Tim has a different problem. He’ll soak up some of the Make Believe Dollars that Ben missed. So we have that going for us, which is nice. But the new treasuries he issues in their place will have to offer the same 4% rate being offered on the new debt. And with inflation becoming a problem, that 4% rate won’t last for long — it will have to go up to 5% in short order, and we could see 10% or higher, if inflation really kicks in.
And this starts to do very nasty things to our national balance sheet. Last year, we spent about $225 billion financing our existing debt. That is, paying out those $2 to everybody holding a $100 bond. Over the next four years, that will rise to nearly $300 billion, even with interest rates staying the same. That’s about half of what we spend on defense.
As interest rates rise, so does the vig Congress has to come up with every year. At 5%, interest on the debt eclipses all of defense spending, and starts to equal Social Security. Or Medicare/Medicaid combined. It might even dwarf ObamaCare.
But we haven’t gotten to the worst part.
Yes, interest rates need to go up to stave off inflation. Interest on new debt issuance must also go up, to attract buyers.
“But,” you might ask, “didn’t we already discuss that fact that there already aren’t enough buyers?”
Yes, yes we did. But you can always find a buyer — at the right price. And that’s going to put additional downward pressure on the price Bernanke gets for his old debt. It’s also going to put additional upward pressure on the interest paid on new debt.
Bernanke might be selling for pennies on the dollars. Congress might have to pay 20%, and interest consumes ever-larger chunks of the budget. There comes a point where people simply stop buying, because they don’t believe that the debt at those prices can be honored.
Which brings us to massive inflation because Ben can’t sell, and national bankruptcy because Congress can’t borrow.
There’s a word for that situation: Greece.
And the only thing that has to happen for all of this to come true … is pretty much nothing. This is money already spent. These are programs already mandated. It’s baked in.
We can’t tax our way out of it, because there aren’t enough millionaires and billionaires. We can’t borrow out way out, because we ran out of lenders years ago. The best we can hope for is that the Fed manages to keep inflation relatively tame. That is, 10% for four years. And that rate for that duration cuts the value of the dollar by about half.
Yes, Bernanke will chop the top off of your savings. But he’ll also wrangle that $20 trillion in debt down to a more manageable $10 trillion, so that Congress can keep paying out the goodies to the voters who don’t possess any savings.
And those voters outnumber you and are more politically active than you — that was proven decisively three weeks ago. If you receive benefits, it doesn’t matter if a Big Mac costs $12, provided your benefits are indexed to inflation (and they are).
But you, you poor sap who set aside something for retirement or for a rainy day…
…it’s the destruction of your savings that will make it possible for some other guy to pay $12 for that Big Mac. Because it’s either that, or Greece. Or Zimbabwe. Or worse.
That’s the real fiscal cliff, and we’ve been puttering towards it now for a long time. The only question remaining is if we keep puttering, or if we hit the gas.