Friday, February 12, 2010

How Apocalyptic?

Just how bad would it be if the US government lost its "risk free" debt rating? One positive consequence that might arise is that officials would no longer be able to easily consume more than is produced just by issuing debt; they would have to pay more attention to the price signals. The question is: would they? Or are they so insulated that the would continue valiantly down a very obviously disastrous path?

That question wasn't meant to sound rhetorical, but I'm afraid it does. Our politics seem to be characterized by such head-in-the-sand positions. It seems likely that the federal government will continue issuing bonds even after its ability to pay them (at the rate investors require) has become doubtful. That leads to either: 1) a default or 2) a major political upheaval that drastically reduces the scope of government. Or both. In the long-run, a political upheaval might be desirable.

Actually, there's another option: massive inflation. Inflating the money supply will allow the government to pay its increasingly expensive and growing debts with decreasingly valuable currency, and thus spare itself the dishonor of breaking (the letter of) its promises. The decline in real value won't go unnoticed, however, and the price of the debt will continue to rise in a deadly feedback loop. It has certainly happened in other countries. Supposedly it took a wheel-barrel full of Marks to buy a loaf of bread in post WWI Germany. Zimbabwe is currently experiencing the same thing, as have the following countries in recent memory: Mexico, Argentina, Russia, Greece, Austria, Hungary, Japan, Israel, Poland, Romania, Ukraine, Turkey, Taiwan... (the list goes on). Why can't it happen here in the 'States? Because we have a growing economy? 'Cause we're the only superpower? 'Cause we're, what... geographically large? Assumptions of our invulnerability to economic law often seem to implicitly rely on such tenuous foundations. The growth of our economy is good reason for optimism, but its not something that can be taken for granted, nor is it independent of things like an unstable money supply.

Setting Kurzweilian optimism aside for a moment, how bad is hyperinflation really? Well, for starters, the value of currency you have saved approaches zero very quickly. That's probably meaningless if you're an American, cause it's unlikely that you've saved anything anyway. Perhaps more relevant in wage-slave terms: whatever your employer pays you now, it will become insufficient to pay your mortgage (assuming adjustable rates), buy gasoline, buy groceries, or buy heat. You'll demand more from your employer, but they're faced with the same pressures, and eventually somethin's gotta give. It'll be your employment, one way or the other. You'll cry out to your government, and they will listen. They will help you: they will give you currency. You'll find that without also having given you wheel-barrels, you can't do much with it. You won't even be able to hire a plumber to unclog your toilet-pipes after you've discovered the most economical use for the currency your government's given you. Its no wonder that "wars, depressions, and social and political upheaval" often follow.

Is this an exaggeration? Hopefully. But it wouldn't be unreasonable to speculate that our current course, if unchecked, will lead there. Its (almost) funny how conservative many people are with the climate for instance, and how reckless they are with money. You've probably heard a well-meaning aspiring intellectual say something like: "Its true that we're not a hundred-percent sure about the effects of human action on the global temperature, but if the effects are large then we're facing disaster. Therefore, until we're certain, we should take the most careful possible route." Its not an un-compelling argument, which makes it all the more relevant in cases where we're absolutely certain that a given path will be destructive.

In other words: Yes, there's a chance that global warming will hurt you and everyone else. But hyperinflation will absolutely-positively-definitely hurt you and everyone else. So, to you crusaders for justice, civilization, and humanity: please focus your attention on real risks.