The only way to pay the debt back is to increase net nominal (not real) tax revenues, actually or de facto. This can be done in a number of ways:Then a couple of days ago the Mad Scientist sent me this from a Research Report from Sprot Asset Management: (here is a link to the entire report)
• The U.S. can raise tax rates.
• The U.S. can cut services, entitlements, and spending for defense
• The U.S. can grow the size of its economy, thereby collecting more taxes without necessarily raising tax rates. For this to work, the U.S. must still get a hold of its spending.
• The U.S. can debase (lower the value of) its currency (or its trading partners can do it for the U.S.).
It is extremely doubtful that the U.S. could raise its tax rates enough to make much of a dent in its budget deficit and entitlement liabilities – to do so, the U.S. would have to tax its citizens into penury. How likely is it that the U.S. Congress would cut services and entitlements in the absence of crisis? Pigs have a better shot at flying. Can we grow our way out of this mess? Sure, if we had an unlimited supply of domestic Oil and Natural Gas (“NG”) and if we were also able to control our spending. In order to grow the economy we must increase our consumption of energy. And “therein lies the rub”: The only energy source we can increase consumption of is Coal, and Coal will not run the U.S. transportation system. Coal will not heat the homes of the approximately 60% of Americans that use NG for home heat. Not to mention the external environmental costs concomitant with the use of Coal.
So we are left with the currency. You see, to pay its IOU’s, a government is very much able to print more money and use it to pay its debts. The problem with that is the contra party, the guys that hold those IOU’s, don’t like that very much. They won’t extend any more credit on such terms. They will want MORE of that less valuable money in the form of interest in the future and for the exchange of goods and services that they sell us. That means higher interest rates and higher inflation. Much higher, and we all know what that means
So how will this US debt crisis ultimately resolve itself? Let’s consider the options. It would appear from our analysis that the spending ‘promises’ are the crux of the problem now facing the US Government. If there isn’t enough new capital in the current environment to fund new Treasury bill issues (as we argued in “The Solution... is the Problem”), then there certainly isn’t enough capital to pay for the US’s unfunded future obligations. The choices, therefore, are bleak:
1. Default on Medicare promises. (Unlikely given the current debate in Washington to
expand medical coverage.)
2. Default on Social Security promises. (Unlikely given the increasing average age of the
3. Put forward a credible plan to balance the budget. (Unlikely given the most recent budget
4. Default on outstanding debt. (Unthinkable)
None of these options are feasible for the US Government. So they realistically only have one option left – to print their way out of their debt crisis.
We keep coming back to the numbers for the US debt, and they don’t add up. Even Alan Greenspan, former Chairman of the Federal Reserve, believes that the rising budget deficits in the United States are “unsustainable”. Because the US Government is printing dollars to fund their liabilities, it is highly unlikely that we will ever see a failed bond auction similar to that of Poland. The far more likely outcome, therefore, will be a US dollar crisis. It is for this reason that we have positioned our hedge funds and mutual funds so heavily in precious metals. At the end of the day, when the world finally realizes what the US has done to the world reserve currency, international investors will shift into an asset that no government can print. In our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end.
I will be the first to admit that the deflation argument held sway with me for a short period of time - and it cost me in lost opportunity. When the data changes and you don't change fast enough with it... you won't be in my business for long.
More to come.