Tuesday, April 05, 2011

Hopes for a U.S. government shutdown

The U.S. debt ceiling has been USD 14.294 trillion - since last February when it was raised by unprecedented USD 1.9 trillion - and the actual debt is just USD 0.095 trillion lower than this value.

The U.S. government shutdown is becoming a real possibility. It could come as early as on Friday - assuming that the Senate Democrats will try to reject the rather ambitious "3rd stopgap bill". The White House has already rejected it.

Despite the short-term shocks and hassles, I think that such a shutdown would be a very healthy procedure for the future of America and the world. The U.S. politicians' skyrocketing chutzpah - when it comes to the wasting of the taxpayer money - would be reduced a little bit. The future behavior of the politicians could become more responsible - in the U.S. and elsewhere.

Obviously, the debt ceiling is just another artificial and random bureaucratic figure. Without a bill that makes the USD 14.29 trillion figure special, nothing dramatic would happen when this threshold is breached. However, similar artificial thresholds may be necessary to make the politicians realize that something is getting out of control.

I am an admirer of the United States but I find the U.S. debt to be so high that buying of the U.S. treasury securities has become irrational. If you divide USD 14,390 billion by 0.309 billion - the population of the U.S. - you will get about USD 46,000. That's a lot of debt for an average person - including infants.

Moreover, the debt seems to be increasing more quickly than the GDP, despite the fact that the recession has been over for some time.

The world continues to lend money to America - because it has gotten used to it. Many people have decided that America has acquired an eternal degree, "the country that can always pay its debt". However, such a degree only exists in the minds of the people who don't think about the problems seriously.

Beijing, 2030: this realistic ad puts recent claims that shutdown would violate anti-slavery amendment under a slightly comical light. Under the influence of the current socialist government in America, the ad was ultimately censored away by the networks for which it was produced.

In reality, the American debt - when expressed in multiples of the GDP - is not far from the most troubled European countries. However, America is a bigger country. Does it make its debt safer or less safe? Traders obviously think that it makes the debt safer.

I think it makes it less safe because smaller countries such as Greece may be bailed out by other countries - such as Germany - that are afraid of the proliferation of problems that would result from a Greek bankruptcy. Now, Spain and Italy could be larger but if they found themselves in problems, they could still be bailed out - although it would be far more costly.

But almost no one can really bail out America. That's what makes people think that America will never need it. But this logic is kind of inverted and based on wishful thinking. America may need it.

In some sense, a dramatic impression is needed for the politicians to become more sensible. If such a dramatic event is absent, the likes of Timothy Geithner will continue to abuse arguments and would-be arguments in increasingly more lopsided ways, in order to uncontrollably increase the money that the big government needs.

(By the way, note how Geithner tries to demagogically identify the government shutdown with bankruptcy even though it is pretty much the opposite thing.) This has been the trend for many years and the fiscal irresponsibility of the U.S. government is not that far e.g. from the Greek example. A huge Europe-like socialist monster has been growing in Washington, D.C.

Incidentally, I think that too much pathetic nationalism is being used in those arguments about the "impossibility of the default". The whole financial system of the world would surely collapse, and so on. Shouldn't you try to regulate your insane nationalist messiah complex a little bit, Gentlemen?

If the U.S. government went bankrupt, it would just mean that the people who hold the U.S. debt would be in some trouble - they would lose a part of their assets. If the U.S. dollar went to 1/2 of its current value, its holders would lose 1/2 of their assets in the U.S. dollars. But would it make trading impossible?

It's just nonsense. The U.S. dollar and the U.S. treasuries are just two possible things that a person may hold. Some people think of the U.S. dollars as the "ultimately constant unit" of wealth. But this is a purely subjective feeling. People think in this way because other people think in this way. But obviously, if the credit worthiness of the U.S. government changed dramatically or the U.S. dollar fell, people would quickly understand that it's not a good approximation to consider the U.S. dollar or U.S. treasuries a constant. They would quickly pick a different benchmark or unit to express their wealth.

Any upheaval of this magnitude would cause many shocks across the world - but they would have approximately as many winners as the number of losers (outside America). However, for America, that would be the ultimate shock, and this is the event you really want to avoid.

So if I were their constituent, I would encourage the lawmakers to get rid of the fear of the government shutdown, prepare for it, and actively work so that it will actually occur because this "diet" is badly needed. There have been about 5 government shutdowns in the 1980s and 1990s - the last one in 1995 (when the debt ceiling was just 5 trillion) helped to create the Clinton budget surpluses around 1999-2000. Sixteen years is clearly a long time...

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