The recent housing bill also includes the provision to raise the national debt, again. by Bob Nightingale
Sunday, August 3, 2008
Ten point six one five trillion dollars is a pile of money I can't even imagine. Yet that is the amount of debt the U.S. Government has made legal this past week. As part of the housing bill, which was supposed to provide relief to struggling homeowners to the tune of $300 billion dollars, the national statutory debt limit was increased by 800 billion dollars. Next year, the projected deficit will be $490 billion, a record high. The actual contribution to the debt will be higher, since funding of the wars in Iraq and Afghanistan is not included in the budget (convenient, isn't it?) ([link edited for length]). The real deficit may be closer to $700 billion per year, going forward.
As of July 31, the actual current debt subject to the limit was $9.5 trillion (12 zeroes). Assuming that there are 300 million (just six zeroes) citizens in the U.S., each one of us now owes over $31,600, including the babies. That average is much higher if you divide the amount by just those who work for a living. The average amount is even greater if you consider those who have the savings to actually pay the debt, if it were demanded in full.
This past year, I've had to struggle to pay my credit cards, a car payment, and an old student loan, in addition to my hefty mortgage payment. My wife has a steady job, but mine went away in June. I landed on my feet, but at a slightly lower pay. I'm also financially responsible for four minor children (my messy personal life, oh well). If I got a bill for my "share" of the national debt, about $190,000, that would wipe out my retirement savings. In theory, I could pay it, but most Americans couldn't pay theirs.
As long as I owe money, I'm beholden to the wishes of my creditors. I don't have the security to walk away from my new job and hope for a better paying one, or have the luxury of not working. If I want to drive my truck, I need to put fuel in it. If I want to live in a warm home this winter, I have to pay the mortgage, taxes and fuel.
In all these transactions, everything that I do is affected by the belief in the value of the dollar. As long as I'm able to make the minimum payments, I can keep my car and my house. As long as I have a steady job, my employer provided healthcare can cover most of my medical emergencies. As long as I don't get falsely accused of a crime, I probably will stay out of jail, but I alone would have to pay for a lawyer to defend my innocence (which has happened in the past). Like most Americans, I sing the bastardized Snow White tune "I owe, I owe, so off to work I go."
But apparently not the Federal Government. It borrows and spends endlessly. I resent that. During these crises, the few congressmen who asked the simple question, "how do we pay for it all?" were silenced by the overwhelming legislative battle cry "we have to do something!" What they did is make us all a little poorer.
Unlike you and me, who will get our stuff repossessed if we don't make payments, there are no repercussions for those in office, who keep on spending. On the contrary, they get reelected for "saving" homes and providing other forms of relief. They don't feel the pain of giving, so there is no point of stopping.
To go to war, Congress doesn't bother declaring it or issuing war bonds to pay for it. It just does it. You have two Senators, one of which will probably become the next president, who are ready to spend endlessly to save the polar bears by building wind mill farms in the mountains and solar cell farms across the dessert. We will probably see "free" medical care in our lifetime, because it's a great vote getter. All these schemes take money. It is money they don't have. And neither do you.
Half the national debt is financed by the government borrowing from itself. The other half comes by auctioning bonds and other debt instruments into the market. Much of these are taken by international banks and foreign governments who believe that the U.S. government has the ability to pay them back. So far, that belief system has worked. The Federal Government (meaning you and me) hasn't defaulted, yet.
In my neighborhood, I've seen the black-and-yellow "AUCTION" signs in front of houses this year. That happens when you can't pay your mortgage and the bank wants to get something, anything, for your house. It'll be too late when we see one of those signs planted firmly in front of the Capitol Building.
I exaggerate. Before the repo men start hauling away our tanks and aircraft carriers, the Treasury will try to auction more debt into the market. The Federal Reserve will ignore inflation risk, and keep the interest rates low, hoping the ghost of Keynes and memory of Arthur Laffer will save us all. Inflation will accelerate, regardless of actual capacity and rate of consumption (supply and demand), because the total supply of money used to pay for everything doesn't stop increasing. It's just that simple.
Did you like this article? If you did, Thumb It! 7
thumbs so far
The views expressed
in this article are those of Bob Nightingale only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Bob Nightingale is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Richard Burns
Date: 2008-08-03 12:29:23
Hi: There is nothing wrong with your article as far as it goes, but the cruel ending is not going to be so nice. I believe that your government is going into massive debt to make sure that the average American is not going to have any Pension Fund or any Medicare. I have read many articles and the rich do not believe that the middle class and lower should have any social safety net and you won't. They have now done this and there is no turning back, you have let most of the industries go that make consumer products so it does not matter how low your dollar goes it will not get the industries back.
You have large Federal debt, 9.5 trillion, and Social Security 50 trillion. Then you have the huge current account deficit. You cannot afford the military that you have. That will have to be cut back. If the taxes are not raised and the cuts made to spending then the big crash will come and the rest of the world will be dragged down with it. But things will not be the same after that, the USD will not any more be the world currency, it will be the Euro. Your country will then have to pay every thing like every other country. The longer the debt is allowed to build it will make the crash that much bigger.
Unfortunately, it is the nature of the Fiat Beast. Because economic growth in a fiat monetary system must rely totally upon credit/debt creation and expansion, debt multiplies exponentially to the point that it becomes irreversible and eventually the system becomes insolvent.
As I have stated many times before, since every single Fiat “dollar” must be “borrowed” into existence, since it is completely backed by and is a legal notification of a debt obligation it is impossible to pay such a debt off, or down, since you would naturally have to “borrow” more Fiat “dollars” to pay off the debt. All the government can do is exchange old debt for new, the problem, of course, is that each time a payment is made toward the periodic interest obligations and the periodic principle obligation, the combined payment for interest and principle is replaced by a new debt load that included both interest and principle. The new principle amount then carries within a new interest obligation on the larger principle obligation.
As you can see, it is a mathematical impossibility, a circular equation with no solution. The ultimate problem is not so much the economy, but the monetary system upon which the economy is built and upon which it completely depends. Of course, like all fiat monetary systems in history, ours will meet the same fate, only this time, as the “money” reaches the terminal point in its lifespan, it will be a global event of a magnitude that few can fathom.
Posted By: Jahfre Fire Eater
Date: 2008-08-03 14:04:34
Good article. I talk to a lot of "average" people in the course of my days. I seldom meet anyone who has a clue what is happening to our currency. Sure, the folks on Nolan Chart and other small groups of people know all about it but the general public has no idea. They don't understand the first thing about our currency, the economy, the cause or consequences of inflation. They trust that the Fed and Congress are doing what is right and necessary because both the Democrats and Republicans are behind these actions. McCain and Obama both believe in socialist monetary poicy, but for different reasons. McCain, to continue the endless religious wars against Islam, Obama, to redistribute wealth as he sees fit.
Neither of them seem to understand where our national wealth and liquidity comes from. Two things that neither can grasp:
1 . American's pockets are not limitless.
2. Inflation is selling the future, selling lives that have not yet been born. It is immoral.
There is no politically expedient deviation from the present course. Since the folks who can decide to alter our course are politicians...no change will happen. We will continue to stare into the eyes of our creditors, our providers of resources and goods, while we devalue the money we trade for their products.
It is a game of chicken but we cannot deviate. So, the only question is, when will our creditors quit accepting dollars? I feel there is built up tension all ready so when the first few make that move the rest will follow in a great rush. The world will change very dramatically in a very short time. Americans will one day be relatively free individuals and the next day they will be assets to be divied up amongst the beneficiaries. An ugly tide of Socialism is headed our way and both the Democrats and Republicans are making sure it comes fast by bankrupting the country. If you want to see America's future, look at the last century of the British Empire.
One good thing is that we may not need another world war to finally close the chapter on the American Empire. It is likely that the costs of our war on terror will do the job nicely without having to drag a lot of other countries into the mess with us. Of course, the military will be the last ones to have fuel, food and clothing as the rest of us sacrifice those things in order to protect the "American Way of Life" Ha, ha! What a load of crap.
Ah, no matter what happens, I'll enjoy writing about it. With our massive debt and social program obligations, our penchant for blowing things up all over the world and our willingness to believe it is OK to put an ice cream cone on the visa card we will be starting down the road to Socialism with half of the rot it causes already in bold evidence. Technology sure seems to speed up the cycle of over reach and collapse...but it apparently isn't much good at making enough people aware of their financial fate due to inflation for any changes to happen. Oh well, better luck next time.
A hard reality of writing here is that if I write much longer, such as including the pitfalls of the Social Security system, I will lose readers. I took the position that the whole government is too large. Social security needs to be privatized or dissolved. It isn't sustanainable in its current form. But that is a topic for another article. :)
I like a strong, credible military, for the purpose of defense. Instead, we have a foreign occupation force, at the expense of domestic priorities. We can't have a healthy debate about domestic spending until there is a pool of funds available.
We haven't had a zero-based budget in this country since 1834. It's a goal worthy of achieving. The best I can do today is make baby steps in that direction. It's a momentum thing.
I could have made the ending of my article more dire, but I can't bring myself to that level of depression. The best I can do is admit that your scenario is one of several dark possibilities.
The Euro is based on multinational treaties, where each country has given up part of its soveignty for the stability of currency. A country should have the freedom to make bad decisions (such as the UK with the British Pound). However the Euro has achieved dominance due to the fact that each of the member countries has behaved itself, so far. It will be interesting to what happens when a county, perhaps Italy, operates out of sync with its neighbors. Will they be allowed to be themselves or a rogue province, like Taiwan or Hong Kong in China?
Hey Digital Bob, did you hear that now some European countries are accepting some Euros over others, depending on the country of origin. They are exhibiting the typical skepticism associated with fiat currency, questioning the value on the basis of what they view as economic stability in one country verses another.
The Euro will find itself in the same trouble as every other fiat currency in the world.