I was invited to speak to a Unitarian Fellowship group this coming weekend on issues related to the coming crash of the U.S. dollar. The group is very unique in that it encompasses both Americans and Canadians in the border cities of Port Huron, MI and Sarnia, ON.
While I won't include the background or foundation of what happens in hyperinflationary situations from the Roman Empire, Colonial America or the Weimar Republic, I am including the full text of the speech as it pertains to America defaulting on its' debt.
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I’ve provided some historical information on hyperinflation. These were all great nations that failed to comprehend the outcome of their continued inflation of the money supply.
Now I will explain why I believe that hyperinflation is coming to America just like it hit 32 other countries in the past 100 years. I will begin with the most damning evidence yet of the danger of this situation. In a January 6th letter by Tim Geithner, the Treasury Secretary for the United States addressed to all members of the U.S senate regarding the issue of raising America’s debt ceiling, Mr Geithner states: “Failure to raise the limit would precipitate a default by the United States. It could lead to the loss of millions of American jobs. Even a short term default would have catastrophic economic consequences that would last for decades.”
The bulk of the letter urges the senators to raise the debt ceiling and speaks of the responsible measures being taken to cut the deficit in half in the medium term. This by the way is still adding to the debt. 2010’s deficit was in excess of $1 trillion, so they are proposing to only add 500 billion to the debt. How is that responsible?
Geithner continues to build the argument for fiscal responsibility as he continues:
“The Treasury would be forced to default on our national obligations causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.
A default would raise all borrowing costs as interest rates would rise sharply. Equity prices and home values would decline significantly…..
It would have prolonged and far reaching negative consequences on the safe-haven status of Treasuries and the dollar’s dominant role in the international financial system, causing further increases in interest rates and reducing the willingness of people and businesses to invest in the United States.
Payments on a broad range of benefits would have to be discontinued, limited or adversely affected including salaries of all federal civil servants including the military; all social security and Medicare benefits; veteran’s benefits; interest payments on treasury bonds, and payments required to keep federal government offices open. (Time 2:30)
As you can tell from this letter, the head of the U.S. Treasury is worried about a default.
What exactly is a default? It’s easier to understand when you examine this at the household level. Let’s suppose you are fresh out of high school. You get an entry level job and an apartment. Your wants exceed your income so you spend more money this month than your income. This is your monthly "budget deficit". So you borrow money using your credit card. The amount you borrowed (and now owe) is called your debt. You have to pay interest on your debt. In the next month you still don't have enough money to cover your spending and have another deficit. You finance this by adding to your credit card and pay interest on the total debt that you owed before the month began. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don't have any money left over for anything else. This situation is known as bankruptcy for individuals and companies, but for a government this is called a default. (3:30)
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Geithner warns that raising the debt ceiling will prevent America from defaulting on its debt? I believe default is inevitable as there is no political will to change this ill-fated course.
In a June 2010 opinion piece in the Wall Street Journal, former chairman of the Federal Reserve, Alan Greenspan noted that "Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit."
The facts speak very loudly to those willing to listen. The debt ceiling has been raised 80 consecutive times, and will continue to be raised until there is no need to raise it. That time will come when the interest due on the public debt exceeds the government revenues from taxation and the American dollar will become worthless to the rest of the world.
I’ve crunched the numbers to prove this point.
A close look at the projections of the US Government, including future revenues of an additional $1 trillion annually, show that if there is no NEW spending and the government is able to stick to its planned reductions, then in 2023, just 12 years from now, the interest on the $46 trillion of total debt will exceed government tax revenues.
If interest rates rise by just 1% as the long bond is suggesting they will this year, then the year to fear is 2020.
If the Oil producing countries stop valuing oil in dollars in the same manner that China and Russia have just done with their bilateral trade, then experts say the bond market premium will jump 4-5% within a single year. To ease into this scenario, I adjusted interested rates upward by 1% per year and the default timeline shrunk to 2016.
Examining historical examples of interest rates, I found that in ALL cases of the bond markets raising interest rates due to rising debt loads, the rates tend to rise ¼ point or more a month meaning a minimum of 3% a year. This scenario, which has more fundamental truisms than any of the other cases, brings the American debt default squarely into 2012. THAT IS NEXT YEAR
Am I certain that the default will happen next year? Absolutely not, but I am certain that there will be a default within the decade. As Greenspan said, politically toxic decisions will have to be made to keep the default at bay for as long as possible. While I won’t get into my personal opinions about which cuts need to be made, I can assure you that the cuts will be deep, they will anger America, and there will be widespread hardship.
Before concluding, it is important to note that of the 105 million housing units in the USA and using the broadest measure of gun ownership, 65 million American homes already have access to guns. Since the financial crash of 2008, Americans have bought enough ammunition to supply all of the world’s armies several times over.
Given the right of Americans to bear arms, what politician has the will power to reduce the social security payments to 59 million Americans; to slash veterans’ benefits; to hike taxes or cancel Obamacare?
For all of the reasons I outlined, I believe with conviction that there will be widespread unemployment, poverty, hunger and maybe even a 2nd revolution in America.
© 2011 Shaun Larocque
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