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Debtor Nation
It is often said that “America is broke”; that we have no money left to do the things that we would like to do. This is simply not true. Truth be told, America is currently $8.9 TRILLION in debt. Being broke would be a great improvement to our current state of affairs.
If you will forgive a racist colloquialism, America has become the most “nigger rich” empire in the history of the world. If I haven’t offended you yet, what say I force you to watch a commercial, even though I have not received a penny in compensation? Don’t worry; it’s at least semi-relevant:
Here it is: the USD is now par with the CAD. The Fed just slashed “the rate” by half a point. The housing market is still in free-fall, and all signs point to hyperinflation as our only hope of survival.
What have the mavens in Congress done to help us? They have RAISED the “credit limit” of Federal Government by $850 BILLION; the fifth such increase since George W. Bush became our President a short 6-and-a-half years ago. What does this mean to you, the voter? Your country will soon reach nearly 10 TRILLION dollars in total debt. A momentous occasion, to be sure- the “debt clock” won’t suffer another millennium effect for at least another 6 or 7 years, when we hit 100 TRILLION.
Nervous? Don’t be. After all, those dollars aren’t worth nearly as much now as they were when we started borrowing them. And this, essentially, is the theory behind the current economic policies of Ben Bernanke, Chairman of the Federal Reserve.
Have you died from boredom yet? No? Then let’s move on to some long, rambling analogies sprinkled with tedious math equations.
Let us say that one United States dollar, as of today, Sep. 27, 2007, is worth one double-hamburger from McDonalds. J. Wellington Wimpy approaches you, and says he will gladly pay you fifty years from now, for a hamburger today. He will even pay 5% interest, compounded annually, while he works to repay you.
How much has he offered you?
1.0042^600 = 12.3631809 = $12.36
Back to Wimpy: you buy him a cheeseburger today, at a cost of $1. He promises he will repay you $12.36, fifty years from now. Popeye offers to break his arms if he doesn’t repay, so you know he’ll make good. You hand Wimpy a dollar, thinking he is a fool to pay an extra $11.36 for his cheeseburger. Then you sit quietly for fifty years.
During that time, the price of a McDonald’s hamburger continues to inflate, along with everything else. To use an extreme example, let us assume food inflates at a rate of 10% per year.
1.0084^600 = 151.252375 = $151.25
The year is now 2057. A McDonald’s double cheeseburger now costs $151.25. Wimpy returns, hands you $12.36, and mentions that he is hungry again. You promptly punch him in the face, and consider the lesson.
In 2057, in this example, Wimpy’s $12.36 only covers about 8% of a McDonald’s cheeseburger. In other words, using hyperinflation, Wimpy was able to enjoy a 2007 McDonald’s hamburger at a 92% discount, and jerk you around for 50 years in the process.
Back to the Fed: so long as our rate of inflation exceeds the interest paid on debt, America stands to gain by financing everything it does. The numbers work. Bernanke isn’t insane, he is simply short sighted.
Back to Wimpy: let us say that he stops by in 2017, and offers to pay 6% interest for another Cheesburger, for another 50-year term. Let’s say the current rate of inflation is only 5% at the time. Are you going to take the deal?
In 2027, Wimpy is back, offering 7% interest. Inflation has jumped to 7%. Are you going to take the deal?
In 2037, Wimpy returns again, now offering 8% interest. Inflation has jumped to 9%. Are you going to take this deal? I doubt it. Even on paper, it no longer makes sense.
In this analogy, America is Wimpy, eager to finance his cheeseburgers. He is currently offering 4.83% over a 30-year term.. Meanwhile, the rate of inflation is about 4% (assuming optimistic, Government-issued figures are correct). Currently, you stand to net 0.83%, per year, by financing Wimpy’s cheeseburgers.
Unless, of course, that annual rate of inflation increases by more than 0.83% over the next thirty years. For example, 30 years ago, in 1977, the rate of inflation was about 6.7%. A few years later, in 1979, the rate of inflation had reached 13.3%.
Let’s say you take Wimpy up on his offer today, and loan him $850 billion dollars (thanks again, U.S. Congress) at 4.83%. Then, thanks to the USD/CAD parity, and the recent rate cuts, America flourishes into a new age of hyperinflation, and returns to a 13.3% annual rate of inflation. You would be losing 8.47%, per year, for as long as this remains the case.
In other words, with $850 B in principal, you would expect to earn $41 B in the first year. At a 13.3% rate of inflation, this money would lose $110 B of relative value during this same period; a loss of $69 B. As time progresses, and these values compound, the situation gets worse and worse and worse.
Furthermore, at an inflation rate of 13%, the US dollar will be losing value at an extraordinary rate. People who hold existing wealth in USD would be inclined to dump it, and move into other currencies, or more likely, hard assets, like gold or silver. As the global market of USD floods with people looking to get out, the laws of supply and demand take over, and the cycle becomes self-perpetuating. As America loses purchasing power, all of those nations whom we import from will also take a hit. In a global economy, no one is safe from this grim future of a total economic meltdown.
At what point will you tell Wimpy to go to hell? At what point will foreign investors stop buying bonds from the Federal Government? At what point does this global ponzi scheme collapse?
Hungry for more?
