Karl Denninger: The Stark Choice Now Facing America

A juicy excerpt from today's "The Market Ticker" excellent post:

"..There are only two options remaining for America, and we as Americans, and our politicians, must choose one of these two paths.

Neither path is easy.

Neither path is pain-free.

The path that will lead us to where we can prosper involves a great deal of short-term pain. It involves forcing all of the bad debt - perhaps your mortgage, the bad corporate debt, the "Ponzi-Scheme" style debt that has been layered up one on top of another - out into the open and forcing it to default.

On purpose.

This means that if you are underwater on your home, you will lose it and your credit will be destroyed for a few years. It means you may have to file for bankruptcy. It means a great deal of short term pain if you are in this position. It means that companies that have taken on too much debt will be forced to either pay down what they can, or go bankrupt if they cannot.

This path will result in higher unemployment for a time, it will result in lower standards of living. You will not be able to spend money you do not have, and neither will our government. Both the government and we the people will be forced to live within our means.

The second path is for Ben Bernanke, Henry Paulson our government and you to attempt to do what we have been doing.

That is, to borrow more money to pay the interest on money we have already borrowed. To refuse to accept that those who borrowed too much, and who can't pay, must declare that fact and face the potential bankruptcy that comes from being too far in debt and unable to make good on obligations.

This is now a critical matter for our nation, because our nation's political leaders have chosen to take the private debt of companies and individuals and attempt to guarantee it with the credit of the United States.

However, The United States is just as broke as we are individually - in fact, more so.

Treasury will have to issue three trillion dollars of new debt over the next 12 months in an attempt to make this work. But Treasury has been using very short-term debt - mostly four week and 13 week "bills", to fund the existing debt, because they are cheaper. As such the total amount of these auctions could easily reach five trillion dollars over the next 12 months.

Already, Treasury is issuing more than $100 billion dollars in this debt a week, on average, including new issues and rollovers. This is about double the total amount of debt that foreigners (or US interests) hold in total, and we have barely begun to actually issue the debt necessary to make the "TARP" operate.

We are, in effect, borrowing to pay interest. If you have ever tried to do this personally, you know that doing so almost always leads to bankruptcy.

It will for us as a nation if we don't stop it now."

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