Rome Is Burning

Okay, not exactly. To be truthful, it is the US budget that is on fire, and both parties are to blame. Right now it is the Republicans who have no leadership, just empty rhetoric. Sadly, the only one in D.C. who seems to have any honesty on the situation is the president, who said something to the extent of “I won’t be here” once the eventual crisis this is going to cause hits. Wow, really? I guess he is being honest, but the situation is insane when one thinks about it.

So what is the situation as it stands? The debt is, essentially, $22 trillion. That is insane. To break it down, every single citizen of the United States owes $66,458 as of this writing. To contextualize the issue, in 1990, as the Cold War was coming to a close, the debt was approximately $3.1 trillion on this day, 18 December 1990. So the US was able to go through Vietnam, the Cold War and the Reagan buildup and the debt was $3.1 trillion. The end of the Cold War was supposed to provide the U.S. with a “peace dividend” (Old enough to remember that phrase?). Twenty years later, in 2010, the national debt was $13.4 trillion. This is on both parties, Republican AND Democrat.

Paul Ryan, the outgoing Speaker of the House, recently lamented that he was unable to do anything to avert the coming catastrophe that he is, essentially, handing over to the next generation. One wonders just how much he laments this debacle as he rides off into the sunset to enjoy a generous amount of benefits provided for him by the taxpayers whom he just screwed.

Why should you be worried? Because it is going to affect interest rates at some point, and many of you reading this in the United States have student loans. Chances are the government will be forced to force you to pay higher rates of interest. To make things worse, it will cause interest rates on everything from homes to cars to credit cards increase (as if the latter isn’t high enough already).

As Ron Paul has noted on numerous occasions, the government has only three options when it needs money: it can raise taxes, borrow or inflate. Raising taxes is politically difficult. People never want to see their taxes increase, plus it can have negative effects on the economy (you have less money to spend). The second one is no better, as that which is borrowed today HAS to be paid back at some point.

The third way, inflating the dollar (printing more money) to pay bills today is also bad. It is like a hidden tax. Tomorrow you go to fuel up your vehicle and it costs a couple of pennies more. That might not hurt immediately, but as fuel and food and everything else rises in costs you start to feel the pain. Inflation is like a hidden tax. As the government prints more money (it’s complicated so I’m using “printing” as shorthand), prices rise because there is more money chasing around the same number of goods and services. Supply hasn’t increased, but our demand for those goods has because we have more money. Just a side note: the money enters the economy through the banking sector as they are working with the politicians, See Murray N. Rothbard, “The Case Against the Fed” and “What Has Government Done to Our Money” if you want a deeper explanation (available for free at www.mises.org)

So, at some point, what is going to have to happen, is the US government will be forced to do several things, all of which are going to be painful. 1. Raise taxes. 2. Cut spending. (no Free X, Y and Z). This will probably happen in the next decade or so, once the Chinese economy is such that they aren’t as dependent on American spending as they have been. Once they, and others, decide they are tired of fueling American greed and profligacy, it is game over. Unfortunately, I’ll be around to see it. Thanks politicians!

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