Two ways for the US to go broke
When it comes to foreign debt, the US can either honestly default or it can inflate the dollar and pay back the debt
We’re in the airport. We can’t seem to get a signal. So, here’s an abbreviated reckoning.Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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From what we can tell from the newspapers, the US housing market got very bad news yesterday. New house sales dipped to a record low. Never before since they began keeping records a half century ago have so few new houses been sold.
Naturally, house prices are falling too. Why is that? Because the housing industry built and sold today’s houses yesterday. A credit bubble takes from the future. Now we’re in the future. Naturally, there’s not much here. It’s already been taken away…used up…built…spent…consumed. We’ve got yesterday’s houses on the market. And today’s. And tomorrow’s.
Which shows how ridiculous the feds can be. First, they nationalized Freddie Mac and Fannie Mae…to keep them from going broke. Then, they bought mortgaged-backed securities by the boatload…and lent money at zero interest rates…to re-flate the banking/mortgage industry. Then, they tell us that we (the taxpayers) are making money on those securities. Yes, we’re supposed to make a profit as they are sold back into the market!
But now the housing market is in a double dip, and a report in today’s news tells us that Fannie and Freddie may be hiding $100 billion in losses.
Our advice: if you buy a house today, mortgage it heavily. Long term. Fixed rate. Your house will go down in price…but your mortgage may disappear completely.
Another thing taking a beating today is Europe’s periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting “services.” But it’s harder to cut services than you might think. Modern democratic welfare states are built on a fraud – that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak – such as the next generation, which doesn’t get a vote.
Citizens don’t like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange – getting more from the feds than they pay in taxes – it’s very hard (maybe impossible) to impose “austerity” measures.
What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that’s what it implies…
As Dear Readers know, the US situation is a little more complicated. We have the world’s reserve currency. Our debt is largely held by foreigners. And it is denominated in a currency we alone control. So, we have the ability to go broke in two different ways.
We can do it the old-fashioned way, that is, by being unable to pay our bills when they come due.
Or we can do it the inflationary way – by paying our bills in a currency that is not worth as much as the stuff we borrowed.
Clearly, the second way is the preferred approach. It’s what the feds are aiming for. It’s a major reason the Fed is pumping $4 billion per day into the world economy. And it’s an additional reason to keep interest rates at zero – even after, by the feds’ own reckoning, the emergency is past.
In short, you can cheat your creditors in two ways. You can default honestly. Or you can inflate.
The trouble with inflation is that it is like a bad dog. It doesn’t come when it is called. And when it does come, it comes on so fast it knocks you over. Then, it goes into the house and tears up the furniture.
But there’s Ben, Tim, and all the rest – dog lovers, everyone of them.
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