Debt deal done, U.S. rating still in question

August 3, 2011 by · Leave a Comment
Filed under: Economic News 

I guess we did something, that is for sure.  We need to get serious on this issue and fast.  People keep citing that our borrowing rates are so low and this is a good time to borrow more so you can take advantage of these “historically low” rates.  I see it like this.

Investors in United States Treasury debt are terrified about the prospects of any major disruption in the income of this asset.   U.S. Treasuries are suppose to be the par excellence risk instrument.  Everything’s risk premium is considered riskier than a U.S. Treasury.  That means there is almost no chance of default.

We are creating massive spending deficits on scales that pale even 10 years ago.  20 years ago and we are talking about spending in one year, the same amount of the whole countries existence combined.  We d0n’t seem to grasp the amount that government is increasing its spending on the U.S. economy.  I don’t think we will decide not to pay the debt holders their payments, but that government will increase the money supply when we do not have enough participates to purchase all our debt we need sold.

Sure the central bank can step in and purchase these bonds.  That is like robbing Peter to pay Paul.  At some point the Fed will have to “do” something with all this debt.   At a point the banks don’t have the assets to address these numbers so if they are involved then its basically a giveaway.  If you just cancel them, then it is still a default and that solves the question of Fed independence.

If some disaster or other event happens and it spooks investors to use some “other medium” (ie: gold) to store their primary wealth.  It will have very rapid consequences.  You will have dysfunctional Treasury auctions that will have under subscription or insanely higher interest rates to entice them to park their money.

The risk is high inflation with incomes staying the same or declining for a prolong period of time.  This will create serious unrest and that will equate into more crime and poverty.  I am not worried about a default from the United States (my country), I am worried about continuing to increase spending (increased debt) and inflating the currency to cause price inflation and really put the pinch on multi-millions of Americans that are already facing stiff headwinds.  The entitlements at some point will need to be reformed drastically and we will need to set a priority on what we are going to provide and what is our responsibility.  Create a age cutoff and people under that age will fall into the new system so that way we pay our are previous commitments and do right by our people.  Its only fair.

We should not be creating an entitlement society but rather an opportunity society.   If people had the ability to get educated and trained in the field that are needed, that would create much wealth in a portion of the population that really needs that help.  We need government sponsored entrepreneurship to help businesses to get off the ground.    We don’t need to coddle the large multi-national corporations as much as we are.  They already get large benefits from our tax codes and now political system as it is.  If you want that dynamism you speak of all the time, then you need to create an environment that is conducive to having people build things and have the opportunity to take on that risk.

We can’t have it as our mission that we need to save everyone all the time.   If we get into a state where a relatively small portion of the American population is supporting a large aging population and we don’t have support in place to help carry that burden and allow people to become wealthy, you will have some sort of revolutionary movement.  The longer we put this issue on, the longer it will take to fix the problem and work thru the pain.

Here is the article that inspired this response.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!