Every major crisis we have had in the last 25 years was easy to see coming. Each time, you had a phenomenon that was clearly out of kilter. It seemed wonderful on one level: everyone was getting free money. Everyone knew that it couldn’t go on forever, but somehow it seemed like it might, so nobody really seemed very worried. And then the crisis came, as we knew it would.
First there was the stock market crash. In the 1990s, stocks kept going up and up and up. It seemed wonderful on one level. Everyone was watching their stock holdings grow and grow and grow. Everyone knew it couldn’t go on forever, but somehow it seemed like it might. So nobody seemed very worried.
And then there was a crash.
Then we had the real estate bubble. In the 2000s, property values kept going up and up and up. It seemed wonderful on one level. Everyone’s house value was skyrocketing. You could take out loans on the equity and do fun stuff. Everyone knew it couldn’t go on forever, but somehow it seemed like it might. So nobody seemed very worried.
And then there was a crash.
Now we have the government debt bubble. Government spending keeps going up and up and up. It seems horrific to us, because we are paying attention — but to most people, frankly, it seems wonderful. We’re getting all these government services and we don’t have to pay for them! It’s utterly unsustainable, and everyone knows it can’t go on forever, but somehow it seems like it might. So people don’t seem very worried. Certainly, they’re not worried enough to vote out of office someone who has exploded our national debt to unimaginable levels.
There is going to be a crash.
We have a serious problem, folks, and Steven Den Beste summed it up well yesterday:
I had a hard time sleeping last night. I was full of fear. There’s a catastrophe waiting for my country, a precipice over which it may fall. And if that happens, it won’t be recognizable any longer, for the next twenty years or more.
I’m not talking about a liberal Supreme Court. I’m not talking about automatic tax increases on Jan 1, nor about sequester. This precipice is less obvious, yet far more dangerous.
I think the dollar is going to crash.
There’s a story told about a man who fell out of a window on top of a skyscraper. As he passed the 20th floor he was heard to mutter, “Well, I’m OK so far.” This country is falling, but hasn’t hit the ground yet. When it does, things get very ugly, very fast.
The problem is the deficit.
Den Beste lays out a fairly realistic scenario for what happens when we keep spending without regard to what we’re taking in:
The only reason that debt service on that $16 trillion hasn’t destroyed us already is that the Fed is holding interest rates down. The reason the annual deficit hasn’t destroyed us yet is that the Fed is “running the printing presses” (only they call it “quantitative easing”) to cover it. But neither of those is sustainable in the long run. The ground is still waiting for us, and we’ll know we’ve hit it when a T-bill auction ends up with a lot higher interest rate than we’ve been paying so far.
It’ll be a cascading failure, once it begins. When T-bill interest rates begin to rise, confidence will begin to fail. The rise will accelerate as bond purchasers begin to price in increasing degrees of risk.
And eventually this explosion of money is going to lead to inflation. In fact, it already has; just go to a grocery store some time and look at the prices.
Which brings us to the third deficit: trade. The dollar is the de-facto world currency. Oil is priced and bought in dollars, and that’s not the only thing that is. But if confidence in the dollar begins to decline, and increasing suspicion that the US will devalue it (either deliberately or inadvertantly) then willingness of others to accept dollars will decline and that will, in fact, result in a drop in the value of the dollar, reflected in changing exchange rates.
All of these things will feed back on themselves and each other, and it will be an accelerating failure. Once something like this happens, it’s almost impossible to stop. I don’t anticipate Weimar Republic (or Zimbabwe) levels of inflation, but I won’t be at all suprised if it hits 20% per year. I won’t be surprised if it’s a lot higher than that.
To me, this is not crazy talk. This is real.
So what should the Republican party do? I don’t know if that’s the question. I don’t know if they’re up to the task.
The question is: what should you and I do?
We have to make people try to understand the problem. We have to make this a priority. Because a crash is going to be very, very hard on our children.
How to make this a priority is an ongoing discussion. Whether to make it a priority is not. It must be done.
Thanks to SPQR.