The Government has “Saved” us from the Government!

by Wes Bridel on October 16, 2013

in Economic Updates

It appears as I write this that the government will come to a Debt Ceiling agreement just in the nick of time.  Of course, that has probably been their plan for months (and is exactly what I would have told you months ago if you had asked what they will do).  This appears to be a favorite strategy of Pres. Obama’s although he provides no leadership in these matters, so it’s hard to say it’s his strategy.

Do you believe that crises as been averted?  Or do you see this as more along the lines of the politicians creating a crises so that they can avert one for their own political advantage.  Each can scream about what bad people the other side is and nothing of substance will actually get done.

The government is still massively overspending & printing with no real efforts to control this bleeding.  The Senate passed a bill that is now sent to the House as I write this that has a token reduction in spending, but it makes zero difference.

I’m interesting in your opinion on this, does this make you feel like Republicans are the fiscally conservative party?  I mean they did push for a spending reduction, right?  This is what they will go home and brag to their constituents about.  But it is utterly meaningless.  How can the Republicans claim to be any better than the Democrats at spending?

Would you prefer to die by gunshot or by stabbing?  I guess I would prefer to die by a fast acting gunshot then by a much slower stabbing death, but either way the end result is the same.  Republicans claim to be more conservative, but their ways are death to the economic survivability of this country every bit as much as the Democrats ways are.

Politicians are for their own power.  The details are just the show they put on to accumulate it.  At least that’s how I see it.  I heard a Republican on the radio a while back explaining that they just had to keep their heads down and make it to the next election so they could win more seats and then they would do something.  REALLY?!?  You feel the people of your district/state elected you to just sit there and wait for the next election?  Again, they are about their own power with very few exceptions.

But I heard an interesting theory about the debt ceiling debates and I want to get it out there before it’s proven wrong.  As shown above, I don’t believe this will happen, but it’s actually plausible in a crazy sort of way and so even though it appears that this is not happening, I think it’s interesting to quickly discuss.  Here’s the idea…

Is a Debt Ceiling Default Planned?

Is the Debt Ceiling Debate Staged?  Is the US Government Planning to Default on Debt Payments to Lower the US Dollar?  This is the theory I heard recently that makes sense in a few ways.  Its way too crazy to believe they would actually do this, but let’s discuss it.

First of all, there is absolutely no reason for the government to default on their debts just because they don’t raise the debt ceiling.  I know the politicians claim this and the media propagates this.  Even Jack Lew who should know better than anyone has said this recently.

But it is against the law for the them to do this and it’s the simplest matter ever to not do it.  The government brings in far more tax revenue each month than the cost of interest on the debt at today’s levels.  (This could easily change in the not too distant future, but we’re talking about today.)

It would be an easy matter for the US Government to take those tax receipts and pay the interest each month without default.  And it’s actually the law that they do this.  So the only way this would not happen is if President Obama ordered Jack Lew to not pay it.  He’s broken the law many, many times already has president since it appears he believes he is the law, so this could happen.  But it’s in no way a foregone conclusion just because the debt ceiling isn’t raised.

So why would the US default?

Well, what if they want the US Dollar to plunge so that the debt is more manageable?  What if they hold to the crazy theory that it’s good for a country to see its currency value drop because it increases exports and thus economic activity?  Let’s look at these…

1)      It’s true that there is no way that the US can pay off its debts at current levels.  But if they were to decrease the value of the US Dollar drastically…let’s say by half…then what they are actually doing is decreasing the value of the debt in real terms.  The debt is numerated in US Dollars and so if they make the Dollar worth less than the debt is worth less.

Of course, this would also completely freak out all the foreigners who own substantial portions of the US Debt.  Which could lead to a spiraling lack of confidence where they see the value drop and thus they sell more US Dollars and thus it drops some more, etc.  It could get really ugly and uncontrollable…but it is a rational way out.

2)      Prevailing economic theory amongst governments today is that a weak currency is good for the country.  This is because if the home currency value is small than foreigners will be able to buy more goods.  This in turn creates profits for multinational corporations which sell internationally and boosts the values of the biggest companies on the stock market.

What this fails to account for is that it the government choosing the big corporations welfare over that of most of its citizens.  When the value of the currency plummets than every product becomes more expensive for them to buy.  So food costs more.  Gas costs more.  And every other thing in life costs more.  If a farmer is choosing whether to sell his produce to a poor American or a rich Mexican, he will choose the rich Mexican who can pay him more.  History has shown that if you try to control this behavior with laws prohibiting export, the situation will only get worse.  So the rich, get extremely rich and the middle class gets poor in a hurry.

If you haven’t read it in a while, I encourage you to read Ben Bernanke’s long term plan from this prior blog post which talks about these ideas in greater detail and from the mouth of one of the ruling class.

As said above, I don’t believe this is going to happen, but I think it’s a good exercise to think through because the reality of the situation in America today is that something really bad has to happen.  And the politicians and bankers that are running things know this.  I’ve been of the opinion that they will keep kicking the can down the road and refuse to deal with the problem until the markets make them deal with it in a very ugly and catastrophic way.  But I also know that if a politician or group of them can figure out a way to deal with this in a way that they believe will increase their own power, than they could do something totally unexpected.  The problems are there and aren’t going away.

You can read the beginnning posts of this series at: Newsletter: QE to Infinity! …1) Gold & Silver Market Update , 2) Gold & Silver Price Management , & 3) Gold & Silver: Backwardization & Conclusion

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