Monday, October 21, 2013

Quick thoughts on the economy

Every day in America, we hear constant debate from our leadership about fiscal policies— one side wants to spend more, the other side wants to rein in spending.  Our debt has grown year after year from one party’s president to the next.  In fact, over the last fifty years, there have been only six years when the U.S. had a balanced budget.  Right now, the U.S. debt is currently at $17 trillion.  That is just the operating debt, in fact, the U.S. actually has an additional $80 trillion of unfunded liabilities.  While over the next ten years, these unfunded liabilities will continue to grow an additional $110 trillion.  At this moment the U.S. debt is greater than any other country, in fact, if you combine all the debt of the European Union, the U.S. debt is still greater.  

The question that should be on everyone’s mind is how much farther we can keep kicking the proverbial can down the road before it hits the brick wall.  Think about this at $190 trillion in total debt, a newborn baby in 2023 will owe a staggering $575,758 .  Personally, I cannot see how the U.S. dollar does not collapse within the next ten years if not sooner, let me explain why.

The U.S. gets away with having more debt than anyone else is simply because the U.S. dollar is the world’s reserve currency.  Being the world’s reserve currency has its privileges.  No other country can run up a bar tab like us and not have an economic collapse.  Having the status of being the world’s reserve currency means that the global economic market prices their goods in U.S. dollars, countries buying and selling must trade in our currency a large percentage of the time, this causes the dollar to have demand and thus a value.  Most American’s think we will always be the world’s reserve currency, however if you ask many economic experts today, most will hint that we are facing large challenges.  The largest is from China; they are slowly gaining traction to replace the US dollar with their own.  Currently, China has established 37 currency swap deals that use their currency instead of the U.S. dollar.  The following is the third paragraph from a recent article on Reuters about the new China/EU swap deal:

"The deal is the latest of a string of currency swamps that China has created with other nations to promote usage of the yuan in global commercial and financial transactions, with the ultimate goal of rivaling the dollar as a reserve currency"

Let me leave you with this, what do you think would happen to the U.S. dollar if tomorrow, it was announced that the U.S. dollar would no longer be used as the world reserve currency?  The answer is, it would lose valuation, extremely fast and here in the U.S., we would see something called hyperinflation.  Hyperinflation is when the general price of goods in an economy increases rapidly as the currency quickly loses real value.  This happened in Argentina and Russia and it will happen in the U.S.

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