CHAPTER 16

DIARY ENTRY: November 2, 2046 – Post-Default

What did the US look like post-default? We certainly did not want another Russia after it defaulted. On August 17, 1998 the Russian government made a morning announcement about its default. Tatiana, aged 20, rushed to the grocery with her mom. The shelves were already half empty and the store closed a half hour later. It remained closed for a couple days. It reopened with bread twice the price. Caviar became out of the question. Later, when the US sent humanitarian aid, she was introduced to powdered milk and Uncle Ben’s potatoes, the first time she had seen potatoes in a box.

That winter, she sat frigidly in the law library. She wore her fur coat and not for style. Who cared about fashion at that point! No, for sheer warmth, with gloves and a hat. Luckily, her dad paid the tuition the week before the default. Half the class, who didn’t, dropped out. She was at the frozen library, as she now couldn’t afford the textbooks. Her prestigious university was state run, so no heat or lights. When she could no longer see her breath, it meant daylight through the window was too low. The Baltic sun rose at 10am and expired at 3pm. Those became the library hours.

One Saturday afternoon as she hurried down the sidewalk on Furshtatskaya, a delivery truck pulled up. Its driver threw open the back door and began selling its cargo: cooking oil and canned peas. Bystanders rushed and pushed to buy. That is, until a cop strode up to stop the illegal sale. The truck hastily pulled away before he got there.

The driver parked two more times on different streets. He never completed his delivery to the grocery store. Instead, he abandoned the truck and his job with his pockets stuffed with the cash. He made more money that afternoon than he did as a warehouse driver in three months.

Tatiana’s dad was a minority owner of a Russian pelmeni (ravioli) factory. Every morning, Aleksey checked the new value of the ruble as set by the central bank. His factory then paid workers with bags of ravioli. It was a problem when a half bag was owed, say ten and a half.

Because the police weren’t getting paid and thus were virtually nonexistent, the Russian mafia came knocking. They would protect the factory from the neighboring gang, who sported BMWs with black windows. Aleksey learned that the security offer was really an order, when one of the factory owners refused and was found floating in the Neva, the large river coursing through St. Petersburg. He was bobbing face down beside Sasha, who was so depressed that he polished off some cheap vodka one night and let himself topple off the stone embankment along Petrovskaya.

Vodka was about the only commodity that remained cheap. The clear liquid in the bottle wasn’t always vodka though, a prevalent fraud, because of the weak police and desperation. Even the nation’s highest leader, Yeltsin, was keeping the misery at bay with vodka. Tatiana and her dad despised him, felt betrayed by him. The young woman concluded that she could not count on government to make her way in the world. The trust was shot.

The day before Sasha committed suicide, he bought a bag of cigarette butts. He dumped them on his kitchen table. As if he was removing peanuts from their shells, he dug the leftover tobacco from under the paper. He made a small pile of the shredded leaves and rolled his own cigarettes.

And this was the cultural capital of Russia. Imagine Moscow, the economic center, where manners were shed.

Those were the conditions Americans hoped to avoid.

Yeah, right!

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By 2025, US debt reached twenty-one trillion, because Uncle Sam had continued borrowing every year.

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[1]

The projection made by the Congressional Budget Office turned out to be fairly accurate, a projection made a decade earlier in 2015. The CBO was a nonpartisan government office in charge of giving Congress financial reports, so that those lawmakers could make intelligent decisions. The CBO made one inaccurate assumption, though, in its projection. The unemployment rate in 2025 was actually 5% higher. The CBO failed to account for the aggregate effect of factories closing in the US for the decade leading up to 2025. Fewer factories meant fewer jobs. Whereas the CBO projected that unemployment would flatline at five percent for the decade before 2025, it actually rose steadily to ten percent.[2] (It was at ten percent in 2009, a year after the financial crisis.)[3]

Whereas the CBO predicted a deficit in 2025 of seventeen percent, it was actually twenty-one percent.[4] The additional unemployed were not paying income taxes, thus lowering revenue for Uncle Sam and widening the deficit. They were also collecting social benefits, like unemployment compensation and welfare, thus increasing spending and widening the deficit further. The 5% rise in unemployment was almost proportional to the rise in the deficit.

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Here’s how Uncle Sam planned to spend his money, the breakdown being virtually the same the year before.[5] Again, the CBO’s projection was pretty accurate.

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“Okay,” you say, “China made us default. So what? What was the big deal about a deficit of 21 percent? Couldn’t Uncle Sam have just trimmed some of his spending in each of the above categories? Problem solved.”

That is precisely what Uncle Sam did, as will be shown shortly. The ripple effects, though, were disastrous.

A couple cuts were made in the five years before 2025. Let’s look at them quickly, to understand the later ones.

Five years before the default, every nation began lending less, anticipating the default. China lent less also to appear equally anxious. This decrease in revenue from borrowing forced Uncle Sam to make some changes. The first was to address the biggest piece of the spending pie: social security.

Too many people were receiving social security checks from Uncle Sam. So the retirement age was moved from 67 to 70. In 1935, when social security began, the age of retirement was 65. Then the age was moved to 67 effective 2005, because there was an imminent shortage of money for retirees.[6] Now the age was moved again for the same reason.

Congress defended that since 1935, our average life expectancy had increased seven years.[7] Because workers were living longer, retirement should start later. Americans would still get retirement checks for four extra years.

Although the public reacted with whining and complaints, the change was tolerated, as many Americans were already working until 70 because they couldn’t live off social security. Uncle Sam had less money in his front pocket from reduced borrowing. But he didn’t really notice. His outlays decreased with fewer retirees needing a check.

Uncle Sam made one other noticeable change leading up to the default in 2025. He made cuts to military spending. In 2015, he spent 16 percent of his annual budget on defense.[8] He curtailed funding for weapons research and development, saving about 2 percent.[9]

‘What a lovely savings!’ thought Uncle Sam.

Except, interest rates within the US had climbed: for example, 4% on home mortgages in 2015 to 6% in 2025.[10] Higher interest rates meant that Congress had to pay more interest on its loans to foreign countries. A two percent increase in interest might seem trivial, until you multiply it by 13 trillion (of debt). Uncle Sam’s new savings on defense were spent on higher interest payments on Treasury notes.

The central bank for the US—the Federal Reserve—could not prevent interest rates from climbing. It had kept rates artificially low for about a decade, 2008-2018. It did so by purchasing US Treasury notes, that is, becoming another lender to Uncle Sam. Where did the money come from for this lending? Easy. The Federal Reserve simply printed the money. ‘How much do we need?’ they asked themselves. After all, that is what central banks do. They print the currency for their respective nations.

Is there a limit on printing endless amounts of cash? Yes. Release too many dollar bills for general circulation, and the supply starts exceeding the demand. Too much of any commodity, including dollar bills, reduces its value. Joe American never sees the value of the dollar decrease, but instead sees the price of consumer goods go up. How so? Jack and Jill trade commodities. Jack has dollars, and Jill has apples. He trades two dollars for two apples. When dollars decrease in value, Jack must trade three dollars for two apples. Apples now cost three dollars, not two dollars. Jack didn’t see dollars devalue; he saw prices go up. After Russia defaulted in 1998, its bankrupt government started printing rubles in trainloads. The ruble dropped in value seventy percent within six months (against the dollar). Meanwhile, consumer prices rose sharply. They nearly doubled on average.[11]

Hence, the measures Uncle Sam took just before 2025 were far from sufficient. The budget was still grossly imbalanced. Spending still exceeded revenue by 21 percent.

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So in 2025, what did the post-default era look like?

Okay. Let’s begin with the default itself. Right before the auction of US treasuries, China dumped a noticeable amount of the US notes it held on the open market. China then announced to the world that it would no longer lend to America. This shocking announcement made headlines and caused Japan and most other nations to pause. The US would default without loans from China, so there was no point lending anymore themselves. None of these nations bought at the auction either.

Congress knew these nations would sprint to sell the US notes they held on the open market and the terrible consequences of it. So Uncle Sam assured the world that he would not default because he would find another lender beforehand. Immediately. He almost begged these nations to hold onto US notes and promised he would make positive internal changes to his budget. His creditor nations agreed to wait, as they knew that, if they sold their notes simultaneously, the notes would plummet in value and they wouldn’t receive much. The loss for them would be enormous.

The US promptly turned to the International Monetary Fund. The IMF is composed of nations, and each chips money into a pot each year. The IMF can then lend that money to one of these nations. When it does, it imposes conditions, that is, changes which restructure the borrowing nation. In 2025, when the US could no longer chip in but instead needed a loan, the IMF had the ability to lend it. Our contribution to the pot every year was only seventeen percent. The IMF was also able to impose conditions over US opposition, because the US only had a vote of seventeen percent. A coalition of countries wanting conditions occurred quickly, and that coalition easily had over fifty percent of the vote.

When Uncle Sam heard the conditions, he got very offended. “How dare you try to control me!” he scoffed. The discussion with the IMF became heated very quickly, and turned into a protracted negotiation over the unfavorable conditions.

Uncle Sam first trimmed the federal agency portion of the spending pie. Federal government departments, such as the FBI and the Federal Aviation Administration, could not be eliminated without causing great instability internal to the country. Regulating flights in the sky at a minimal level was important for basic public safety. All of these departments were trimmed by 10 percent on average. But that downsizing did not translate into much savings. For example, in 2014, Congress was only spending three percent on transportation and water infrastructure. [12]

The defense portion of the spending pie was not touched further. Uncle Sam had already trimmed the defense budget by 10 percent by eliminating funding for research and development. Reducing the size of the military itself seemed risky to national security.

Within months of China refusing to lend, the US next defaulted on its interest payment to the Old-Age Reserve Account. Remember, that account helps fund social security checks.

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The elderly received monthly checks for a lower amount. Eleven percent less, which was how much the Reserve Account funded social security checks.

As Uncle Sam continued to reject the IMF’s conditions, other shortages occurred.

Within a couple months of defaulting to the Social Security Administration, Uncle Sam was compelled to default on his interest payments to all foreign countries. From 2015 to 2025, interest payments on Treasury notes grew from six percent of federal spending to fourteen.[13] Uncle Sam wanted to avoid cuts to social welfare programs (including social security), as the cuts would affect half of America. When I was scraping by on money, I quit paying others before not having food. The remaining piece of the pie in federal spending was interest payments to other nations.

This move angered a large portion of the planet. Nearly every major country held US notes in its central bank, billions of dollars’ worth. For example, in 2015, Brazil held 255 billion, Ireland 246 billion, and Caribbean countries together 337 billion.[14]

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[15]

Those amounts had not decreased over the next decade. The very real prospect of getting stiffed for the entire loan, not just the interest owed, represented a huge loss for almost every major country worldwide. Really angered, the IMF member nations dug their heels in further. “You will accept our terms!” they insisted. They also started selling some of their Treasury notes, the sale of which sank the value. They behaved just as my mother and sister did after I defaulted to myself. If you recall, the same thing happened to my IOUs in my family.

Because Uncle Sam still did not have an IMF loan, another shortage then befell welfare recipients and other Americans receiving public benefits. They received 25 percent less and the same percentage reduction in Medicaid (their health coverage). Retirees had no reduction in their own medical coverage (Medicare).

These reductions ended up balancing the budget, bringing the deficit to zero. “Aha!” sneered Uncle Sam to the IMF. “I don’t need your lousy loan.”

As you can see, you were right. Trimming each portion of the spending pie did eliminate the deficit and did eliminate the need for China’s loan and for anyone else’s loan.

But the ripple effects of those immediate cuts were disastrous. If we had made them gradually over the decade before 2025, the situation would’ve been different. All at once was ugly. Cutting back on food over time is uncomfortable; fasting is really painful.

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Over the six months after China quit lending, economic conditions slid into the muck. No one wanted the dollar, so its value tanked. After the default of Russia in 1998, the ruble decreased in value by seventy percent. The average price of consumer goods doubled.[16] In 2025, US stocks plummeted. Accordingly, 401(k)s fell seventy-five percent.

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Let’s look at how each demographic group was affected. The poor who were suffering from a 25 percent reduction in benefits now had to contend with consumer prices having doubled. Billie, mid-twenties, lived in Pittsburgh. She lived in a complex of very blocky apartments as generic as games pieces from Monopoly. She shared the one-bedroom with the father of her child. Her son took after Ralph, as both had droopy eyes and dull wits. Ralph’s disability check was just enough to cover the low-income housing and cable and to buy cartons of Camels. Food stamps bought just enough groceries to justify having a fridge, and WIC provided formula for little Ralphy, III. Cable was critical, more important than a cell phone, because they rarely left the apartment. Why leave when you didn’t have any money to spend? They watched every Steelers game, and then followed hockey as if they were sports agents and their livelihood depended on it. They had so much sports memorabilia packed into the living room, they could’ve opened a hip sports bar there.

After the benefits reduction, the new formula supply left Ralphy hungry. Cutting back on smokes wouldn’t solve that problem. The disability cutback caused them to drop cable. The reduction in food stamps would cause them to starve. The situation was really dire when food started costing double.

Neither of them finished high school, and unemployment was rising above ten percent. They were usually passed over for even minimum wage jobs, especially Ralph with those droopy eyes. It didn’t help that it took him several seconds to answer even basic questions. They didn’t have a car anyways. Being decent people, they lent their blue van to a friend, who totaled it. He denied being high.

The second demographic, retirees, were hurt by the 11 percent loss in benefits (when Congress failed to make the interest payment to the Old-Age Account). Mr. MacEwen lived across town in Pittsburgh. Before retirement, he had sold carpet for his career, first in the showroom and later to dealers. He was so smooth at sales that he convinced all the dealers to pay a little extra for the carpet. He would then take them on vacation together, using the extra amount they had paid all year. The extra covered his part of that Caribbean vacation too. They were thrilled.

Being of Scottish descent, he applied enough to his 401(k) over his career to have a nest egg at retirement. He was a millionaire, he liked to joke with his wife. He had very close to one million. His social security check coupled with the interest earned on his 401(k) gave him a decent lifestyle. With his $4,000 per month, he could golf seven days a week and travel in every season. He also enjoyed reading westerns and making wine. That’s pretty much what he did.

Until the reduction. The eleven percent decrease in his social security check didn’t make much difference. But losing 75 percent of his 401(k) sure as hell did. Now he had $1,700 per month. Forget golf, winemaking, and the trips. Fortunately, his house and two cars were paid off. Because consumer prices doubled, his groceries now cost a grand per month. His homeowners insurance and car insurance now cost three hundred. With the remaining four hundred, he could pay his utilities and cell phone bill.

But what about gasoline? And car repairs? And real estate taxes?

Damn it!

Hold on, maybe he could go back to selling carpet. Except, he was 72 and who the hell wanted carpet now!

As a third demographic, how about the other half of America—the workers? Cheryl, thirty-something, lived next door to Mr. MacEwen. His mulch beds looked better and her lawn was spotted with more dandelions, much to her dismay. She was an accountant. She was divorced and lived alone, except when she had custody on alternating weeks. Although she made nearly six figures, she had been living paycheck to paycheck, except for the meager amount she put toward her 401(k) every month. What distinguished her from a waitress living pay to pay was only the scale of her lifestyle (and that she was contributing to a retirement plan). Cheryl’s house was larger and her SUV newer.

Now that groceries cost five hundred dollars more a month, Cheryl quit contributing to her retirement and used the money at Giant Eagle. She loved its mauve tile floor and apple fragrance. She felt so Italian there. Her mortgage and car loan were locked in, so no changes there. But she couldn’t meet her basic expenses, because her utilities, cell phone bill, insurance, and fuel costs significantly increased. She cashed out the piddly amount left in her 401(k), of course paying the taxes and penalty on the early withdrawal. That $3,600 held her over for six months only and then she was in trouble.

Almost all the businesses in Pittsburgh which catered to disposable income folded. Cheryl, Mr. MacEwen, and Billie no longer had extra money for Pier 1 imports and Jo-Ann Fabric. They no longer had extra money for home décor stores, craft supply stores, restaurants, bars, cruise lines, hotel resorts, airlines, beauty salons, bowling alleys, movie theaters, and symphony halls. Both major corporate franchises and American small businesses closed.

These closures caused tremendous unemployment, which shot up from ten percent to sixty over six months.

With half of America’s workforce having lost their jobs, Uncle Sam quickly had only half of his income tax revenue. Without us even considering the increased cost of public benefits, the deficit went from zero to 46 percent.

F&#k! The vast majority of the American population would need public benefits—when added to the half already on social security and benefits. With such a shortage in revenue, they would receive next to none. Without an immediate rescue, we might’ve had a violent revolution and certainly prolific riots.

F*%k! Uncle Sam would have to accept the terms of the IMF. He was bankrupt and about to wear tattered clothes. What were the wretched conditions again?!

 

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[1] https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/44172-Baseline-OneColumn.pdf, p21 for 2012 and 2013 data; https://www.cbo.gov/publication/45069 (Baseline 2015 )

[2] https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50724-Update-OneColumn_1.pdf, p.109

[3] http://data.bls.gov/timeseries/LNS14000000

[4] https://www.cbo.gov/publication/49973, 2015-25 BudgetDataProjections.xlsx, Table1 (adjusted for higher unemployment)

[5] https://www.cbo.gov/publication/49973, 2015-25 BudgetDataProjections.xlsx

[6] https://www.socialsecurity.gov/planners/retire/background.html

[7] https://www.socialsecurity.gov/planners/retire/background.html

[8] https://www.cbo.gov/publication/49973, 2015-25 BudgetDataProjections.xlsx, Tables 3 and 1

[9] https://en.wikipedia.org/wiki/Military_budget_of_the_ United_States. In 2013, 10% of defense budget was R&D. See also https://www.cbo.gov/publication/49973, 2015-25 BudgetDataProjections.xlsx, Tables 3 and 1

[10] http://www.freddiemac.com/pmms/pmms_archives.html. See also https://www.cbo.gov/publication/49973, 2015-25 BudgetDataProjections.xlsx, Tables 4. Mortgages were 2.2% higher than interest on public debt in 2015.

[11] http://www.imf.org/external/pubs/nft/2003/russia/. Fig 1.2. Inflation 90%.

[12] https://www.cbo.gov/publication/49910, Exh 8

[13] https://www.cbo.gov/publication/49973, 2015-25 BudgetDataProjections.xlsx, Table 1

[14] http://ticdata.treasury.gov/Publish/mfh.txt

[15] http://ticdata.treasury.gov/Publish/mfh.txt

[16] http://www.imf.org/external/pubs/nft/2003/russia/. Fig 1.2. Inflation 90%.