This is the way the world ends/Not with a bang but a whimper.
T.S.Eliot, The Hollow Men
Merrill Lynch published this chart last night of the U.S. Short term Treasury obligations of $742 Billion. Note that 2/3rds of this debt is held by the central banks of about 8 countries including China, Russia, Saudia Arabia, and Japan. Let’s assume the dollar keeps falling because the Fed is afraid to raise interest rates in an election year. At what point do we encounter a “buyers strike” from these Central Banks at a Treasury Bill auction, which forces rates much higher in order to keep paying for the War In Iraq? What happens then? According to Merrill, this is what happens.
The US consumer is ultimately forced to violently adjust its impaired balance sheet. An insatiable appetite for debt comes against the constraint of reduced global credit availability.
There are only two ways to “violently adjust” a balance sheet: forced asset sales or bankruptcy. Either one leads to financial panic. Someday when the history of the decline of the American Empire is told, we will look at this chart on the left, and see that it was when Ronald Reagan came to office that we started going into debt to the rest of the world. And we will know that the idealogical stupidity of the conservative revolution lead us to this Day of Reckoning.
The task of rebuilding America as a producing/saving economy as opposed to a consumption/debt economy will be left to the Democrats. It will be painful and the supply side economist idealogues that brought this plague upon our nation will retreat to their think tanks like Heritage and AEI and pretend it wasn’t their fault.
Our Puritan forefathers would have locked them in the Pillory stocks for public shaming.