The media is scaring the crap out of people about what would happen if we went over the cliff. I believe we should be encouraging it. We should be sprinting towards the cliff to make sure we get a good jump. The sooner we default and reset the economy, the better. Deflation and defaults are natural occurrences in economies that are out of control with debt. For some reason in modern history, we’re taught it’s bad. In addition we have a Fed chairman who spent his whole academic career studying The Great Depression and came to the conclusion that the Fed didn’t use all of its tools to make it better faster. All this from a guy who lives in the fantasy land of academia with no real hands on experience. When an economy defaults and rebases its currency, there’s pain for a few years but eventually things get back to normal. Debt is cut and investors are able to move on. Savers are rewarded while people living on credit get a fresh start towards financial security. Recent defaults include Argentina, Zimbabwe and Germany twice. All of these countries still exist today and made it through the default. The alternative is to create an unsustainable economy where the middle class disappears. The ultimate solution for the US will also be a default. The reason I say this is because politicians are not willing to do what it really takes which is massive spending cuts in government programs combined with heavy tax increases for at least a decade. Americans won’t even listen to this because we’re so spoiled. The problem is that we’re trading pain now for worse pain later. It’s like knowing you have cancer but refusing to treat it until later. The problem is simple; we are spending more than we’re bringing in. Many Americans are very familiar with this situation. There are three solutions:
1. Decrease spending so you have more income than expenses
2. Increase income over current expenses
3. A combination of 1 and 2
When you look at the solutions your heart sinks because this is what they’ve been debating for the last 2 to 3 years only to put it off for next year. It’s hard to tell what solution they will ultimately choose but the outcome will be the same. People will be forced to cut spending and cut debt while the economy resets.