Debt Ceiling Breached, Does Anyone Care?

[inthemoneystocks]

The United States of America in now drowned in debt by $14.39 trillion. This debt, is obviously at an all time high for the country. The politicians from both parties seem to only care about winning elections and really do as little as possible to solve the problem of a debt burdened America. The current debt ceiling which is the legal limit that the country can borrow has been reached yet the U.S. Treasury continues to borrow more money, even this very week. President Obama asked Congress for another $2 trillion in order to keep the government running as usual. Now lets be fair here, the debt ceiling has been raised by nearly every president on numerous occasions regardless of the political party. When I was watching the popular television program, Freedom Watch with Judge Napolitano, it was reported that the debt ceiling has been raised 70 times already. This is a rather fascinating number when you think about it. What is the point of having a debt ceiling when it can be raised at anytime?

We certainly live in a debt built society. The country and the world as we know it has been built on debt. The value of the U.S. Dollar is certainly not what it was years ago. This is due to the fact that inflation has inflated everything from homes, government, business, and the ultimately the money supply. My dad talks about going to a movie for 0.25 cents when he was kid. Today, a movie costs around $15.00 a ticket. My parents bought their first home for $27,000, today that same home sells for around $300,000. Has the value really gone up that much? Of course not, it increased in price because of inflation. Have we now reached a point in society where the inflation building has come to an end? Everyone knows that when you blow up a balloon the air will eventually leak out and deflate. Are we now at that phase of the economy?

At this time the stock market seems to only care about the falling U.S. Dollar Index. When the U.S. Dollar Index declines, the major stock indexes seem to inflate and trade higher. The opposite effect occurs when the U.S. Dollar Indexes trades higher, the major stock indexes will deflate and trade lower. Currency prices are dictating every move in the stock market right now. This is not sound money, and most politicians are either afraid, or just too dumb to address this problem. For crying out load, President Obama assigned a gasoline task force to find out why gasoline prices were climbing on a daily basis. Are you telling me that he could not figure out that gasoline was climbing for the same reason every other commodity was climbing, because the U.S. Dollar Index was falling! You see, politicians, like many on Wall Street, like to play dumb when things are not going so well. To my knowledge, there only seems to be one politician out there that has told the truth for years and his voting record is there to prove it, it is Congressman Ron Paul (R-Texas). This man has talked about the failed economic policies of the United States for years now and nobody wants to hear it. Congressman Paul has talked repeatedly about going back to a gold standard. This may not happen for many years, however, it is the only way that a new global economy can survive.

The days of printing money are coming to an end in my humble opinion. The fiat system was great for many years, however, it is no longer sustainable due to the debt that has been accumulated. I suppose it will have a few more years left before it finally ends. The U.S. Dollar can gets tossed around like a yo-yo by the central banks for a few more years to keep this ship sailing. Traders and investors should probably watch for a major gold and precious metals correction sometime this year. This is when the smart money will load the boat with the precious metal as the world moves closer to the gold standard in the coming years.

Nicholas Santiago
InTheMoneyStocks

 

[MichelAnge21]

I am 53 and I heard some people clamour for the return of the gold standard all my life.

Maybe those people should reflect why it was abandoned in the first place. It s not my intention to start a debate with gold bugs, but I would like them to name ONE respected economist ( not a politician or self-proclaimed expert on the internet ) who thinks a return to the gold standard would be a good and practicable thing.

How come even Switzerland severed their last link to a partial gold standard some 10 years ago ?

Could it be that the gold standard made sense in the 19th century, but not today ?

The one thing gold bugs have against fiat currency is that you can print as much paper money as you want. But did they reflect that the ability to increase the monetary mass is PRECISELY why it is flexible and adaptable to changing economic conditions ?

The dominant economic theory today maintains that showering fiat money from a helicopter is a very good way to pull yourself out of a recession. There are, of course, many other advantages to fiat money like paying interest and monetary mass growing as the economy grows.

Gold, in comparison, either would have to appreciate constantly in value or we would have to constantly find new gold mines to dig the yellow stuff from the ground. And what about the handfulf of countries that produce 85% of the gold production each year ? Will they become instant economic powerhouses ? Let s see how much of that stuff we produce in Canada...Let s divide by our 34 millions population....hmmmm not too bad..not toooo bad at all...maybe I ll become a gold bug after all...

I can see that there are some people who disagree with me, but they dont seem to be making any progress in the economy depts of universities...Renowned economists simply do not see gold as a practical solution for modern economic conditions. Gold bugs are so passé.

Besides....we re Forex traders here...we trade fiat money all day.

Now for the debt ceiling, Forex traders do care. If the Tea Party wing of the Republican party REALLY want to gamble until you get pretty close to a default by the USA....then just dump the US dollar...Dont wait for the extreme limit of august 2: sell at least 2-3 weeks before

 

[Pharaoh]

There are two sides to this coin.

A gold standard for paper money forces at least a little more honesty - or else a country can find itself in terrible trouble. One of the big reasons the USA went off the gold standard was that other countries were getting ready to redeem their US dollar holdings for gold when the US didn't have enough gold to back those dollars. This sort of scenario dates all the way back to the Mongol Empire.

In theory, a country that locks its currency to gold and always has the gold to back it up would find itself immune to inflation. Since the overall value of goods and services increases faster than the gold supply, this would create a deflationary environment. A scenario like that encourages savings, but discourages companies from making large capital investments. After all, it wouldn't make economic sense for a company to borrow money to buy some new equipment for 1 million gold dollars today when it can buy it next year for 900,000 and a few years later for 500,000.

The dishonest over production of gold backed paper money broke the gold standard in the US. It doesn't take a rocket scientist to figure out that fiat currencies are much more likely to be massively over printed. In a best case scenario, long-term low inflation slowly eats away at the value. In a worst case scenario, a government in crisis will try to print its way out, which can trigger hyper-inflation and even economic collapse.

Happily, since there isn't any sort of economic or debt crisis, there's no motivation for the USA or European Central Bank to print huge amounts of fiat . . .

Oh wait. This could be very very bad.

 

[MichelAnge21]

Pharaoh

Everything you wrote is absolutely true and that is why we will never go back to the gold standard. Our economies grow because we constantly create debt and all debt MUST be paid or the system collapses. Now, the only way to pay the debt is a normal inflation. It can be a moderate inflation or out-of-control inflation, but inflation helps the borrower because he repays with a depreciated currency. On the other hand, a reasonable interest rate compensate the lender. Nothing would be that simple with gold. Of course, gold would protect us from the neverending cycle of booms and busts, but growth would be very limited simply because we need to stimulate growth by convincing people to go shopping with borrowed money ( and paying interest ).

The mere fact that interest is paid increases the monetary mass. Where there was a 1000 dollars debt last year, there must be a 1050 repayment now at maturity. Will you have to dig 1 gram of gold from the ground now because you need to print 50 extra dollars for the interest ? Or, as you said, you keep the same amount of gold at Fort Knox and it appreciates, but you still need to print money. And this way, your currency is not strictly pegged to gold at all. When France used the gold franc, the franc weighed a precise quantity of gold that never changed for over 100 years. In other words, a 100 franc coin always weighed 5 times as much as a 20 franc coin and the franc was defined by Law as exactly a certain weight of gold. If you print money and your gold reserve is the same, your dollar is not worth the same weight of gold as before. As the economy grew, France always had to increase her gold reserves through international trade. It actually worked pretty well back then and until WW1, but it s not adapted to our modern economy. The USA, for example, with chronic trade deficit, would be doomed ( because they would settle international payments in gold ) Instead of detaining " fiat dollars ", China could build the most enormous gold reserves in History. Eventually, international trade would simply shrink.

Finally, I never agreed with people who insist gold has a " real value " We have very few industrial uses for gold: we actually dont need that stuff. Only with what we already mined since your namesakes, the Pharaohs, we would have an industrial inventory for many centuries. That s why of course it was perfect as a currency: we do not consume it. We can accumulate it. But its " value " is purely subjective. We see it as valuable: therefore it has value.That is circular thinking at its best. Gold is the opposite of an essential commodity: it s a mostly useless commodity. Food has value: without it, you die. Labor has value: time is money. Let me finish my " Gold-extractor-from-seawater machine " and you ll see if your gold still has value. ( BTW, I m about to sollicitate FPA members who would like to invest in my invention. I think this is a fertile ground here judging by the numbers who send their money to anybody promising a 1000% ROI ).

Now if we get to the point where the western World will collapse under the weight of its debt...well it happened to many countries in the 20th century that used fiat money....they simply created a new fiat money and they got back on their feet with all debts wiped out...takes about a decade to get out of the crisis. Of course, it s an economic catastrophe and destroys all savings as well as debt but not only people who had gold did well: anybody with something of " real value " like landowners avoided ruin.

 

[Pharaoh]

Even in a zero inflation environment, borrowing money will involve interest. The lenders need to be paid something to make it worth their risk. This is why even if you have a perfect credit score, you aren't too likely to be able to finance a home purchase at the official prime rate, but will pay a little more.

The US Government's multi-decade spending spree has only been made possible by knowing that they can pay the debts back in deflated dollars. The problem is that the government is used to be being able to hand out more than it takes in. Worse, more and more of the entitlement programs are linked directly to inflation, so there's no way for the government to inflate its way out of Social Security obligations - and those obligations are growing fast while the number of workers paying in drops.

Combine this time bomb with the massive issuance of currency to bail out all the banks, and we're getting dangerously close to a point where a small crisis could escalate into a fiscal meltdown of epic proportions.

The ECB is in a situation that's not too different, so the trigger for hyperinflation or Great Depression II could begin in the USA or Europe.

Eventually, even the worst hyperinflation can be tamed, but it's only a matter of time before any government with the unlimited ability to print money mis-uses that ability - throwing away long-term stability for short-term benefits.

The solution may not be a return to precious metal standards, but the current plan is a runaway train zipping through a series of tight curves. We've almost derailed a number of times, and I don't see any overwhelming signs of stability returning.

 

[MichelAnge21]

There is a difference with the ECB: the european debt is held by Europeans. It s a very recent phenomenom that asian lenders started to buy some of it ( and Europeans should nt jump with joy that China is now buying their debt ). If a confidence crisis grips the market, they have the tools within their own EU borders to intervene.And the Europeans still have more savings in their mattress to buy more debt. I simply dont know if it was such a great idea to accept certain countries that have a destiny of going bankrupt at regular intervals in the Eurozone...

As for the american debt, largely held by foreigners, it sure makes the US currency vulnerable to a movement of panic that would originate outside the US borders. Foreigners sure have started to understand that they will be repaid with a depreciated currency.

But there is a very simple cure for that..it is simply one that makes Americans cringe...it s called higher taxes. Do Americans today remember that their parents and grandparents had a much higher marginal tax rate than today ? And even an insanely high rate under Eisenhower ?

There is room to increase taxes in the USA. Contrary to lets say the scandinavian countries, the USA are not at that point where it s not even worth going to work in the last 2 months of the year because it would put you in the highest marginal rate.

Just bite the bullet: higher taxes are unavoidable. You can combine with budget cuts but there s no way to avoid some tax increase to put the fiscal house in order. And it would be a nice gesture if Americans accepted to repay their own debt instead of that " stealth default " that would leave foreigners holding the bag.

That leaves the chronic trade deficit. As long it will exist, the USA will bleed money that has to be repatriated with foreigners buying either US debt or buying real estate and industries in the USA. When Americans will understand that the oil imports are vastly responsible for their trade deficit, I guess they will finally do something about it.

 

[Pharaoh]

Many good points there. I think the next big financial crisis is more likely to start in the USA, but the Eurozone has its share of ticking time bombs, so can't be counted out. Either way, a big enough crisis in one will spill over to the other side of the Atlantic pretty quickly.

I'm not sure if higher taxes alone would be enough in the USA. The amount of debt is staggering. The built-in dishonesty of fiat currency (as opposed to the rampant cheating on "gold backed" currencies) makes it too tempting for politicians to go on money printing sprees. Worse, so much money now exists only in electronic form that it would be simple for the Fed to increase the money supply without wasting paper making "real" money.

Personally, I think we should pick a couple of states we don't need and sell them to other countries to balance the trade deficit.


Breaking oil dependence has been the smartest possible course the for US ever since the first oil crisis in the 1970's. Instead, the oil dependence keeps growing. Dealing with it would require citizens to sacrifice in one way or another. Like higher taxes, this isn't the sort of thing that gets politicians re-elected.

Sooner or later, America is going to have to bite the bullet and deal with these issues. Delaying it only makes the problems worse and the solution more painful. Sadly, the "anything to placate the voters, at least until the next election" viewpoint of Congress makes going for a more controlled method of fixing the problems become less likely and a full scale reboot of the economy (with all the associated issues this will cause) more and more likely.

Without some huge correction on a national level, our eventual choices in the USA are looking more and more like: Failure of the banks and Great Depression II or hyperinflation leading to total collapse of the USD. Or, first GD II followed by hyperinflation when the Fed tries to shove enough cash in to end the depression and overdoes it.

Conspiracy theorists might wonder if the master plan is to send as many dollars overseas as possible before wiping out 99% of the value of those dollars via hyperinflation.

 

[MichelAnge21]

Many good points there.


Personally, I think we should pick a couple of states we don't need and sell them to other countries to balance the trade deficit.

Well, with the truckloads of money you send us every day in Canada for our oil, we could buy Maine and Florida. Maine is perfect for summer vacation ( and we would control the lobster ressources ) and Florida for the winter.

Florida is already canadian from december to march anyway...

 

[Pharaoh]

We need to keep Florida. All that rent from Canada in the wintertime is the only reason the USA didn't go bankrupt 20 years ago.