When I was young, back in the 60’s, I was in the grip of apocalyptic thinking. I joined, with my wife and children, and lived in for eight years, from the age of 32 to 40, my prime, in an apocalyptic commune in Tennessee called The Farm. Everyone there fully expected Western Civilization to collapse momentarily.
After the Farm collapsed instead, my wife and children and I escaped, in 1984, with nothing but a loan (later forgiven) from my parents, sufficient to purchase a used Chevy stationwagon and enough gas to get to Boise, Idaho. Like dust bowl refugees, Susan and I and our four children loaded up the car with ourselves and the few meagre personal possessions left us by the collective, and headed for unconditional parental, and grandparental, love.
Following the subsequent protracted trauma of re-integration into “square” society, I gradually came to see all of those apocalyptic expectations/hopes, as delusional, going so far as to eventually, post 9/11, become a (shudder) Republican.
I used to say, concerning the risk of owning stock in Apple, that the only way it could lose was if the entire global financial system were to collapse. Well, here we are. Now I’m beginning to think I was right the first time, just a little ahead of the curve, when I dropped out and joined an agrarian collective.
The problem with the Keynesian stimulus idea is that the purpose of the stimulus is to stimulate more lending, borrowing, and spending. That’s it. That’s the whole theory. Nobody is going to do that. Nobody wants to lend, borrow, or spend, and a temporary tax cut, or a job building the high speed rail from Disneyland to Vegas, is not going to make anybody lend, borrow, or spend. We (personally and corporately) are eliminating borrowing, cutting spending, and we’re certainly not going to loan anybody anything. We will continue this behavior until we feel as rich as we used to imagine that we were. This stimulus, and the next stimulus, and the one after that, are not going to change that dynamic. In fact, the specter of Congress creating massive debt, payable by our children and grandchildren, only further exacerbates this mood of economic Puritanism.
As far as the imminent and immanent apocalypse is concerned, I don’t think that it is possible for the governments of the world to sustain enough debt to turn this around. The reason Poulson didn’t use the TARP to buy up toxic assets, and the reason Geithner has not yet come up with a plan, is because the amount of toxic assets is enormous, far beyond the ability of the government to deal with. Eventually default may be the only option, that is, the writing off of all debt, both private and public. It has already happened in Iceland, and will soon be happening in a number of other countries. The current moratorium on mortgage foreclosures is a mild form of defaulting on the debt. When the Obama plan for housing becomes reality, it too will be defaulting on debt. Massive inflation is yet another way of defaulting on debt.
If all debt is defaulted, the result will be that poor and middle class people will become richer, and rich people will become poorer. Congress is made up of rich people, and their campaign contributors are also rich people, so this is not an attractive option for them. But if a majority of the populace is kicked out of their homes, lose their jobs, and their pensions disappear, the government will be overthrown, as it already has been in Iceland. Riots are spontaneously arising all over the world. So that is not an attractive option either.
Congress will default on debt as much as necessary to prevent a revolution, and as little as possible to minimize the suffering of rich people, but that may end up being a lot of defaulting. China will be left holding a bag of U.S. Treasury paper, which is why they are beginning to accumulate gold.
The other result of universal default will be that there will no longer be enough trust to support a financial system. The concept of wampum will be the kind of sophisticated financial instrument to which we can only aspire. Barter will be King.