The economic condition of the country continues to decline toward its rendezvous with an, as yet, unknowable catastrophe. As economic and political matters become more desperate, so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation, it will occur via a direct repudiation of obligations or a quasi-surreptitious one like the hypothetical one presented in this article…a look (not a prediction) at a series of not improbable events that could develop [and which] would change our economic world overnight. Viewed from this perspective, I don’t think such a move or something approximating it is out of the question. Words: 1300
So writes Monty Pelerin (www.EconomicNoise.com) in edited excerpts from his original article* originally posted on mises.org entitled Desperate Economic Action Ahead?.
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Pelerin goes on to say:
A Possible Economic Apocalypse Outlook for America
The country has officially been in economic recession since the end of 2010. Many believe that it never recovered from what began in 2008. The word depression is now commonplace. Trust in Congress has fallen to single digits. Similarly, government reports and statistics are increasingly mocked by the public. The media is likened to Pravda because only government-speak is allowed. Distrust, despair and fear are everywhere.
Official unemploymentnumbers approach 14%. Unofficial estimates of unemployment range from 30 -35%. There are no signs of a turnaround in employment.
The Dow-Jones averagehovers around 4,500.
Official GDPhas been declining for four consecutive quarters. Independent analysts estimate the true numbers have been declining for two years.
Tax collectionscontinue to dropwhile Federal spending accelerates.
The rate of foreclosureshave doubled…and personal and corporate bankruptcies have reached levels thought impossible.
Major companies have leftor announced intentions of leaving the U.S. to avoid the confiscatory taxes and regulations.
College students, unable to find jobs, are emigrating to more favorable economies.
California, Illinois and several other states are in bankruptcy court as are thousand of municipalities….
Welfare and unemployment checks are two months behind…
Social Security checks and Medicare reimbursements are delayed.
Some private pension funds have reduced their payments by 10 – 25%.
Hospitals and doctors refuse to see Medicare patientsuntil Federal reimbursements, already eight months behind schedule, are paid.
Public unions across the country are on strike. Large areas are without teachers, police, firemen or hospital staff.
Food stamps are being rejected at grocery stores because of slow reimbursement and government default risk.
Martial law has been imposed in several citiesto counter rioting and looting.
Isolated runs on banks have occurred. Mattress-stuffing is considered less risky than zero interest returns from banks.
The dollar is being rejected by local merchants around the world.
Oil is priced in a weighted basket of currencies of which only 20% represents dollars.
Foreign disinvestment in Treasuries has been acceleratingas a result of trade wars, concerns of default and the desperate need for funding at home.
Gold is selling at $2,800 per ounce.
The economy continues to deteriorate despite QE on a scale not even Paul Krugman would have recommended….
The deflationary spiral continuesdespite incredible money-creation. Banks continue to add more excess reserves. Creditworthy borrowers refuse to borrow. People and businesses everywhere have hunkered down, waiting for the next shoe to drop. Many withdraw funds from the banking system in fear of its collapse.
The Possible (Likely) Emergency Measure
It is against the above economic backdrop that the President of the United States Joe Biden (in office for six months after former President Obama resigned “to spend more time with his family”) appears, along with Treasury Secretary Chris Dodd and Fed Chairman Barney Frank, and issues the following short, terse message:
The Federal Government, as a result of our national economic emergency, will be recalling all U.S. dollars effective immediately. All will be replaced with new currency known as the JohnLawDollar. Each old dollar will be exchanged for three JohnLawDollars. Amounts in checking accounts and savings accounts will automatically convert by tomorrow at 10 AM. Currency in circulation must be taken to a bank and converted within the next 48 hours. Dollars in foreign countries will have 72 hours to convert. All old dollars will be unredeemable and no longer legal tender after the deadlines. All contractual obligations will be honored in JohnLawDollars.
This action is necessary in order to revive our economy from a downturn nearly as severe as the Great Depression. Your new dollars are triple what your old dollars were. With your larger amount of money, we encourage you to go out and buy stuff, lots of it. Your cooperation will revive the economy.
The Intended Solution – and Reality – of the Emergency Measure
The announcement represents:
a (undeclared) U.S. default on 67% of its contractual obligations – including Treasuries, Social Security, Medicare and welfare payments. All debt has been reduced by 2/3s in value. The debt problem (public and private) is what is killing the economy. With one short proclamation, the debt problem has been reduced dramatically.
a tripling of the money supply which will:
eventually triple prices and wages,
cause home prices to soar while mortgage obligations remain fixed and payable out of incomes that will be three times what they are now.
The government will have cut its obligations dramatically and will now be able to pay its bills. The government’s gain will come at the expense of Social Security, Medicare and welfare recipients. Borrowers gain only what lenders lose….Only the amounts “stolen” from foreign investors might be claimed to help the U.S. The rest is nothing more than a redistribution of wealth.
The Likelihood of Such An Emergency Measure
Many believe that the government would never do such a thing. The reality is that this has been their proposed solution for the past couple of years. It is exactly the policy they have tried to implement. There are only two differences between the current policy and the hypothetical one – effectiveness and timing.
Fed Chair Ben Bernanke has clearly been trying to inflate the economy. He and other supposed experts regard inflation as the way out. It is only Mr. Bernanke’s ineffectiveness…[that] we don’t have inflation. The hypothetical measure is nothing more than the preferred strategy compressed in time. The effects, other than timing, would be identical. Lew Rockwell’s thief analogy is appropriate. What is the difference between a thief that breaks into your house every night and steals a little versus the one who backs up a moving truck and takes everything? Eventually you end up with an empty house. Only the timing differs….
The political class’ survival is at stake. Eventually anything that extends their rule will be tried. It is not concern for you or the economy that is driving policy, but the preservation of power of an increasingly wounded power elite. Their survival is now driving policy. Unfortunately what benefits them is generally harmful for the economy….
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Nothing discussed here or tried by the Administration will solve the economic problems of the country. What I have suggested is what I think could happen. It is not to be confused with good economic policy. Both the hypothetical measure and the more conventional inflationary strategy will lead to hyperinflation.
Inflation is not an economic event. Short of an inept Central Bank, inflation is always a political event. It is never a solution to an economic problem. It is employed out of desperation. When economic and political problems are intractable, the political class is apt to do anything to retain power.
Protect yourself, your family and your wealth in that order. Do not expect any help from Washington. The political class is not your friend, especially when their survival is at stake.
Editor’s Note:The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://mises.org/community/blogs/montypelerin/archive/2010/08/10/desperate-economic-action-ahead.aspx (Monty originally posted this on American Thinker. Monty Pelerin is a pseudonym derived from The Mont Pelerin Society. Friedrich Hayek, Nobel laureate in Economics in 1974, was the founding father of the Mont Pelerin Society.)