We, the people of the US, are heading for a disaster of epic proportions. And when it hits, due to the US influence abroad, the world will feel the hurt at the same magnitude. Why? Fiat currency, that’s why. Combined with rapidly increasing national debt, and interest rates kept artificially low, with massive infusions of “cash” into the market place, the foundation holding up the confidence in the US dollar is starting to crumble.
Given more credit ratings downgrades by the various international credit foundations and agencies, the point of irreversible damage is quickly approaching. When that happens, hyper-inflation will implode the dollar nearly overnite, and nothing the government does will be able to stop the fall. Nothing. And the reason the government can do nothing, at that point, is that our standard of currency, the US dollar, is based on nothing but the confidence of the marketplace, both at home and abroad. When that confidence goes south, the dollar will become worthless as a method of exchange between people, leaving tangible assets and items, along with gold and silver, as the preferred methods.
Given the the sheer number of people living “paycheck to paycheck”, and holding essentially worthless material goods, when that disaster hits millions upon millions will starve off and die out, particularly within the inner city areas. Doom and gloom? Maybe. Maybe not. We will certainly know soon whether or not the US government’s credit rating gets downgraded further. These credit downgrades didn’t happen due to low taxation. They happened because neither of the major political parties seriously addressed the real problem. Spending. And yes, I said both of them, even as the first credit downgrade happened under the watch of the Democrats. Bush lowered taxes, but that arguably created economic growth, resulting in at worst, a wash revenue-wise, but likely a revenue increase. Liberals will argue the contrary, but history doesn't support their assertion.
What Bush did that made conservatives cringe is to spend. With the help of a Republican congress to boot. A medicare prescription drug plan. The Patriot Act. And “No child left behind”. Liberals might wish to include Defense spending, particularly with two wars, but neither of those wars were added to the Federal baseline budget like the previous three items. Then along comes Obama. With a progressive leaning Democrat Congress. $841 Billion Stimulus, give or take a few billion, in which much of that was rolled automatically into the baseline budget. The Omnibus bill, again rolling more spending into the baseline budget. And Obamacare, which by definition, is part of the baseline budget, even as most of the spending hasn’t kicked in yet.
Those baseline budget additions became entrenched in the general federal funding for various programs, agencies and departments, and include an automatic 4-7% increase, annually, due to inflation. For reference, that means $10 Billion added to the baseline budget in 2002 would, due to the automatic increases, cost the taxpayers $17.1 Billion dollars this year, assuming the average automatic increase of 5.5%. A $7.1 Billion increase in spending. And we are talking about hundreds of billions in baseline budget additions.
Contrast that with static tax rates over that same time period, but growth of only 3%, on average(and that is probably a very liberal estimate of GDP growth).
There is no possible way that revenue, even with unprecedented continuous growth for that long of a period could ever catch up to spending. And our government only continues to add additional spending to an already bloated budget. This is why there have been, and will continue to be, credit downgrades.
But can’t tax hikes address the discrepancy between spending and revenue? No, they cannot. Assume spending and revenue were really as the liberals love to point to in 2001, when Bush took over. In the 11 years since then, given no outside influence, no 9/11, no tax hikes or cuts, no housing bust, and a continuous annual 3% growth, spending would have outstripped revenue by $800 Billion, give or take a few billion, assuming a starting point of $1.9 Trillion for both. This kind of spending cannot continue if we expect to remain viable, financially, as a country.
More credit downgrades are in our future, if we continue down that path, even if one assumes an increase to the Clinton era tax rates, and increased capital gains tax rates, that won’t bring in the expected revenue since we don’t live in a vacuum. Those credit downgrades will force the government to increase the interest rates on bonds, just to obtain the cashflow necessary to keep the government running. Those increased interest rates will carry over to private industry, making it virtually impossible to obtain low-interest loans that Americans have come to expect on mortgages, cars, and even credit cards. The credit industry will deteriorate, becoming a much smaller part of our GDP, as less and less people take on the mounting costs of financing purchases, and the GDP will shrink. A lot. When that happens, government revenue will also shrink, while the spending, if not checked, will continue on it’s upward path.
Deficits of $1 Trillion will seem like drops in the bucket, and the debt will skyrocket higher than anyone thought possible. The ultimate inevitability is when the federal government defaults on it’s payments, forcing everyone the world over to shed any dollar holdings they may have, turning the dollar into nothing more than a worthless piece of paper. Greece would have been there, except for an association with the European Union which has artificially propped up there economy using an influx of Euros. However, the austerity measures have been severe, resulting in mass rioting across the country. Now imagine no one there to help prop up our economy. No one to force austerity measures.
Mass rioting will be the least of our problems, when no one can buy the food they need or the fuel they need. With the dollar tied to nothing but consumer and investor confidence in it, when that confidence deteriorates, the disaster will have started, and God help those who aren’t prepared.
It’s too late to move the dollar back to the gold standard. It isn’t too late to stop the gluttonous spending by our government and restore fiscal sanity. When fiscal sanity is restored, the government’s credit rating can be restored, and the dollar can be strengthened. Strengthen the dollar and the disaster can be averted, regardless of what happens in other countries.
The first panacea for a mismanaged nation is inflation. The second is war. Both bring about temporary prosperity. But both bring about permanent ruin. And both are the refuge of political and economic opportunists
– Ernest Hemingway