Saturday, July 23, 2011
Debate over the debt ceiling has reached a fever pitch in recent weeks, with each side trying to outdo the other in a game of political chicken. If you believe some of the things that are being written, the world will come to an end if the U.S. defaults on even the tiniest portion of its debt.
The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default wonâ€™t take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.
Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.
We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.
This article was posted: Saturday, July 23, 2011 at 3:44 am