Thursday, November 13, 2008

What Happens When the U.S. Defaults On Its Debt?

Okay, this is unthinkable, right? Unfortunately not. Europe 2020 , a website that forecasts political and other events and their impact is predicting that the U.S. will default this Summer (2009). This site has been warning about our current financial debacle for several years, and they seem to have called it right so far. An article in Money Week was also talking about the possibility of a U.S. default. A CNBC article shows that as we keep increasing our national debt by bailouts and other capital injections (in order to prevent financial collapse), at some point our credit rating will be lowered, which will lead to the default. Martin Hennecke, senior manager of private clients at Tyche is quoted:

"The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system" and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

The problem we face is this: we need to throw huge sums of money into our economy to keep it from collapsing, but we don't have the money, so we have to increase our debt. But increasing our debt will at some point cause the same kind of collapse, when our credit rating is lowered.

What happens to us when we default? I think at that point we will be on our own, i.e. limited to only the resources within our borders. That means very little oil. Think about the implications of that for a minute. All military activities abroad will have to stop, and the basic routine of all daily life will no longer work. The good part is that we are a vast nation still with much natural wealth, and we should be able to produce all our own food and shelter, but only if we totally redesign how we go about it. So farming must now be by manual labor rather than machines, using no chemicals for pest control or fertilizer (because all these things depend on oil). Food must be grown near where it is used. Jobs in our traditional economy will be totally useless and will disappear. They have no value since they are based on trade with the rest of the world, rather than on producing things that we need here. It seems that the only way this can happen in an orderly way is for government to create basically a command economy of some sort and assign people to roles in it. Maybe this can be done through incentive rather than directive, but we may not have time for that. And I know, China and the Soviet Union have proved that this doesn't work. So what is a better alternative?

Do you believe this can happen in the United States without massive social disorder and perhaps revolution? We better pray that it can.

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