Wednesday, October 17, 2012

Our Debt Sentence

Today's “jump right out atcha” headline: “Foreign holdings of U.S. debt hit record $5.43T”. That's right, folks – the U.S. economy, which everyone in our own country seems to think is like unto a large and fast-decaying beached whale, is still a glamor stock for the rest of the world. The Chinese, for example, who already own our butts, have put in another 0.4 percent, and the Japanese another 0.5 percent. The article states, dryly: “Demand for U.S. debt has remained high even though the United States has run budget deficits in excess of $1 trillion for the past four years.” (I like that expression -- “demand for U.S. debt”. Sounds almost subversive, doesn't it?)

So what's going on here? The only reason “U.S. debt” could be considered anything other than a totally lunatic investment is that no other investment is as good. Now remember, we're not talking about short-term speculation here, or day trading – we're talking about people who are in it for the long haul. In fact, U.S. debt of this magnitude really is kind of like a beached whale, in that you can't move very much of it at once, or you risk your investment. Buy too much too fast, and the price goes up to the point where it's no longer a good investment. Sell too much too fast, and the price goes down, and your remaining holdings suffer a drop in value. So the whole affair is a very ponderous one, not unlike (another maritime simile here) steering a very large oil tanker. Ponderous, but delicate at the same time. No one can invest in a big way with funds they don't have, for example... and no one can invest with funds they might need in a hurry at some future date. So it's always a matter of fine tuning, and never a matter of impulse.

But it's also a matter of strategy and cold calculation. Think of the main kinds of things that would make U.S. debt a risky investment, and ask yourself how likely they are to happen. One would, of course, be a collapse of the U.S. economy, with a resulting sharp fall in tax revenues, which would compromise our ability to “service” the debt – i.e. to pay interest. Another would be severe (but not necessarily “hyper”) inflation, caused simply by the government's printing way too much money. And another would be a decision to just cancel the debt – tell our creditors “sorry about that”, or, in the words of Bluto in “Animal House” -- “You f----- up; you trusted us.”

Now here's the point – each of these actions has been either predicted or even recommended of late. Let the economy collapse and start over – and re-establish our currency from the ground up (with actual backing this time). Or, get out of it by printing so much money that we can pay off the debt with pocket money – then, again, re-establish our currency from the ground up. Or, just tell everyone who owns a piece of our debt to bugger off, and it serves them right for taking advantage of the poor, beleaguered American taxpayer.

The interesting thing about these options is that they all have a strong hint of anarchism – of wanting the system to destroy itself. And sure enough, these notions are typically proposed by starry-eyed idealists... radical libertarians, card-carrying anarchists, or aging hippies. And – paradoxically, perhaps – any of these options would render us a non-player on the world economic stage for, probably, generations to come. (Not that the Chinese would mind, for instance – even though they would be the biggest loser.) We would be as ridiculous in the eyes of the world as Zimbabwe – but worse, actually, because we should have known better. Which is why, class, it's never going to be allowed to happen.

How do I know this? Simply because the Chinese and the Japanese are nobody's fools. At least in the mid term, they aren't interested in bringing our system to its knees – only exploiting it to their best advantage. I don't know about Japan, but the Chinese holdings constitute a form of blackmail – mess with them too much, and they might just dump our debt onto the market, which means we don't get to borrow any more for a very long time, which means drastic cuts to war, domestic programs... you get the picture.

And Europe isn't interested in our being thrown out of the game just yet either. For one thing, they're depending on us to help prop up their banks and failing national economies. For another thing, we're part of their empire, and although we're heading for third-world status in the distant future, they have no interest in accelerating the process. After all, a source of raw materials and manpower still has to be economically coherent and technically viable.

So – the bottom line of all this is that many of the fears expressed of late, by politicians, would-be presidents, and commentators are little more than rabble-rousing and hysteria. If you look at the Chinese – a people of infinite patience – you have to conclude that our economy is not about to collapse, despite claims to the contrary... that intentional severe inflation isn't in the cards... and certainly that no one is about to cancel the debt. That would be the most foolish thing of all, because it would end the enslavement of the American people to Europe and to much of the rest of the world... and that state of affairs is making way too many people happy for anyone to want to change it.

(Footnote: An economist recently noted – cynically, perhaps – that “every budget is a balanced budget”. In other words, if you can make up for the difference between revenues and expenditures by borrowing, then you've balanced the budget. Your only worry then is how to service the debt (i.e. the loans) and how to, eventually, pay off the debt. Our national debt can never be paid off – and that's just the way everyone else (Europe, China, etc.) likes it, because it keeps us dependent, obedient, subservient, and enslaved. (Think of what would happen to the credit card companies if everyone paid off all of what they owed every month. They'd all go out of business.) The risky part these days is not in the area of paying off the debt, which is impossible, but in servicing the debt – i.e. in paying interest, which we are able to do at this point. But when things get to the point where we can't even do that, then there's going to be trouble. (Think again of a credit card holder who can't even make the minimum payment.))

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