The Final Bubble: U.S. Government Debt

Prominent economic I-told-you-so-er Peter Schiff makes the succinct case in the Wall Street Journal for why tripling down on massive U.S. government debt produces long-term risks that are inconceivable for most mainstream politicians, economists, and commentators:

[T]he nations funding the majority of America's public debt—most notably the Chinese, Japanese and the Saudis—need to be prepared to sacrifice. They have to fund America's annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.

These nations, in other words, must never use the money to buy other assets or fund domestic spending initiatives for their own people. When the old Treasury bills mature, they can do nothing with the money except buy new ones. To do otherwise would implode the market for U.S. Treasurys (sending U.S. interest rates much higher) and start a run on the dollar. (If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.)

In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.

As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.

But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. […]

If any other country were to face these conditions, unpalatable measures such as severe government austerity or currency devaluation would be the only options.

Link via Instapundit.