| Any nation which wants to progress has to follow sound economic policies to achieve its ends.
Sound economic policy dictates that saving be considered a virtue. Savings allows accumulation of capital which then can be used for industrial production.
In America consumer activity is a figure that is used to judge economic activity. We have consumer confidence readings, Retail sales, New home sales and a bunch of other data. What we are doing is missing out on the whole point that economic growth is not measured by how much consumers spend but rather the sum of the goods and services produced by the country.
Production always comes before consumption. Just as you cannot expect a paycheck if you dont work, so also you cannot expect to consume if you have not produced. It is precisely here that we have a problem.
With the decoupling of Dollar from Gold, we now have the capacity to print as many dollars we want so that we control the swings of the business cycle. Predicting the business cycle is no easy feat, so we have a few extra dollars floating around that causes inflation. Now inflation is not a bad thing in the mind of the Federal reserve. Here is how it works.
Inflation allows the price of goods to rise. A financially prudent family would put aside money for a rainy day for emergencies. As far as possible they will save for the purchases of big ticket items. With inflation, it is possible to buy the item now, and pay for it with inflated dollars. So it makes sense for the consumer to borrow to buy things. The consumer is on a buying binge, because if he buys today, he knows it is going to be cheaper than tomorrow. The Government is also doing the same, take on debt and then pay back with inflated dollars. A wonderful racket. However, all this comes with a little fine print called debt repayment.
In order for consumers to service debt they need jobs and for the Government to service its debt it needs tax revenues which again is dependent on jobs.
Consumers are so accustomed to looking for bargains that other countries are more than happy to supply us with cheaper goods. So now we start running trade deficits. Meaning we print a dollar and buy someone elses production. Trade deficits means loss of employment which means we are eroding our tax base, meaning the govt has to borrow more and more to keep afloat.
There are a lot people who buy Govt bond, because of safety of capital. Those who export to us love to buy our bonds too. It keeps the price of the dollar up and because they hope we dont default, things can continue indefinitely or so they think.
What could go wrong?
1. The dollar declines in value so that no one wants to buy Govt. Debt. If the dollar declines and since Govt debt is denominated in dollars we will pay back with a deflated dollar. Obviously a foreign nation would like to get interest and also be covered for the dollars decline. The demand for debt declines and so the coupon rate goes up. We have to pay an even greater debt servicing cost so we have to borrow more and pay more interest. For the consumer that leaves them will less and less deiscretionary spending. Consumers will be less likely to take on more debt, because of their inability to repay.
2. We just do not create enough jobs so that existing debt taken on by consumers is defaulted upon. It is here that financial institutions will be hurt most. More and more capital that should be available for investment will now be used as a reseve for bad debts, leaving little room for the economy to grow.
Are we there yet...
We cannot borrow ourselves out of this situation. When things start to go bad the first sign will be the decline in the dollar. We have had a 20% decline in the dollar vs the Euro in the past 2 years. Can it get worse? Gold is another indicator. For years it was languishing below the $ 400 level and now it it right there and is threatening to go higher.
Could we use our Military might to force others to buy our debt...We might have to given the way things are going. Ask any banker and they have people in China and India because that is where the new growth story is.
It will surely be a sad day when someone retires and finds that there is no social security, because all the surplus money that is being pulled in for Social Security is being used to mask the real size of the deficit and our debt problems would be a whole lot bigger.
Can Bush or Kerry even begin to tackle this? Their parties have gotten us into this pickle. On the campaign trail no one wants to talk about this major issue that will affect the life of every American for years to come. Most Americans are in their naivete do not believe we have a problem. It is there?
The cure for this problem lies in reducing the size of the Government and getting back to sound economic basis. which means a return to the Gold standard and an end to the income tax as we know it. The income tax has been used to usher in this policy of consumer spending. A consumption tax will promote saving and be beneficial for all in the long run. For those of you who think immigration is a bad thing, I would suggest that you change your minds. The future of any country is determined by the ratio of its young to old population. A greater percentage of our people are older than a few years ago. It is the same reason why Corporations want to invest in China and India, because of better population demographics. If we do there might be hope for Social Security yet.
I am voting Michael Badnarik Libertarian party candidate for president, because he is the only person whose platform allows this change to happen. And boy do we need the change
For those not voting for Badnarik, I would appreciate your input as to why/ |