posted on Mar, 25 2009 @ 08:45 PM
1) As correctly noted in the second post in this thread, hyperinflation would cause debt to melt away like butter on a hot skillet. Yes, you would be
able to pay off your mortgages and student loans with "chump change."
2) In this scenario, the world would get paid back in hyperinflationary dollars, so while there would technically be no "default," the actual value
of the money received would be next to nothing and it would be the same ultimate outcome as a default. Yes, the world would be mad as hell and hate
America. (Even more than they already do...which is saying something indeed given the vast amount of general bile directed at the USA on all levels
from all directions).
3) A hyperinflationary outcome may not happen, although I think its likely. If we jacked up the interest rates high enough, it would stem the tide of
inflation and restore international and domestic investor confidence in the USA. This is precisely what happened in the early 1980s when the Paul
Volcker FED raised interest rates to double-digits and held them there, dfespite howls of pain from the domestic economy. The tide of inflation from
the 1970s was stemmed, confidence in the US was restored, and we entered a liong 25-year boom. Its interesting to note that Obama has the very same
Volcker as part of his economic team.
HOWEVER, for a variety of reasons, I think the US is less likely to take this "bitter medicine" of high interest rates, even though it would be in
our long-term interests. This is because we have so much more debt now on every level (personal, corporate, and governmental) that the temptation to
hyperinflate out of it will be greater. Moreover, the cost of servicing this debt with higher interest rates would literally break the backs of many
individuals and companies. The short-term pain would be enormous, perhaps greater than the great depression. I don't think people have the stomach or
the spine for it. If the govt starts to go down this road, the protests will be intense and the pressure to lower interest rates will be gargantuan.
We are also less far-sighted and long-term-thinking oriented than we used to be, so few will be able to argue persuasively for the long-term benefits
of higher interest rates in the face of the severe pain.
For all these reasons, I think the US will take the "easy way out" and hyperinflate. This, of course, will bring its own form of pain in the sense
that in the medium-to-long term (depending on how severe it is), high inflation destroys the value of all capital and holdings. Still, it will be the
"path of least resistance" for a heavily indebted USA.