It's common knowledge that our government borrows money on a staggering, fantastic scale. And that, in 2009 alone, we are borrowing and spending on a scale not contemplated outside of global wars gone by.
As the U.S. economy as we know it ends, foreign holders of American debt are beginning to make their unhappiness known, and this is getting a lot of press.
But the real story of American debt, and the credit-worthiness of our government, is not a foreign vs. domestic issue. It has to do with the legitimacy of the U.S. government itself.
The American public at large has absolutely no conception of what has just happened to them. To put it simply, one of the the largest mass transfers of wealth in the first world has just occurred - from ordinary taxpayers to a few ultra-wealthy individuals, both foreign and domestic.
Although the paperwork for this is done and filed safely away, it is far from clear to me that it will stand. When all the hand-waving and bullshit is over, eventually American voters will begin to wonder why they pay so much in taxes and get so little. The answer will be that we are paying a lot of our taxes directly to a group of rich individuals, instead of using them to perform services.
This is the magic of "too big to fail" and "government borrowing." Sleight of hand. Pay no attention to that man behind the curtain. That giant mountain of money you're giving away? It is merely your interest payments. Your bailout funds. You must pay them. The government's debt obligations are sacred. The economy might collapse. Soldiers and schools and police and EMTs come later. Healthcare? You cannot afford healthcare. You must pay the rich people first. After all - you borrowed their money. Or, you needed them to stay in business, so they wouldn't lay you off.
You don't remember agreeing to this? You feel it's unfair? Too bad. You have a Sacred Contract. "There is no way out of it."
Or is there?
Eventually, if it becomes bad enough, some firebrand politician will run on the platform of abrogating certain loans. Others might find themselves losing to competitors who promise prosecution of those responsible for that epic wealth transfer. Senators and presidential hopefuls might see the poll numbers jump for those who promise to try to reclaim some of that vast stolen treasure.
It is vast. Maybe you didn't look at that chart earlier. Look, to see what the stakes are.
There is much theater around the sacredness of contracts. Geithner, for instance, suggested that it was "legally difficult" to limit executive pay in companies we bailed out because those executives have "contracts" and they have to be honored.
Only, there are no contracts anymore. No rules at all, really. Those same executives should get no bonuses, no private jets, because they let their companies fail. They should get nothing, because there should be no company left to pay them. Those were the rules.
We could have refused to bail out any company unless their executives agreed to end their old contracts (which were about to be worthless) in exchange for the government's aid. We could have set any terms we liked.
We did not.
You may use your own common sense to guess why.
So to recap: contracts are only as good as the government that enforces them. Democratic governments are only as good as their poll numbers.
The model here is that of the banana republic. The old Shah of Iran may have given British Petroleum a fantastically good deal on drilling rights back in the day, at the expense of the people of Iran. This, after all, is why he was installed. But the value of the lease was tenuous - because the lease was not with the Iranian people. It was with a government that they loathed, and which was unstable. Eventually (despite ruthless and horrifically violent attempts to stay in power), the Shah was deposed. Iran's oil industry was nationalized. 100% of its profits now line the pockets of Iranian, rather than foreign, power brokers.
Revolutionary governments do this all the time. They abrogate contracts, nationalize ("steal") factories, ports, ships, bank accounts, etc. They jail or torture or behead those who formerly sat on boards or at the heads of courtrooms or in the hearts of command bunkers. One needs only to claim that this is in the interest of law and order. It becomes legitimate when people believe it is.
Revolutions are violent in countries that are undemocratic. In countries like America we have them all the time, in voting booths instead. The idea that we might suddenly no longer feel obligated to pay our debts, or that we might suddenly view the law in such a way that many formerly powerful Americans become criminals, is not at all so far-fetched.
Should the public come to understand that their indebtedness is part of a criminal enterprise, the purpose of which is stealing tax money, they will simply treat US bonds like the chits of busted mafia bookies. Bailout cash will become stolen goods. Politicians, Captains of finance industry, may find themselves discussing RICO with their lawyers from prison.
All just from a shift in perspective. Watchers of public perspective can tell you, bigger shifts have occurred. When they start, they spread like brushfire.
The concept of using the taxes and indebtedness of voters to enrich already rich people may seem unassailable in the U.S. today. But we have never pushed it so far before. There are certainly limits. History tells us that when we cross those limits, all the rules will change. No paperwork, no matter how beautifully crafted, holds its value when enough voters (and their representatives) deem otherwise.
If I were holding bonds issued by the U.S. government, I might start thinking extremely hard about who holds the other end of that debt. The American taxpayer? Or a political paradigm that may not be long for the world?