Let me state from the outset something which Dr. North saw fit to repeat several times in the book: all the strategies advocated are, as of 1982, legal. This, however, did not stop Dr. North from relaying stories of how people had evaded price control laws in the past, combined with ambiguity about when it might or might not be justified to break the law. North has been known to flirt with the notion of non-violent resistance to unjust laws, something he discusses also in his 1983 book Tactics of Christian Resistance.

The book begins with a description of the Ponzi scheme that we strangely refer to as Social Security, which North refers to as The World’s Biggest Chain Letter (vii). Drawing on statistics showing the insolvency of Social Security, he makes a powerful case that it cannot be salvaged without persistent high deficits. He has been proved right in this judgment, as the national debt which then was about 33% of GDP has tripled to 100%, for an advance of over 2% per year. He believed that deficits would lead to increased money printing and therefore high inflation. In those thirty years, the money supply (M1) has quintupled from 440 to 2280 billion dollars, an average of 5.5% monetary inflation per year. But price inflation has moved more slowly — $100 of 1982 money are worth $235 of today’s money, which is in itself evidence of organized legal theft by our government, but amounts to just shy of 3% annual price inflation. That’s enough to distort capital markets and leach away a great deal of potential prosperity, but not enough to cause the pain it would take for politicians to impose price controls.

Gary North thought that the end of the Ponzi scheme was at hand in an inflation followed by price controls, which would continue for only a few years because people tend to find price controls unbearable. Instead, the Ponzi scheme has simply continued to grow. The national debt has tripled and SS now costs $800 billion dollars a year. The deficit is running about 8% per year. In other words, the underlying conditions which lead North to predict price controls have only intensified. The ship of state is still headed on a course to wreck on the iceberg of social security, only the ship is now going four times faster and the iceberg is twice as large. Gary North is still of the opinion that price controls are coming, or he was as recently as 2006. If he is correct, then the message of Government by Emergency is still very relevant. Even if he is wrong, much of the advice in the book is still good economic advice in a world where the social safety net is threatened: tithe, work six days a week, unplug the TV, develop multiple income streams, save at least 10% of your money, and consider cutting off support to your college-age children.

The title refers to the growing power of executive orders and the federal bureaucracy in general, a growth which has come as Congress has become derelict in its duties. In times of vaguely defined national emergency, the President has been given dictatorial (and probably unconstitutional) powers which include price-fixing. It has been practiced before, under both FDR and Nixon, and North believes it will again.

In the book, North urges people not to rely on pension plans, but rather to prepare for a failure of the US dollar to buy much of anything except increasingly scarce goods rationed at low prices. He urges readers to begin acquiring hard assets, and to move away from cash. He also urges them to avoid consumer debt but to keep open a line of credit so that they can have the ability to buy goods in large quantities should the early stages of the crisis arrive. He believes that the economy is headed toward “feudalization,” a state in which the division of labor is significantly hampered and trade becomes more locally based, with rewards for those who can secure supplies of hard-to-get items, along with those who have skills in repairs. Because both wages and prices could be frozen, he encourages employers to find non-monetary ways of benefiting their employees, in order to keep them from leaving as the purchasing power of their wages decline. Finally, he devotes a significant amount of space discussing the philosophy of barter, keeping a low profile, cultivating business contacts, becoming self-employed, understanding real profits as opposed to cash profits, and other skills useful both in times of price controls and in easier times.

The book remains relevant, but it is dated by the thirty years that have passed since it was revised. More up-to-date versions of Gary North’s economic thoughts may be found online at garynorth.com.

2. Fred’s advice for the Drug Enforcement Agency: http://fredoneverything.net/DEA.shtml

3. A Black Panther supporter threatens the life of a member of Youth for Western Civilization, showing that multi-culti centers are still upheld implicitly by the threat of minority violence: http://www.westernyouth.org/articles/youth-for-western-civilization-makes-waves-on-constitution-day/

4. This isn’t strictly something to read, but see this:

5. The End of ‘Pax’ Americana, by Pat Buchanan

6. Wellesley Public School Students Learn to Pray to Allah:

7. Spanish, Italian debt downgraded as the debt sickness continues spreading through Europe.

8. Is Herman Cain the leading Republican candidate? Oh, this could be fun!

9. On the criticism of Steve Jobs for not publicly making ostentatious donations to charity. Because if you don’t run around doing your good deeds toward men, you’re not an acceptable businessman in the United States of today. And because, of course, improving the lives of workers and producers by making awesome products and creating boucoup jobs is “capitalist greed.”

10. An article on the not often discussed mass immigration of Americans into Mexico, and on massive economic growth in Mexico in the last ten years is making the US look less appealing to Mexicans. That’s right, folks — the flood of Mexicans into the US turned out to be a specific historical phase caused by particular circumstances, not the endless nightmare that many have made it out to be. (While we have relatively little to fear from Mexico, we are tearing apart their legal system by exporting our quixotic war on drugs. See #1.)

Enjoy!

The United States is not going to get hyperinflation unless Congress nationalizes the Federal Reserve System.

It will get mass inflation at some point: anywhere from 15% per annum to 30%. But it is not going to get 50% or 100% or more.

I won’t recap the whole article, which I recommend you read, but one of North’s main contentions is that there is no incentive for the banksters at the Fed to hyperinflate. They would lose a large chunk of their pensions, while at the same time incurring the wrath of millions of voters who now understand what causes inflation, partially thanks to the educational efforts of Ron Paul.

My response to North is below the fold. It’s depressing and 3500 words long. Don’t read it unless you’ve got time on your hands and are emotionally stable enough to think about the sky falling without freaking out. For those who don’t want to read the whole thing, the bottom line is that I think that North makes some excellent points but fails to meaningfully grapple with some of the powerful financial pressures which could lead our country into hyperinflation.

Now, Gary North is right in saying that the bureaucrats at the Fed want to avoid blame and save their pensions. He is also correct in saying that the way to avoid hyperinflation is to act like Paul Volcker and allow interest rates to shoot up and credit to contract and a recession to keep prices from climbing too fast. Inflation began to shoot up in the late 70′s, with prices shooting up 5% in ’76, 7% in ’77, 9% in ’78, 13% in ’79, and 12.5% in 1980. And so Volcker reined in credit, letting interest rates go sky-high.

And here’s where things get sticky — interest rates had less potential to destroy things about thirty years ago. The total debt of the United States government in 1980 was about 900 billion dollars — around 30% of our nation’s gross domestic product. Government revenues were at about 520 billion with a deficit of about 75 billion dollars — we ran deficits at about 15% of revenues. For a few years, Volcker had to hold the real interest rate on US government debt somewhere around 10 to 15% in order to beat inflation back down to around four percent. This approximately 10% rise in interest rates equaled about 90 billion or so in excess interest payments — only about 18% of government revenues. We had a relatively low national debt, a large but manageable deficit, and therefore plenty of room in the budget to absorb the higher costs imposed by rising interest rates.

Fast-forward thirty years, to today. Today, the total debt for the US government is about 14,700 billion dollars — around 100% of our nation’s GDP. Our revenues are around 2250 billion per annum, with outlays of about 3550 per annum — a deficit equal to about 57% of income. So our debt is about three-and-a-half times bigger, and our deficit is about four times bigger, relative to revenues, than in 1980. Our debt load is comparable to that of Greece, both in the ratio of debt to GDP and the ratio of the deficit to revenues. The difference, however, is that we don’t have anyone to bail us out.

So what happens if this generations gets its own Volcker? In this day and age, a rise in the real cost of debt payments by 10% means a rise of 1400 billion in government costs. As we calculated above, Volcker 1980 raised the government’s costs of operation by about 18% of revenues on top of a 15% deficit — a hefty but not fatal cost increase. A Volcker 2011, according to these rough figures, would raise the government’s cost of operations by 62% on top of a 57% deficit.

If government takes the non-inflationary Volcker route, it immediately has to deal with a new deficit gap of over 119% of revenues. To even balance the budget, let alone trying to pay down any of the national debt, would require immediately cutting all non-interest spending to a mere 24% of their current levels. Not a cut of 24% — a cut to 24%. So, on the one hand, Congress is faced with the option of rapidly dismantling over 3/4 of the services it provides to taxpayers and non-taxpaying voters. On the other hand, if it does not make such cuts, Congress faces a world where people are increasingly unwilling to lend the US money, as our debt flies past 100% of GDP and our deficit is well beyond the Bernholz line.

The drying up of available credit, combined with soaring interest rates and a government four times larger than we can afford will place tremendous pressure on our government to try to print its way out. If you think the people of the United States would be angry about hyperinflation, you should consider how much more angry they might become if they learn that Social Security, Medicare, and a host of other programs are all disappearing overnight, along with massive government lay-offs. The public reaction will make Volcker’s tractor-driving protesters look like girl scouts.

The results of trying to stop hyperinflation could produce some of the strongest hyperinflationary pressures imagine. Somewhere, deep in his gut, this is what Gary North fears as well. Despite North’s assurance that “Americans should not take seriously the scenarios of Germany-Austria in 1921-24″, he sure does put a lot of disclaimers in his essay. Let’s look count the disclaimers:

[1] The United States is not going to get hyperinflation unless Congress nationalizes the Federal Reserve System.

[2] The FED could be nationalized. Congress could take over. Then all bets are off. But if we are talking about the existing Federal Reserve, with government-appointed academic economists visibly in charge and the privately owned and operated FOMC making the decisions – which will favor large banks – there will be no hyperinflation.

[3] This is why I do not think we are facing hyperinflation . . . at least not until Congress nationalizes the FED. [ellipses original]

Of the three disclaimers tucked away in the article, the word ‘until’ in the third is most revealing. At least for the split second when North typed that word, the scenario he envisioned went something like this: The incentives within the Federal Reserve System will cause its operators to try to avoid hyperinflation, even at the cost of sky-rocketing interest payments. Congress, which is responsible for budgets, will find this pressure intolerable. At some point, in desperation, Congress will pass legislation allowing it to bend the Fed to its will. And then, as North puts it, all bets are off.

Why is it that, throughout most of the article, North barely mentions the possibility of Congressional interference, let alone explains what would cause it? Well, it could be that North is tired of crying wolf. It was he, after all, who was arguably the most significant of the Y2K theorists, running an entire website dedicated to teaching people that the US economy would collapse into the stone ages due to a computer glitch that would occur when the world entered the year 2000. He also had a similarly apocalyptic tone about AIDS and the Soviet Union, though I do not know for certain whether he made any other specific predictions that failed as spectacularly as his Y2K predictions.

Regardless, one could see why Gary North might want to disassociate himself from the sky-is-falling people who have been predicting imminent hyperinflation for years now. But it would be a pity if, when the sky actually is falling, North were to be among those saying it isn’t.

Now, if I had to bet on it, I don’t know whether I would bet for or against hyperinflation. The actions of the United States government have been so erratic over the last few years, and the banking system is in such a bizarre state, that I simply do not know how I would go about determining its likelihood.

Now, I don’t practice Santeria, and I ain’t got no crystal ball, but I do know enough about how sovereign debt to know that there are just four basic ways this debt situation can come to a resolution. And all things do come to a resolution. So, from my favorite to least favorite, here they are, along with a few notes on what might cause them and what they might mean:

1. Default

This is pretty much self-explanatory: we refuse to pay our creditors what we promised them. This has the advantage of eliminating the horrifying debt problem, but does so at the cost of seriously reducing America’s perceived credit-worthiness and ability to access credit in the future. It would also put severe pressure on all institutions and investors who have bought US debt. Further, because it severely curtail our ability to borrow money, it would almost certainly force us to balance our budgets in relatively short order by about 40%.

It is unlikely that, without significant external pain of some kind, the American political class will be willing to tarnish the reputation of the US government, greatly shrink government, and possibly cause a Constitutional crisis all at the same time. And so things are likely to continue as they are until the situation is much, much worse.

Another possible complication of a default is that the government, wishing to minimize the negative consequences of a default, might only engage in a partial default. Thus, instead of simply failing to redeem our debt obligations, we might announce that we are willing to only redeem them at some fraction of their face value. We could do what the US did in 1779, and only pay 0.1% of the face value of our debt. Or we could just shave a miniscule amount off our debt as a timid first step toward paying down the debt, say, offer to redeem our debt at 85% of its face value.

The problem with a relatively minor default is that it brings on many of the consequences of a major default (failure of financial institutions, lack of trust in the US dollar, drastic lowering of credit scores), without achieving the main benefit of a default: making the debt problem go away. It’s possible that if we engage in a too-small default, we’ll be facing economic instability and higher interest rates, and be in an even worse situation than what we started with. If we are going to default, we must do so massively. Any too timid default simply escalates the problem, prolongs it, and will require another default or even a hyperinflationary period.

The eventual winners from a default will be the taxpayers. The losers will be government workers and people who receive a variety of benefits, along with people who were short-sighted enough to lend the US government money.

2. Hyperinflation

This option is one that is usually popular in smaller, less-organized nations. It’s really a thinly disguised version of option (1). Instead of defaulting on our debt, we simply announce to the world that we are printing 14.7 trillion dollars in ten-thousand dollar bills, which we will give to anyone who wants to cash in their debt with us. We can offer to deliver payment to our smaller creditors in the form of suitcases full of cash. We can pay China back by sending helicopters full of dollars over there and just throwing tons and tons of dollars out of them.

The moment we’ve sent out enough dollars that the world realizes we’re hyperinflating our debt away, the US dollar will cease the be the world’s reserve currency. Everyone will be trying to unload their dollars to buy anything they can. If dollars do not become completely worthless in such a scenario, we will wind up buying double cheeseburgers on the $20,000 value menu at McDonalds.

Hyperinflation has basically the same benefits that a default has: it makes the debt go away. On the other hand, it absolutely wreaks havoc on all sorts of long-term contracts. Anyone who has loaned someone money is going to be repaid in worthless money. Anyone who has taken on massive debts will be able to pay them off with a couple dozen eggs.

The winners in a hyperinflation are people who, prior to the hyperinflation, borrowed a bunch of money. The losers are hard-working, frugal people who saved money without realizing that the US government was going to destroy it. Because of the instability which hyperinflation causes, along with the way it tears apart all long-range economic planning and rewards bad behavior, I would much prefer default to hyperinflation. Rural people also tend to fare better than urban people during hyperinflation.

3. Default and Hyperinflation

This sounds awful, but there’s two possible ways it could occur.

It could occur if we start with a partial default. Suppose the US defaults on 10% of its debt. Once we’ve done that, the markets will be going crazy, people will be running away from US debt, and we’ll still have a debt of 13.2 trillion dollars. Because our debt rolls over at about 20% each year, we need to find 2.6 trillion dollars of credit per year. But who wants to loan 2.6 trillion to a country that has demonstrated its lack of resolve to keep its own promises. I don’t. If the US cannot attract lenders, it will either have to default again or hyperinflate the debt away. But if the US does attract lenders, it will be at a high cost, say, 10% or even 20% annual returns on the debt. Because 10-20% of 13.2 trillion dollars is about 1.3-2.6 trillion dollars in new interest payments, we now face an even bigger deficit, leading to a further flight of creditors and even higher interest rates. This keeps on going until the lending market completely breaks down, and then we hyperinflate our debt away. There’s a couple ways this could play out, but the bottom line is that a timid default could send us into hyperinflation.

Another way this could occur is if inflation keeps creeping steadily up. This is entirely possible. As of September 2009, prices were deflating at almost 2.5% per year. As the inflation of our monetary base started to work its way into the system, deflating dropped to 1% by mid-October. The deflationary trend caused by credit contraction was overcome by the inflation of our monetary base to the point that price deflation stopped altogether by the beginning of December, and inflation set in at 1% by the end of December. By mid-January 2010, inflation hit 2%. By March 2011, it reached 3%, and as of today we are at or near 4% annual inflation.

Now, despite the fact that inflation is occurring at about 4% per year, the nominal annual interest paid on treasuries right now is around 0.1-0.2%, which means that investors who loan the US money are currently accepting a loss of almost 4% of their investment per year. Perhaps they are crazy enough to do this at present, but will they be crazy enough to do this if inflation keeps creeping up and hits 5% by the end of the year, or 7% by 2013, or 11% by 2015? I doubt it. If inflation keeps increasing, the interest rates on our debt keep increasing. So if we experienced sustained inflation over a period of about five years, the rollover time for our debt, our interest expenses could skyrocket during that period, leading to higher deficits, more money-printing, and even higher inflation rates.

If we slide into hyperinflation gently, as Israel did in the 80′s, the extremely high interest rates that would entail for US debt could mean that we hit hyperinflation, or something awfully close to it, with correspondingly high interest rates keeping us in ever-higher debt. Remember — hyperinflation only gets rid of debt if it is rapid and unanticipated. If people are able to watch us going into it steadily, year by year, hyperinflation wouldn’t solve our debt problem, but would only cause increasing instability in our financial markets. And then, when things got bad enough, we would have to default.

Again, hyperinflation, like default, must be done deliberately and decisively, in such a manner as to rip off the band-aid all in one tug. Otherwise, it could lead us into a prolonged period of financial troubles which could leave our economy in far worse shape than the Great Depression did.

So if we default or hyperinflate, let us deflate or hyperinflate once and for all.

4. Neither.

I highly doubt that we’ll be able to resolve our debt problem without defaulting outright or defaulting through hyperinflation. But maybe, just maybe, if a number of highly unlikely things happened at the same time, we could pull out of this. Here’s the things we’d need. We will probably need some combination of all of them to pull this off. Here’s what it would take.

1. Austerity. If we want to end the debt problem, we have to close the deficits and start paying down our debt. The problem with this is that if we want to just close the deficit, we’ll need to cut about 50% of government spending, other than interest payments, right away. And that wouldn’t even solve the problem — it would just hopefully keep it from getting worse. To start solving the problem, we’d have to cut even deeper, cutting out maybe 50% of the government.

But there’s more bad news. A genuinely austere government couldn’t keep playing the money-printing games it plays to keep interest rates low, so austerity would likely mean higher interest rates, which means more deficits. Depending on how high interest rates go, we may well have to wind up cutting 75% of our federal government just to keep ourselves able to pay our interest rates. If real annual interest rates went to around 15% and stayed there for awhile, we could cut every cent of government spending — every soldier’s pension, every social security, every government salary — by 100% and still not balance the budget.

So the question is — do the American people have the will for the austerity it would take to avoid the twin temptations of debt and hyperinflation? And remember, if we cut taxes at all, that means even more austerity will likely be necessary. Given the current political realities of the United States, I think it’s pretty clear that austerity won’t get us all the way there. It probably won’t even get us a tenth of the way there, shy of some economic catastrophe scaring our spending-drunk nation sober. Which brings us to factor number two:

2. Higher revenues. If we can’t close the deficit through austerity, and we can’t, we’ll need more revenues for the Federal Government if we are to avoid hyperinflation and/or default. This is troublesome, because there’s only three ways I know of that we can increase revenues. And all three are doubtful at best right now.

(a) A growing economy. If, somehow, the economy were about 40% bigger, we’d get 40% more taxes, and the budget gap would close. Sadly, the economy seems to be halfway dead right now, with no sign of recovery in sight. So it’s highly unlikely that a growing economy will rush in and save us. With the debt growing at 10% per year, the economy would have to grow by 10% just to keep up, and 10% is impossible. Even 4% is highly unlikely. So given the current rate at which the problem is getting worse, by the time the economy grew enough to solve the problem it would be too late.

(b) Higher taxes. Higher taxes, one would think, could be a way to raise taxes. Right now, the Federal Government collects about 15% of the nation’s gross domestic product directly through taxes. If we can raise that number to 24%, a tax hike of about 60%, then we could balance the budget. But there’s a problem. If we raise the tax rate, we will depress our economy. If we are to the right of the top of the Laffer curve, and I don’t think anyone knows, then the depression of our economy will shrink it so much that raising taxes will actually reduce government revenues.

(c) Lower taxes. There is a theory, popular in Republican circles, that lowering taxes will lead to economic growth, which will lead to higher government revenues. The problem with this is that even if it works, it will take a fair number of years before any tax cut could be compensated for by economic growth. And in the meantime, the lost revenues from the lowered taxes will increase our deficits and leave the problem much closer to spiraling out of control.

3. Inflation. Right now we are inflating our debt away at a little less than 4% per year. Unfortunately, we are adding 10% per year to it right now. If, somehow, investors are dull enough not to realize or care that we are ripping them off by about 4% to 10% every year, and they continued being apathetic about this, it’s possible that we could inflate away a small portion of the debt. The problem with this option is that, if the investors turn out not to be stupid, we get rising interest rates and could easily set off a hyperinflationary spiral.

4. Low interest rates. Somehow, we’ve got to keep interest rates low. If investors are scared for their lives about Europe, it’s possible that they’ll keep running to treasuries in fright and keep interest rates low for a while. This can buy us a little time, but only so long as the rest of the world continues to look like it’s about to fall apart. Of course, if finances in other parts of the world actually do fall apart, then we’re lost. At best, fear can buy us a little time and save us a little bit of interest.

Conclusion

While option (4) is might be possible in theory, the drastic steps that must be taken, along with the good fortune which would be necessary to pull it off, make it highly unlikely that we will manage to avoid either default or hyperinflation.

Forgive us our debts, as we forgive our debtors . . .

Financial markets have long watched the 10-year and 30-year treasuries because they have long been considered a good indication of long-term interest rates. While I’m sure they are still interesting, I think a more important number to watch now may be the 5-year treasury bond. You see, a 10-year treasury will mature at a time when, according to the highly optimistic assessment of the Congressional Budget Office, we as a nation will be more than 23.5 trillion in debt. Best-case scenario. Right now, at 14.6 trillion in debt, our country is already standing at the edge of a cliff, its economy incredibly volatile. Increasing debt loads, changing interest rates, and monetary inflation all combine to make the ten-year outlook way too foggy for the 10-year treasury to actually tell us a whole lot about the next ten-year period. And the 30-year treasury, forget about it. The US dollar and the US debt simply will not survive that long — there’s no way to run the math that doesn’t involve drastic inflation or default.

As detailed in a recent article on rollover risk, US federal debt is currently loaned out in a variety of bonds ranging from 1 month to thirty years in maturation dates. But the average time for our debt to mature and be replaced by new bonds, a process called ‘roll-over’, is about 4 years 2 months. The 5-year treasury is currently the closest single bond to the average length of a debt roll-over cycle in the United States. The yield on the 5-year treasury on August 1 was 1.32%. In the last eight days, it has plummeted to just 0.91%. That’s incredibly low. That means that if current annual inflation rates of about 3.7% persist over the next five years, a $100 5-year treasury bond will be ablto buy only what $83.50 could buy today. That means that so many people are rushing to buy 5-year treasuries that the US government is able to sell them to people at an anticipated 16.5% loss. And that’s assuming that inflation stays stable, which is a dangerous assumption, because the fundamentals of US currency lead many economists (pretty much all except the crazies like Paul Krugman) to think that inflation is likely to rise. That’s what happens when you print and print and print money to cover all your needs. Robert Murphy has written a nice little piece on that here.

So why would people accept a guaranteed 17% loss on their investments over the next five years? Easy. It’s because they are much more afraid of what they could lose if they invested somewhere else. They are running to one of the few perceived safe havens left — the US government’s invincibility.

The clumsy three-year-olds who run this country have been allowed to play with matches and gasoline inside the walls of our financial house for about a century now. President Obama talks about adjusting the furniture, and sweeping it up a bit, and maybe doing some serious redecorating, but the fact of the matter for those willing to look is that the house and been engulfed in flames for the last few years. The events of the last eight days or so, to continue the metaphor, are the sound of a massive explosion somewhere within the burning building. We can’t quite make out all the details of the explosion, but we know it’s dangerous. And so people are running to cover in the form of treasury bonds — investments in the house. Hearing the blast, panicked people are running into the burning exploding house.

That’s what dropping rates on the 5-year treasuries mean. That’s how insane things are now. Now, it is true that not everyone is running toward the house. Some people are already out of the house, or are actively running away from it into gold, silver, and a variety of other investments which are essentially bets against the burning house. But the drop in treasury bond yields means that overall demand on the 5-year treasuries is going up. Basically, more people are still running toward the explosion than away from it.

These people who are running toward the explosion are keeping the interest rates on US debt at extremely low percentages. They are gobbling it up at startling rates, which is the only reason a nation 14.6 trillion in debt with a GDP of 14.8 trillion is still able to keep borrowing at the rate of 1.4 trillion per year. But there is a law that governs large crowds running toward a burning building. Eventually the crowds will get close enough to the burning building that they feel the heat and begin to run away. Some people will likely burn to death as the crowd behind them hasn’t yet realized the danger.

All in all, everything averaged together, the US is only paying a 1.4% annual interest on its debt, which, when we consider that we have 3.7% inflation, means that we’re effectively paying an interest rate of negative 2.3%. When the people really start running out of the burning building in more reasonable numbers, the US is going to have to offer debt at real interest rates higher than 0%. Even a mild run on US treasuries would blow real interest rates up to 2% per year, which on top of at least 3.7% in inflation will mean nominal interest rates of at least 5.7% per year.

If that occurs in the next few months, a 4.3% shift upward in interest rates will add an extra 645 billion dollars in interest payments to the federal budget. Considering that we’re already spending 3609 billion a year while taking in only 2202 billion in taxes, 645 added to the federal deficit would blow our annual deficit to 2 trillion. In less than two years that would put us in a worse position than Greece when it was receiving its first bailout. Except that no one is there to bail us out. So we’ll start paying Greece-style interest rates, say, perhaps 8% interest on a debt of 17 trillion by then.

That 1360 billion dollars in interest per year. That’s basically a doubling of our current deficit. As more and more people run out of the burning building, interest rates continue to climb, which in turn fuel the deficit, which in turn requires the US to borrow ever-larger sums of money from people ever less interested in buying our debt, which requires that we offer higher and higher interest rates.

Once interest rates hit 15% on 15 trillion dollars, or 11% on 20 trillion dollars, interest will consume our entire federal tax rolls.

The game will be over before that point. We have no choice: we will default directly or default through hyper-inflation. The only question is how long the period of denial lasts. I can’t imagine it lasting more than ten years. Five sounds more reasonable.

Watch the five-year treasury yields.

It’s the ‘split over ten years’ bit that disturbs me. According to this article, the spending cuts are phased in in such a way that next years budget will only be 0.6% smaller than this years, and, if everything goes right and interest rates stay low and Congress doesn’t renege on its promises and we don’t start another war, spending will eventually have to drop by a whopping 6% per year. Considering that we’re only taking in 60 cents in taxes for every dollar we’re spending, a 6% decrease, for all practical purposes, changes nothing.

Debt financing is like crack cocaine to the US government. We need ever-higher doses and each dose seems to work less well. Our finances are rapidly going downhill and our creditors are starting to grumble. And so the Tea Party, valiantly holding the crack addicts feet to the fire, have made him promise to lower his crack-snorting by 0.6% next year and 6% over the next ten years.

A crack addict has to be locked up. By passing this bill, we’re treating an addicted bond junkie US like a rational human being, and we’re treating financial heart failure with a band-aid. This is not a victory for the tea party — at least not a substantial one. They have stopped our fall into the abyss from accelerating exponentially, for now. They have not stopped or slowed the fall itself.

balanced budget amendment: a fictional cure that will magically make the US responsible. except when, as always, US soldiers are fighting somewhere overseas.

bipartisan: my party’s actions.

billionaires: a group of people who supposedly have caused the deficit crisis by not paying their ‘fair share.’ See FAIR SHARE.

Bush: yes, everything is still his fault.

Clinton: see SURPLUS. The one time he had a tiny surplus absolves him of all the deficits he ran, and, by association, proves that Democratics are not at all responsible for any portion of the US national debt.

compromise: you agreeing to do what I want.

credit ranking: if we just pass a large enough debt ceiling increase, our credit ranking will stay good, and real interest rates will remain negative forever and our debt holding will be magically consequence-free.default: an undefined ominous something that will happen after August 2 that sounds really scary

hostage-taking: what that other party is doing by not passing our party’s plan

ideological: how Republicans are.

moderates: people who agree with me.

revenue: taxes.

revenue enhancement: tax hikes.

extremists: whoever I currently at odds with.

fair share: people who make above average need to pay more taxes. fair share is always a quantity undefined but definitely more than whatever the well-to-do happen to be paying now.

full faith and credit: the myth that the US is a nation which honors contracts and pays its bills.

loopholes: somehow, some people are getting to keep a larger proportion of the fruits of their labor than we’d like: so let’s take it away from them and throw it into the infinite black hole of the federal deficit.

making tough decisions: see TOUGH DECISIONS, MAKING.

millionaires: see BILLIONAIRES.

partisan: that other party’s actions.

patriotic: higher taxes for the well-to-do

patriots: rich people willing to pay higher taxes.

pay our bills: supposedly a possibility in Congress, where no one has yet learned enough basic math to realize we’re going to be forced into default. If we could just raise taxes a little higher . . .

revenue: taxes — revenue is used to make it sound like Uncle Sam is a producer, instead of a tax-feeder.

revenue enhancement: tax hikes, but we approve them.

sophie’s choice: a totally inappropriate Holocaust metaphor that people tend to use too often. Whenever you hear the phrase, turn the TV off.

surplus: we had one under Clinton, so Democrats don’t have to be responsible at all for their approval of Bush’s wars, their constant expansions of every entitlement imaginable, any of the failed stimulus projects, or the unprecedented massive deficits under Obama. See BUSH.

tax cuts for the rich: any and all tax cuts are bad, because they include rich people.

tough decisions, making: cosmetic spending cuts planned for at least six years from now.

Government policy so far has been to spend every cent of SS money the moment it comes in, which means that social security operates on a hand-to-mouth basis. The moment that social security pays out more than it takes in, bam! other chests must be raided. And there are no other chests to be raided.

Obama has put Social Security on the table as a bargaining chip, threatening that he might obstruct the sending out of Social Security checks if the Republicans don’t sign a compromise bill to raise the debt limit. And he’s not okay with a 30-, 60-, or 90-day extension which would allow the government to borrow 250 to 750 billion dollars more. No, he says. Your Social Security checks are in danger unless the the Republicans allow a trillion or more. (I picture in my head pudgier, bald Obama hold his pinky finger to his lips and declaring, “And we’ll hold the world hostage for . . . one trillion dollars

Drudge, in his usual sensationalist manner, says “Obama threatens to hold up Social Security checks.” And it is true that politicians are threatening each other and blustering as though they actually cared about fixing the country’s problems. But the deeper problem is that the US is already broke and simply pretending not to be.

These are rumblings before a great earthquake of default or hyperinflation. It will be up to the federal government of the United States to decide which we experience. I, for one, prefer default. Either way, when the troubles hit, both parties will be able to scurry for cover. The Democrats will blame Republicans for too much military spending and not enough regulation, and the Republicans will blame the Democrats for too much stimulus and stifling regulations.

How America interprets the upcoming financial day of judgment will be instructional.