Then The Gods of the Market Tumbled...

For those of you who didn't see the article in the Financial Times yesterday (and, I'm sad to say, I can't provide you with a useful link because FT nukes their content after 24 hours, except for subscribers), the U.S. government is in danger of losing its Triple A credit rating for the first time since it was originally assessed on U.S. government debt in 1917. With all of the other economic statistics barreling out in the mainstream U.S. media about unemployment, the U.S.'s credit rating may not seem like an extremely important factor, yet it is perhaps the most critical indicator that the 70+ year ponzi scheme that the federal government has justified with smoke, mirrors, and most importantly an ignorant voting public, is finally showing signs of cracking.

Having a Triple A credit rating means that the U.S. can borrow money at extremely favorable interest rates, primarily because it means that the risk of non-repayment is very low. A reduction in that credit rating by the actuarial gurus would mean that those financial wizards believe that there is an increased risk that the U.S. government might default on its debt. Fortunately, the credit rating has been affirmed, for now. But that there was a question is, in an of itself, a worry.

The United States is in uncertain fiscal territories. Those who say it is on the "brink of disaster" are perhaps sensationalizing things. The likelihood of a massive meltdown is quite small. After all, the U.S. is a $15+ Trillion economy, meaning it can withstand substantial shocks and not fall into some sort of precipitous decline. However, there are real risks on the immediate horizon. The U.S. currently has a national debt that is

with an additional $75 Trillion in long-term unfunded liabilities in the Social Security and Medicare accounts. With the Baby Boomers retiring, the specter of those bills coming due should haunt actuaries and accountants not only of the people responsible for America's check book, but also America's creditors.

As proof that I'm not just making this stuff up, I highly recommend you watch David Walker, the U.S. Comptroller General (Chief Accountant) talk about the crisis the country is facing (this video is a bit old, so the numbers are lower than they are today):



America's likely comeuppance for its fiscal malfeasance will be in the form of a gradual decline. Our international creditors will start charging higher rates for borrowing money, and our annual deficit will begin an even greater uptick as we maintenance the debt. Social Security and Medicare will bleed dry the current taxpayer, and the federal government will be faced with a situation where they simply cannot raise taxes any more and simultaneously dread the political disaster of non-payment of benefits to the highly motivated voting populace that is the elderly. So they will do what every government since the beginning of man has done in such a crisis: print more money. It's much easier today than it was a hundred years ago. The computers at the Federal Reserve can effortlessly create fiat money ad infinitum.

Prices will begin to go up, and the Dollar will continue to slide. And it will keep sliding and sliding, prices will keep rising and rising, until one day the world decides to stop holding their reserves in dollars. This is already beginning. It will continue.

And then things will get really good. We will experience something not seen in our lifetimes: hyperinflation. Prices will skyrocket by the minute. Americans have forgotten how bad this can really be. Russia experienced hyperinflation after the fall of the Soviet Union, and it was said that people preferred buses to taxis because you pay at the beginning of a bus ride and at the end of a taxi ride, and by the time you got to where you were going, the prices would have doubled, so it was advantageous to pay at the beginning. Think this can't happen in America? Continue to ignore history, then.

Eventually the hyperinflation will burn itself out. People will stop spending except on basic necessities. The rest of the economy will collapse and then prices will plummet as fast as they went up--only this time, nobody will take the greenback seriously. The people will begin to resort to hard currencies as the only trustworthy method of payment. "If you can't pay me in silver or gold coins, you aren't buying anything from me" will become a commonplace phrase.

This entire cycle: hyperinflation followed by hyperdeflation is what economist Ludwig von Mises called a "Crack-Up Boom." It is a scenario that seems impossible in our world of government salvation of all of our problems--but that is the trouble. It is the government salvation of our problems that has led to our ultimate demise. As the saying goes "all is not gold that glitters."

Unfortunately, this problem exists already--even without new entitlement programs. And in a year when it seems that everybody is rushing toward "Universal Health Care" and "Universal Health Insurance," which is just code for "Taxpayer-funded health care" that its advocates ignore what an extraordinary exacerbating effect it will have on the present crisis.

I think it would be great if everybody could have health insurance--but I'm not willing to risk the existence of the republic for a few years of health coverage for all. It is simply too high a price to pay.

As people go to the polls in the primaries and in November, it is imperative not only that we pressure all of the candidates to take our fiscal crisis seriously, but also that we vote for candidates who are tough enough to withstand the mounting political pressure to fix our short-term health care problems with new entitlement programs and as a necessary adjunct to those programs, more unfunded liabilities. We cannot have our cake and eat it too. And if we continue down the present path, there won't be any cake at all.