A Positive Approach to a US Government Default

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Who can honestly say that he is not enjoying the show?

Clowns to the left of us, jokers to the right…it’s fun, isn’t it?

Yesterday, the Dow fell and gold rose above $1,600 to a new record high. The euro fell, but against the dollar it is still more than 50% higher than it was when it was introduced 10 years ago.

In Europe, the world’s leading bankers and financial policymakers try to figure out how to avoid doing what comes naturally – going broke.

And in America, politicians scramble to raise the debt ceiling level before it is too late.

The big question is: who will default first? The Europeans? Or the Americans?

Larry Summers, former US Treasury Secretary, warned on TV that failing to raise the debt limit would be worse than after the Lehman bankruptcy in 2008. Ben Bernanke told Congress the same thing.

In Europe, the IMF and the rest of the financial elite have the same message. Don’t let Greece default, or there is a serious risk of “contagion,” and financial catastrophe. Larry Summers even crossed the ocean to give bad advice to the Europeans:

“No big financial institution in any country [should] be allowed to fail.”

On both sides of the Atlantic, the situation is about the same. The geniuses and scam-artists who run the big banks want to keep the honey pots open as long as possible. But there are pressures – mostly from the middle classes, who feel they have been ripped off – to put on the lid.

In Europe, the Germans resist giving more money to the spendthrift Greeks and Portuguese. In America, Tea Party activists want to bring an end to Big Government by cutting off its source of funds. They want to hold the line on the debt limit. Many would be happy to see the nation default.

And here at The Daily Reckoning, we stand with the Tea Party and the Germans. We’d like to see the US government default. Why?

  • Because the feds have already done enough damage with their borrowing; it’s time they lived within their means…
  • Because we already have enough zombies, supported by borrowed funds…
  • Because it will be less painful to stop the debt build up now than later…
  • And because we just want to see what happens when the zombies run out of fresh meat.

Finally, at least some people in Congress are getting serious about cutting spending.

WASHINGTON (AP) – One of the Senate’s staunchest budget-cutters unveiled Monday a massive plan to cut the nation’s deficit by $9 trillion over the coming decade, including $1 trillion in tax increases opposed by most of his fellow Republicans.

The plan by Sen. Tom Coburn, R-Okla., is laced with politically perilous proposals like raising to 70 the age at which people can claim their full Social Security benefits. It would cut farm subsidies, Medicare, student aid, housing subsidies for the poor, and funding for community development grants. Coburn even takes on the powerful veterans’ lobby by proposing that some veterans pay more for medical care and prescription drugs.

Coburn would also eliminate $1 trillion in tax breaks over the coming decade, earning him an immediate rebuke from Americans for Tax Reform, an anti-tax organization with which Coburn has had a running feud. He would block taxpayers from claiming the mortgage interest deduction on second homes and limit it to homes worth $500,000. He would also ease taxpayers into higher tax brackets more quickly by using a smaller measure of inflation to adjust the brackets.

Coburn would cut $1 trillion from the Pentagon budget over a decade. He would block military retirees from the Tricare Prime health care plan, the option with the lowest out-of-pocket cost, saving $115 billion, and he would raise the prescription drug co-payment under the program, as well as require higher out-of-pocket fees. He also would reduce the fleet of aircraft carriers from 11 to 10 and Navy air wings from 10 to nine.

“I have no doubt that both parties will criticize portions of this plan, and I welcome that debate,” Coburn told reporters. “But it’s not a legitimate criticism until you have a plan of your own.”

This fellow, Coburn, has the right idea. Throw away the scalpel. Get a chain saw. He’d raise the Medicare eligibility age to 69…and cut $1 trillion out of the Pentagon budget. He needs a much bigger chainsaw…but at least he’s on the job.

And more thoughts…

Germans must have a race memory that makes them fear debt and inflation. They’ve suffered from both – especially during the war period, from 1914 until 1946. Even then, their problems were far from over. A third of the country was occupied by the Soviets and then run by communists for another 40 years. They don’t want anything to do with the kind of policies that led to that debacle.

War reparations, imposed on them by the French, British and Americans after WWI, bankrupted the nation and turned the population into bitter enemies of their Western neighbors. Then, the reparations were the proximate cause of hyperinflation of the early ’20s, which destroyed the middle class. Destitute and sour, the riff raff of Germany was easily drawn to extremists. The Nazis promised that their central planning would make Germany healthy and proud. The Bolsheviks promised their central planning would make Germany as successful as Soviet Russia. Scarcely 2 decades after the Armistice, German troops were on the move again, leading to another 5 years of war.

Today, sovereign debt takes the place of war reparations. A generation of taxpayers in Greece, Ireland and America is supposed to bear the debts of their spendthrift elders.

And once again, clouds gather and the sky darkens. Consumers close their wallets, just as they did in the ’30s. Auto sales are running 28% below their level of 10 years ago. Home appliances are selling as this time 20 years ago.

Housing is down a third…and keeps dropping.

Unemployment, properly measured, is at Depression levels too.

And this just in: a drought in the South threatens to turn the region into a giant Dust Bowl – just as in the ’30s.

*** “France’s system of social support is too generous,” said a guest last night. “It attracts the wrong kind of immigrants. They don’t want to work. They just want to take advantage of our welfare system.”

Today’s debt problems in Europe can be traced to a cultural misunderstanding. Germany’s low interest rates work for Germans, more or less. They save. They work hard. They have a cultural bias against waste and idleness.

But offer the same interest rates to Irish property developers…or to the government of Greece…and pretty soon you have problems. The cultures are different. Germans may be reticent about borrowing…but not, apparently, the Greeks!

Different groups respond to incentives differently. By trial and error, they develop systems of government and banking that work for them. Some groups value leisure and larceny far more than others. Some place less importance on wealth. Many people disapprove of working too hard…some regard it as a sign of failure and incompetence.

It is all very well to give the Westphalian landser a comfortable safety net, in other words. His pride, his status, and sense of right and wrong will not permit him to use it – unless he really needs to. But give the same safety net to other peoples, and soon they are lolling about in it…happy with the leisure and the standard of living it affords them.

And then, naturally, the net gives way under the weight of so many shiftless malingerers.

Regards,

Bill Bonner
For Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. Good article as always, although it is debatable whether it was the WW1 reparations which bankrupted Germany. One of Marc Faber’s top 6 investment books to read (http://new.gloomboomdoom.com/public/pSTD.cfm?pageSPS_ID=4250), The Economics of Inflation by Constantino Bresciani Turroni (Bocconi 1931) was written by an Italian economist who lived in Germany in the early 1920’s and afterwards wrote a detailed study on the causes of the post-war hyperinflationary boom in Germany.

    He debunks the idea that it was due to reparations, noting that hardly any had been due by 1923, and tracing the hyperinflation and national bankruptcy back to 1914, when Germany entered WW1, took it’s Mark off the gold standard and started to print money in order to finance it’s war efforts. There were many gyrations along the way, but it took almost a decade before the parabolic consequences worked their way through the system.

    Who says history doesn’t repeat, and to quote Marc Faber himself “I will never sell my gold while I see clowns like Bernanke and Geithner in government”.

    Doomsday Dan
    July 20, 2011
    Reply
  2. Hi Bill,

    I’m a big fan of the Daily Reckoning site and the articles you write. It’s unbiased, untarnished, independent and honest in my opinion.

    I am a simplistic person and consider myself rational but rather I thrive on creative thinking and I consider the application of common sense as paramount. In fact maybe there should be a spot price for common sense and maybe it will surpass Gold’s spot price quite easily.

    My view on the Great Correction are as follows:

    To progress in this world as an individual requires climbing a ladder. The political world, high finance, corporate environment or just plain living is that in order to get to the top, we all have to climb a ladder. We study, we work, we network and for some beg, steal and borrow. Our progress within the ladder relies on other individuals to provide us the opportunity to push us to the next level and the cycle goes on until we reached the desired level.

    How does all this apply to the Great Correction? Well quite simply, it’s not that Country Leaders, Central Bankers or Regulators know or don’t know the solutions to our economic problems. With the application of common sense, I have no doubt the people in charge know what the solutions are but are unable to act on it simply because of one thing.
    And that one thing is “DEBT”. The kind of debt that is not in a monetary sense but of the sentimental kind.

    I have read somewhere that the cost of the Presidential Campaign to elect President Obama was around the billion dollar mark funded by sponsors, party supporters, etc etc. CEO’s of companies get to become the leaders of their respective companies through the support of the numerous individuals within the company.

    To cut a long story short, the people who earned the Top Jobs owe the privilege to the numerous other people who paved the way on their journey to the top.

    The leaders of our world are unable to provide the necessary solutions because their job is to pay back the debt they owe to the people who provided them the privilege. To truly lead and provide the necessary solutions requires the leaders of our world to default on their sentimental debts. Defaulting on sentimental debts has led to tarnished reputations, scandals or rather forgettable legacies.

    In support of the numerous articles and statements made on the Daily Reckoning site about Gold I particularly like the combinations of the following:

    Gold is the currency of Kings
    Silver is the currency of the Common Man

    Debt however is the currency of Slaves.

    It seems approriate that all this talk about the Gold Standard, the price of Gold is exposing the inability of our Leaders to resolve our economic issues, after all how can they, they are slaves to their debts.

    Maybe the Gold Standard should be called “The Return of the King”.

    If Gold is the currency of Kings, then the countries with the most amount of Gold Reserve will become Kings. And countries who can’t afford Gold due to their enormous debts are essentially slaves.

    But if the supplier of Gold are Gold Mining companies who are literally backed by Physical Gold and are the sole providers of the currency, then Gold Mining companies becomes more than just a business but almost like a proxy for Central Banks without the policies, money printing or politics.

    Perhaps my views can sound overly simplistic or maybe radical but nevertheless my perspective.

    Thank you for all the great articles you have written, reading the articles on the Daily Reckoning has been feeding my absolute thirst, hunger and passion for investing, financial markets and everything related to finance and the policies that shape it.

    Regards,

    Farmer B

    PS. Please feel free to offer me a job.

    Reply
  3. Should that read Westphalian burgher instead of landser?

    RandomPedant
    July 23, 2011
    Reply

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