Will This Be The USA in 2012?

The economic condition of the country continues to decline toward its rendezvous with an, as yet, unknowable catastrophe. Here is… a look (not a prediction) at a series of not improbable events that could develop [and which] would change our economic world overnight. Words: 1550

So says Monty Pelerin (pseudonym) at www.EconomicNoise.com  in edited excerpts from his original article*.

[Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.]

Pelerin goes on to say:

A Possible Economic Apocalypse Outlook For 2012

The country has officially been in  economic recession since the end of 2010. Many believe that it never recovered from what began in 2008. The word depression is now commonplace. Trust in Congress has fallen to single digits. Similarly, government reports and statistics are increasingly mocked by the public. The media is likened to Pravda because only government-speak is allowed. Distrust, despair and fear are everywhere.

The Possible (Likely) Emergency Measure

It is against the above economic backdrop that the President of the United States Joe Biden (in office for six months after former President Obama resigned “to spend more time with his family”) appears, along with Treasury Secretary Chris Dodd and Fed Chairman Barney Frank, and issues the following short, terse message:

The Federal Government, as a result of our national economic emergency, will be recalling all U.S. dollars effective immediately.  All will be replaced with new currency known as the JohnLawDollar. Each old dollar will be exchanged for three JohnLawDollars. Amounts in checking accounts and savings accounts will automatically convert by tomorrow at 10 AM. Currency in circulation must be taken to a bank and converted within the next 48 hours. Dollars in foreign countries will have 72 hours to convert. All old dollars will be unredeemable and no longer legal tender after the deadlines. All contractual obligations will be honored in JohnLawDollars.

This action is necessary in order to revive our economy from a downturn nearly as severe as the Great Depression. Your new dollars are triple what your old dollars were. With your larger amount of money, we encourage you to go out and buy stuff, lots of it. Your cooperation will revive the economy.

The Intended Solution – and Reality – of the Emergency Measure

The announcement represents a (undeclared) U.S. default on 67% of its contractual obligations –  including Treasuries, Social Security, Medicare and welfare payments. All debt has been reduced by 2/3s in value. The debt problem (public and private) is what is killing the economy. With one short proclamation, the debt problem has been reduced dramatically.

Tripling the money supply will eventually triple prices and wages. Home prices will soar while mortgage obligations remain fixed and payable out of incomes that will be three times what they are now. The government will have cut its obligations dramatically and now be able to pay its bills.

The government’s gain will come at the expense of Social Security, Medicare and welfare recipients. Borrowers gain only what lenders lose. Other private contracts produce winners only at the expense of losers. There is no net value added. Every gain is someone’s loss. Only the amounts “stolen” from foreign investors might be claimed to help the U.S. The rest is nothing more than a redistribution of wealth.

The Likelihood of Such An Emergency Measure

Many believe that the government would never do such a thing. The reality is that this has been their proposed solution for the past couple of years. It is exactly the policy they have tried to implement. There are only two differences between the current policy and the hypothetical one – effectiveness and timing.

Fed Chair Ben Bernanke has clearly been trying to inflate the economy. He and other supposed experts regard inflation as the way out. It is only Mr. Bernanke’s ineffectiveness as to why we don’t have inflation. The hypothetical measure is nothing more than the preferred strategy compressed in time. The effects, other than timing, would be identical. Lew Rockwell’s thief analogy is appropriate. What is the difference between a thief that breaks into your house every night and steals a little versus the one who backs up a moving truck and takes everything?  Eventually you end up with an empty house. Only the timing differs.

As economic and political matters become more desperate, so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation, it will occur via a direct repudiation of obligations or a quasi-surreptitious one like the hypothetical one presented. Viewed from this perspective, I don’t think such a move or something approximating it is out of the question.

The political class’ survival is at stake. Eventually anything that extends their rule will be tried. It is not concern for you or the economy that is driving policy, but the preservation of power of an increasingly wounded power elite. Their survival is now driving policy.  Unfortunately what benefits them is generally harmful for the economy.

It is improbable that Bernanke’s strategy will gain enough traction fast enough. Two years have gone by and inflation is decreasing rather than increasing. Mr. Bernanke has thrown more than anyone dreamed at the problem with no results. Thus, a home-run pass somewhat like the one discussed becomes more likely. It will be a surprise when it comes.

Conclusion

Nothing discussed here or tried by the Administration will solve the economic problems of the country. What I have suggested is what I think could happen. It is not to be confused with good economic policy. Both the hypothetical measure and the more conventional inflationary strategy will lead to hyperinflation.

Inflation is not an economic event. Short of an inept Central Bank, inflation is always a political event. It is never a solution to an economic problem. It is employed out of desperation. When economic and political problems are intractable, the political class is apt to do anything to retain power.

Protect yourself, your family and your wealth in that order. Do not expect any help from Washington. The political class is not your friend, especially when their survival is at stake.

*http://www.economicnoise.com/2010/11/23/investing-part-2-factors-that-will-determine-the-future/ (Monty originally posted this on American Thinker. Monty Pelerin is a pseudonym derived from The Mont Pelerin Society. Friedrich Hayek, Nobel laureate in Economics in 1974, was the founding father of the Mont Pelerin Society.)