Since the start of the financial crisis, politicians have done nothing to save it. It would be difficult to find a single success story from the multitude of regulations and programs that have been offered over the past five years. The national debt has risen by trillions of dollar, and the housing sector is still in limbo.
We now have transcripts of Federal Reserve monetary policy meeting transcripts for 2006. It is clear that the Fed did not know about the imminent housing market collapse and subsequent crisis. Although there were warning signs, the Fed leadership failed to recognize them due to incompetence or arrogance. Ben Bernanke called the cooling housing boom healthy, and stated that “so far, we are witnessing, at best, an orderly fall in the housing market.” Tim Geithner complained about Alan Greenspan not getting the credit he deserved. This view is only shared by a small number of people these days.
The federal debt has risen to an equal amount to the country’s entire GDP today, thanks to both the continuation of existing policies and the introduction new ones. Add in future obligations due to an aging population, more money to Fannie & Freddie, pensions, and the total rises up to levels that are hard to visualize and almost impossible to repay. Given that there is still high unemployment and rising household debt (up 9.9% for installment debt in November, the fastest increase since November 2001), taxpayers cannot help to raise revenues. As the financial sector becomes more complex and opaque, taxpayers are unlikely to help with revenues. This is because unemployment remains high and household debt is increasing (up 9.9% in November for installment debt, the fastest increase since November 2001).
What is the best way for the country to deal with its massive debt? There are only four options to help the country get out of its current debt mess. The default and growth options are unlikely to work. While there will be no overall growth as consumers and local governments reduce their debt, certain sectors will thrive. A default by the federal government is unlikely, regardless of how severe the country’s debt problems are. It would increase borrowing costs and have other consequences that are too frightening to contemplate.
There are two other options: Austerity (spending less money) and inflation. While austerity is the best option, it can cause unrest and pain in the short-term. The majority of the population is unaware of the magnitude of the country’s financial problems. Politicians have spoken a lot about reducing expenses, but not taken any action to address the issue. Although cost savings have been made, they won’t have any real impact. The administration requested and will receive an additional $1.2 trillion in debt ceiling increases over the next weeks.
Inflation is the best course of action. Holders of U.S. bonds and any other dollar-denominated financial instrument (including stocks or bonds) will be affected. The dollar will lose value and holders of U.S. debt will be burned. However, the government will not care as it will see no other political option. Holders of precious metals such as gold and silver as well as holders of stable currencies will be rewarded when this happens.
Alan Noblitt, the owner of Seascape Capital, is a note investors. He is a note investor in all 50 states, and can assist mortgage note holders with almost any situation.