Although I don’t think any of the so-called “serious” politicians will allow the federal government to default on its debts at this juncture, our current fiscal policy is unsustainable. At some point, the government will have to stick it to one or more of the major interest groups in play: bondholders, seniors and others who depend on entitlements, and taxpayers. I believe bondholders will bear the brunt of the government’s nearly inevitable fiscal collapse, and that is exactly as it should be.
The politics of the situation are relatively simple. More senior citizens vote than any other demographic, and with Baby Boomers on the cusp of retirement, their numbers will swell, so large cuts to Social Security and Medicare will remain next to impossible. Tax rates will rise, but American taxpayers (and the American economy) simply will not stand for the level of taxation necessary to maintain our foreign empire, pay entitlements, and service the debt.
Something must give, and it will be the debt, specifically the 47% of our public debt held by foreigners and foreign governments. These groups have little direct impact on American politics, and although it will create international outrage, our domestic politics don’t allow any other way out.
And bondholders–both foreign and domestic–should lose out. They act as the government’s enabler, ready to supply the junkie with his next hit whenever his cash runs low. This is an institution that launches wars on whims and imprisons more of its own citizens than any other country on Earth. Anyone who voluntarily gives his own money to it either lacks even a passing familiarity with its stunning immorality and incompetence or is so blinded by status quo bias that he can’t see the very clear writing on the wall. Buying debt carries risks, and when you give your money to the governmental equivalent of a magic bean salesman, you have no right to complain when you don’t get it back.
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