We’re here in Vancouver at Addison’s “Fight or Flight” investment symposium. More on that as the week progresses…

Yesterday, stocks went down another 90-some points on the Dow. Oil stayed just under $100. And gold is still hitting records.

According to the papers, investors are on the edge of their seats. They’re waiting to see what happens in Washington. Everybody knows that a default would be disastrous. That’s why everybody also doesn’t worry about it; ‘they won’t let it happen,’ they say to themselves.

“Neither side budging,” is a subhead from yesterday’s New York Times.

It is widely assumed – even by us – that they’re going to budge soon. Otherwise, all Hell will break loose…and they’ll be blamed. The Democrats are afraid they’ll be blamed more than the Republicans. The Republicans are afraid they’ll be blamed more than the Democrats. And neither side really has the guts or gumption to play this game of chicken to the end.

Instead, they’ll budge. And they’ll come up with a solution that will be every bit as effective as the European’s solution to the Greek debt situation.

“Hogwash,” is how Felix Zulauf describes the European solution. It is a political fix…not a market solution. The market was discounting Greek debt by half. The politicos gave it a 20% haircut, lent more money, and kicked the can down the road again.

Hogwash is what we’ll get in the US too. Even worse. No discount. And a bigger kick.

The real solution is the one neither Democrats nor Republicans can tolerate – letting Mr. Market sort it out himself. Mr. Market is a pro at this sort of thing. He’ll get the job done. He’d probably write down the value of all debt…and toss out the stuff that can’t be repaid. In a few months, the crisis will be over. Then, the economy could stage a real recovery.

“Bill, are you saying that there wouldn’t be grave consequences to a US default? How can you be sure it wouldn’t trigger a full depression?”

Hey, we’re not sure of anything. And we wouldn’t be a bit surprised to see a depression. Unemployment would probably soar. House prices would collapse even further. Stocks would probably get sawed in half. And GDP would go negative in a big way.

What’s more, real interest rates would be higher…investors would be wary of US government debt, making it harder for the feds to continue their old free-spending ways too.

Atlantic Magazine lists “13 ways a debt ceiling breach would destroy the economy.” It’s the usual claptrap. Default would send interest rates up. Higher interest rates would make recovery harder, and so forth.

And don’t forget that the feds send out 88 million checks a month. If something were to happen – such as a default, which kept people from getting their checks – it would be a serious blow to the economy. Without this consumer income, the economy would go into a kamikaze dive.

All true. And all nonsense.

We don’t doubt that a default by the feds, even a technical, temporary default, could cause the economy to sink. But the way we see it, the economy still needs to reckon with all the problems it encountered in the crisis of ’07-’09. The problem was debt. There was too much of it. Until it shakes this dust off its sandals, it can’t build on a firm foundation.

The authorities tried to deal with that problem by adding more dust. More debt. A new GAO study shows that in the ’07-’09 crisis, the feds put out an amount greater than the entire GDP of the nation in order to stimulate the economy. What did it get for all that money?

Nothing but more debt.

Why?

The Keynesian stimulus model stops working when the economy shifts from adding debt to destroying it. Then, you can put out all the additional cash and credit you want. It won’t do any good. Households are reluctant to borrow; first, because they don’t have the income or the collateral to support it, and second, because they’ve already got too much debt and are eager to get rid of it.

When the economy goes into a credit contraction, trying to add more debt is like pouring whiskey down the throat of a passed-out drunk. It’s not the kind of medicine he needs.

He needs to dry out. And get rid of the debt. That’s what a depression…a default…a bear market…and higher interest rates can do for an economy.

The sooner the better.

We’ve been putting the pieces together. Last weekend, we noticed that the “Imperial Agenda” was part of the reason the middle class is going broke.

Cheap credit helped finance the middle class spending spree. It also helped finance the empire. Without artificially cheap credit, neither the federal government, nor US households, would be in the mess they’re in today.

And now the empire follows its own inevitable course. Bread at home. Circuses abroad. The voters won’t give up either one.

As for the bread at home, 44 million people now get food stamps. One of every four children gets them. The US Treasury sends out 88 million checks every month. And 51% of the public now gets some of its money from the feds.

Overseas, the circuses get bigger, more costly, and more absurd. The US is now involved in 6 military adventures in the Mideast and North Africa, if you include its intervention in Yemen and Pakistan. It maintains bases all over the world. And it now costs $1 million to keep a single US soldier in the field in Afghanistan.

How long can it afford the costs? The federal government gets roughly $2.2 trillion in tax revenue. It spends roughly $3.6 trillion. You can see for yourself, the feds have to borrow nearly 50 cents for every dollar in revenue.

But wait…we’ll ‘grow our way out of debt’ just like we’ve always done in the past, won’t we?

Uh…no. Not this time.

Because the last time the US had this much debt was immediately after WWII. “After” is the key word. WWII had a beginning and an end. The homeland population made sacrifices during the war so they were ready to spend when it was over. Military spending could be dramatically cut, too, giving the domestic economy a boost.

But now, the wars never begin and never end. There are no declarations of war. No debates in Congress. No surrenders. No armistices. No ticker-tape parades. We now have wars that go on forever against enemies who are never clearly identified, at costs that can’t be calculated and for reasons that can’t be explained.

Meanwhile, at home, the feds no longer offer relief to those who are temporarily unemployed or to an economy that is in cyclical recession. Now, they give permanent support to people whose jobs are gone forever…and to an economy locked in an eternal slump.

The wars go on and on overseas. At home, the recovery never comes. And the Empire goes broke.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.