How will the U.S. deal with its enormous debts?
Actually, I believe the stock and bond markets have one eye cocked on the forthcoming US debt problems. The debt problems of the US are so huge, so intractable, that I definitely must keep them in mind in my investment strategy.
First, I'm convinced that the US has absolutely no choice but to default on its 'impossible' mountain of debts. The US is not going to face its creditors and boldly announce, 'Sorry, we can't pay our debts. So we're going to renege on them. It's over, we can't pay and we can't envision a time when we'll ever be in a position to pay off our debt.' Frankly, I can't envision this kind of blunt US default.
Wait, there is another way to default. You default by depreciating your currency, by printing so damn much of your money (inflating or 'Quantitative easing') that your debts become insignificant over time.
Hard to understand? I demonstrated the 'inflation cop-out' in my own case with my GI insurance policy. When I took out my GI insurance policy in 1945, I treated that policy (until I paid it off) as a debt. I struggled to pay the required $20 a month until I had paid off the policy. By the way, paying $20 a month was a real hardship for me back in the 1940s.
Now its 2010 and I've lived through 65 years of Fed-sponsored systematic inflation. Today I look back on those $20 monthly payments and they seem like small change. In fact, today I could pay off my entire insurance policy debt overnight and not give it a second thought.