People, pundits, and politicians repeatedly state that the massive debts the government is creating will be paid by their children and grandchildren. I don’t think this will happen; at least not in the way most people envision.
Our government is like a drunk with an unlimited charge card. He has some income from a minimum wage job but he owes a million dollars. He cannot begin to pay back the principal and continuously adds to his debt buying things he doesn’t need with money he doesn’t have. He is totally out of control. There is nothing on the horizon indicating his behavior will change.
The charge card company is the holder of US bonds; China being the largest holder.
Eventually, US debt holders will figure out that the drunk will never pay off his loans. They will begin increasing the interest rate they charge ever higher when they roll the loans over. Moody's Investors Service has warned that the AAA rating of US securities is in jeopardy due to high debt levels. Losing a AAA rating will cause investors to demand still higher interest rates. Indeed, interest rates have recently started rising as the government is seeing reduced demand for US bonds. Paying more interest with borrowed money plus continued borrowing will add considerably to the principal making it even more impossible for the drunk to pay off his debt. Interest will consume more and more of the wages the drunk gets from his minimum wage job until there is no money left for him to support himself..
The national debt currently stands at $12.6 trillion. Medicare and Social Security are entitlements promised to the American people. They are called unfunded liabilities because the government has no plans or means of paying for these two programs. When you add Medicare and Social Security unfunded liabilities to the national debt, the total is a staggering $106 trillion. The current market value of all final goods and services produced in the US (GDP) is $14.2 trillion. The national debt plus the Medicare and SS unfunded liabilities is equal to 7 times the GDP.
Recently the Social Security system took in less money than it paid out for the first time in history. Now SS benefits must be partially paid for by cashing in the US bonds the SS system purchased over a number of years from the US government. Of course, the money SS paid for the bonds has long ago been spent by the government. Since the government has no money, redeeming the SS bonds will force it to simply sell more bonds.
The government cannot raise taxes enough to manage the debt because in would destroy the economy, lead to higher unemployment, and the public would never stand for it.
The government cannot cut services enough without creating overwhelming protests from the public. Witness the protests currently occurring in Greece and France when their governments try to reduce spending. Special interest lobbyists who finance the reelection of politicians will protect their government “benefits.” There are so many Americans receiving government handouts, significant cutbacks are politically impossible.
In the final analysis, the government will have only two options; simply print more money or simply repudiate its’ debt.
Since foreign governments own much of our debt, repudiating their claims would introduce a host of undesirable consequences. For instance, foreign governments could simply seize US government and non-government property. It is highly improbable that our government would deny payment of foreign government owned debts.
As the dollar falls in value, foreign investors whose currency has maintained its value will buy up American companies and real estate at bargain prices. We will have sold our very country on the cheap.
Printing more money was the option the Wiemar Republic took in post World War 1 Germany.
The Wiemar Republic was established in 1919 as the government of Germany following WW1. The Wiemar Republic was staggered by the huge debts resulting from war reparations. The Republic responded by printing more currency. In December, 1923 there were 500 million Rentenmarks (paper currency) in circulation. By July, 1924 total paper marks increased to 1,211 quintillion. Paper marks became nearly worthless. German citizens were using paper currency for wallpaper and actually burned it in their stoves because it was cheaper than buying coal. Civil unrest and the damaged economy caused by hyperinflation led to the Nazi takeover of Germany and the rise of Adolph Hitler.
Nobel Prize winning economist Milton Friedman said that increasing the amount of currency of any civilization throughout history has always caused a proportionate reduction in the value of the currency; inflation or hyperinflation. Price inflation always follows increases in the supply of paper currency. Most of us can remember how the US inflation of the 1970’s and 1980’s played havoc with the economy.
Simply printing more money is not a feasible remedy for our debt problems.
The only option I can see is that we could auction off government assets; maybe starting with open land and progressing as necessary to national parks and probably further. Indeed, our descendents will pay a heavy price for our allowing the irresponsible spending we are currently seeing.
Our children and grandchildren have more to fear from their government than any generation in our history. However, legitimately paying off our debt with their taxes isn’t one of them.
