May 05, 2016
Well, not in this post. Sorry. It's really depressing.
Obama's real goal in his presidency was to end the "American Century". The goal was to reduce the United States from being "the last remaining super power" to being just one nation among many, no more important or influential (or rich!) than any other. His foreign policy has been to damage our allies and build up our enemies, to try to level the playing field, and let the world know they cannot rely on us for anything from now on. His domestic policy has been to weaken our economy so that we are no longer the 600 pound canary in world trade.
And though he hasn't totally succeeded at this, he's left behind a huge time bomb that's going to finish the job in one year or ten or twenty: a $20 trillion national debt.
Debt service is no joke. Right now it's affordable but only because the Fed is keeping interest rates at 0%. If interest rates return to something like historical norms, say about 5%, the US Government will owe a trillion dollars a year just on debt service, before it does anything else.
That isn't economically possible on a balanced budget without ridiculous tax hikes beyond even the dreams of the most avaricious socialist, so it means that immense budget deficits will never end, which itself is a cascading failure since increasing the total debt in turn increases each year's debt service payments. And there will come a time when that is also no longer possible because no one will bid at the T-bill auctions. So the Fed will have to run the printing presses -- which in fact they're already doing, calling it "quantitative easing".
The Fed has actually been doing some of this for decades. When the board of governors think they need to increase the money supply, the way they do it is to create new money out of thin air, and use it to buy T-bills on the open market. But starting with the Great Recession, the rate at which they've been doing this has drastically increased. Part of the reason they did that was that they were trying to prevent Deflation, and they mostly succeeded. But now they can't stop or even crank back on doing this, and it's going to backfire eventually.
In the long run what this means is that the US dollar will collapse. The only question is how long it's going to take. And when it happens, it will complete the job Obama has begun, no matter who is president or which party is in power or what they think their foreign and domestic policy should be. America will suffer runaway inflation, and nothing can prevent it.
After which, the dollar will no longer be a "reserve currency" anywhere in the world, and international trade will no longer be done primarily in dollars, and there will be a lot of other consequences like capital flight, a total disruption of American foreign trade (both selling and buying), and, probably, political unrest. I'm not sure it leads to a revolution but stranger things have happened. It's not impossible it could lead to one or more wars.
The only thing I'm sure about is that it won't be pleasant, and for most of the population it will be more painful than the Great Depression was. The majority of Americans will go through a substantial decline in living standard.
By the way, the US government can't repudiate its debt. The 14th Amendment includes this:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
The US has to keep paying interest on the debt, and in the long run the only way that will be possible is with massively inflated dollars.
Anyway, this catastrophe pretty much can't be prevented. And sad to say, this is part of why I think this year's election isn't really as important as a lot of people do. We're already past the point of no return, no matter who gets elected.
UPDATE: So what should individuals do? Buying gold isn't any answer; that won't be liquid enough, for one thing. If we reach the "wheelbarrow of money to buy a loaf of bread" stage, there is one thing that will be liquid enough to be used as an alternative to cash.
Everyone should buy one or more guns, and in particular stock up on ammunition, and keep stocking up, faster than you are using it. When we reach the point where no one will accept $billion dollar notes for anything, they'll still accept a handful of 9 mm cartridges in barter. Because the utility and value of cartridges will be obvious to everyone in an environment where traditional law and order are breaking down.
I can see a time when that becomes the only useful currency in this country and the more boxes of it you have in your closet, the better off you'll be.
And if I'm wrong, you'll still be able to use that ammunition yourself or sell it to friends for whatever we will be using for money by that point.
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At Chizumatic, we take pride in being incomplete, incorrect, inconsistent, and unfair. We do all of them deliberately.
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