In the 1930s the United States was the world’s largest creditor. Today we are the largest debtor nation in history. Recently, congress has proposed to raise the debt ceiling 1.9 Trillion dollars to nearly 14.3 Trillion. The national debt is the single biggest issue we face – and is the cause directly or indirectly to most of our economic problems. Our deficits threaten social security, medicare, our future prosperity and amount to an attack on the middle class. Deficits lead to an expansion of the money supply – the cause of inflation. A recent poll shows that Americans are strongly against the reckless fiscal policies coming out of Washington.
One more thing – the 14.3 Trillion dollar deficit is only the nominal deficit. The government has many “off balance sheet” liabilities. These include unfunded liabilities with regard to social security and medicare. It is estimated that if these were added to the nominal deficit – the true deficit would top 100 Trillion. When one considers that our annual output of goods and services is around 14.5 Trillion our national deficit amounts to a super sized sub-prime mortgage.
The Stimulus and Inflation
Most people view the stimulus as simply taking money from one pocket and putting it in another – taking money from taxpayers and giving it to politically favored recipients. That would be bad enough – a huge wealth redistribution program. It’s much worse than that. Actually – the government does get this money from taxpayers. However, they don’t get it from us the way most people think. The government could not raise taxes enough to pay for this (see above). So what happens is rather insidious. We borrow the money to pay for the stimulus. In recent times we have been borrowing from places like China and Japan. However China is more and more reluctant buy our bonds. So what happens? The Federal Reserve (the so-called lender of last resort) buys the bonds. It is estimated that the Fed is now “buying” up to 80% of the bonds we issue. This is terrible news. Where does the Fed get the money to buy the bonds? They print it. When they do that, the money supply is increased and we pay for this through inflation. Inflation is the hidden tax. In the last 95 years inflation has eroded the value of the dollar by more than 95%. This is the sad result of what is referred to as “monetizing the debt”. We pay for it through inflation.
Think of it this way – because of this inflation – over the last year or so, the dollar has declined relative to other currencies by about 10%. That means, if you had a $1000.00 CD it’s only worth around $900.00 now in inflation adjusted terms - and worse relative to other investments. On top of that – because interest rates are so low – you’re earning less than 2% on it. Think of how devastating this is to seniors who have saved all of their lives for retirement. They can’t get a good return on their money – and the money they saved is losing value.
Nobody should feel very stimulated by the so-called stimulus.
The massive deficit spending causes inflation, deficits DO matter, inflation is a monetary phenomenon, and we’re getting close to the practical limits of deficit government spending. However, to add insult to injury, when these policies cause price inflation, the accusatory finger invariably gets pointed at the business community (“those greedy you-know-whats!”), instead of the real culprit: runaway government spending. Tax and spend - borrow and spend. This becomes a vicious inflationary cycle.
Inflation widens the gap between the “haves” and the “have-nots”. People of means can invest in things that allow them to keep up with inflation. For the middle class, most savings are kept in the bank at lower interest rates. Inflation eats away at those savings causing deterioration in the financial well being of middle class families. As the dollar declines in value – the savings of middle class families also declines in value. For the poor, the value of wages drops as inflation causes everyday needs to become more expensive. Thus, through inflation (caused by deficits) the rich stay rich or get richer and the poor (and the middle class) get poorer.
Deficits allow for the “exportation of jobs” overseas. The way trade would normally work is this. Let’s say that a US retailer buys a million dollars worth of goods from a supplier in China. Without getting into the mechanics of foreign exchange – let’s just say that the supplier from China will accept the US dollars as payment. In fact that is what happens most of the time. Under normal conditions, the dollars that end up in China would have to be spent back in the US. This, after all, is what trade is all about. We buy stuff from you, you buy stuff from us. This would create jobs here in the US to make the stuff that they would buy. However, because of the deficit here in the US, they buy our Treasuries, our US debt, instead of goods and services – stuff. That’s a simplification of the process, but serves as an illustration. China does not run government deficits. We do. We buy their stuff, they buy our debt. If we stopped creating that debt, they would have to buy our stuff.
Elliot Simon
The Deficit
The National Deficit
In the 1930s the United States was the world’s largest creditor. Today we are the largest debtor nation in history. Recently, congress has proposed to raise the debt ceiling 1.9 Trillion dollars to nearly 14.3 Trillion. The national debt is the single biggest issue we face – and is the cause directly or indirectly to most of our economic problems. Our deficits threaten social security, medicare, our future prosperity and amount to an attack on the middle class. Deficits lead to an expansion of the money supply – the cause of inflation. A recent poll shows that Americans are strongly against the reckless fiscal policies coming out of Washington.
One more thing – the 14.3 Trillion dollar deficit is only the nominal deficit. The government has many “off balance sheet” liabilities. These include unfunded liabilities with regard to social security and medicare. It is estimated that if these were added to the nominal deficit – the true deficit would top 100 Trillion. When one considers that our annual output of goods and services is around 14.5 Trillion our national deficit amounts to a super sized sub-prime mortgage.
The Stimulus and Inflation
Most people view the stimulus as simply taking money from one pocket and putting it in another – taking money from taxpayers and giving it to politically favored recipients. That would be bad enough – a huge wealth redistribution program. It’s much worse than that. Actually – the government does get this money from taxpayers. However, they don’t get it from us the way most people think. The government could not raise taxes enough to pay for this (see above). So what happens is rather insidious. We borrow the money to pay for the stimulus. In recent times we have been borrowing from places like China and Japan. However China is more and more reluctant buy our bonds. So what happens? The Federal Reserve (the so-called lender of last resort) buys the bonds. It is estimated that the Fed is now “buying” up to 80% of the bonds we issue. This is terrible news. Where does the Fed get the money to buy the bonds? They print it. When they do that, the money supply is increased and we pay for this through inflation. Inflation is the hidden tax. In the last 95 years inflation has eroded the value of the dollar by more than 95%. This is the sad result of what is referred to as “monetizing the debt”. We pay for it through inflation.
Think of it this way – because of this inflation – over the last year or so, the dollar has declined relative to other currencies by about 10%. That means, if you had a $1000.00 CD it’s only worth around $900.00 now in inflation adjusted terms - and worse relative to other investments. On top of that – because interest rates are so low – you’re earning less than 2% on it. Think of how devastating this is to seniors who have saved all of their lives for retirement. They can’t get a good return on their money – and the money they saved is losing value.
Nobody should feel very stimulated by the so-called stimulus.
The massive deficit spending causes inflation, deficits DO matter, inflation is a monetary phenomenon, and we’re getting close to the practical limits of deficit government spending. However, to add insult to injury, when these policies cause price inflation, the accusatory finger invariably gets pointed at the business community (“those greedy you-know-whats!”), instead of the real culprit: runaway government spending. Tax and spend - borrow and spend. This becomes a vicious inflationary cycle.
Inflation widens the gap between the “haves” and the “have-nots”. People of means can invest in things that allow them to keep up with inflation. For the middle class, most savings are kept in the bank at lower interest rates. Inflation eats away at those savings causing deterioration in the financial well being of middle class families. As the dollar declines in value – the savings of middle class families also declines in value. For the poor, the value of wages drops as inflation causes everyday needs to become more expensive. Thus, through inflation (caused by deficits) the rich stay rich or get richer and the poor (and the middle class) get poorer.
Deficits allow for the “exportation of jobs” overseas. The way trade would normally work is this. Let’s say that a US retailer buys a million dollars worth of goods from a supplier in China. Without getting into the mechanics of foreign exchange – let’s just say that the supplier from China will accept the US dollars as payment. In fact that is what happens most of the time. Under normal conditions, the dollars that end up in China would have to be spent back in the US. This, after all, is what trade is all about. We buy stuff from you, you buy stuff from us. This would create jobs here in the US to make the stuff that they would buy. However, because of the deficit here in the US, they buy our Treasuries, our US debt, instead of goods and services – stuff. That’s a simplification of the process, but serves as an illustration. China does not run government deficits. We do. We buy their stuff, they buy our debt. If we stopped creating that debt, they would have to buy our stuff.