Just as we thought we may have seen all the unlikely events happen, all the black swans landing in our back yards and the most bizarre outliers coincide, it can always get a bit more outrageous. Or, in other words: Bring Out The Gimp.
The chain of odd events started off with the sub-prime crisis and culminated in the Lehman collapse. It didn’t stop there. On the contrary. The sub-prime crisis turned into a banking crisis, a credit crisis and a full-blown financial crisis, in which many workers, companies, banks, cities, states and even nations (e.g. Ireland or Greece) filed for bankruptcy. Or they should have. If they weren’t bailed out with taxpayers’ money because they were ‘too big to (let) fail’ or because it would put the entire financial system to a virtual standstill. Such event have been unanticipated until recently.
Now, bring out the gimp. The USA will shortly no longer be able to pay its bills. Moody’s and others are prepared to lower USA’s triple-A rating. This will not only raise their cost of borrowing, it is also a bad sign when it comes to confidence and morale.
So, extremely indebted as the USA already is, the negative outlook of an adjusted credit rating is now forcing the country to … raise the debt ceiling even further. Yes, this will be combined with some spending cuts, but still. While you would expect the USA to fight debt with more income ánd lower expenses (higher taxes and spending cuts) the country is fighting a massive problem called debt by allowing the debt to grow even further.
So, what’s next? Higher interest rates and higher inflation are likely. And hey, if the inflation is high enough, the country’s debt will ‘inflate away’ in real terms. This could be a solution for the huge debt position, but it will really hurt.
Update: August 1st, 2011: After weeks of political struggle, president Obama announced last night that Democrats and Republicans have come to a last minute agreement on raising the $14,3 trillion debt ceiling by another $ 2,4 trillion. The agreement comes with a plan for $2.4 trillion in spending cuts over a decade. A decade: that’s ten years. It has also been agreed that taxes will not be raised. There’s a catch phrase that perfectly describes this agreement (and for virually all solutions for today’s economic problems): “kicking the can down the road“. Nice title for the next Tarantino movie?
On a separate note: the line “Bring Out The Gimp” is from the acclaimed Tarantino movie Pulp Fiction. It is a distinctive quote, describing an already strange and outrageous situation going really out of hand. In the movie, the two rivals find themselves captured and ball-gagged in the basement of a pawn shop. When the hillbilly rapist called Zed orders to ‘bring out the gimp’, things get really weird…