Quote from Misthos:
Exactly. The Deficit hawks don't understand that a) you don't ever need to pay off the debt, you just need to keep it manageable and b) if you balance the budget you will plunge the country into an immediate DEPRESSION. And I would say we would easily exceed the 6% initial launching point/drop in gdp because of the chain reaction of defaults in the public and private sectors. It would be horrific - ATM machines not working, bank runs, etc....
Who wants that?
But here's the problem. Bernanke thinks he can find a middle ground between severe debt deflation and hyperinflation. You can't. There is no middle gorund. Here's why:
To avoid a deflationary collapse/death spiral, you need to print money (monetize) and deficit spend (fiscal stimulus).
BUT...
If you do the two above, eventually you will need to FIRST sop up the excess money that was created by the Fed. This could be done.
But what about the deficit spending - the fiscal stimulus by Congress and the White House? That spending adds to the total national debt, which of course, will add to the annual interest rate payments on that increasing debt. And I'm not even talking about paying down the debt - but just making the interest payments. But here's the problem. If GDP doesn't significantly rise, which would also increase tax revenues, the gov't will be faced with a higher and higher interest payment as a percentage of all tax revenues. Some estimate 35%-50% of all tax revenues within a decade. Then what do you cut? Social Security? Defense? Medicare/aid? Do you further monetize?
The government will not cause a severe depression thru balanced budgets, IMHO. They will deficit spend as long as they can. Ultimately, we will have extreme inflaton. If rates rise, the servicing of the deficit gets even more costly. That's when de facto default occurs. When we need to print just to make the interest payments. That's when it will be obvious that it is all a sham.
Well, I think you hit the nail on the head.
Balance the budget and we go headfirst into Depression.
Accumulate endless debt, and soon, foreigners leave Treasuries, and rates explode (deflationary Depression). Or, the FED steps in, monetize and we go down the road of Zimbabwe. That's the Schiff-Rogers bet. I can't see Bernacke actually doing it. Although, I thinks there's
even less a chance Bernacke will step-aside and let the bond market tank.
There are only two solutions to avoid a Great Depression (deflationary, or inflationary):
1) Grow out of the debt (post WW2 America)
2) Revolutionary technology on par with electricity, combustion engine, railroad etc - free energy comes to mind.
The other day, I researched the similarities between post WW2 America and present-day, to see if there was reason to hope. I would suggest others do the same.
To recap, post WW2 America grew out of similar debt (~100% of GDP) by virtue of:
1) A huge manufacturing base.
2) Huge foreign demand for US products (Europe and Asia lay in ruin)
3) A balanced Federal Budget
4) High taxes.
Fast forward to present day America.
Jack Taxes? = Depression. Balance the Budget? = Depression. Foreign competition is extremely high. Foreign demand is extremely weak. And America's manufacturing base is now in China.....
Add to that, the Financial, Real Estate and Insurance Sector contributes 25% to GDP. Nearly every group in that sector relies entirely on leverage, ever-increasing asset values and a buoyed economy to remain solvent. 25% of our GDP .. 3.5 Trillion Dollars. A deflationary Depression would cut FIRE by at least half (13% GDP), making Ben all the more likely to go Weimar.
I don't know when America crossed the debt-Rubicon. I've heard 87 tossed around. Either way, we are seriously done. Free energy is possible. I bet the CIA/NSA or DARPA has it. But this is a controlled take-down of Rome.
The most frightening aspect: Europe, Japan, America and Canada are in the same boat. It will be a Global Great Depression.
Some might inflate. Others might deflate. But the Depression will be Global. China is the only lifeboat. They've got the manufacturing base and little debt.
Now, we just watch the sovereign debt contagion sweep across the weaker European territories like the black plague, until it reaches bigger States, and then US Treasury markets. Germany and France are desperate to stem the cracks from becoming a torrent. Either way, it's too late. We're on a collision course. All they can do is push Judgment Day back another few years. If that. I used to think 5 years. Now I think it's around 3, or less.
The best hope for America is a Great Depression today. Unbelievable. Imo, that's why the Pentagon requested 400K troops deployed to "the Homeland". Stave off a wholesale revolt when the "Czars" implement Martial Law, rations, price controls, nationalization of IRA's etc. This is it.
