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As economic and political matters become more desperate in the U.S., so will what the government considers
acceptable. If a debt default cannot be engineered via continuous inflation as the Fed’s current money-printing is attempting to do, it will occur via a direct repudiation of obligations or a quasi-surreptitious one such the hypothetical one I present in this article. 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 [ – and your financial well-being too]. Words: 1365
So said Monty Pelerin (pseudonym) (www.EconomicNoise.com) in edited excerpts from an earlier article* which became the most highly read article to appear on www.munKNEE.com in 2011.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) edited the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’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, in part:
If just some of the following situations occur in 2012:
1. Official unemployment numbers approach 14% with unofficial estimates of unemployment ranging from 30 -35% – with no signs of a turnaround in employment.
2. The Dow-Jones average hovers around 4,500.
3. Official GDP declines for four consecutive quarters. Independent analysts estimate the true numbers have been declining for two years.
4. Tax collections continue to drop while Federal spending accelerates. The deficit is expected to exceed $3 Trillion. Federal debt exceeds $16 Trillion.
5. The rate of foreclosures double from the previous high…
6. Personal and corporate bankruptcies reach levels thought impossible.
7. Major companies leave or announce intentions of leaving the U.S. [in record numbers] to avoid confiscatory taxes and regulations.
8. College students, unable to find jobs, emigrate to more favorable economies.
9. California, Illinois and several other states plus thousand of municipalities are in bankruptcy court with many states and municipalities using IOUs for payments.
10. Welfare and unemployment checks are two months behind on average.
11. Social Security checks and Medicare reimbursements are delayed.
12. Some private pension funds reduce their payments by 10 – 25%.
13. Hospitals and doctors refuse to see Medicare patients until Federal reimbursements, already eight months behind schedule, are paid.
14. Public unions across the country are on strike. Large areas are without teachers, police, firemen or hospital staff.
15. Food stamps are rejected at grocery stores because of slow reimbursement and government default risk.
16. Martial law has been imposed in several cities to counter rioting and looting.
17. Isolated runs on banks have occurred. Many withdraw funds from the banking system in fear of its collapse with mattress-stuffing considered less risky than zero interest returns from banks.
18. The dollar is being rejected by local merchants around the world.
19. The price of oil is priced in a weighted basket of currencies of which only 20% represents dollars.
20. Foreign disinvestment in Treasuries has been accelerating as a result of trade wars, concerns of default and the desperate need for funding at home.
21. Gold is selling at $2,800 per ounce.
22. The economy continues to deteriorate despite QE on a scale not even Paul Krugman would have recommended.
23. Treasury and toxic asset purchases have swelled the Fed’s balance sheet from $800 billion in 2008 to $6 Trillion.
24. The deflationary spiral continues despite incredible money-creation.
25. Banks continue to add more excess reserves.
26. Creditworthy borrowers refuse to borrow.
[Bottom line:] People and businesses everywhere have hunkered down, waiting for the next shoe to drop.… then I can just imagine what might hypothetically unfold politically and what possible (likely?) emergency measures might be imposed to remedy the situation, as follows:
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, has passed new legislation which will:
- recall all U.S. dollars effective immediately
- replace U.S. dollars with new currency known as the JohnLawDollar
- exchange each old dollar for three JohnLawDollars i. e. 1 for 3
- automatically convert all amounts in checking accounts and savings accounts by 10AM tomorow
- require all currency in circulation domestically be taken to a bank and converted at the new exchange rate into the new JohnLawDollar 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 future 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 Intented Solution – and Reality – of Such an Emergency Measure
[Such an] announcement [would] represent a (undeclared) U.S. default on 67% of its contractual obligations – including Treasuries, Social Security, Medicare and welfare payments [effectively reducing] all debt…by 2/3rds. The debt problem (public and private) is what is killing the economy [and] with one short proclamation [as put forth above,] the debt problem [would be] reduced dramatically.Tripling the money supply would eventually triple prices and wages. Home prices would soar while mortgage obligations would remain fixed and payable out of incomes that would be three times what they are now. The government would have cut its obligations dramatically and be able to pay its bills.
The government’s gain would come at the expense of Social Security, Medicare and welfare recipients. Borrowers would gain only what lenders lose…There would be no net value added. Every gain would be someone else’s loss. Only the amounts “stolen” from foreign investors might be claimed to help the U.S. The rest would be 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 [outlined above] 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.
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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, i.e., inflation fast enough…[and, as such,] a home-run 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…
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/2010/08/10/desperate-economic-action-ahead/
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