Plan for National Bankruptcy of the U.S.A.

(This is a long, serious post about how Uncle Sam should just man up and admit that he's broker than broke. Then Uncle Sam should roll up his sleeves and do what CharlieHipHop suggests -- as he should've 20 years ago instead of being a stupid, stubborn jerk. Skip to the comments for the funny stuff. It's all serious EconoPoliticoBlahBlah from here until then. You have been warned.)

Whether or not the bailout proceeds as planned, the United States of America is bankrupt. The sooner we come to terms with this reality -- and begin to plan accordingly -- the better.

Before I show you how a bankruptcy might work, let me strengthen the case for its inevitability.

Why America's Bankruptcy Is Inevitable

It's ironic that as Wall Street asks for the biggest government handout in history, the ultimate judge of this bankruptcy will be the markets. Even if Congress gives Henry Paulson absolute dictatorial control over $700 billion to hand out as he wishes to his buddies on Wall Street, the global markets will slaughter the dollar and American investments. This dynamic has already started to play out.

Yesterday, everything that the average American wants to go up -- stocks, bonds, Treasuries, the dollar -- tanked, and commodities shot through the roof. This is not supposed to happen. It's unprecedented and scary. Normally, when stocks rise, Treasuries fall and vice versa. To put it in terms that a layperson can understand. It's as if your salary were cut (the dollar fell) as your savings evaporated (Treasuries, stocks, and bonds) and the price of everything (commodities) shot up by 20 percent in one day.

Expect this to continue. Nothing can stop it at this point, though my bankruptcy plan below can assuage it somewhat. You will see it in your day-to-day reality very soon, perhaps within weeks and certainly within months. Get ready for all the things I've been warning about (empty gas pumps, bare store shelves, hyperinflation).

This is a classic bankruptcy. There is no way that the U.S. can ever hope to repay its debts. Our government drowns in red ink. A great number of citizens can't keep their heads above water. Our companies are in the hole. As if the camel needed another log on its back, now our banks are holding a bunch of monopoly money and owe more than they hold.

This happened because of profligacy on the part of the government -- the shiny new Homeland Security Department, the sexy war in Iraq, the righteous holy war on marijuana, the generous tax give-aways to multi-millionaires and billionaires. None of that can be turned back now. It's done. We spent beyond our means, and now we're broke.

It also happened because we the people were stupid on two fronts: we let our government pass atrocious laws, and we borrowed for the things we wanted instead of saving for them. Shame on us. Let's not make those mistakes again.

Let's deal with reality -- if bankruptcy is defined as having insurmountable debts, the United States of America is bankrupt. That is the way it is. We can sit around crying about it or we can do something about it.

How to Execute National Bankruptcy

The first thing you do when you discover a tumor is cut the damn thing out if at all possible. There is now a tumor called the derivatives market. It is worth something like $50 trillion dollars, but nobody really knows. Warren Buffet has called these "instruments of mass destruction." Derivatives trading is what brought down Enron. It's what's bringing down everything else now.

Step One: a radical notion (bear in mind that weekends, abolition of slavery, and the national parks were all once considered radical notions) -- Zero out the derivatives market.

How? Simple. Massacre all insolvent financial institutions and wipe all debts clean. Congratulations. You now own your home. Of course, your investments are essentially worthless, but we'll get to that in a bit.

The solvent institutions can continue operations (after proving beyond any doubt that they are, indeed, solvent and not just playing a shell game) and the insolvent ones can be temporarily nationalized to smooth the transition. The prudent ones will be needed by Step Three of this plan.

Step Two: Drop the Dollar

Yeah, I just said that. The dollar is on its way to oblivion anyway. Let's replace it with the eagle or whatever you name the new currency (I'm using "eagle" from here on out). Per the Constitution, only Congress shall have the power to create eagles.

When we drop the dollar, we wipe the national debt and all public debt clean.

Dumping the dollar will not make our trading partners happy. However, skillful diplomacy will allow deals to be made that will pay off our creditors at hundredths-of-eagles on the dollar and keep the wheels of trade lubricated.

The eagle will not be a fiat currency. The federal government will back it with whatever gold is left in Fort Knox, and gold and silver will be seized from the defunct financial institutions as restitution for having created this mess. Additionally, American citizens will be asked to make the patriotic sacrifice of trading whatever gold, silver, diamonds or whatever fungible assets they may have for eagles. The eagle, unlike the dollar, will be a strong, hard currency backed by real assets.

Step Three: Retain Value in Existing Assets

When we nuked the financial institutions in Step One, we wiped out a lot of shareholder value, but when we instituted the new currency in Step Two, we ensured that commerce will go on. Companies will still do business, and now all their debts are gone. (Bonds are now without value -- sorry, but that's a hit we're going to have to take.) Those companies have assets and profits -- and now a clean debt slate! Party time!

The value of equity shares will simply be translated to eagles, and new brokers will emerge to trade them. To make up for lost bond wealth, institute a forced dividend. That will not sit well with uber-capitalists, but people will need income. Companies should be obligated to pay some small amount (ten percent, say) of quarterly profits as dividends. This would actually have the effect of inducing higher profits as companies with higher dividends would be more highly valued and would see their share prices rise accordingly; true value would determine share price, and idle speculation would have a lesser role.

Step Four: Shore up Social Security

We don't want to hurt people on fixed incomes or disabled people. Make sure that Social Security remains in place. Bump up payments to make up for lost bond income.

Step Five: Make sure it doesn't happen again.

Simplify the financial system, and keep the insurance, commercial, and investment banking industries separate from one another. Disallow complex financial instruments. Stocks, bonds, loans, and insurance policies -- that's it. No credit default swaps, no SIVs, no derivatives of any kind.

By default, interest rates will have to be high on the eagle or none of our trading partners will accept it. This is good. It will discourage borrowing and encourage saving. Perhaps some exceptions could be legislated -- banks might be allowed to offer lower rates on home loans and small business loans, for example.

The federal budget will need to be slashed dramatically, and taxes on the most fortunate raised substantially. Congress will have to hammer that out, but it's clear that we can't allow our national finances to get so far out of control.

Step Six: Assign blame and punish those responsible.

The greedy sons of bitches who re-wrote the laws to enrich themselves and screw the rest of us need to pay for this mess. Those that knew what they were doing were evil, and those that didn't were fuckwits. Either way, they suck, and many of them would look fabulous in orange. Whether dumb or exploitative, they deserve to lose their wealth and should be given a chance to redeem themselves through honest labor, of which much will be needed as we claw our way back to prosperity.

Most of all, let's not let this happen again. A healthy democracy or republic depends on an engaged citizenry. Be involved -- in your community, in your family, in your government, in your life. It matters.

It may not be the most appealing notion, but letting things continue to slide will be far uglier than the consequences of the above plan (or something like it).