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As a non-expert it seems to me that the "rational" US policy, once the rest of the world stops financing US debt, is to hyper-inflate the currency so dollar denominated foreign debt disappears as a problem.

The pre-conditions for this is that a short-termist and selfish electorate (not to mention political and economic elites), will not tolerate simultaneous higher taxes and reduced expenditure.

The public might be happy to stop corporate welfare, but will not accept major cuts in domestic social expenditure. Elites would probably favour the reverse policy. Most Americans also seem to be comfortable with wasting vast sums on a bloated military budget, skewed more to useless high tech projects that only benefit the military-industrial complex than to spending on the sort of relatively low tech but numerous forces which might actually be of use.

If a sovereign government is unable to raise the funds to pay interest on its debt, by taxation or further borrowing, there is only one recourse left. The printing press.

Everyone in such a country is likely to get poorer, but elite groups have more opportunity to diversify assets so as to maintain or increase their relative advantage over the rest of the population.

I find it difficult to know if the UK is in a similar position. However I am sure the Brown-Cameron National government can appeal to the Dunkirk spirit and relive the triumphs of the MacDonald-Baldwin National government of the 1930s. Of course the modern generation may not remember the Second World War or be willing to put up with enhanced austerity. The modern idea of savage cuts in public expenditure bringing about the end of civilisation, is a slight reduction in the projected percentage rate of growth in public expenditure. What the reaction would be to across the board reductions in actual amounts of expenditure is unpredictable. Perhaps Gordon also needs to invest in some new printing presses.

by Gary J on Tue Oct 30th, 2007 at 11:59:35 AM EST

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