'Distant But Real'

While policymakers, pundits, and economists such as Paul Krugman are apparently relaxed about our nation's fast growing debt load, more and more people are beginning to have their doubts, including government officials from one of our closest allies.

In a report published by The Age, "Joyce's Armageddon Warning," the Shadow Finance Minister for Australia's main opposition party, Liberal Party, suggested that it is time for his country to make contingency arrangements for events that no longer seem totally out of the question:

TONY Abbott's new finance spokesman, Barnaby Joyce, believes the American Government may default on its debt, triggering an "economic Armageddon" that will make the recent global financial crisis pale into insignificance.

...

In an interview with The Age, Senator Joyce said he did not want to alarm the public, but there needed to be a debate about Australia's "contingency plan" for a sovereign debt default by the US or even by an Australian state government.

"A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that?" he said.

He said the chances of a US debt default were distant but real, and politicians were not doing the electorate a favour by refusing to acknowledge the risk.

Senator Joyce first warned of America defaulting at a Senate estimates hearing in October where he asked Treasury secretary Ken Henry for his views.

Dr Henry warned then that public figures had to be careful about discussing "hypotheticals that are that extreme" because such discussions could be misinterpreted in the community.

Rather than tempering his language since his promotion, Senator Joyce has stepped up the rhetoric, saying he also had concerns that some states would have trouble repaying their borrowings.

"The first thing you tell a new client is exactly where they are. We have to tell the Australian people precisely where they are," said the former accountant from the Queensland town of St George.

"The Federal Government has $115.7 billion in debt, Australian government securities, notes and bonds on issue, and the states have another $170 billion in debt," Senator Joyce said.

"We have to ask whether the states have the capacity to repay that. I would say in some instances they do not - particularly Queensland."

Senator Joyce said that if the US recovered, global funds would flow back into North America. He said the only way Australia could keep capital flowing into the country would be to increase interest rates.

"That is the first scenario, which is extremely bad for Australia.

"The worse scenario is where the United States doesn't repay their debt - the $US2 trillion in debt they owe to the Chinese, the $US1 trillion in debt they have to the Japanese and the $US1 trillion in debt to others - and then we are really nailed." That would result in a shift from the US dollar to the yuan, "and China becomes an immensely powerful player overnight".

"If America collapses there will be no more sale of Chinese products to America and therefore very little purchase of Australian resources by China."

"The whole pulse of trade is compromised because people say, 'Why would I trade with the US when it might not pay its debt back?' "

He said this "real financial crisis will mean this preamble we have just had pales into insignificance".

Asked what sort of contingency plan he would advocate, Senator Joyce said it was like trying to prepare for a tidal wave, but the local economy should have more self-reliance.

"Things you look for in that economic Armageddon are the capacity to feed ourselves, the capacity to provide the fundamentals in medicines and basic fundamental requirements for our nation."

(Hat tip to PW.)

Comments

[Ron Glandt]

I wonder, Michael Panzer, do you sit around and attempt to find and think up negative articles like this article? Is it because this kind of crap sells. Instead of writing the doom and gloom, maybe it would be better to think of some good constructive solutions instead of promoting the negative side of everything. Or watch the Fox channel - fear sells of course!
It is necessary to be a realist but there has to be a healthier way to spend your time.

[Don]

4 Trillion is nothing to be sneezed at, especially when combined with personal debt of U.S. citizens.

Debt taken on for the purpose of creating more wealth later is not dangerous. Anyone who has a business knows that anything you spend to reasonable increase the productivity of your company is wise and prudent.

The real question then becomes, is the income going to be there to cover these debts? I would argue yes at this point, as would most reasonable analysts.

[Rick]

I know he is foreign-born, but couldn't we make an exception claiming exigent circumstances and elect this man our president? He is the first forward-thinking and honest regarding what must be done politician I have heard of from anywhere.

[Rick]

Don--

4 trillion is not to be sneezed at, but the actual U.S. federal government debt is over 12 trillion, 7.7 trillion of which is public debt (including that held by China, etc) and 4.3 trillion is money borrowed by the government from other government agencies like Social Security. Since we deficit spend every year (now at unfathomable levels), we have to borrow money to pay back the people who lent us money before. There is no income to cover these debts as you suggest; there are only more debts. This is the classic Ponzi scheme--taking money from new investors to pay back old investors. As Bernie Madoff found out, it only works until investors stop throwing new money in, and when that happens, the old investors who are still in it are shafted.

Maybe I am an unreasonable in my analysis, but since we continually show we are unwilling to stop spending more than we make, even in good times, I can't see it going on forever.

[Matt]

The real debt is 100+ trillion in Debt how is this Sustainable????? Plus once your unemployed it seems like no one cares about you. Is the executive or accountant going to pick up a hammer and hammer a way on some bridge?

[jg]

Hey, Ron, go put your head back in the sand.

Neat clear-thinking fellow, that Australian is. May his countrymen heed his warnings.

[Mark G.]

No worries. Our mopheaded Treasury Sec. said there is no need for a plan B because plan A is going to work. Now go out there and get even deeper in debt you useless eaters.

[kevinearick]

Humanity has a huge population beyond its prime, a large population of young people intentionally misguided in the means to economic production, and a relatively small population of people capable of maximizing economic potential, delivering a frequency of maximum volatility, at a time when the planet is expecting migration toward the harmonic frequency of symbiotic equilibrium, because government, as it is currently designed, is a one-way street, controlled by inert capital to avoid exposure to evolutionary pressure.

Consumption and associated finance, economic activity, is a reward for behavior that no longer generates it, which is why the economy is discharging. The economic motor of symbiotic adaptation has been shorted, and the battery discharged, because the leading edge of the middle class forgot its place, to productively invest in the middle class at the bottom end, to the end of maximizing NPV through stability. The upper middle class got greedy, assuming that it required no foundation, and no future source of energy. It removed investment, spent liberally, and expected future generations to pay for its retirement.

Now that the bill is due, they are looking for someone else to blame, and the charlatans who enabled the process for profit are the objects of their ire, which does nothing to solve the problem.

Ultimately, governments have to compete for participation, which requires independent energy sources, and there is no political support to that end, in economies that immobilize new participants to the end of feeding maladaptive legacy constituents.

Without new constitutions, humanity becomes obsolete. Assuming that those excluded from these old geographically locked economies, as a penalty for dissent, have been doing nothing all this time is an error. The only question is who all will make it across the strait, before the strait disappears.

Evolution does not favor downstream breeding.

[Rocky]

Although the US economy seems to be going to hell in a hand basket, the $US still buys quite a bit, especially if you are a careful shopper. For the princely sum of $60.65 (including 9.5% state and local sales tax), I recently was able to buy a package of 2 boxer shorts, a package of three A shirts, a pair of heavy duty socks, a pair of jeans and a comfortable pair of leather dress gloves with Thinsulate. All of the clothes came from low wage countries. Once Obamacare and the global warming treaty go into effect, the leather gloves by themselves may cost me $60. Shopping tip: If you are planning to visit an off price store in your area, do an Internet search first for special coupon savings.