America’s looming debt crisis could blow up the entire financial system

“Sire… worse than a crime, you have committed an error,” said Charles Maurice de Talleyrand-Périgord. A crime is whatever the feds say it is. Often not what you think it ought to be. But an error is different. It is a left turn when you should have turned right. It is forgetting your wife’s birthday. It is a budget deficit, when you should have been running a surplus.

In the Big, Bad, Budget Abomination, for example, there are two huge errors. The obvious one: they increased the deficit. They chose more spending, not less – even more money they don’t have on programmes they don’t need. And they are doing it on such a large scale – with $2 trillion deficits – it is sure to blow up the entire US financial system.

We all know you can’t spend more than you make for long. But some people delude themselves that we’ll “grow our way” out of the debt trap. As we’ve seen, in the light of federal policies, such growth is less and less likely. As Fortune points out, the US may see more than 500,000 people emigrate from the country as a result of Donald Trump’s aggressive deportation campaign. The hit to the US labour force is likely to shrink the country’s GDP.

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Deficits will also gobble up the supply of capital. “As government spending increases, the less productive public sector absorbs more labour and resources, starving the more productive private sector of these critical inputs,” as Seeking Alpha points out. The predominant view is that, although the feds’ deficits are clearly a mistake, it will take many years for the harm to show up. So, the consequences, such as they are, will probably fall on our children and grandchildren, not on ourselves. And since none of us knows the future, why worry about something that may or may not actually happen sometime in the distant tomorrow?

Debt deniers and the Republican "spendfest"

Yet the iceberg is dead ahead and the danger looms closer. Inflation rose in June, for the second month in a row. Whether this marks the beginning of large price increases or not, we don’t know. But it might be a good idea to keep an eye on the lifeboats, just in case.

Other debt-crisis deniers look to Japan for comfort. Except for the fact that their economy is shrinking (along with their population), a Fuji of debt – the biggest pile in the world – hasn’t seemed to bother them. But wait. Even there, the error is becoming more apparent. The yield on ten-year Japanese government bonds has hit 1.595%, the highest since October 2008. The Japanese can do maths. At 250% of GDP, even a small increase in interest rates has a devastating effect on government finances. The government must borrow to cover the interest payments, which widens the deficit, increases the debt and raises the cost of interest.

Back in the US, the Republicans’ “spendfest” goes on and the errors multiply. Not only are they spending too much, they are claiming to spend too little. After all, if huge deficits don’t really matter, why try to save money on medical care for those who need it?“GOP lawmakers are warning that slashing spending on Medicaid and food assistance will cost the party seats in the mid-terms – threatening their razor-thin House majority – by kicking millions of Americans off safety-net programmes,” says The Hill. The poor lawmakers had to decide. Which error, which sin, which mistake to make. Being fair about it, they make them all.

For more from Bill, see bonnerprivateresearch.com

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