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The Soaring National Debt

October 11, 2013

Forgive me readers for not posting the latest developments regarding the “government shutdown”. As a countdown to the stalemate in Washington, everyday until October 18th, 2013 I will post something in regards to our soaring national debt.

Lets begin with the shot fired across Washington’s bow in April of 2011 on the part of Standard & Poor’s (S&P), the financial service company that is one of the Big Three credit rating agencies when they downgraded the federal government’s long-term credit outlook from “stable” to “negative.” “As S&P made clear, getting spending and our deficit under control can no longer be put off for another day, which is why House Republicans will only move forward on the President’s request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington,” said House Majority Leader Eric Cantor (R., Va.). We are now in October 2013 and the federal government has not reduced the federal spending.

If the rating of the federal government continues to deteriorate, and if international creditors lose confidence in the federal governments ability to pay off its debts, we could see a crash in bond prices along with skyrocketing interest rates. For yours truly, its not a matter of “if”, but “when.” This will cause a decrease in the relative value in the dollar with a reciprocal increase in the price of oil, which is a major reason why we must have an energy policy that immediately causes us to explore and consume our own energy resources.

The crisis in Europe in 2011 shows how volatile bond prices can become when nations become deeply indebted. Rates go up for the same reason consumers are forced to pay higher interest rates for mortgages. Interest rates reflect risk. International markets will decide lending money to the United States is riskier than it was in the past: the greater the perceived risk, the higher the interest rates. This stage could be delayed in the short term because of the debt crisis in Europe. As the Euro weakens, the dollar will strengthen. Yet this reprieve has given us a false sense of security.

As hard as it is to believe this, even for me, the Federal Reserve will not be able to keep rates low forever. We have maintained near-historic-low interest rates in recent years in part because the Federal Reserve has tried to stimulate the housing market and stabilize home prices.  When interest rates go up, and they have nowhere to go but up, we will all suffer enormously. I would say, if you haven’t done so already, start getting the idea of a home loan or car loan out of your head now or it will be very costly for you later. I believe we have already hit a debt wall and liquidity crisis.

So what does this mean? It means that going forward borrowing enough money to fund our military and other programs will become much more expensive. We are digging ourselves into a hole so deep with sides so steep, it will be impossible to get out. All this seems like a repeat of the era of King Henry VIII where his royal highness clipped coins and debased the currency of the time just like our government is debasing our currency and aggravating inflation. My wife and I just finished watching a marathon of the Tudors and I felt like I was watching our modern day federal government in the form of King Henry VIII.

In Henry VIII’s time, debasement was accomplished by reducing the gold and silver content of coins. In today’s world of paper money, we simply print more, which the Federal Reserve has already done, and may continue to do. This has and will continue to make everything we buy more expensive, and everything we own worth less. If our government attempts to inflate its way out of a debt crisis, much of our savings will be wiped out. Other nations will see this as an opportunity to make a decisive move against the dollar. And you and I will be the one to pay the price.


From → Economics

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