A US civil war

[Reality Check]

If the US seems to be on the verge of hyperinflation, I am willing to bet that the Fed and/or the US Treasury will find some political way (as tough as that can be) to devalue the currency.

Wow. That requires the political leaders in the FED and the U.S. Treasury to actually see it coming, actually understand the risks, actually know what to do to avoid it, and have the intellectual integrity and political courage to take very painful actions before the crisis is obvious to the average voter.

The author of "Guns, Germs and Steel" wrote a follow on book about societies collapsing. The one common theme was the elites never saw it coming until the peasants came through the elites bedroom window with pitchforks. A more concrete example is elites of both the Democratic and Republican party sitting around a table explaining why construction workers in the United States should not be worried about illegal immigrants taking away their jobs because illegal immigrants just do farm work and yard work. The political elites are often out of touch with realty.

[Reality Check]

If things continue as they are - and kicking the can down the road means they will - then both the United States and Europe will eventually have to make a choice.

Things continuing as they are means continuing to run huge annual government budget deficits until the debt, as a percentage of GDP, becomes so large the interest payments alone consume the government budget. Interest rates on government debt are already artificially low, so this will happen sooner, rather than later even if interest rates remain artificially low.

At that point the political leaders will have two choices:

Default on the government debt, balance the budget, and live with the consequences of that, or

Print money until the then existing debt becomes an insignificant portion of both the money supply and the GDP.

This second option is possible for the U.S. because U.S. debt is denominated in terms of U.S. dollars and the U.S. government can devalue the U.S. dollar by simply printing massive amounts of money and injecting it into the economy. This will of course destroy the value of defined benefit monthly pensions and other fixed income streams as well.

Call this hyper inflation, or devaluation of the U.S. currency, the effect is the same, the value of the U.S. dollar becomes a small fraction of what it was in the year 2000.

My bet is the later course because printing massive amounts of money is just more of the same thing that will have been done for years already.

Defaulting on the debt and balancing the budget would be dramatic actions that are totally out of character for leaders that lived their entire lives by kicking the can down the road.

[Marc]

Thanks, Reality Check, for the further cogent insights. I feel that you indeed have the two principal methods listed that the US Federal Government would use to keep its head above water financially. A problem I respectfully see with "printing money until kingdom come" is that in order for the US Government to solely use this tactic as a financial-survival mechanism, it will likely need to do it at an accelerating rate to the point that it will likely become intolerable to the average citizen and not so easy to hide. Thus, I can see the US Government using money-printing in conjunction with, say, re-tying the currency to some sort of tangible basket of valuable commodities: say, gold in conjunction with other valuable metals, and perhaps even land, real estate, and intellectual property as well. (The amount of commodity backing could be ratcheted up or down in a way that, in conjunction with any further money-printing or debt creation, aims to balance tolerable levels of inflation with tolerable levels of deflation. However, the Federal Government/Fed may decide to do it in a way in which redemption of dollars for the aforementioned goods is not so easy to do, assuming that there's a way to pull that off.)

Of course, even this dual printing/devaluation scheme cannot go on forever, which may well also be carried out in tandem with finding ways to encourage Americans to take on more debt (such as educational or business-startup debt for a myriad new slate of degree and entrepreneurial programs). All in all, it will be a most interesting coming decade or two, with a big wild card being when/if China really creates problems for the United States to the point that both countries seriously militarily clash.

Thanks again for the valuable insights. —Best regards, Marc

[Trevor]

I think it's a real possibility that appeasement may end up being used the first time around. We may be anxious about China, but we also have little will to get involved in another conflict. Iraq is over, Afghanistan is winding down, and all we want to do is forget the rest of the world exists. We paid for it the last time this was done, but it doesn't mean that we can't do it again.

As for our debt, I don't see us doing anything about it until we hit bottom. Some effort was made last year, but the fact that there was so much hatred and anger over cutting a very trivial sum tells me that even symbolic efforts are going to be nearly impossible.

[thomasglee]

I think it's a real possibility that appeasement may end up being used the first time around. We may be anxious about China, but we also have little will to get involved in another conflict. Iraq is over, Afghanistan is winding down, and all we want to do is forget the rest of the world exists. We paid for it the last time this was done, but it doesn't mean that we can't do it again.

As for our debt, I don't see us doing anything about it until we hit bottom. Some effort was made last year, but the fact that there was so much hatred and anger over cutting a very trivial sum tells me that even symbolic efforts are going to be nearly impossible.

Just like it was leading up to WWII, I agree that appeasement will be used - initially. But once the Chinese start pushing (just as the Nazi's did), it will lead to war. Remember, it wasn't that long between appeasement and full-out war back then and it won't be that long between them this time around either. The question is more "when" will China push so much that appeasement has to be given?

[Trevor]

Well, the first act of appeasement was Hitler retaking the Rhineland in 1934, so it was used for about 5 years before Britain and France decided to take action. If China goes after the Philippines, we'll scream and condemn the action, but I'm not sure we'd intervene militarily.

[Higgenbotham]

Would it break down to be along religious lines? Possibly, and it might make for strange allies (Christians and Muslims actually coming together; for example???)

Here's one example of strange allies that may interest some readers - Mormons and Muslims share a lot in common - and as reported recently are the two fastest growing religions in the US.

http://articles.latimes.com/2008/apr/02 ... e-morlims2

[thomasglee]

Well, the first act of appeasement was Hitler retaking the Rhineland in 1934, so it was used for about 5 years before Britain and France decided to take action. If China goes after the Philippines, we'll scream and condemn the action, but I'm not sure we'd intervene militarily.

Well, in many ways we've been appeasing China for several years already. We've turned our backs when they deal with UN recognized terror states, we've turned our backs when they (believe me, north Korea doesn't do anything without China first knowing) allowed north Korea to act as their proxy causing problems in the region and we've kept our backs turned as China has slowly occupied north Korea (all the ocean ports are now almost fully Chinese occupied and controlled).

You're right about the Philippines.

[Trevor]

Yep and China has become much more aggressive in the past few years. we'll see what they do once a younger generation takes power; this makes the book I wrote rather like a warning. We've also shipped a lot of our technology to them, such as the deal with GM. That'll bite us in the ass one day.

It's why their neighbors are moving into our sphere of influence, even if they may not like us much.

[Reality Check]

Well, the first act of appeasement was Hitler retaking the Rhineland in 1934, so it was used for about 5 years before Britain and France decided to take action. If China goes after the Philippines, we'll scream and condemn the action, but I'm not sure we'd intervene militarily.

Maybe I am just hung up on the Philippines as a first military adventure for China, but ...

China is the worlds only ground army super power.

The United States is the worlds only blue navy super power.

The Philippines has no mainland and has no land bridge to mainland China.

Attacking and occupying the Philippines requires China's blue navy support and supply Chinese ground armies strung across a series of islands cutoff from each other.

China attacking and occupying the Philippine Islands as part of China's first military adventure would be inviting a Sea Battle with the U.S. far from the Chinese mainland where even a tie for China is a loss for China.

We can hope China is that stupid, but I would not count on it.

Once China has airbases, missile bases and sea ports in South Vietnam. South Korea and Taiwan occupying the Philippines makes much more sense.