On January 20th there will be a new President in office and with this event – so we are told – a new era of economic hope will unfold and come into being. It seems that President Obama intends to introduce another massive stimulus into the American economy, with hugely funded infrastructure projects to encourage employment, tax cuts and redistribution of wealth for the middle classes, more Medical benefits for the poor and more tax breaks for America based businesses, just to name a few. But I do have some questions about these policies. Such as: Where will President Obama find the money to feed all these voraciously money-hungry projects ? What effect will all this spending have on the US Fiscal Debt and the dollar ? And where are the government policies that should function to reduce or payback US Debt ?
Since 1971, when the dollar was so ignominiously yanked off the gold standard by President Nixon (because he couldn’t pay the US IMF Debt caused by the Vietnam War), all world currencies have since become fiat and are therefore no longer backed by any valuable hard asset such as gold or silver. Within a short time, the dollar found its way onto a new and darker standard – the Treasury Bill/Debt exchange standard – wherein all reserve dollars accumulated by foreign countries could only be used to either purchase American goods or buy commodities like oil or purchase American Treasury Bonds. So most countries – and in particular China, Japan, Russia and UK – have all purchased large amounts of Treasury Debt Instruments which give ridiculously low and unfair interest rates in the longterm, because they simply can’t use their reserve dollars for anything else. Hence, since 1971, the rest of the world has been continually fueling and paying for America’s cheap debt/credit based lifestyle and policies. As a consequence, it is well subscribed that the American government has always had what can only be described as “benign neglect” regarding its own non-existent Fiscal Debt or Deficit policies which are manifest in its prolonged and continuous lack of proper dollar management. This “benign neglect” benefits no-one but America and only in the short term since it must beg the question: “Why should foreign world governments continuously pay America’s Fiscal Deficit, and thereby fuel her voracious credit based lifestyle forever ?”. The answer – what most people say these days – is that the world needs the American economy, therefore the world must support the dollar and continuously fund America’s debt in order to avoid economic Armageddon. But the cracks are already appearing in this convenient excuse – since it is clear that certain countries are fed up both with Amerca’s selfish “benign neglect” of her dollar as well as her ever-increasing debts….
In the newspapers and journals that I’ve been reading, the geopolitical position of America is now being questioned as well as significantly threatened. As an example, most people have heard of the Axis of Evil – a country cartel which includes the
likes of Venezuela, Russia, China, Iran, India etc., Obamawho do not want to purchase oil or other commodities (as per Breton Woods) using the US Greenback. A new oil bourse has recently opened up on Kish Island in Iran (May 2008) where they trade oil mainly in Euros and never in dollars. How dare they, I hear you cry – what about Breton Woods ? Well, what about Breton Woods. If Nixon can remove gold from the dollar at the flick of a switch without consent (a prime contractual postulate of the Breton Woods agreement was that America’s Dollar must always be backed by gold) then why can’t other countries say to hell with Breton Woods and the dollar ? China has about $2 trillion in her dollar reserves and Russia has about $500 billion. And these two countries cannot be said to be great friends with America – but they certainly have the capability of easily destroying America’s economy with all their excess reserve dollars. Since it is fairly clear that the US Government has lost control of its own currency through its own lazy policy of “benign neglect”, all these two countries have to do is sell off their dollars and diversify into Euros and Yen for its horrific effects to be truly felt. If this does happen, America’s dollar economy will catch fire and consume itself in a rage of hyperinflation. But, of course, this won’t happen – or so the stale, old argument goes – because China and Russia both need the American market. This feeble argument is no more than an ever-hopeful and somewhat desperate Western view I think. China alone has a population that is 5 times larger than the US population of 300 million. All China has to do is turn her manufacturing inwards, to supply the citizens of her own domestic markets. As well, we also have Europe, India, Russia and the Mid-East, altogether a much larger market than America. And if all that wealth moves from West to East as has been predicted, where will this leave America ?
So now lets quickly return and look at Obama’s policies. In a general assessment these stimulus policies are all spend, spend, spend aren’t they ? How will President Obama balance his government’s forever increasing debt ? At some point, this debt must be paid back. If this is not the case then America is likely to be left naked, broke and stranded economically. In August 2007 we had the Sub-prime debacle. Come March 2008 and this developed into a fractured Financial Credit Bubble and many banks and financial institutions fell. The third and final stage – if America does not start tending her own Fiscal Deficit properly, will be complete loss of dollar confidence and the bursting of the Treasury/Debt exchange bubble – where all foreign countries stop buying useless US Treasury Bonds, and cease paying for America’s on-going credit and debt mistakes and excesses respectively.
And from this point on, America will have to pay back her massive debts all on her own.
Since September 2008, the US National Debt has been increasing by $464 million per day.
Current US Fiscal Debt or Deficit = $60 trillion and rising. . . .
