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Posted: 6/16/2009 11:30:39 AM EST
I am not an economist or anything, and I might be way off here, so somebody please check this and see if my understanding of the situation is correct:

We don't "do" balanced budgets because, up until recently, it's been so easy to borrow money and pay tomorrow for the neat stuff we wanted today. The reason that it was so easy is because the US had a strong military, a stable government, a vibrant economy, so we were expected to always be able to repay and there was little apparent danger that something bad would happen and we would go broke. Because of this we didn't have to offer much of an interest rate in order to sell our debt, people would come out of the woodwork to buy it because inflation was low (so the value of the dollar wasn't severely eroded) and it was considered massively safe. It's as if the bank was offering to lend you $100,000 today if you repaid $101,000 twenty years from now, easy money, lot's o' good stuff I can do with that, why the hell not borrow?

This continued until we had a lot of debt. And even at very low rates of interest, repaying that much debt becomes burdensome. But not so bad... as long as the economy kept humming along, generating tax income, keeping lender confidence high, putting plenty of cash into the global system that needed to be parked somewhere safe, like US debt. So the national debt doubles in 10 years, to about $11 trillion last year.

And then, crisis, the economy isn't humming along, it's on three cylinders and shuddering as the latest bubble fails, spouting fluids and smoke. Initially, it's all good, investors flee the crashing stock markets for the safety of US bonds. But then the investors realize: 1) Tax receipts suck 2) The Fed is slashing interest on debt to make borrowing from your bank cheaper (to stimulate the economy, but returns on bonds are less) 3) Existing debt is damned huge 4) The administration plans to borrow it's way out of the recession and pump money into the economy to keep it alive while existing assets collapse. The federal government goes through a spending spasm to the tune of around $4 trillion plus another $8 trillion in debt guarantees (which they're not actually on the hook for unless they let the banks fail) to prevent a systemic banking/economic collapse. Cash poured into the economy spells inflation, which, coincidentally, makes US debt easier to repay. Additional social programs and bailouts are announced with an estimated deficit of $10 trillion over the next ten years, and that's probably low balled significantly. Total national debt set to rise 500%+ between mid-90's and 2019.

The investors are now poorer than they were last year, getting a lower interest rate, and suspicious that the US won't be able to repay debt without slashing its budget, which We Do Not Do, or through massive tax increases, which kill struggling economies. Both of these get politicians fired, so that's out. The only alternative to slashing services or raising taxes is to inflate your way out of the debt by making it worth less or even worthless. Money can be pumped into the economy and inflation does its thing until existing debts aren't worth what they were, screwing the bond holders.

The investors can see this coming, so they've stopped buying bonds at low interest rates. The Feds are making sure the bonds sell and that money flows into the coffers by buying them themselves with money created out of thin air (quantitative easing), which is wildly inflationary, which really drives away investors as it appears to validate their fears.

So, at this point we can't sell bonds at low interest rates for actual money because the investors are wary. We can't increase the interest rate because it will kill private lending even deader than it is and hammer an economy that's already half-bled out. We can't reduce federal spending because politicians are supposed to be employed for life, it's the law. We can, apparently, increase taxes if they're sneaky enough, redistributive enough, or target certain despised groups, but that harms economic recovery and can't possibly cover the shortfall. From the government's POV, the only escape is miraculous economic recovery or massive inflation. It's a guess which is going to happen, but not a difficult one.

OTOH, not even government spending has kept up with the rate of wealth destruction, so deflation is a real concern. If they stop borrowing and spending too early, deflation will kick our asses by suppressing consumer spending until the economy slowly recovers or we run out of wealth to burn.

Best case scenario, they quantitative ease just enough (like stopping a hydroplaning bus on a dime), the economy recovers naturally, and we're stuck with a $25 trillion-ish national debt by 2015, but can still barely make the payments thanks to reduced services and higher taxes, standard of living drops a bit to something near the current average European level. Investors buy enough debt, satisfied that a valuable lesson has been learned by all, that the lights stay on. But more likely, the economy will continue being fucked up by political do-gooding and outright theft, we'll significantly undershoot or overshoot on the QE, and then hurtle, screaming and on fire, into an economic canyon of great depth as the dollar crashes, replaced by a new reserve currency, and prices for gas, food, energy, etc. etc. go stratospheric. Third world America, or at least 2 1/2 world.

Is that a reasonable summary, or am I screwed up?
Link Posted: 6/16/2009 11:38:40 AM EST
I think you nailed it. Who did you plagiarizer?
Link Posted: 6/16/2009 11:43:26 AM EST
Basically its like this:

Our entire monetary system is a huge Ponzi scheme. As long as we have continued growth, we can pay dividends to investors with new investments. Once the growth stops, the scam is revealed. That is how Bernie Madoff got shut down, and where the economy is at this moment. No one will invest any money into a system they have no confidence in.

Read "The Creature from Jekyll Island".
Link Posted: 6/16/2009 11:52:29 AM EST
Rainbows and all kinds of happy shit–––––––––-––––––––––––-–––––––––––––––––––––––––-–––––––––––––– Us –- Totally F'ed


I'm pretty sure this is where we are currently.

-X
Link Posted: 6/16/2009 11:53:39 AM EST
Originally Posted By Black-X:
Rainbows and all kinds of happy shit–––––––––-––––––––––––-–––––––––––––––––––––––––-–––––––––––––– Us –- Totally F'ed


I'm pretty sure this is where we are currently.

-X



LOL! Yup...

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