Summary: The world is changing fast. Yet as so often in history the changes remain unseen until some event reveals them in unmistakable fashion. Can we look ahead at America’s future? Perhaps we should start with the obvious, the almost inevitable.
Consider a nation in financial crisis, a typical Latin American-type crisis .
(a) Large foreign debts due every year for the next 30+ years, which it cannot conceivably pay (without selling itself). The principal and interest due each year are just rolled over — totally aprox 4% of GDP this year.
(b) Massive borrowing (well over the red line of 3% of GDP) each year to pay for necessary imports. It will take years to gently reduce this dependence — or a long, severe recession.
(c) Massive additional borrowing (aprox 7% of GDP per year) for at least the next two years to restructure its financial system.
Argentina? Costa Rica? No, this is us. Our delusions of global hegemony were like our dreams of wealth from ever-rising home value — both artifacts of ample, cheap credit. Now the bills come due.
How do our elites hope to obtain the loans necessary for America’s survival (at least $1.5 trillion in 2009)? We can only guess. Since private inflows have almost stopped, there are several reasons foreign governments might provide the vast sums of cheap loans we need.
(1) Hold the world hostage. As in “loan us the money or the world economy burns.”
(2) Hope that they see this as in their best interest, and that they take no measures to prepare themselves for an eventual day of reckoning (as we certainly are not).
(3) Trust to the kindness of strangers.
The third option is insane. The first will work, but might impel the world’s major nations to ally against us so that we can never again hold them hostage. The second is blinkered, seeing the outcome as binary: we get the money or the world burns. This is unrealistic, as these things are usually resolved by negotiations.
At some point I believe we will need to talk with our creditors, when the current ad hoc financial and regulatory mechanisms break down. That might be soon, judging from recent events. We are likely to get the money we need. The debate will be on what terms we get the money. We can only speculate how this might work; here is my guess.
The Master Settlement of 2009
I. The US receives $1.5 trillion in new lending in 2009 and 2010, with smaller loans in the following five years. New lending under this agreement ends in 2015.
II. Existing US government and agency bonds held by foreign central banks are rescheduled. Principal or interest payments begin in 2016, amortized over the following 30 years at low fixed interest rates.
III. The bonds are denominated in an index of currencies, weighted by the debt held by each nation. We lose the ability to inflate the debt away by printing money.
IV. The US dollar is immediately devalued by some fixed amount (perhaps 20%). The lower dollar will reduce our imports, as they become more expensive. Our exports again become competitive on world markets, so we can earn the money to pay our debts.
V. Our creditors will demand (and receive) consensions. We can only guess what those might be. China will certainly ask for a sphere of influence that includes Taiwan.
Needless to say, this will end our pretensions to global leadership. Like everyone else, we will need to carefully ration foreign spending so that we have the foreign exchange needed to pay our debts. Like the post-WWII UK, foreign bases — and foreign wars — will become expensive luxuries.
This is unthinkable. Absurd. Cannot happen.
After it happens, the experts who now say this is impossible will explain why it was inevitable.
What should we do to prepare for this harsh new world?
The world is changed, I can feel it in the water, I can feel it in the earth, I can smell it in the air.
Said by Treebeard, leader of the Ents, from The Two Towers– part II of Tolkien’s The Lord of the Rings trilogy.
We speculate about these things in order to better understand how the world is changing — what futures open before us. Keeping that in mind, I take the guesses presented in this post and give simple (or simplistic) answer in A solution to our financial crisis.
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Some FM posts about the current crisis
Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
Another voice warning about the nationalization of AIG, 18 September 2008
A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
Another step away from our Constitutional system, with applause, 19 September 2008
What do we know about the financial crisis? What are the key questions?, 20 September 2008
Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
Legal experts discuss if the Paulson Plan is legal, 21 September 2008
Essential steps to surviving the current crisis, 23 September 2008
How should we respond to the crisis?, 24 September 2008
A solution to our financial crisis, 25 September 2008
Is the US economy in good shape, or in terrible shape?, 27 September 2008
A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.
A few of the most important posts warning about this crisis
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime. Here are some of those posts.
A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
“The changing balance of global financial power”, by Brad Setser, 22 August 2008
“The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008