The Elephant in the Room

I refer to today's Australian Financial Review, page 63, and the article titled "Bernanke's duty to come clean" written by Vince Hooper, at the University of New South Wales.

In this article Mr. Hooper has clearly outlined the reasons why (I believe) there can be no medium term global economic recovery.

"The world needs to know how the US intends to reduce its mountain of domestic and external debt."

True , I think the US needs to work it out first! Mr. Hooper outlines three ways the currently unsustainable level of US debt can play out:

1. The US does nothing but continues to accumulate further debt. Not actually a strategy or outcome, but a description of the current state of affairs.


2. The US selectively defaults on its debt obligations. Possible, but the concomitant annihilation of the US dollar will send us head first into Great Depression II. In my mind this is the doomsday deflation scenario. The flipside of this scenario is that lenders no longer support US's borrowings leading to a rapid rise in the US interest rates.


3. The US monetises its debt. This is the high-inflation scenario.

There is no easy way out of the hole the US has dug for itself. The reason Bernanke hasn't annunciated a strategy to extricate the US from its current unsustainable debt position is that there isn't one politically acceptable. The only way forward for the US is probably a combination of the following:

• global disengagement


• massive reduction in military spending


• lower standards of living


• reduced imports


• higher taxation


• currency devaluation


• progressive rebuilding of its industrial base

A cursory review suggests that this will need to be imposed on the US citizenry by circumstance rather than choice.