Monetizing Our Way to Bankruptcy

I reported last night on ACT! for America’s legislative briefing that took place at the Capitol on June 23rd. During a break between speakers that morning I happened to encounter a well-known Republican congressman in the corridor, and had a brief chat with him.

This congressman is a real fiscal conservative. I had met him on previous occasions, and highly respect him. He’s been in Congress for a while, but has managed to hang on to his principles. If the rest of Congress were like him — even if just the rest of the Republicans were like him — the country might not be careening towards financial disaster.

During the presentations that morning several speakers had mentioned the national debt, and how crucial debt reduction is for our national security. They cited the current figure of $14.1 trillion, emphasizing this unacceptably huge accumulation of debt.

And it is unacceptably huge. But the actual national debt is far larger than the official figure. Even if we assume that we won’t borrow more money — which we cannot avoid, since the sluggish economy and depleted tax revenues will force us to raise the debt ceiling just to meet the interest payments on the existing debt — our current debt is much higher. If Congress and the president were honest, they would add in our obligation to the Social Security “trust fund”, which now contains nothing but IOUs. If those were included, how many more trillion dollars would be added to the national debt?

And then there are the unfunded federal pensions, the expected steep increase in Medicare and Medicaid (with or without Obamacare), the possible future bailouts of bankrupt states like California, and on and on. The actual debt is many trillions of dollars higher than the official figure, and getting higher every day.

With all that in mind, I approached the congressman, shook his hand, and told him how much I appreciated his work. I emphasized that the criticism I was about to voice was not directed at him.

Then I said:

“They’ve been talking about the national debt in there, and how it has to be reduced. But it’s grown so large now that it can’t possibly be paid off.

“No matter how much we raise taxes or cut spending, there’s no way it can be done, not without inflating the currency.”

His facial expression became very somber and serious, and he replied:

“You’re right. We’re going to have to monetize the debt. There’s no other way.

“It’s a terrible thing. It will be disastrous.

“God help this country.”

Then he had to go, and I had to go, so we shook hands again, said our goodbyes, and parted company.

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I’m an amateur on economic issues, and also a paranoid crank when it comes to the Fed, the currency, and the national debt. I realize the extent of my crankdom, however, so I refrain from buttonholing strangers on the topic, and tend to rant and rave only to my wife and close friends.

So this was a rare validation of my own idiosyncratic conclusions. A congressman of some years’ experience, who sits on various committees that oversee fiscal matters, says without hesitation that the national debt will have to be monetized.

The magnitude of what this means to the future of United States of America is difficult to imagine. There is no historical precedent for what is about to happen, so the consequences can’t be fully predicted. There has never been a single world reserve currency before, and now it is on the verge of being massively inflated.

Anyone who says he knows what is going to happen is pulling your leg.


Since our banknotes can no longer be redeemed for anything of permanent value, the purchasing power of the dollar depends entirely on how much faith our creditors place in the dollar reserves they hold. That faith is rapidly disappearing: the Chinese have divested themselves of about 95% of their treasury notes. In other words, our biggest creditor has realized that we can no longer be expected to make good on all our debts, and is prudently refusing to loan us any more money.

Without enough new lenders, the only solution for us is to monetize the debt, a process which used to be known as “printing money”. In an age of universal electronic transactions, however, it is no longer necessary to crank up the printing presses at the Treasury Department. We have much more creative ways to increase our dollar holdings, and “quantitative easing” is simply the latest strategy. Now that QE2 has been retired, our government will no doubt come up with some ingenious new stratagem to acquire more cash without access to additional reserves having actual value.

Based on our level of debt, the dollar must lose 80%-90% of its current value, and possibly more, before the national debt is paid down to a reasonable level. This process has already begun, but it’s hard to recognize, because the three other major world currencies — the pound, the euro, and the yen — are also being inflated. If you want to see signs of the coming inflation, watch the prices of silver and gold. Or consider the value of the Norwegian kroner and the Swiss franc, which are rising against the other currencies.

Who will bear the brunt of the coming inflation?

Needless to say, the very rich will likely escape the worst of the consequences. They will hedge their assets, acquire non-perishable commodities, and retreat to safe locations where they can wait out any civil unrest.

The working poor, who live from paycheck to paycheck, will not see as much change as most of the rest of us, provided that they manage to remain employed.

People on fixed incomes — the elderly, the disabled, welfare recipients, etc. — will be hard-hit. Our government has already gamed the cost-of-living index so that the real rate of inflation will far exceed the official level that drives the annual increases in pensions and benefits.

The middle class will presumably bear a disproportionate burden. The real value of 401(k)s, mutual funds, and most pensions is likely to plummet, and the scythe of unemployment will cut down many “symbolic analyst” positions. As the purchasing power of the middle class evaporates, what will happen to the rest of the national economy, which depends so heavily on consumer spending?

Tough times lie ahead. If Iran doesn’t hit us with an EMP, our government may have to sell off a big chunk of federal real estate to the Chinese, or lease them the mineral rights to all our national parklands. Or devise some other creative last-ditch strategy that I can’t think of.

I’m not predicting when any of this will happen — I’ve learned my lesson over the last three years: the Fed and the Treasury Department can display enormous ingenuity when staving off the inevitable.

Yet it has to happen. There’s no avoiding it. The debt will be monetized.

It may occur in six months, or two years, or five years.

But the change will come — and relatively soon.