Some readers asked me, early on, in our exercise to discuss the economy and the 2007 – 2008 financial system meltdown to address America’s sovereign debt.  Thank you for the compliment, but that far exceeds the knowledge base and wisdom of this hometown boy, but let’s “kick its tires” so to speak.

I understand the basis for their concerns because they, and many others, have worked years paying into some deferred income tax retirement program such as an IRA, 401(k) plan, or other pension plan.  And now, with the current financial crisis of the nation, people have fears about the safety and soundness of their plan’s investment portfolio.

Concerns of retirees in this case focus on the U.S. Treasury securities within their portfolios because of America’s massive debt.  We will look at one economist’s viewpoint for possible scenarios that might play out.

I feel that his reasoning process considers the essential dynamics of the situation.

Dr. Jeffrey Rogers Hummel, Associate Professor Of Economics at San Jose State University, wrote this paper for the Library Of Economics and Liberty and was copyrighted in 2008.  The fundamentals are very applicable to America’s plight today.  Only the amount of our sovereign debt has dramatically increased, making his argument even more compelling.  The title of his paper is “Why Default on U.S. Treasuries is Likely”.

Hummel lists three possible scenarios available to the decision makers:

1. The naively optimistic believe our politicians will fully resolve this looming fiscal crises with some judicious combination of tax hikes and program cuts.

2. Many predict that, instead, the government will inflate its way out of this future     bind, using Federal Reserve monetary expansion to fill the shortfall between outfalls and receipts.

3. In contrast, Hummel, believes that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating (backing away         from) part of the principal.

Based upon the potential divisiveness within the congress and/or with the president, most will agree with Hummel on the first scenario.

Hummel then reviews America’s fiscal history from 1940 – 2008 to explain the basis of his opinions formed regarding the two remaining scenarios listed above.  These must be summarized due to the complexity and lengths of his explanations.

The second scenario successfully paid for 25 percent of the cost of World War II.  Because of high inflation at the time, monetary expansion produced revenue through the process of seigniorage (pronounced san’yor-ij).  This source of revenue for governments comes from the difference between the face value of coin and printed currency and the cost of minting and printing them.  However, this revenue isn’t available in our fractional-reserve banking system of today.  The revenue from WWII seignorage amounted to 12 percent of our Gross Domestic Product (GDP) at that time.

During the 1970’s inflation peak, seignorage amounted to only 1/2 percent of the current GDP then.

Therefore, in Hummel’s opinion, this dismisses the strategy of high inflation to avoid America’s potential bankruptcy.  Only in poor countries, such as Zimbabwe, with outdated financial and banking systems, will high inflation remain lucrative.

Lets continue with the third scenario with Column two.  Take heed of 2 Chronicles 7:14.

By Aaron Russell.