I know I am not alone in my belief that the era of “spend and borrow” will come to an end as creditor nations grow more wary about buying treasuries. I really don’t see this happening in the long term, however, unless the gold standard were revived by a major economic power, or the Euro proved over several years to be less volatile than other floating currencies.
It is happening right now. There is some concern that the US might not be able to meet its current long term T-bill obligations. Unfortunately, it is a situation of scale, in which government remedies are a factor below the problem—like fighting a brush fire in the middle of a forest fire.
Next year, US tax revenues may be down by double digits from this year, and raising tax rates will reduce revenues even further, as the Laffer curve strongly loses amplitude in the flight to stability and liquidity.
That is, huge amounts of money are fleeing yield and other capital gains investments, and going into “mattress” storage, ironically, like T-bills, that generate little or no taxable income, or are just being held as liquid assets.
By itself, this would just mean a huge increase to the federal deficit, while driving the country into depression. But in this case, federal spending, which is still seen as the solution, makes the problem much, much worse. A death spiral.
When T-bills collapse, the government is bankrupt $1 beyond tax revenues, so it is no longer able to deficit spend. With a slump in tax revenues, this could mean as much as a 25% (my guess) halt to the federal government.
The big four parts of the government, Social Security, Medicare, Medicaid and Defense, have to take the hit. Most likely immediate means testing to Social Security. No extra money to give to people who have money.
And finally, if the government wants to improve the situation, it has to cut back even further, so that it has a budget surplus of hundreds of billions of dollars.
The Pentagon is already anticipating this catastrophe, and is making huge, if quiet cuts and hopefully hiding a ton of assets off budget.