海角大神

Two ways for the US to go broke

When it comes to foreign debt, the US can either honestly default or it can inflate the dollar and pay back the debt

We鈥檙e in the airport. We can鈥檛 seem to get a signal. So, here鈥檚 an abbreviated reckoning.

From what we can tell from the newspapers, the US housing market got very bad news yesterday. New house sales dipped to a record low. Never before since they began keeping records a half century ago have so few new houses been sold.

Naturally, house prices are falling too. Why is that? Because the housing industry built and sold today鈥檚 houses yesterday. A credit bubble takes from the future. Now we鈥檙e in the future. Naturally, there鈥檚 not much here. It鈥檚 already been taken away鈥�used up鈥�built鈥�spent鈥�consumed. We鈥檝e got yesterday鈥檚 houses on the market. And today鈥檚. And tomorrow鈥檚.

Which shows how ridiculous the feds can be. First, they nationalized Freddie Mac and Fannie Mae鈥�to keep them from going broke. Then, they bought mortgaged-backed securities by the boatload鈥�and lent money at zero interest rates鈥�to re-flate the banking/mortgage industry. Then, they tell us that we (the taxpayers) are making money on those securities. Yes, we鈥檙e supposed to make a profit as they are sold back into the market!

But now the housing market is in a double dip, and a report in today鈥檚 news tells us that Fannie and Freddie may be hiding $100 billion in losses.

Our advice: if you buy a house today, mortgage it heavily. Long term. Fixed rate. Your house will go down in price鈥�but your mortgage may disappear completely.

Another thing taking a beating today is Europe鈥檚 periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting 鈥渟ervices.鈥� But it鈥檚 harder to cut services than you might think. Modern democratic welfare states are built on a fraud 鈥� that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak 鈥� such as the next generation, which doesn鈥檛 get a vote.

Citizens don鈥檛 like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange 鈥� getting more from the feds than they pay in taxes 鈥� it鈥檚 very hard (maybe impossible) to impose 鈥渁usterity鈥� measures.

What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that鈥檚 what it implies鈥�

As Dear Readers know, the US situation is a little more complicated. We have the world鈥檚 reserve currency. Our debt is largely held by foreigners. And it is denominated in a currency we alone control. So, we have the ability to go broke in two different ways.

We can do it the old-fashioned way, that is, by being unable to pay our bills when they come due.

Or we can do it the inflationary way 鈥� by paying our bills in a currency that is not worth as much as the stuff we borrowed.

Clearly, the second way is the preferred approach. It鈥檚 what the feds are aiming for. It鈥檚 a major reason the Fed is pumping $4 billion per day into the world economy. And it鈥檚 an additional reason to keep interest rates at zero 鈥� even after, by the feds鈥� own reckoning, the emergency is past.

In short, you can cheat your creditors in two ways. You can default honestly. Or you can inflate.

The trouble with inflation is that it is like a bad dog. It doesn鈥檛 come when it is called. And when it does come, it comes on so fast it knocks you over. Then, it goes into the house and tears up the furniture.

Japan hasn鈥檛 been able to get the cur in the door in over 20 years of calling. And when it came to Argentina, Zimbabwe and Weimar Germany, it what such a nuisance they wished they had never whistled.

But there鈥檚 Ben, Tim, and all the rest 鈥� dog lovers, everyone of them.

------------------------------

海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.