Inflationomics

Two Roads to Bankruptcy

The U.S. government debt is climbing by the second (see the debt clock).  And that doesn’t count Medicare, Social Security, the states (which will need to be bailed out), and the European countries that are grossly over-extended.  The quick answer to all the debt problems?  Default quickly, declare bankruptcy, eliminate the debt, cut expenses, fire employees, start over with a smaller, clean slate (state), act responsibly by balancing budgets.  On the other hand, what politician would want to do that?  What U.S. politician would want to curtail his/her own power/influence and prestige?  Not many.

Which brings us to the second possible way to bankruptcy: default slowly.  That means pretending that you have something of value and forcing everyone to accept your I.O.U.s for as long as you can get away with it.  Some people call it quantitative easing, others call it printing money or expanding the money supply and extending credit.  But, no matter how you look at it, it’s a gradual default on the debt.  By paying off one’s debt with ever-depreciating dollars, the U.S. government, through the Fed, is giving less value for everything it buys.  It’s paying off its 1914 debts for 5 cents on the dollar.  It’s paying off its 1970 debts for 18 cents on the dollar.  And it’s paying off its 2000 debts for 80 cents on the dollar.  See http://www.measuringworth.com/ppowerus/.  In time, with more inflation, payoffs will be made with ever cheaper "dollars."

In the meantime, while this gradual default goes on, thousands more employees are being added to U.S. government payrolls, either directly or indirectly through government bailouts of states, corporations, or foreign governments.  In short, the power/influence and prestige of the U.S. government (and the Fed) grows as long as the world accepts U.S. dollars as payment for all debts public and private.  Growing power/influence and prestige?  What U.S. politician would willingly give that up?  Not many.  I guess we’ll be seeing the slow road to bankruptcy and the growth of government spending for some time yet.

Robert Jackson Smith

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