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Source link: http://archive.mises.org/3644/is-the-us-still-a-good-risk/

Is the US Still a Good Risk?

May 30, 2005 by

America’s trade woes have deep root in how our public finances are conducted. Bad debtors like we are usually come to regret not discharging their debts honorably. Our fate—of having no choice but to buy more expensive goods, especially commodity goods—may be visited upon us as soon as our creditors realize that lending into arrears, where no collateral is offered, is simply a banker’s euphemism for the act of throwing good money after bad. FULL ARTICLE

{ 3 comments }

Neil Craig May 30, 2005 at 1:30 pm

Do bad debtors usually come to regret not paying off? Certainly a default on the dollar would destroy that as an international currency, probably putting the Chinese whatever in first place. It would also encourage the current position of being the world’s military superpower (the fact that the Iraq adventure has not proven profitable is very good for humanity). It would probably lead to a world recession.

None of that means it would cost the US less than paying out.

tz May 31, 2005 at 10:18 am

JPM and GS can just sell OTC (is that over the counter or under the table) credit default derivatives against the USA and transfer the risk. It worked so well with GM…

Mark Humphrey May 31, 2005 at 11:25 pm

Sean, thanks for your interesting commentary.

You seem to imply what I have assumed to be true: in the aggregate, Americans are depleting their “pool of funding”–the goods that workers and capitalists live on while they await the period of production. By depleting the provision for the future, Americans reduce their ability to maintain producer goods and effectively eat their seed corn.

In the absence of the benevolent exchange of foreign goods for dollars, and foreign investment in US short-term paper, the process I described above would necessarily force a shortening of the structure of production in the United States. As the production structure gets shorter, relative prices adjust to favor the production of consumer goods over intermediate producer goods; within various branches and levels of production, price adjustments force the abandonment of more capital intensive, round-about ventures in favor of less capital intensive and less volume-productive enterprises.

What I am attempting to describe is similar to the recessionary phase of the boom, in which relative price changes that reflect the reality of scarcity force the abandonment of capital intensive white elephants in favor of more immediate and pressing needs. Except in the present situation, the retrenchment may not be a short-lived cyclical downturn in which the wasteful malinvestment of the boom is purged. Rather, the shortening of the structure of production might become chronic due to unrelenting monetary abuse, combined with big government spending and regulation.

In other words, surrealistically low interest rates not only inspire the waste of scarce and precious capital through leveraged speculation (stock, real estate, and derivatives bubbles), but they discourage saving and whip up consumption. But the monetary alchemists at the Fed believe their power resides in their ability to take interest rates down. Ben Bernake believes low interest rates are the reflection of a surfeit of capital! It seems likely that any downturn in the USA will be the occasion for the Fed to send rates into the cellar. Such a development, of course, would insure that the pool of funding declines more than it has already!

If events follow such a course, the inflow of capital into the USA will slow, established businesses that were profitable might lose money, and debt repayment difficulties might proliferate.
The ultimate effect of such a process is, as you know, a monetary deflation.

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