Is "the Zimbabwe option" in our future?

Why Default on U.S. Treasuries is Likely

Excerpts:

We all know that there is a limit to how much debt an individual or institution can pile on if future income is rigidly fixed. We have seen why federal tax revenues are probably capped between 20 and 25 percent of GDP; reliance on seigniorage is no longer a viable option; and public-choice dynamics tell us that politicians have almost no incentive to rein in Social Security, Medicare, and Medicaid. The prospects are, therefore, sobering. Although many governments around the world have experienced sovereign defaults, U.S. Treasury securities have long been considered risk-free. That may be changing already. Prominent economists have starting considering a possible Treasury default, while the business-news media and investment rating agencies have begun openly discussing a potential risk premium on the interest rate that the U.S. government pays. The CBO estimates that the total U.S. national debt will approach 100 percent of GDP within ten years, and when Japan's national debt exceeded that level, the ratings of its government securities were downgraded.

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Still unconvinced that the Treasury will default? The Zimbabwe option illustrates that other potential outcomes, however unlikely, are equally unprecedented and dramatic. We cannot utterly rule out, for instance, the possibility that the U.S. Congress might repudiate a major portion of promised benefits rather than its debt. If it simply abolished Medicare outright, the unfunded liability of Social Security would become tractable. Indeed, one of the current arguments for the adoption of nationalized health care is that it can reduce Medicare costs. But this argument is based on looking at other welfare States such as Great Britain, where government-provided health care was rationed from the outset rather than subsidized with Medicare.

Comment: My sister and mother flew in Friday for a surprise visit. I showed my sister a 100 Trillion Zimbabwean bill and tried to explain hyper-inflation to my mother. When my Mother was 13 (1933) she and her friend found $ 81 beside the road. They turned it into the police. After a number of months no one claimed it and my mother received her half of the $ 81. I asked her what she did with it. She bought an Elgin watch, a new dress, and gave the rest to her parents. My son did a little Consumer Price Index lookup. $ 81 in 1993 is the equivalent of $ 1,342 today! Thats' inflation! Check out the BLS inflation calculator here: http://www.bls.gov/data/inflation_calculator.htm

More on! AND Here.