Our Inescapable Future

If you have been convinced by the media that an economic recovery is underway, please consider the following.

The United States government in the 2009 will have to roll over $2.569 trillion of existing debt in addition to financing a $2.5 trillion deficit via selling more treasuries. That is $2.569 trillion worth that becomes due and payable this year, no getting around it. In the past, much of the deficit has been financed by foreign central banks recycling our import dollars. Not only has that amount been cut in half, but other nations have more urgent needs for that money, so that source of foreign financing of the Great U.S. Credit Party is gone.

It is flat out impossible that the US private markets could purchase $5 trillion of treasuries, which amounts to 38% of GDP. To pull that amount of money out of the economy and put it in the hands of government – in large part to pay off foreign debt – would collapse what remains of the economy. So what’s a government to do? In the words of analyst Doug Casey:

In the absence of sizeable increases in tax revenues, it is quite clear that the lion’s share of the planned sales of Treasuries in 2009 cannot be met by demand from the market. Either the Treasury will have to raise interest rates significantly, or the Fed will need to step in very aggressively to support the planned auctions. Our expectation is that both will happen. Auctions will fail and the Fed will step in. The market will react to more printing by anticipating inflation and demanding higher interest rates. Once the cycle starts, it will be very hard to pull interest rates back.

And that means: monetary devaluation will be the only way for the U.S. government to shift the cost of irresponsible spending into the future. Or, in other words, big-time inflation. The only way to get out from under this massive amount of debt is to pay with greatly devalued dollars.

Another point to remember: No nation has ever succeeded in reducing gross indebtedness via inflation without also destroying its economy. Not one. So there is your prognosis for an economic recovery. Like that famous quote from the Vietnam war, “We had to destroy the village in order to save it.”