Thus spake the Congressional Budget Office on the long-term future of American fiscal integrity (or rather, the coming lack of it). As Niall Ferguson reported in his piece for the Financial Times back in February,
“The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.”
So is the US the next Greece? All this talk of the US debt might seem to some like needless additional US-bashing or at worst, anti-Americanism. After all, just look at Europe, right? The Euro is supposedly worse off than the greenback – that’s why the US dollar has gained in strength against the Euro so far this year.
But the first fact is that the United States is not far behind Greece. Ferguson reports that the IMF released figures showing the extent to which developed economies would have to rein in their deficits to restore economic stability over the next decade. Japan and the UK both need fiscal tightening around 13% of GDP – next are Ireland, Spain and Greece at 9% of GDP. The US is next, at 8.8%. Not much difference.
Moreover, just consider the fiscal state of states like California – Los Angeles is able to time precisely when it will run out of money (May 5th this year, 2010) – which is already bankrupt, and Illinois, Nevada and New York are not far behind. You know that California’s economy is larger than Greece’s, right?
The second fact is that there are important ways in which the United States could never be Greece – that in fact, the situation is worse than it is for Greece, although it might at first appear that the United States of Printing Presses has an endless supply of “get out of jail free” cards. The US can print its way out of its debts, yes, – and many analysts think this is exactly what it will have to continue to do – but the key difference is that the US dollar also acts as the world reserve currency, the key medium for trade in oil, gold and other base commodities.
Hyperinflation Not Confined to the US
It would be one thing if the US could just hyperinflate on its own, but since the world’s core commodities are also denominated in USD, it means the price of oil, gold and copper is going up for everyone else as well.
If you’re surprised at the ripple effects little old Greece is having on global trading patterns (due to the potential “domino effect” it is feared to have if it were not bailed out), just imagine what a crater the USD will cause.
Arguments from the fact that the US can just print its way out of its debts are certainly true, but appear to blithely overlook the massive side effects this will have on the world commodity trade – the very foundation, even engine, of the world economy. We’ve all woken up to the fact that the printing press is going to be the only means of escape (in the same way that a hamster outruns its wheel by running faster); but what we (the mainstream media, or even some independent commentators) haven’t come to yet is how to deal with the reality that will ensue – the consequences of this monetary change at the level of the unit of measure of the world’s basic goods.
Surviving the Sovereign Debt Crisis
My suggestions: pay off all your debts within the next two years at the latest (this year is preferable). Figure out what is essential (personally, materially, spiritually, etc.) to your life now. Pare down – cut back on spending; cut back on eating; cut back on all your “stuff”. This will all be good for you to do anyway. Figure out where all your money is. Start converting your assets into the form(s) that are going to actually help you.
If you have $300,000 sitting in near-cash, for example, maybe you want to pay off your mortgage and own a house free and clear (I’d say that’s very wise, given inflation prospects). Perhaps you want to ensure that your means of transportation are owned free and clear. And that you have a source of income that you can control. If your portfolio is still small, consider converting your growth stocks into high-quality income-producing assets (such as dividend stocks – I wouldn’t recommend most bonds).
It’s not that anything overdramatic is happening here. You don’t have to be a Tea Partyer to want to protect yourself from the obvious, even if we don’t yet know what obvious is going to look like.
If you found this article useful, please retweet it on Twitter or stumble it on StumbleUpon. I’d also love it if you subscribe to my RSS feed for free tips and posts like this one delivered right to your reader or by email (posts are not for duplication).Related Posts
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