Jen Kuznicki
Obama recently said on the Letterman show: “But, we don’t have to worry about it short term, right now interest rates are low because people still consider the United States the safest and greatest country on earth, rightfully so, but, it is a problem long term, and even medium term.”
This monetary policy of printing (borrowing) and spending survives without affecting us for only as long as interest rates remain low but it cannot even do this forever; it creates another very deleterious effect as explained below. The Federal Reserve is both printing (lending) the money and setting the interest rate. Because it is their money, they as lenders, can determine what they wish to charge. Oh yes, one more thing. Our government (that means you and I) is now responsible for that debt because it is money that is lent to government (us). We did not even lend the money to China; we burdened ourselves. That is called monetizing the debt. We (our government) owe the Federal Reserve for what we borrowed. It is like the second coming of Fannie and Freddie, which were quasi government backed enterprises that partnered with the private sector because now, with this recent stimulus designed to pay down bad mortgages, that same debt is totally government owned and backed and to achieve this we have also diluted the money supply. Printed (borrowed) money is really an IOU. No, it is not actually printed but, instead of being backed by gold, it is backed by a note, which is an American Government promise to pay it back so we can now spend more money.
The CRA, Fannie Mae and cheap (low interest) Federal Reserve Money caused the crisis in the first place because the money was easily given to poor risk borrowers which created an artificial market and even further exacerbated the problem by artificially increasing prices that warranted large loans the borrows could never pay back. So now the thinking runs something like this. If our government is given the money, by the Federal Reserve, it will lend the money to the banks holding the bad mortgages and those banks will then lend to new homebuyers to buy some of the massive housing inventory and additional bad mortgages. Now the new homeowners owe the banks, the banks owe the government (us) and the government (us) owes the Federal Reserve. Does this sound ok? It is not because the money was created, in the first place, from thin air.
Ask yourself how an economy can grow strong enough to provide the necessary tax revenue to pay off this new debt (and a lot more debt coming in the form of old debt entitlements and unfunded new entitlements). It is almost impossible, especially in the face of new taxes and regulations that slam business so hard that they stop producing products and services. BTW, that translates into additional jobs lost. Borrowing, again, to pay down old mortgages does not create many jobs unless taxes and regulations do not molest business. Since they do not plan to stop spending on government-established bureaucracies, friends of government and entitlement recipients (of all sorts) to keep their voting base happy and since they will also usher in regulatory and tax policy harmful to business, job growth, must and will, fall off.
What makes the US government unique is that it can partner with the Federal Reserve Bank to print money and keep interest rates low. Theoretically that can go on for a modest (not very long) time but the effect has to ultimately inflate the cost of goods and services simply because diluted money buys less and, additionally, it depresses the production of these same goods and services (supply) to further increase their costs.
So what Obama is saying is that as long as he is President he can keep the lid on the eventual crisis. That crisis translates into failure to pay back what we borrow or an inflation substitute. And the latter is what will occur. In short the currency is devaluated and that must create inflation. Inflation is like getting very old and very sick simultaneously. It robs everyone of what they have saved in terms of deposits, bonds, SS, pensions, certificates of deposit and even their stock market portfolios. These amounts represent finite quantities that do not rise to the occasion. Hard asset prices do; they cost more; yet even that does not always translate into home price appreciation for various other reasons.
So, in essence, devaluating the currency is theft of the first order. Other terms might include larceny, bank fraud, scam, pyramid scheme, shell game, counterfeiting, embezzlement, looting, extortion and stealing. When it takes a wheelbarrow of money to buy an orange you can think back to what Obama once said. And maybe at that time some republican President will get the blame because the bomb, which was very much built by this Administration, goes off on his or her watch.
Let’s see what the forty-seven percent have to say after their pensions, fixed incomes, entitlements and deposits (which do not produce interest income) no longer allow them to afford their new inflation induced life styles.
If you enjoyed this article, please consider sharing it!
3 Responses to Regarding our national debt..an economic primer you should be aware of.
My Tweets
Follow Me On The Web!
How can both a borrower and a creditor be… actually the same? That is the point and therefore the line "We did not even lend the money to China; we burdened ourselves" should read "China did not even lend us the money; we directly borrowed it from ourselves and gave it to ourselves".
Excellent article task, and a great foundation to teach from. Not everyone pays attention to the root causes behind price fluctuations. If fact many just accept reality as it is, and complain with the multitudes of others just like them…ignorant of why gas, milk, and / or something minor, like pine nuts, jump so drastically in price. In other words, most people think micro when they should reflect on macro economics.
Obama recently again promised that, "I will end the wars and use that money to pay down the debt". He stated that again at the DNC convention.
If we turned our swords into plowshares and our knives into pitchforks and scraped all of our military we would still be spending about 25% more than we take in. Does Greece, Britain, Spain, Portugal, Ireland and Italy suffer because their debt was created by their military costs?
Our debt is created by a confiscatory and regulatory government that now takes 25% of GDP; then add an additional 1.7 trillion in annual regulatory compliance costs. On top of that an enormous amount of entrepreneurial spirt never leaves for work because it has been too discouraged to invest the time, labor and capital since the risk/reward ratio sucks. The largest part of the budget is entitlements and they continue to grow exponentially so that within less than two decades the entire budget will consist of Medicare, Obamacare, Medicaid, SS and debt interest on a ton of money we still owe and continue to borrow. How do you fix that in any country? Liberty can also be defined as freedom from government. Never has that concept been more applicable.
BTW anyone who thinks that a rising stock market represents prosperity should try to understand that whenever government throws money into an economy that money finds a path into the market. Now the institutional players (part of the 1%) get to play with free government money which all of us have to pay back. The bulk of us lost wealth from property devaluation yet the government points to a stock market appreciation created by government meddling that looks a lot like the housing bubble created by that same meddling. None of this creates jobs. And if you need an example check out the Japanese economy that has experienced two decades of a jobless recovery yet their stock market does fine while the government goes deeper into debt because of Keynesian spending. The Japanese have no shortage of willing workers; an entitlement society was never created based upon generational institutionalization of "free stuff" the way it has been in America and Southern Europe. The Japanese youth cannot find jobs and neither will ours.
Recovery and growth is measured in terms of GDP and on that basis we are falling apart. Unless Obama is defeated our economic woes will exacerbate and take the entire World along with it.