By George Noga

In German mythology Gotterdammerung is the destruction of the gods and all other things in a final battle with evil powers. It also is the final opera in Wagner’s The Ring of the Nibelung.

Symbolically, on March 28, 1945, with  Russian forces less than 20 miles from the bomb-cratered city, the last scene from Die Gotterdammerung was the final performance of the Berlin Philharmonic. As the audience left, they were offered cyanide capsules (suicide pills) from baskets held by children wearing Hitler Youth uniforms. You therefore can understand why this term is an apt metaphor for the destruction, inter alia, of the US economy.

Afterward, we will inhabit a dystopian post-apocalyptic world.

This is the final posting of a three-part series about the endgame, i.e. how the US crisis of spending, debt and deficits reaches Gotterdammerung, its ultimate and inevitable climax and the dystopian post-apocalyptic world we will inhabit afterward.

The first two parts in the series are on our website: This part deals with the rubble that will be the United States economy following the Minsky Moment, the unknown and unknowable instant the market for US sovereign debt collapses.

When Will the Minsky Moment Happen?

To reiterate, the timing of the Minsky Moment is unknown and unknowable as is knowing when grains of sand falling on a pile will cause an avalanche. The best I can proffer is the following. Conceivably, it could happen at anytime, even tomorrow morning. However, I do not believe it is likely to happen until 2013 at the earliest. I would be shocked if it did not happen prior to 2020.

If I were to wager, my  money would be on the period 2014 to 2018 with the middle three years of  2015 to 2017 being most likely. Note: Economist Hyman Minsky (deceased) is enjoying a revival. His book about unstable economies was selling for thousands of dollars a copy until its recent reprinting. That alone should tell you something.

The US Will Default on its Sovereign Debt

George Noga

The default will not come immediately after the Minsky Moment; most likely it will come months or years afterward – but come it will. Let’s begin with default because it is a virtual certainty. I will circle back later to provide a better time line of what happens immediately after the Minsky Moment.

The meltdown begins the day people quit buying US bonds and bills under terms we can live with. That may already be beginning. In 2011, 61% of all debt issued by the Treasury was purchased by the Federal Reserve. There’s no telling what the terms might have been if purchases had to come from real people and institutions using their own money.

“In 2011 61% of US sovereign debt was purchased by the Fed.”

Default is a certainty because there simply is no other path. Sure, the government will try  other alternatives before it defaults; that’s why default wont happen until months or years after the Minsky Moment.

Even the Bank of International Settlements (“BIS”) in its 2010 paper “The Future of Public Debt” projected that under a base line scenario the US Debt/GDP ratio would reach 150% by 2020. Subsequent to the paper being written, things have become worse. BIS is the central bank for central bankers and its paper is chock-a-block with dire warnings.

These are central bankers for crying out loud saying things like: “It is essential that governments not be lulled into complacency by the ease with which they have financed their deficits thus far.”

“The question therefore is not whether there will be default,
but upon which promises (plural) government will renege.”

The question therefore is not whether there will be default, but rather upon which promises government will renege. In conjunction with default there also will be rampant financial oppression that could take many forms, such as forcing people and institutions to buy debt, much as California now forces its pension plans to buy its bonds or legally forcing ruinously low interest rates amidst high inflation.

Another form of financial oppression already taking place is the government forcing Social Security to buy worthless Treasury bonds.

Time Line Following the Minsky Moment

It will come suddenly, seemingly out of nowhere. One day it is business as usual and the next day no one on Earth (except the Fed) will buy US sovereign debt. In the short run (first phase), the Fed simply will print enough money for the government to meet its obligations; this phase could last months. The Fed will do everything, including throwing money from helicopters, to prevent deflation; hence there is only a small likelihood of deflation.

In the second phase, inflation ramps up as government tries to inflate its way out of the crisis. Government will use oppression to keep interest rates well below the rate of inflation. But the economy will tank as inflation is nothing if not corrosive and perfidious. Eventually government recognizes inflation wont work; still no one will buy its debt; and the only way out is to default on its sovereign debt as well as on promises such as Social Security, Medicare and untold others. Governments default all the time on their debts and the US will be no exception.

“The pain will be compounded by defaults throughout Europe and by Japan. Several states and cities also will default.”

Prior to default, there could very well be a panicky attempt to impose a VAT to raise a giant amount of new tax revenue to fund the higher interest payments on the debt. The crisis would be used to scare everyone into agreeing to a VAT, which would begin with a low teaser rate. To be meaningful in dealing with the crisis however, a VAT would need to raise an enormous sum – in the range of $6,000 to $8,000 per household annually.

Consequently, it would suck so much money out of the economy that a severe recession would ensue and any new revenues from VAT would be offset by reduced tax revenue elsewhere in the economy.

The pain will be compounded by other countries defaulting around the same time including most of Europe and Japan. Moreover, California, New York, Illinois, New Jersey and many others states (cities also) will default. The Minsky Moment will lead to a Minsky Meltdown and there will be misery on a biblical scale for at least a decade and likely much longer. We will be lucky to maintain the rule of law and to avoid large scale social unrest.

Life After Default and the Eventual Recovery

Ultimately, after a lost generation, there is an end to the crisis. By the time default happens, most may come to welcome it as the beginning of the end of a terrible time. People are practical and will deal with default as best they can.

Alexander Hamilton well understood this 222 years ago; he wrote the following in his Report on Public Credit: “Those who are most commonly creditors of a nation are, generally speaking, enlightened men; and there are signal examples to warrant a conclusion that when a candid and fair appeal is made to them, they will understand their true interest too well to refuse concurrence in such modifications of their claims, as any necessity may demand.” Hamilton was 100% on the money (literally true).

“There will be a new American compact with government.”

Americans will endure unimaginable economic hardship. Either way, we will have a new compact with government. One possibility is that we will emerge as a socialist welfare state with a 20% VAT and little remaining liberty.

The second possibility is that we revert to America’s historic position of limited government in terms of its share of GDP. If this happens, there will be a recovery and a period – perhaps a sustained period – of prosperity. Everything will be fine for a time until people forget and succumb to politicians’ siren songs promising them vast benefits and largess from the common weal.

I would like to believe Americans, after enduring all the pain and hardship, would learn the correct lesson for all time that more liberty and less government are the eternal fountainheads of our prosperity. Perhaps we will, but I fear the painful lesson will be forgot soon enough.


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