By Bill Wilson
In the first part of “The ‘new’ normal,”
we analyzed the dilemma faced by fiscal reformers seeking to make
budgetary cuts or even balance budgets in advanced economies that have
active central banks.
Namely, if central banks around the world can just engage in
unadulterated monetary expansion to enable profligate governments to
perpetually refinance new and existing debt obligations — hardly a new
practice — what need is there to ever cut spending?
Beyond that, we previously noted that even though too much debt can
inhibit economic growth, and that a debt-induced funding crisis can even
bring a society to its knees as in Greece, the world central bank
cartel possesses a trump card.
So dependent are governments (and other financial institutions) on
this unlimited financing scheme that, if the printing presses were shut
off, it would likely crash the world financial system as governments
and banks defaulted on their borrowings. That is because the large bulk
of debts, particularly by governments, are never paid. They are simply
rolled over via refinancing.
In addition, financial elites argue that cutting government spending
and borrowing would have a deflationary effect, increasing
unemployment, causing a recession or worse.
This creates something of an impasse to adopting responsible fiscal
reforms in Washington, D.C. and other capitals the world over.
But since that is more or less the state of affairs — the world
central bank cartel, after all, is in a position to dictate such terms —
the onus is therefore on fiscal reformers to show why spending should
be cut anyway, and that sound money should be restored. The fiscal
reformer’s case is very much a prescriptive one to make, whereas those
in favor of unlimited, perpetual deficit-spending and never repaying the
national debt need only argue for the status quo.
The first reason for action is because it is necessary — before it is
too late. The greatest threats to the current system are black swan,
worst-case scenarios. For example, 1) the increasing possibility of
widespread rejection of the dollar as the world’s reserve currency
because our debt load is too great; 2) that oil and other commodities
will no longer be settled and priced in dollars, causing rampant
inflation domestically; or 3) China and other foreign creditors actively
dump their U.S. treasuries holdings in an attempt to crash the market
for U.S. debt and dollar-denominated assets.
Any one of those events occurring would likely cause the other two to
take place, and therefore pose considerable downside risks. The death
of the dollar as the world’s reserve currency would significantly
increase the costs of servicing U.S. debt privately, and lead to much
higher prices (i.e. hyperinflation) here in the U.S.
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