Originally posted in May 2009.

On Thursday April 30,2009 the U.S. Government Accountability Office issued “The Nation’s Long-Term Fiscal Outlook, March 2009 Update.”This report indicated that “GAO’s updated simulations continue to show escalating and persistent debt that illustrates the long-term fiscal outlook is unsustainable.”Does this mean that their computers started to smoke?As trillion dollar deficits are predicted as far as the eye can see, what will happen to our government when our debt does get to a point that we cannot sustain?Does anyone know what our lives will look like when the federal government cannot be kept going? When will we reach this unsustainable point?Will anyone bail out the U.S. Government? A few years ago I came across two possible nightmare scenarios. The first scenario is called “Death by Panic”,^[i] a plot that is quickly taking shape.With our rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of record breaking size.^[ii]  America is already leaning heavily on foreign investors and governments, especially Japan and China, to buy the government debt that funds the deficits.Currently foreign ownership of our public debt is more that 48%, with China holding more than $700 billion and Japan more than $600 billion. This nightmare is playing out as foreign investors are starting to realize that we are not going to come to grips with our deficits.The rest of the world is losing confidence in our fiscal management.Is it just a matter of time before foreign investors give up on the United States long-term ability to pay our debt?^[iii] “We have lent a huge amount of money to the United States,” Chinese Premier Wen Jiabao recently said.“Of course, we are concerned about the safety of our assets.To be honest, I am definitely a little bit worried.”Other governments are also losing confidence.Czech Prime Minister Mirek Topolanek, whose government holds the European Union presidency, labeled our government’s current policies as “a road to hell.”[iv] This nightmare scenario foresees that the financial markets of the world will be flooded by the sell orders on U.S. bonds, notes and bills that no one will buy.Desperate for buyers, the U.S. will have to raise interest rates to usurious levels, and practically overnight the dollar will become nearly worthless.^[v]  The U.S. government will be completely broke and have no way to borrow the money it needs to run.The government will have to shut down.Social Security and Medicare benefit checks cannot be printed. Even if the checks were printed, they would be returned to the retirees stamped “Insufficient Funds”. We have already also started to experience the second nightmare scenario, called “Death by Hyperinflation”.On March 18 the Federal Reserve decided to purchase up to $300 billion of long-term Treasury securities over the next six months.[vi]  This is a way the U.S. Treasury will finance our exploding federal debt.When the Fed buys Treasury’s securities it simply writes a check and the Treasury puts the money in the bank.The bank credits the deposit even though the Fed will not actually have real money to back up the check.The moment the Treasury cashes the check, new money will be created.^[vii] But creating new money without corresponding economic growth will lead to inflation.As the government needs more money to pay its bills more and more new money will be created without corresponding economic growth so more and more inflation occurs. Inflationary cycles will intensify to the point where hyperinflation takes over. The value of the dollar has been on a steady decline for some time.This is one of the reasons that China and other countries are calling for a global currency.Foreign holders of our dollars foresee Treasury increasing the supply of dollars, thereby pushing down their value. As this nightmare scenario continues workers will find it takes more dollars to buy their groceries, clothing, housing and other products and services.Retirees will find their savings dollars are less valuable and will not cover their living expenses.Eventually the dollar becomes virtually worthless. Foreign investors will swoop down and buy up entire industries “dirt cheap”.Banks will cancel all credit cards because they cannot collect money fast enough to keep pace with the rapidly falling value of the dollar. As Americans wake up in either one of these nightmares, they will have no jobs, no savings and no prospects. Black markets will spring up, workers will strike, people will storm Capitol Hill and the White House, riots and anarchy will spread across the nation.^[viii] Many Americans are already starting to live these nightmares.Your thoughts on these scenarios would be appreciated.