How high can the debt ceiling go? Mom and Dad Normal learn about money Part 8

Part 8 in the Money Series: Mom and Dad Normal learn about the debt ceiling

Danger sign

How high can the debt ceiling go before lightning strikes?


Dad Normal has done a lot of thinking about what Sue and Abe have taught him. He corners Sue at the breakfast table, where she is gathering up her books to get to her teaching job at the middle school.

“You know, Sue,” said Dad. “I think you’re right. The world can’t go back on the gold standard.  A few individuals can squirrel it away for a rainy day, as long as everybody doesn’t do it. Those individuals will be better off than if they relied on a 401K plan at the office. But the world got a lot bigger, and there isn’t enough physical gold to meet everybody’s growing needs. Going back on the gold standard would mean world economic development came to a halt. The Chinese, Indian, and Third World people whose economies are expanding would not be able to grow. The gold standard won’t work for the world economy any more.  What’s happening is that countries who don’t want the United States to be the world’s dominant power are considering a way to make a basket of currencies be the global reserve currency. The problem is that nobody’s sure what would happen if they did that. What if China bought Russia’s oil without using U S Dollars? What if China stopped buying U S Debt? What would happen to the value of China’s currency?  Nobody knows. So far, that uncertainty has been sufficient to keep too many people  from doing it. The only thing that is certain is that there’s no way for the nations to go back to the gold standard. The world has passed the point of no return on the wampum system. But what else can work better?”

“So do you think the global economic system could collapse?” Mom asked, as she inserted another Eggo into the toaster.

“The system depends on ever-expanding markets,” Sue explained. “Like every Ponzi scheme, it has to keep growing to survive.“

“Meaning, the U S Debt has to keep going up,” Mom clarified. “But what happens if the U S Debt goes down?”

“The U S Debt is a measure of how many U S Dollars other countries are buying. So the only way for the U S Debt to go down is to expand U S Exports, or to contract U S Imports,” Sue told her. “We can’t expand exports, because we aren’t building anything to sell. And if we contract imports, it means our people aren’t buying anything, since everything we buy is made outside of America. So that means to make the debt go down, we have to collapse the U S Economy.  And if the U S Economy collapses, the global savings of other countries is devalued.”

“We have to keep exporting dollars, then, is what you’re saying,” Dad interrupted. “We have to keep expanding the debt, forever.”

“Or at least for as long as whatever politician is currently in office expects to be re-elected. When we stop expanding the debt, the Ponzi scheme unravels. It’s like Bernie Madoff. Everybody was happy investing their money with him. He paid big returns. And then one day too many people showed up at the Wampum Window, and Bernie was caught. The U.S. has to keep expanding the debt, until the day when too  many members of the Spoon Cartel call their loans.”

“You’re saying that Congress is going to continue to expand the debt ceiling, every time the issue comes up?”

“Yes, and I’m also saying that Congress, or the CIA, or the President of the United States, or whomever it is that makes these decisions, is going to continue to go to war wherever the opportunity to prevent oil from being sold for some currency other than the U S Dollar, sticks its camel nose under the tent.”

“We’re going to war for oil?”

“Nope. We’re going to war for the relationship between the U.S. Dollar and the ability to purchase oil. Because the cost of not going to war would be greater than the cost of doing nothing. The cost of a collapse in the value of the dollar would be unthinkable. Globally. For all the countries whose reserves are in U.S. Dollars.”

“Sue, that’s enough,” Mom insisted. “The President of the United States would never let us go to war for such an evil reason.”

Abe raised his hand. “Uh, Mom?” he said.  “I’m not really sure the CIA lets the President in on the reason. The Doctrine of Plausible Deniability allows the CIA to do things that the President never finds out about. Protecting the U S Dollar through acts of war and assassination would fall under that category.”

“Good grief, Abe,” said Dad.  “But this isn’t a sustainable practice. It has to end somewhere.”

Next: Where can this all end?



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