A Simplified Guide to the Debt Crisis
Thoughts in and around geopolitics.
By: George Friedman
I have argued repeatedly that the United States has been heading into a period of massive economic instability.
It’s been evident to anyone who bothers to look but is now impossible to ignore.
As I see it, there are two dimensions of the crisis.
The first is the danger of a default by the federal government – and by default, I mean a situation where it does not have the cash to pay its debts.
At that point, the government still has the option of paying off the debts it wants to – i.e., to American voters through Social Security and Medicare – while ignoring the ones it doesn’t – i.e., to foreign banks and corporations.
The latter would create a massive global crisis since the institutions Washington owes money to are also indebted to other institutions.
A general default by the U.S. would create a global and disorderly economic crisis, which would inevitably ricochet back to the U.S. because debts owed to American institutions would not be paid.
The default, then, must be directed at least in part at Americans.
The problem here is that Americans vote.
Neither Democrats nor Republicans want a default, but the possibility of triggering a small default large enough to frighten the American public – one that one party could blame the other for – is too delicious an opportunity to pass up.
The Republicans want to limit support to the lower classes, which will please those who feel the debt is out of control, mostly Republicans.
The Democrats, whose constituency tends to be poorer, are more willing to raise the debt ceiling, allowing themselves to seem utterly moral and highly sensitive.
The truth is that this may bend but will not break the system.
A default of this size is not an apocalyptic event.
The expressed concern is the decline in global trust in the United States.
The rest of the world doesn’t trust the U.S. so much as it trusts the fact it has more money than God and is comforted by the knowledge that a default would not put an end to American lending or financing.
Last week, I was in Singapore, and the few bankers who talked to me spoke almost exclusively about China, not about the precarity of the U.S. economy.
As a matter of economics, I suspect that the debt ceiling issue will be settled.
It may eventually balloon to more dangerous levels, of course, but at this point, as a matter of politics, a default would provide an orgy of mutual loathing.
Many seem to think that the threat of recession looms large.
Warren Buffett has said as much, and I continue to respect any man who puts his money where his mouth is, especially if that man isn’t me.
I would counter that recessions are not calamities; they are merely a natural part of a business cycle that imposes efficiencies on the economy by punishing inefficient businesses and opening the door to new and efficient ones.
So while I am tempted to link a recession with the debt crisis in order to declare Armageddon, I don’t think it rises to that level.
From my point of view, that kind of massive terminal crisis for this cycle hasn’t shown itself.
In the 1970s, inflation, unemployment and the cost of money were crippling the system and signaled a radical surge by the Reagan election.
We are not there yet.
For all the turmoil of the current era, the truly hard times have not yet revealed themselves, nor has a political figure who could usher the U.S. from one era to the next.
Whereas I’ve wondered in the past whether the sky is falling, my view today is: not yet.
But I am enjoying our democracy, the greatest show on earth.
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