombs bursting in air and all that sort of thing.”

(ARE YOU READY FOR THIS???)

Obama continued: “The National Anthem should be ‘swapped’ for something less parochial and less bellicose. I like the song ‘I’d Like To Teach the World To Sing’. If that were our anthem, then, I might salute it. In my opinion, we should consider reinventing our National Anthem as well as ‘redesign’ our Flag to better offer our enemies hope and love. It’s my intention, if elected, to disarm America to the level of acceptance to our Middle East Brethren. If we, as a Nation of warring people, conduct ourselves like the nations of Islam, where peace prevails - - - perhaps a state or period of mutual accord could exist between our governments.”

“When I become President, I will seek a pact of agreement to end hostilities between those who have been at war or in a state of enmity, and a freedom from disquieting oppressive thoughts. We as a Nation, have placed upon the nations of Islam, an unfair injustice which is WHY my wife disrespects the Flag and she and I have attended several flag burning ceremonies in the past”.

“Of course now, I have found myself about to become the President of the United States and I have put my hatred aside. I will use my power to bring CHANGE to this Nation, and offer the people a new path..My wife and I look forward to becoming our Country’s First black Family. Indeed, CHANGE is about to overwhelm the United States of America “

WHAAAAAAAT, the Hell is that!!!

Yes, you read it right.

I, for one, am speechless!!!

Dale Lindsborg , Washington Post

Monty Pelerin has an archive of articles following a similar theme located here: http://www.americanthinker.com/monty_pelerin/