Thoughtful and important post from my friend Gregor Macdonald on the inevitability of debt repudiation in the U.S. It can be de facto or explicit — through inflation or a declining tax base — but Gregor’s point that U.S. debt repudiation is "already in the pipeline" is one that anyone interested in the future of U.S. economic growth must reckon with.
We also know that flagrant monetization will not be allowed to go on forever. That too is in the pipeline, as the FED has expanded outright non-sterilized purchases of financial assets. They have backed-stopped trillions in assets already with Treasury lending, but have since moved on to outright purchases. It’s likely that any month now they will start classical monetization of Treasuries. The FED has told us so. Thus, the second path to repudiation will come via quantitative easing, and inflation.
Now comes the populist response to the financial crisis. This is the third pressure that will come to bear on both tax revenues to Washington, and Washington financial policy. One face of the populist response is Liquidationist. The other face is Keynesian and Interventionist. The Liquidationist movement, to the extent its successful, will promote default in the private sector. (It will also be associated with Tax Revolts). The Interventionist movement will seek to move default into the public sector. In the end, it doesn’t really matter which pipeline is the conduit for default.
Read the whole thing.