So, I ran into an old friend the other day. He is a small businessman in a rural town here in Alabama, and he was buying a couple of cases of 5.56mm in a local gun store. He's never had the time to be an activist like me, given the constraints of his work load, but he is like-minded. I hadn't seen him in probably five years or so. He recognized me first and came over to chat about the present crisis and where I saw things heading.
He said, "I always thought you were an alarmist when you talked about being prepared for a shitstorm, but I was in Sam's Club a few weeks ago and I saw something that scared the bejeezus out of me."
"What was that?" I asked.
"I saw (NAME REDACTED) and he had one of those big flat-bottom carts stacked with big bags of rice, beans, salt, cases of canned meat and tuna, you name it."
"Who's (NAME REDACTED)?" I asked.
"He's my banker."
I laughed, but neither of us really thought it was particularly funny.
So, he told me, he asked the banker what was up, and the guy (who he's known almost all his life) looked sheepish like a boy caught with his hand in the cookie jar. Initially evasive, he said he was just "stocking up on a few things." When my friend pointed to the industrial cart and told him he had a funny concept of "a few things," the banker broke down and told him that he believed that the debt crisis was going to put a premium on tangible property. Talking about the value of the dollar, "he said he didn't want to get caught unprepared in a game of musical chairs when the song stopped," my friend related.
"Well," I asked, "what makes him think that he's going to hang onto his chair when the room's full of big hungry desperate guys with sledgehammers? They'll either break him and take his chair, or break the chair out of sheer spite."
"Why do you think I'm here buying ammo?" he replied.
Folks, when button-down, precise folks like the Congressional Budget Office issues carefully-worded but stark warnings like this, and small town bankers are in Sam's Club buying food staples like there's no tomorrow, you'd better be getting ready to deal with the gangs of big hungry desperate guys with sledgehammers.
Federal Debt and the Risk of a Fiscal Crisis
July 27, 2010
Economic and Budget Issue Brief
Over the past few years, U.S. government debt held by the public has grown rapidly—to the point that, compared with the total output of the economy, it is now higher than it has ever been except during the period around World War II. The recent increase in debt has been the result of three sets of factors: an imbalance between federal revenues and spending that predates the recession and the recent turmoil in financial markets, sharply lower revenues and elevated spending that derive directly from those economic conditions, and the costs of various federal policies implemented in response to the conditions.
Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels.
Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that “crowding out” of investment would lead to lower output and incomes than would otherwise occur. In addition, if the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. Rising interest costs might also force reductions in spending on important government programs. Moreover, rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.
Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by a number of other factors, including the government’s long-term budget outlook, its near-term borrowing needs, and the health of the economy. When fiscal crises do occur, they often happen during an economic downturn, which amplifies the difficulties of adjusting fiscal policy in response.
If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. To restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.