In last month's economic post, we talked about what's in Fort Knox and explored the concept of money. This month, I want to discuss another MUCH MISUNDERSTOOD economic concept, inflation. Someone has access to your savings, retirement, and investment accounts and is quietly transferring your money to his pocket. Most people don't have a clue about it because they don't understand inflation.
First, let's get a handle on our national debt. Check out the National Debt Clock which reports a figure that exceeds nine trillion dollars. That's about $30,000 per citizen! By the way, "debt" and "deficit" are not the same. A deficit is a shortfall between income and expenses. For almost every year of its existence, the federal government has spent more than it has received. In those years, it has operated at a "deficit." The "national debt" is the net shortfall from these annual deficits (and a few surpluses) accumulated during the history of our republic.
So how can the US government function when it appears to be so seriously insolvent? How would you? You would try to find someone who is willing to loan you the money until you can "get your head above water." Our government has done precisely this. To make it easier to contemplate, think of this as a GIANT loan extended to Sam. Here is some helpful background on Sam's loan. There is interest involved. At a rate of 5%, the interest on Sam's loan would be about 450 billion dollars per year. So without ever paying off any principal, let alone getting "his head above water," Sam has to come up with 1.2 billion dollars EVERY DAY just to make interest payments.
Bad as this is, it's only part of Sam's sorry story. Imagine that Sam has said to several hundred million of his closest friends, "I will take care of you when you get old." If you will pay me some money NOW, I will take care of you LATER. There is a problem with Sam's generous offer. The contributions he gets from his friends don't cover the costs of what he has promised to do. He has created a major unfunded future liability. How big is Sam's liability? According to one report, He has promised to provide SIXTY TRILLION DOLLARS worth of future benefits to his close friends.
Sam is in major trouble! He is deep in debt and he has made expensive promises to friends that he can't possibly keep. How do I know he can't keep them? Simple math! If Sam collected enough money to pay off his loan and fund the promises to his friends, he would have to receive over $500,000 from every household in America. Sam has the power to levy taxes, but there is not enough money in American households to cough up that kind of cash! (Most households are just as badly in debt as Sam!) No amount of taxation is capable of fixing Sam's problem.
So what are Sam's options? There are three: (1) Declare bankruptcy - for America this amounts to the collapse of the government. Not a happy thought. (2) Renege on promises - for Sam this would mean saying, "I know I promised you I would take care of you. But I don't have the money to do what I promised. Here's all I can do." For America, this option would mean a drastic dose of reality for a society addicted to entitlement. Not gonna happen! So what's the third possibility?
I presume the third possibility is to pass on Sam's debt to us in the form of devaluing the currency we hold.
Hallelujah, what a savior!
Posted by: Jeff | March 05, 2008 at 12:17 PM
I'm assuming that the third option is for the U.S. government to print more federal reserve notes. Argh!
Posted by: Lilly | March 05, 2008 at 11:19 PM