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John Wayne's Holster: Government Insolvency and Privatization
John Wayne's Holster
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Monday, July 17, 2006

Government Insolvency and Privatization

The Federal Reserve Bank in St. Louis recently published a report that some may find quite shocking. According to the report, the United States is not heading for bankruptcy. Actually, it is already bankrupt, as “it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.

How did it happen? I will have to save that one for another time.

Anyone who has been paying even the slightest bit of attention to the financial news knows there is a growing budget deficit. And it is only going to get larger as the baby boomers begin to retire and collect Social Security and receive Medicare benefits. This is going to lead to a huge fiscal gap. Current estimates state that the fiscal gap could reach as high as $65,000,000,000.00! That’s trillion – with a “T”.

According to the Fed report, that is "more than five times the US GDP and almost twice the size of national wealth".

How are we going to get out of this mess? Raise taxes? Eliminate or reduce entitlements? Cut discretionary spending? I suppose that taking these measures will help, but it is unlikely that the government will be able to implement these changes to the extent that they will have any real impact.

So there is going to be a big problem. And investors don’t like problems. Especially insolvency! Soon as they catch wind of all this, they are going to begin dumping their treasury bonds, driving up the interest rate. Can you say inflation?

The Fed is going to have to buy the bonds back to keep rates down. Unfortunately, they won’t have the money to do so. What then? The most likely scenario is that the Federal Reserve will simply print more money, further diluting its steadily dropping value, and then use this fiat money to buy back the T-bonds. Can you say hyper-inflation?

Anybody still wondering why the Fed decided to stop publishing statistics on M3 (money supply)?

What will the outcome of all this be? You can count on conservatives stepping up to “save the day”. Unfortunately, it won't be you that they are saving. The bankruptcy of the US Treasury will present a perfect opportunity for conservatives to sell their privatization scheme to a fearful and helpless public. And by privatization, we are not just talking about Social Security. We are talking everything from school and prisons to utilities to Amtrak and the FAA – things the government has no business being involved with in the first place. On the downside, the public looses in the short term.

The big beneficiaries of this are, of course, the corporations and bankers who are really running the show. Maybe its just me, but... No, they wouldn't do that. Would they?


At 7:14 PM, Anonymous Roy said...

You have certainly been busy lately! The number you cite are extremely alarming, so much so that I will reserve full comment until I have had a chance to review them for myself. I thought that our deficit was now in the hundreds of millions. I do not see how it could reach 65 trillion that quickly. But if so that would call for drastic steps in reducing that number, can you say means test social security and completely cut-off Amtrack, farm subsidies and an increase in immigration.


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