Wednesday, October 16, 2013

Exceptional Debtor Status

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

Jim Rogers speaks out about the Washington charade, one that has been repeated dozens of times over the past decades, surrounding the debt ceiling. The only thing exceptional about America, he says, is our exceptionally high level of debt.

The solution is taking a "chainsaw" to spending. But this involves surrendering our artificially high standard of living today. We need to cut back consumption and save.

Politicians, of course, have no stomach for this. They fear that too many of their constituents will punish them at the ballot box for taking away resources deemed to be entitlements.

Thus, in Groundhog Day-like fashion, politicians squabble in their political theater and then kick the can down the road once again. This will work until creditors no longer lend to the US.

"Eventually the market's gonna say, 'We don't want to play this game anymore. We're not going to lend you money at any price.' And America will go into sudden and steep decline just as has happened in the UK, in Spain, and in many other countries over the past 200 years."

This process is already underway, as countries such as China and Japan have cut back on their US sovereign debt purchases and are diversifying out of dollars. To compensate for lower market demand for Treasuries, the Fed has stepped in to buy much of new Treasury debt issuance--thus keeping interest rates lower than they would otherwise be.

But this effect is temporary. Expect the Fed's buying to escalate with diminishing marginal effectiveness in suppressing rates. That is when the wheels are likely to come off.

America's exceptional debtor status portends exceptional collapse.


dgeorge12358 said...

The only source of the generation of additional capital goods is saving. If all the goods produced are consumed, no new capital comes into being.
~Ludwig von Mises

dgeorge12358 said...

The half-trillion dollars a year the feds now pay in debt service on present and ancient debt is equivalent to one-fifth of all the yearly revenue collected in taxes.
~Andrew Napolitano