I think America should lead the world in debt default since we have led the world in most everything else for the past century. I will now give you some background on our situation and my reasoning for making such a statement.

The Federal Reserve board of governors has made critical decisions that will determined the economic road that America will take to the next phase of this greater depression. Ben Bernanke of the Fed recently announced Quantitative easing two (Q2). Quantitative easing one of $1.7 trillion did not stimulate the economy enough so Q2 is now the order of the day.

The Federal Reserve is empowered to create our money and that is why when you look at a greenback is says it is a Federal Reserve Note. These notes are backed by the U.S. Treasury. They promise to pay face value of the notes for whatever they are worth on the world money market. When the dollar is strong it will buy more of other nation’s currency and when it is weak it will buy less.

Most of our national debt is financed by issuing treasuries which pays market interest rates to the holder of the treasuries. When the treasuries comes to maturity the holder of them is paid off with Federal Reserve Notes.

The Federal Reserve controls our monetary system although constitutionally that was the task given to Congress. The truth is that they just outsourced that task to a private firm one black night when few were looking. It was a stupid thing to do because they let a private firm of bankers regulate our monetary system and our economy. Our forefathers were dead set against doing that. The Federal Reserve bankers have a mind of their own and they do not have to follow what the elected government suggests. They can even do end runs around congressional legislation.

They have taken on more and more power over the years to regulate our economy. I do not think it takes a constitutional scholar to understanding that the Fed is now doing many things that are not constitutional. They now seem to work for the best interests of big financial institutions rather than the people of the United States.

As you obviously know, in 2008 we entered the great recession which really should be called a depression. But, that terminology is not politically correct even though the effect on wage earners, home owners and real unemployment rates say otherwise. We are now supposed to be in a recovery but for most there has been no recovery. The great recession just shape-shifted into the great stagflation. Most wage earners, the unemployed, the underemployed, and those on fixed incomes are still losing ground relative to the ever rising real cost of living (versus the fabricated cost of living that the government feeds us). For these people we are still in a depression. It is now a inflationary depression.

Why the great recession happened is beyond the scope of this article. In short, I will say it was caused by government intervention in the free market system, socialistic government programs that were not adequately funded or robbed for something else, delusion and greed by all kinds of investors, the devious act of financial institution robber barons, and most of the people of the nation living beyond their means.

That is why we are in the fix we are in, but those in government and the Fed that are fixing the fix by putting this nation deeper in debt, are really putting us in a much worse fix. For example, government intervention to lessen the effects of the last two recessions and the continued overspending by government has more than doubled the national debt in the last ten years. In the last ten years the national debt went from under $6 trillion to nearly $14 trillion.

Our entire GNP for a year is now about $14 trillion but our debt is growing even faster than our GNP. Right now we owe other nations or ourselves the entire GNP of the United States for one year. Meanwhile we keep spending more than we are taking in. In the next year we will spend about another $1.5 trillion over what we will receive in revenues. We will need to borrow that $1.5 trillion and also pay  interest on the $14 trillion debt that we already owe ($600 billion a year at today’s interest rates). So next year the U.S. treasury will need to borrow at least $2 trillion (I have heard much higher figures).

The problem then is, who is going to lend us $2 trillion? We are only paying a few percent interest on even long term bonds so who will continue to take the risk of investing in the future of the United States dollar when it just fell ten percent and is likely to fall another ten percent because of U.S. overspending and Fed policy. Why would anyone want U.S. treasuries if they invest $10 and get $9 back in buying power? The fact is that those that hold a large portion of America’s debt are looking for ways to get rid of it as soon as they can. They are not looking to buy more and what they do buy because of world insecurity about other currencies is in very short term treasuries that we will have to pay off and refinance once again shortly.

In order to raise that $2 trillion we should be paying sufficient interest rates that will attract investors but the policy now is to let the Federal Reserve print more notes and use it to buy up our own debt. They call printing notes to buy debt, “quantitative easing”. We already had Qe1 and now Qe2 has been announce. Qe is the Fed buying up American treasuries to keep interest rates on them artificially low. The Fed has no money of its own to buy these treasuries so they just print it. Then at a later date they intent to sell the trillions of treasuries that they bought with all the extra notes they created and buy back the surplus notes that they printed and remove them from the world monetary system.

A future problem hits us when the Fed starts selling the treasuries they hold and the U.S. treasury also keeps selling their own treasuries. If the Fed starts selling treasuries it does the exact opposite of quantitative easing. In order to sell all these treasuries the interest yields on the treasuries have to go up. That is because in order to find more people to buy all these treasuries dumped on the market you have to offer them higher interest rates than you would have if there was not a surplus. When interest rates on treasuries go up the cost of all borrowing in the United States goes up everywhere and when that happens recessions follow.

If the interest rates got really high like in the Jimmy Carter years our government could not pay the interest on our debt and it would have to default. But if the Fed does not buy back the funny money that they put into the world system once a recovery starts, inflation always follows. Some for good reason believe that the Fed will never be able to pull this hat trick off, and that the Fed quantitative easing policy will either create hyperinflation or a depression.

I will give you another example of what happens when you just increase the number of dollars in the world with no increase in American output although the example does not perfectly fit because it is much more complicated.  But, say I owed you 100 dollars and the note comes due so you wanted to get paid. So I pay you but I slip in a ten dollar bill that I just made off of my copying machine and then I say to you that my debt is paid in full. In the real world it is not that obvious but it amounts to nearly the same thing. Your packet that contains 100 dollars now buys what 90 dollars used to buy and there is no way for you to determine where the funny money is so you have no choice but to take it. Even so, everyone knows your $100 packet of money is really now worth $90 in buying power so they are going to raise their prices to make up for you paying them with these devalued packets. That is why increasing the money supply without any increase in the worth of a nation causes inflation.

That is where we are at. Those that hold dollars get 3 percent interest but the dollar lost ten percent of its value in a year so the investors are getting mad. They certainly are not going to lend us anymore money to us at low interest rates. Next time they will want what they think the dollar will drop plus some interest on top of that for their investment. They will want more like 13 percent interest. Even so, we cannot pay 13 percent interest rates. At that rate we could not even pay the the interest on our national debt and we still have to run our government. The only alternative then is just to print the short fall or default.

So if our Treasury Department can only borrow 1 trillion on the free market but needs $2 trillion to run government for another year they will just ask the Fed to print it. The Fed will just then announce Q3 and print more paper and buy up what the Treasury department cannot sell. Then next year any creditors will want even more interest to finance us because we debased the value of the dollar once again by printing surplus money. Then all this printing of money to keep government going puts the nation in an ever increasing inflationary spiral and soon you have hyperinflation.

So, I hope you now see where this monetary policy leads. If we actually pay the higher interest rates our deficits will get even worse and a few years down the line we will reach a point where are deficits will be so high that we will not even be able to pay the interest on our debt. When that happens we will default on our debt and nobody will be lending to us at any price. On the other hand, if we just print money the dollar will continue on a downward spiral and it will continue to take more dollars to buy things.

So what does that mean to the average Joe in the United States? If the interest rates go up it means businesses cannot borrow, so few new jobs will be created and unemployment will go up. It also means that you cannot afford that 20 percent interest payment per year on the mortgage on that new house you want. If you now own a house but have an adjustable rate mortgage and interest rates go up beyond your means to pay your probably going to lose the house. So higher interest rates in a time of high unemployment means the nation starts spiraling down into a great depression.

On the other hand, If the government prints more and more money it means the costs of everything you buy greatly increases in price but your buying power will not keep up. In other words, your standard of living is continually being eroded. Government at this point has one of two choices. Keep printing more funny money until your nation emulates the Weimar Republic where all wealth was destroyed by hyperinflation. Or it needs to drastically cut spending, raise interest rates and even raise taxes, all of which will put the nation into a deflationary depression, and it will have to do so without a large government social safety net. (A safety net would just increase the cost of government and defeat any attempt to drastically cut government spending).

What you should see by now is that all paths led to the same end. By implementing Q2 they kicked the can down the road 6 months and then they will have to decide to either do Q3 or allow a rise in interest rates and allow a decent into a depression one year before the national elections. You know that is simply not going to happen. So by 2013 when the next administration takes over we will be well on our way to hyperinflation. And at that point we will be too far gone to do anything that will not put us in a greater depression. That is just the reality of the situation and no change of political parties is going to change the debt box that we put ourselves in.

You might wonder if we could stop this from happening if Congress started in 2011 to cut spending? It is possible, but it is not going to happen because the social cuts necessary would cause riots and social upheavals. We would also have to gut the military. We would have to allow the nation to go into a depression and from there try to build a free enterprise system with government pretty much out of the way and have it all up and working by the 2012 election. That is quite impossible and you know as well as I, that the essential cuts necessary in our budget are just not going to happen. We are talking about the need for a trillion dollar cut next year and for the cuts to remain in place in the following years and not just the $100 billion that the Republicans are proposing which really are savings spread over many years. They will not even get that.

Knowing the realities, if we still have a country in 2013 I think we just will need to default on our debts and start a new monetary system based on something tangible so people in the future would not see holding the new dollar as a risk. We need to say to those holding the old dollars. Sorry but you make a bad investment. We will look to see how much we will pay for those old dollars after we get our budget balanced. Our first priority will be to have a balanced budget every year and if we find surplus within our new tax structure we will pay some yet to be determined fraction to reimburse in part those holding old debt claims and old dollars.

We need to tell them if you no longer will trade with us because we are restructuring our debt that is your right. But, remember if you want our food and our high technology we are ready to directly trade with you using our new dollars. At the same time we must also rebuild a first rate manufacturing system at home so we can once again buy home made products. It would have to be a very business friendly system, much like Hong Kong is today.

I guess we will need to tell the world that we really regret having to go bankrupt and leading the world into debt default but we had no choice in the matter. Fighting wars for other nations so that they could be free of tyrants cost us a lot of money and put us in debt. We also regret that some of you nations decided to form an illegal oil cartel to roll us. We developed the technology for you and you still get it out of the ground for $5 a barrel. but you think charging us $100 a barrel is fair. Well, that also helped put us in debt and your illegal cartel polices are part to blame for the reason you are holding near worthless old dollars.

Then to China we should say we helped build your industry and we regret that you saw fit to pay your people slave labor rates in order to dump cheep products in America and destroy our own manufacturing. You have business polices that are unfair to your own labors just so you can undersell other nations and that along with your devious trade practices helped cause our default. That is why you hold almost a trillion in old dollars. We have a saying in America. There is no free lunch. You might learn what that means.

I guess if we default we will be in good company. Many nations have defaulted on their World War II debts to America. Not to mention the money we provided to rebuild Japan, South Korea, Europe and many other nations throughout the years. We should point out that there was the constant defaulting, loan forgiveness and debt restructuring of third world nations and nations like Argentina where America picked up most of the tab, and don’t forget we picked up most of the cost of the UN since 1948.

We might also mention that we helped bail out Russia after the Soviet Union collapsed and its member nations defaulted on their debts. So if the nations want to throw us out of the WTA and NAFTA, probably all the better for us because it never served our interests anyway.

Maybe the delusional think that Japan will do better than us and that they will actually pay off their huge debts when their nation become chock full of  old people in a decade? Maybe Europe can take care of its own overspending problem and its own huge debts, but more likely some nations will be defaulting in Europe within a few years. Maybe China thinks they will do good when America no longer buys most of their products? But, somehow I doubt it. Somehow, I think certain nations will still be standing in line to trade with America even after a default.

Heck, we can tell them that we are not even against all the indebted nations defaulting on their own debt and following our lead. Yes, we might as well be the lead nation in debt default since we have been the lead nation in the world in most everything else for the last century. Not that what anyone thinks matters, because there simply is no solution available to us but default. That debt default will come either through not paying the bills or making the dollar nearly worthless so the debt will not seem like much.