Financial Options: Cut Spending, Hyperinflate, or Default

By | June 29, 2011

Without seriously drastic cuts — cuts that would make Paul Ryan blanch — we can’t fix this economy without wrecking the government. …

Can we tax our way out? Back to Lindsey:

The tax-the-rich proposals of the Obama administration raise about $700 billion, less than a fifth of the budgetary consequences of the excess economic growth projected in their forecast. The whole $700 billion collected over 10 years would not even cover the difference in interest costs in any one year at the end of the decade between current rates and the average cost of Treasury borrowing over the last 20 years.

Clinton-era tax rates won’t even begin to cover the spending problem. Not even close.

That leaves us with three possible outs: Cut the budget to the bone, hyperinflate away our debts, or default.

The most serious budget-cutter we have, Congressman Paul Ryan, is not nearly serious enough about the disaster we face. Or if he is serious, he doesn’t have enough of his party backing him up. And even if he had that, Ryan still would face a public too uninformed to understand or tolerate what must be done.

Option One, in other words, is off the table. Ain’t. Gonna. Happen.

So how about Option Two, Hyperinflation?

Inflation only as high as eight or ten percent is harmful to a nation’s economy, its savings, and even its social fabric. Hyperinflation destroys all of those things. It’s no remedy; it’s a cure worse than the disease.

That leaves us with Option Three: Default. Simply put, the government of the United States simply refuses to honor its debt obligations. It’s called “sovereign default” because you can’t take the government to its own courts to make it pay up.

Default would be terrible. The dollar would cease to act as the world’s reserve currency and that inflation we’ve spent the last forty years exporting to the rest of the world, would come flooding back to our shores all at once. Can you imagine how expensive a barrel of oil would be, if we had to scrounge up enough euro or yuan from our meager reserves, to pay for one?

And what about our budget? It would still be seriously out-of-whack — but Washington would lose the ability to borrow from overseas to cover the shortfall. Washington would either have to balance the budget — and right then, buster! — or start rolling the printing presses again. Call it “The Mother of All Quantitative Easings.”

Or just call it Option Two. We’re back to hyperinflation.

Read the whole thing. There’s a bad scene coming. Via Vodkapundit » It’s Delightful, It’s Delicious, It’s Default.