Wednesday, July 27, 2011

Debt Ceiling

Well it's all over the news and radio, every where you look and seemingly just about every half an hour here in the U.S.  I don't have much to say on this really, the whole idea of what our country has done to get into this situation is appalling and really it would seem to me all the most likely to happen scenarios are just ways to "kick the can down the road for the next guy".  There is one idea that I have heard Ron Paul mention that I really like which is to just wipe clean our debt to the federal reserve, I mean if you think about it a little that is like taking a loan out against our own savings and then paying the bank interest to do that...  Currently the majority of our debt is in this form and it could be a great first step in a general corrective course.

Now remember how I have mentioned that our currency is in fact a representation of debt, this would cause a very interesting scenario that would likely be of great benefit to everyone.  The act of wiping the slate clean of our own debt to ourselves as a nation would instantaneously deflate dollar values, as the volume in circulation would shrink, to what level is really up to the market but I suspect it would not be noticeable just not huge.  The net effect would appear that corporations would be making more profits, workers more money because the dollar has greater spending power and prices would be cheaper.... sadly it couldn't work quite like that because either workers would need to have a pay reduction (very tough thing to accomplish psychologically) or corporations profit levels would have to drop and the initial effect would likely be the latter followed by a gradual normalization of salary.

This scenario while sounding very radical has been done before as a way to help recover from the effects of defaulting on external debt....  yes that is right there is a recent example of exactly the same thing the U.S. is going through now from the start and well into recovery, ( see the story of the second Mexican peso for more info ) Mexico defaulted on it's "external" debt which caused a lot of capital to flee the country encouraging significant amounts of inflation and poverty, as a part of their recovery plan Mexico created the New Peso, essentially a new REPLACEMENT currency to be valued at 1/1000 of the original peso.  This greatly helped to bring back stability in the Mexican currency and their economy has been performing very well as a leader among the Latin American economies.

So given we have a blue print of what could happen if the U.S. govt. defaults on its external debts and how we might be able to recover.... does it not sound like the "radical" stop-gap that Ron Paul proposed could be a way to help put more money in our pockets, avert the near term problem without making matters worse and give us more time to completely make this problem obsolete?  Seems like a win-win to me...  What do you think?

1 comment:

  1. Addendum: Just to be sure my intent is clear here, I am not saying the proposed solution is not in fact a kick the can down the road plan because it is. I just see this one plan has the best possible outcome for the most people now. Bank accounts get deflated to a higher value, Debt default crisis is averted and the significant debt repayments that would be cut is an act of helping get our government moving toward a state of operating on a balanced or even a surplus budget.