Inflationomics

A Debt Makes a Debtor, a Large Debt Makes an Enemy

There's an old saying that "a debt makes a debtor, a large debt makes an enemy." So let's talk about the world's largest enemy, I mean debtor. Of course, we're talking about the U.S. government and its creation, the Federal Reserve System.

As of December, 2008, "the national debt has risen sharply to some $11 trillion ($5.7 Trillion when President Bush came to power) and projections that this debt could surge to as high as $20 trillion in the coming years. And this does not count the staggering unfunded liabilities of Social Security, Medicaid and Medicare. The head of the Federal Reserve Bank of Dallas, Richard W. Fisher has said that the unfunded liabilities from Medicare and Social Security add up to $99.2 trillion."

For a country with a GDP of $14.614 trillion, that's quite a debt!

To whom is this debtor a threat?

  1. Creditors: Holders of U.S. government IOUs. This includes T-Bond, T-Note, T-Bill, and U.S. dollar holders, as well as people who are owed U.S. dollars like Social Security, Medicare and Medicaid recipients, government employees and vendors (anyone who accepts U.S. dollars as payment for money owed).

    At this time, China , Japan , and various other nations hold the largest number of Treasury obligations in the world. U.S. dollar holders are spread out around the world as well—the world is on a U.S. dollar standard—with the U.S. dollar acting as the world's reserve currency. In addition, many commodities are purchased with dollars and many people believe that the dollar is the best place to invest when times are difficult. However, should the U.S. government default on its debt, dollar holders and Treasury securities holders will lose. While it is unlikely that the U.S. government will default on its debt anytime soon, (because it can simply create more dollars as needed) it is likely that more dollars will be created, thus making each dollar worth less and making it easier for the U.S. government to repay its debt (witness the lower interest rates and increased money supply expansion recently). This creates a gradual decline in the dollar’s value and simultaneously makes it easier to repay dollar-denominated debts (with dollars of lesser value) for as long as the dollars are accepted by creditors.

  2. U.S. taxpayers: The people who must pay for the government-incurred debts.

    At some point, taxes could be raised to cover the debts (or a larger percentage of the debts). When taxes are raised, taxpayers become poorer. Taxpayers have to ask whether the higher taxes are worth the return. Generally they are not because governments are the least efficient way of providing services—whether it is for mail delivery, schooling, or banking. When there is no profit motive, there's no incentive to keep costs to a minimum. Even when there is a profit motive, sometimes costs get out of control and bankruptcy ensues. So, without a profit motive (as in government), costs generally escalate, leading to higher and higher taxes, more borrowing, or more money supply expansion (inflation). Unfortunately, U.S. citizens no longer have any say in what happens to the value of the dollar (even if they know what is going on). Politicians are in control of the U.S. money monopoly (and have been since 1913, when they created the Federal Reserve Bank) and they would never admit to creating the inflation that deprives its citizens of their purchasing power. They always blame that on someone else! See Zimbabwe .

  3. Other countries that threaten to surpass the United States in financial strength (market power) or military might.

    While it's unlikely that the world will continue as it has for the past ten years, it's possible that in another 20 years, China could pose a threat to U.S. supremacy and hegemony. Before that happens, there is a good chance that U.S. politicians will pick a fight with China.

  4. Young people who could be subjected to a military draft; i.e., body seizure.

    Bodies will be needed to fight off the enemies of the world's largest enemy.

So how does one protect oneself from the world's largest enemy, I mean debtor? One can:

Start now! Beat the rush!

For a solution to the world's fiat money problems, see Money and Freedom.

Robert Jackson Smith

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