U.S. Debt Repudiation – an extreme scenario with endless implications
You may be watching with some wonderment the endless ability of the United States Government to write checks for trillions of dollars. A government already bleeding trillions of dollars is signing up to pour billions into banks, rogue counter-party insurers, car companies, people who bought too much house – all while supporting two nation-building wars and the rest of its mundane obligations like building roads and schools.
Forget the $1.75 trillion Obama will add onto the debt sinkhole of past president, just cast your eyes to what financial obligations lie ahead. Boomers. Retiring. Healthcare. I’ll stop there.
How could any government possibly pay back the interest, much less the principal, on such a debt. If you start examining the numbers, ignoring the fearsome quantity of zeros involved, you might think it will be like any average person and their credit card bill. Except, imagine that a single person has $80,000 of income, and $960,000 in credit cards – there is virtually no reasonable scenario in which the income will catch up with the monstrous debt obligations.
When it’s an individual, we call that bankruptcy. The courts step in to say, “Look, this person may have been honest about his intention to fulfill these obligations, but now we judge that it will never actually happen. And it’s neither reasonable nor moral to obligate this individual forever. All the debts are converted, it’s over.”
When a nation does the same thing, evidently it is called debt repudiation. I had never heard of this term until recently. Energy analyst Gregor MacDonald is writing about this cogently and often these days:
For example, we now know that an industrial depression will collapse tax revenues to Washington. This is already in the pipeline, as States from California to Kansas cannot even issue their own tax refunds. So the first path to repudiation comes from a collapse of GDP.
We also know that flagrant monetization will not be allowed to go on forever. That too is in the pipeline, as the FED has expanded outright non-sterilized purchases of financial assets. They have backed-stopped trillions in assets already with Treasury lending, but have since moved on to outright purchases. It’s likely that any month now they will start classical monetization of Treasuries. The FED has told us so. Thus, the second path to repudiation will come via quantitative easing, and inflation.
Let us begin to entertain scenarios in which the United States walks away from its debt obligations to China and the Middle East. Bankruptcy is a renegotiation of terms; there seems to be a decreasing chance that our financial terms of the past few decades will stand. This seems awfully dire a scenario, but I think that open-minded analysts should open themselves to what this means.