The U.S.A. is bankrupt, and we don't know it...?

A very interesting commentary was published on Bloomberg this morning. You can read it here. Watch the video here. It states emphatically that these lovely United States of America are bankrupt, and we just know it. I deny that. We know it. We just won't admit it.

Let's face the facts folks, we cannot pay off the national debt. When you cannot pay off your debt, that's bankruptcy. When you cannot payback your debt, you meet the official legal definition of the term bankruptcy. Now what we are grappling with her is power and problem of human psychological denial. Given the fact Ram fans can deny the state of their offensive line, and propound that it was a good idea to take an injury prone QB in this years draft, we will certainly be able to deny the robust and concrete fact that our current form of government is bankrupt.

Notice I said our current form of government... Some people just aren't observant. They just don't pay any attention to detail or take note of things.

So Mr. Kotlikoff lays his program for radical simplification. I love it, but it will never happen under this democratic republic. Such a program cannot be initiated until some dude with 4 stars on his lapel drives up to the capital with some tanks and machine guns. When that happens, let's hope he begins a radical simplification program.

When your political power blossoms from the barrel of a gun, it is possible to say no to the special interests. What the former reps say means absolutely nothing at that point. You just implement the reforms. Anybody who doesn't like it is going to get hurt... real bad. They will have a different way of manufacturing consent in those days.

And so we have the righteous ending to the age of Aquarius. The free radicals of the 1960s wanted to spend freely on guns and butter and this is what comes of it. They thought they could regulate Wall Street, or do away with it entirely. Do you see what has happened now? They captured all of your regulatory machinery and all your social programs also. They blew the market economy skyhigh with plenty of help from the government. Good government "on your side" turned into an exercise in the organized looting of the public sector, with bankruptcy resulting.

I guess you were off in the 5th dimension with some drugs and free love whilst this was going on. The only thing that mattered was that the moon was in the 7th house and love was steering the stars at the dawning of the age of Aquarius...

Fuck those sonofabitch Aquarians! Do you see what you have done? You are the stupidest goddamn sonsofbitches on the face of the Earth, and I am not kidding either. I fart in your general direction, and upon all your idealism. Life is a series of difficult trade-offs, and you can never ever learn that. You want your cake and you want to eat it too.

Talk of the 3rd Bubble, and Fiscal Armageddon

So, everywhere I turn these days, I hear quiet, terrified whispers about a growing 3rd bubble from guys I like to call 3rd bubble theorists. What is this 3rd bubble and what is a 3rd bubble theorist?

3rd bubble theory basically maintains that in the past 10 years we have gone through 2 violent economic bubbles and that a third one is now forming. The first bubble was the Internet bubble. It burst some time in mid September of 2000. The second bubble was the real estate bubble. It burst in mid September of 2008. Each bubble formed for about 6 or 7 years, then it exploded. You might argue that the internet bubble got underway in 1994. This when Al Gore held the famouse "Information Superhighway" conference at my dear UCLA... when I was a senior there. The second bubble got started early in 2001 when Alan Greenspan dropped interest rates to nearly nothing to cope with the onrushing crisis of the Internet bubble collapse. Household finance was cheap. Mortgages were considered safe. Banks rushed in.

Now we are building a 3rd bubble: The Government debt bubble. To cope with the explosion of the real estate bubble, the U.S. Federal Government is sucking in huge masses of capital in the form of T-Bills, whist prepping massive deficit spending packages to bail out giant corps and stimulate the dying economy. Terrified to put their money is stocks, corporate bonds, or just a plain old bank account, scarred investors are all to happy to slam their cash into a T-Bills. It is considered the only risk free investment.

These theorist maintain that we are in for a protracted period of grinding deflation. Everyone in the world is trying to deleverage at once. This is a fancy way of saying we're all trying to get out of debt... except the government. Firms and Families are taking all revenues and paying down debt. This is why spending has dried up, and the governments of the world are rushing to fill the gaps as spenders of last resort.

As the use of leverage goes away, the size of M1 and M2 money supplies dries up. As buyers take all profits and pay and pay down debt, demand slips. Together, these two forces produce enormous deflationary pressure. Business must offer fire-sale prices to attract any buyers at all. Ergo the prices of gasoline, Townhouses, Blu-ray disks and Tabasco sauce drop.

In this scenario, the value of the dollar increases. The value of commodities, goods and services decrease. Your dollar becomes more and more valuable as time goes on. Corporate profits look worse and worse. It doesn't make sense to buy stocks, commodities, or invest in new business when you are in a deflationary cycle.

In this scenario, investors will just keep stuffing their money into Government T-Bills. Since they are stuffing their money into Government T-Bills, Government debt increases. Since they are not stuffing their money into good, productive, profitable private enterprise, GDP does not grow. Rather, it is likely to shrink. Because GDP does not grow, but rather shrinks, Government tax revenues shrink. Because the government is likely to cut taxes as a stimulus, revenues will shrink here as well. [Beware of the Arthur Laugher curve, but not in this environment.]

So here it is: Another bubble of insolvency. With ever increasing debt, and with decreasing revenues to pay for it, the Government debt bubble eventually burst. What does the end of the world look like when the 3rd bubble bursts? What features will this Fiscal Armageddon manifest?

First, the Government will default on its debt. It will not be able to pay loan service without printing money. When the government defaults, probably after attempting to print itself out of this mess, the good 'ol Dollar bill will bust. The value of the USD will basically fall off to nothing. We will experience hyper-inflation of 3,000% per month, as producers of goods and services around the world shun our money. The Government will have to introduce a new currency, which I will call the VDollar, or virtual dollar. This will be an electronic currency only. There will be no paper or coin. It will probably be Gold-backed, but only in theory. Attempt to trade your digital bits for actual gold and you will get the cold shoulder. Nevertheless, expect the Government to spin-up some yarn about gold securities in Fort Knox, or something like that.

If the U.S. Federal Government busts the dollar bill, it will be a defeat the dimensions of which we have never experienced. It will be a route from which no honor can be salvaged. I don't want to imagine which Hell or what chaos will be visited upon the world if this scenario comes to pass.