Grand Strategy in the Age of Mass Destruction

What Happens Next?     

By J.R. Nyquist


After U.S. budget talks broke down last week the dollar fell against the Swiss Franc, yen and euro. It is being said that the United States may lose its AAA bond credit rating if Congress doesn’t raise the debt ceiling by 2 August. What is the holdup? The House, Senate and the White House do not agree on the path to balancing the federal budget.

House Speaker John Boehner says, “The spending binge has to stop.” On the other side, President Obama accuses the House majority of “trying to balance the budget on the backs of the poor.” The President says he asked Congress for $1.2 trillion worth of “revenue increases” in exchange for $1.65 trillion in spending cuts. House Speaker Boehner says “no deal.”

The current House majority feels it was elected to reduce government spending, not to raise taxes. The current president feels he was elected to uplift the downtrodden, not to cut off social programs. Neither side is in a mood to back down. Both feel they are in the right, and each has backed the other into a corner.  “We have now run out of time,” complained the President on Thursday. “They [the House leaders] are going to have to explain to me how we are going to avoid default.”

There are good reasons to think that a partial U.S. default is close at hand. First, the two sides at loggerheads represent diametrically opposing principles which cannot ultimately be reconciled. The opposing sides are “from different planets,” as Speaker Boehner has admitted. If they have not reached an agreement now, what chance will they find agreement in the next several days? The impasse is real, and the likelihood of a partial U.S. government default is higher than most analysts would have previously guessed.

One might ask what a default would entail. At stake is the credit worthiness of the United States government. As everyone who owns a credit card has discovered: the lower your credit rating, the higher your interest payment. In the case of a government that owes over $14 trillion, the cost of the U.S. losing its AAA rating will be high.

How is the credit worthiness of the government decided? Formally registered and “Nationally Recognized Statistical Rating Organizations” (NRSROs) make this determination.  An example would be Moody’s Investor’s Service, Inc. , which recently published a report titled “US debt limit has not constrained government debt, [which] can be credit negative.” Another NRSRO would be Standard & Poor’s Rating Service, which has a sub-page on Understanding Ratings. (With 150 years of experience behind it, Standard & Poor’s has placed the U.S. Sovereign Rating on a “credit watch.” This means a decline in the credit worthiness of the United States could occur in the next few weeks or months.)

Already the NRSROs doubt if the U.S. will put its financial house in order. It is not simply a matter of raising the debt ceiling. If the United States fails to prevent the debt to GDP ratio from rising above 100 percent, the government’s credit rating could suffer as much as from a partial default. If the government continues to accumulate debt, a point is reached at which the amount is too large for anyone to think it will be paid back.

How did we get to this point? While nearly everyone is in favor of smaller government, they have nonetheless become addicted to government programs. Cutting the budget is popular, but most federal entitlement programs are sacrosanct. Over the past 80 years, Americans have become dependent on government in various ways. Quite naturally, people like the idea of government solving their problems. After all, it promises to make life easier for them. What people have refused to realize is the way in which this process gradually undermines national productivity and solvency.

It seems that the multiplication of wants applies on a collective level, and it applies to the state. The state has access to a seemingly unlimited supply of cash. Yet there is a limit. Even history’s richest nation cannot have everything it wants. A kind of revolution is therefore pending; that is to say, a passage from one national reality to another. If the government partially defaults next month the situation will worsen. The dollar will suffer and the government’s means will further shrink. In this situation, the price of gold will go even higher. 

The danger for the country, and the financial system as a whole, is found in what happens next. How does the country adjust to new financial realities? Will violent passions be aroused? The English Civil War and the French Revolution both grew out of disputes over government finance. In both instances the parliament overthrew the National Executive. In both instances the respective countries suffered from internal warfare, with hundreds of thousands of casualties.

It is too early, of course, to predict civil war. In this context, we should remember the words of Gustave Le Bon. “The social idea of the Anglo-Saxons is very clearly defined,” he wrote. “whether under the English monarchy or the republic of the United States. It consists in reducing the functions of the State to a minimum, and increasing the functions of the individual to a maximum….”

Obviously, America is no longer an Anglo-Saxon country, though we can see the old Anglo-Saxon tendency attempting to re-emerge. This re-emergence is either a genuine awakening of an old spirit, or its last gasp.


Below: Pearl Harbor and America's Unreadiness in 1941. Are we ready now?