“Sovereign debt crises happen suddenly. One day, a country is paying normal interest rates and has full control over its fiscal and monetary policy. Then, investors lose confidence. Within days, the country has collapsed, and within weeks the savings of the majority of its people are wiped out, as the government either defaults or radically devalues its currency.
The election is not the source of my paranoia. I think that Obama is more likely to have advisers who understand the concept of currency crises.
What has me paranoid is the enormous surge of debt issuance that is coming. If enough international investors decide that they need a large risk premium to compensate them for funding this debt, we could find ourselves with a lot of Treasury bills to roll over in an environment where interest rates are 10 percent or more. The government will not be able to afford to pay those rates, and so something drastic will have to be done.
At that point, what are the government's options? Sharp spending cuts? My guess is that will be unthinkable (we might still be in a recession, after all). Print money to pay the debt? My guess is that option will not look attractive politically.
That leaves the option of declaring a national emergency and enacting what is known as a wealth tax or a capital levy. The idea is you undertake a one-time confiscation of assets and promise never to do it again. You hope that this has zero adverse incentive effects but brings in a boatload of money.
Only a relatively small portion of the population will be affected--and even they can be persuaded that the alternative is riot or revolution. So it can be the least bad alternative from the standpoint of political survival.”
Arnold Kling, “Why I am Paranoid”, EconLog Blog (6 November 2008).
http://econlog.econlib.org/
Arnold Kling is a noted economist who has worked for the Federal government and as a professor at several universities. He holds a Ph.D. in economics from the Massachusetts Institute of Technology, and worked as an economist in the Federal Reserve System from 1980 to 1986 and at Freddie Mac from 1986 to 1994. He is a founder and co-editor of EconLog, a popular economics blog that reflects Libertarian thinking.
Here are some figures related to the public debt of the United States. At the end of September the total national debt of the United States exceeded $10 trillion, or approximately $33,000 for every man, woman and child in the country. Of this amount, somewhat more than half, $5.8 trillion, is debt owed to the public (states, corporations, individuals, and foreign governments), the rest being held by government agencies (e.g., the Social Security Trust Fund and other government-controlled accounts). The figure for the national debt does not include unfunded Social Security, Medicare and Medicaid obligations, which are estimated to be some $60 trillion. Note that these estimates also do not include any debt incurred during the month of October and to date in November, months in which the U.S. government assumed the obligations of Freddie and Fanny (~$5 trillion) and has been spending hundreds of billions like a drunken sailor, and if the rhetoric coming out of Washington is any indication of the future, the sailor thinks the party has just begun.
The external debt of the U.S. is that portion of the national debt owed to foreigners. Approximately 25 to 30 per cent of the total debt, around $3 trillion (not counting the Freddie and Fanny obligations owed to foreigners), is in the hands of foreign nationals or foreign governments. It is difficult to ascertain how much of the debt is held directly by sovereign wealth funds, that is, held in state-owned investment funds under the control of other countries’ governments or their central banks. It is likely that it is a high percentage, approaching 50 per cent.
The risks to the United States of its external debt is three-fold. First, even if nothing extraordinary happens in the next few years the borrowing demands of the Federal government are expected to be huge. Much of the financing must come from foreign investors, who have expressed an increasingly unwillingness to lend. To entice them to do so, a higher interest rate will no doubt have to be paid on any new debt and any rollover debt, raising debt service costs greatly, even if it doesn’t create a crisis. Second, much of the debt is held by countries that -- how may I put it politely? -- do not hold the United States of America in highest regard and indeed may not have this country’s interests and welfare as a high priority on their national agenda. Indeed, much of the debt is held by countries that wish us the worst and we are now vulnerable to decisions they make and therefore we must be sensitive to their reaction our decisions on a host of foreign policy questions. And Third, financial crises can occur suddenly and without warning and for completely unexpected reasons. As we have seen in recent months, a crisis in one market may set off contagion to other financial markets, and credit everywhere dries up. Foreign exchange markets and prices of foreign assets are far more volatile than domestic markets, and simply stated while a crisis cannot be predicted we can say if it occurs it will be extremely bad.
Dr. Kling is noting a possibility that has been mentioned many times in Tdjs. The United States has placed itself in a very difficult position and made itself very vulnerable to events and decisions by its adversaries over which it has no influence. We can only pray that the foreign governments now controlling our fate realize that it is not only this country that will suffer if the dollar collapses and the U.S. is forced to take extreme measures to pay its debts.
The American people should ask how they allowed themselves to be put into this position, and, more importantly, how much sacrifice they are willing to make to eliminate the danger that now surrounds us.
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