As economic and political matters become more desperate in the U.S., so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation as the Fed’s current money-printing is attempting to do, it will occur via a direct repudiation of obligations or a quasi-surreptitious one such the hypothetical one I present in this article. Here is… a look (not a prediction) at a series of not improbable events that could develop [and which] would change our economic world overnight [ – and your financial well-being too]. Words: 1365
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) edited the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say, in part:
If just some of the following situations occur in 2012:
1. Official unemployment numbers approach 14% with unofficial estimates of unemployment ranging from 30 -35% – with no signs of a turnaround in employment.
2. The Dow-Jones average hovers around 4,500.
3. Official GDP declines for four consecutive quarters. Independent analysts estimate the true numbers have been declining for two years.
4. Tax collections continue to drop while Federal spending accelerates. The deficit is expected to exceed $3 Trillion. Federal debt exceeds $16 Trillion.
5. The rate of foreclosures double from the previous high…
6. Personal and corporate bankruptcies reach levels thought impossible.
7. Major companies leave or announce intentions of leaving the U.S. [in record numbers] to avoid confiscatory taxes and regulations.
8. College students, unable to find jobs, emigrate to more favorable economies.
9. California, Illinois and several other states plus thousand of municipalities are in bankruptcy court with many states and municipalities using IOUs for payments.
10. Welfare and unemployment checks are two months behind on average.
11. Social Security checks and Medicare reimbursements are delayed.
12. Some private pension funds reduce their payments by 10 – 25%.
13. Hospitals and doctors refuse to see Medicare patients until Federal reimbursements, already eight months behind schedule, are paid.
14. Public unions across the country are on strike. Large areas are without teachers, police, firemen or hospital staff.
15. Food stamps are rejected at grocery stores because of slow reimbursement and government default risk.
16. Martial law has been imposed in several cities to counter rioting and looting.
17. Isolated runs on banks have occurred. Many withdraw funds from the banking system in fear of its collapse with mattress-stuffing considered less risky than zero interest returns from banks.
18. The dollar is being rejected by local merchants around the world.
19. The price of oil is priced in a weighted basket of currencies of which only 20% represents dollars.
20. Foreign disinvestment in Treasuries has been accelerating as a result of trade wars, concerns of default and the desperate need for funding at home.
21. Gold is selling at $2,800 per ounce.
22. The economy continues to deteriorate despite QE on a scale not even Paul Krugman would have recommended.
23. Treasury and toxic asset purchases have swelled the Fed’s balance sheet from $800 billion in 2008 to $6 Trillion.
24. The deflationary spiral continues despite incredible money-creation.
25. Banks continue to add more excess reserves.
26. Creditworthy borrowers refuse to borrow.[Bottom line:] People and businesses everywhere have hunkered down, waiting for the next shoe to drop.
… then I can just imagine what might hypothetically unfold politically and what possible (likely?) emergency measures might be imposed to remedy the situation, as follows:
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, has passed new legislation which will:
- recall all U.S. dollars effective immediately
- replace U.S. dollars with new currency known as the JohnLawDollar
- exchange each old dollar for three JohnLawDollars i. e. 1 for 3
- automatically convert all amounts in checking accounts and savings accounts by 10AM tomorow
- require all currency in circulation domestically be taken to a bank and converted at the new exchange rate into the new JohnLawDollar 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 future 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 Intented Solution – and Reality – of Such an Emergency Measure[Such an] announcement [would] represent a (undeclared) U.S. default on 67% of its contractual obligations – including Treasuries, Social Security, Medicare and welfare payments [effectively reducing] all debt…by 2/3rds. The debt problem (public and private) is what is killing the economy [and] with one short proclamation [as put forth above,] the debt problem [would be] reduced dramatically.
Tripling the money supply would eventually triple prices and wages. Home prices would soar while mortgage obligations would remain fixed and payable out of incomes that would be three times what they are now. The government would have cut its obligations dramatically and be able to pay its bills.
The government’s gain would come at the expense of Social Security, Medicare and welfare recipients. Borrowers would gain only what lenders lose…There would be no net value added. Every gain would be someone else’s loss. Only the amounts “stolen” from foreign investors might be claimed to help the U.S. The rest would be 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 as to why we don’t have inflation. The hypothetical measure [outlined above] 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.
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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. Viewed from this perspective, I don’t think such a move or something approximating it is out of the question.
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.
It is improbable that Bernanke’s strategy will gain enough traction, i.e., inflation fast enough…[and, as such,] a home-run somewhat like the one discussed becomes more likely. It will be a surprise when it comes.
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…
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.
The handwriting is on the wall: This great dollar disaster is only just beginning. Obama and Bernanke have no choice. Either they dramatically devalue the dollar over the next three years, or they go down in history as the first administration to default — to welch on the government’s debt obligations. Words: 1781
If the U.S. dollar is being devalued so rapidly, then why does it sometimes increase in value against other global currencies? It is because there are times when one particular global currency will fall faster than the others but the reality is that they are all being rapidly devalued. As the 6 charts below illustrate, the UK, the EU, Japan, China and India, as well as the U.S., have all been printing money like there is no tomorrow. Unfortunately, this is a recipe for a global economic nightmare. Words: 1102
The Federal Reserve is now trying to figure out ways to boost inflation expectations… so that Americans are encouraged to spend more before their money is worth less. Unfortunately, not only will their money soon be worth less, it will literally become worthless! Words: 904
There are now countless warning signs all around us on a daily basis that the U.S. is headed for a complete societal collapse. Words: 573
The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression… [at which time] a $100 bill in the United States will become worth more as functional toilet paper/tissue than as currency. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement. The article is long but well worth the read. Words: 3565
If our assessment is correct, over the coming years, stocks, precious metals, commodities and real-estate will appreciate in value versus paper currencies. Furthermore, on a relative basis, we expect precious metals and commodities to outperform all other asset-classes. Conversely, we anticipate that cash and fixed income instruments will probably turn out to be the worst assets to own over the next decade. Words: 869
It is an old saying that the “road to hell is paved with good intentions”. Well, in recent years, that road has been changed to a super-highway! America was put on that super-highway a few years ago and right now we are traveling at break-neck speed toward the financial abyss. Words: 1132
The economy is now so manipulated by politicians, big bankers, and special-interest groups that making sense of the markets has become an almost impossible feat. Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for a stunning rise in interest rates. Words: 968
A recent research paper* by the Bank for International Settlements, entitled “The Future of Public Debt: Prospects and Implications” paints a terrifying prospect for the inhabitants of most of the developed world with deficits spiralling out of control for every western industrialized country under study and inflation a foregone conclusion as a result. Words: 1128
Countering Krugman’s argument that today’s low interest rates show that no one is worried about lending money to us and, therefore, that we should borrow and spend our way to prosperity, Ferguson argues that today’s interest rates are irrelevant. When countries get into trouble, he says, they get into trouble quickly – the way Greece and…
By now nobody should have any doubts as to just how disturbing America’s fiscal debacle is. For those naive and innocent few who still think there is a Hollywood ending with a pot of gold awaiting everyone at the end of the rainbow, we present the following “10 essential fiscal charts” from the Pew Policy Institute.