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.
A few years ago I came across
two possible nightmare scenarios.
The first scenario is called
“Death by Panic”,
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. 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?
“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
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.
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
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.
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
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.
Many Americans are already
starting to live these nightmares.Your
thoughts on these scenarios would be appreciated.
.Harry E. Figgie, Bankruptcy 1995, Boston:
Little, Brown & Company. 1993, p. 26.
.Elizabeth Becker and Edmund L. Andrews, “IMF:
U.S. deficits a global time bomb,” Chicago Tribune
8 Jan. 2004: p. 3.
Tully, “The Deficit: American’s Credibility GAP,”
8 Mar. 2004
Global Research, “Global investors ponder implications of US dollar collapse,”
March 26, 2009
E. Figgie, Bankruptcy 1995, Boston: Little, Brown & Company. 1993, pp.
FRB Press Release, FOMC statement, March 18,
.John R. King, Chaos in America, Tehachapi:
America West Publishers, 1990, pp. 73-74.