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Inflation is Inevitable

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debt inflation

When the US increases its debt it is to pay government expenses that is not covered by tax collection. Right now more debt is issued than the regular debt market can absorb. The debt that cannot be sold to the free market is basically monetized by the Federal Reserve. The FED create new dollars that they use to purchase the unsold/unsellable debt. At present time the FED is creating around 80-90 Billion USD every month in this manner, about 30% of the monthly government budget. Obviously all of this new money will go to pay wages and for goods and services the government needs. It is quite inevitable that a lot of these freshly created dollars will end up chasing goods and services produced outside of the US. Think government employees buying a Samsung TV or a Toyota.

It is given that all of these freshly created dollars are not backed by any new products and services produced in the US. When Samsung/Toyota or any other foreign company accept USD as payment for their goods and services they expect to be able to turn around and actually buy something they need in return from the US. Or at least be able to sell the USD to somebody who wants to buy something in the US. For every month the FED creates 80-90 Billion USD, it means that the people holding the USD will be able to purchase less for them. There are more and more USD chasing the same amount of goods and services. There is price inflation.

What will happen is that if the US continues this crazy deficit spending foreign countries and companies will start to say: “Dudes, you guys are actually not producing anything. You are just conjuring IOU’s out of the FED’s magical hat and expect us to give you our products in return for some ones and zeros in a computer. I think we will reject this. From now on if you want to buy something you can pay us in Yuan (or Euros, Bitcoin, Gold or whatever).”

This is basically what the BRIC countries are gaming for even today. Brazil, Russia, India and China wants to skip the USD all together and trade directly in their own currencies. They are tired of using a currency that is getting continually devalued. The devaluation is one thing, the insane security measures to avoid “money laundering” with USD is at this point so anal that its getting very difficult to use USD for simple, regular trade.

If you thought the economy was bad now, you cannot imagine what would happen if there was even just a slight loss of confidence in the dollar. Default would be like a hand grenade, confidence loss is an atom bomb. It is the reserve status that enables the US to purchase incredible amounts of goods, services, oil, labour etc abroad without having to consider having a positive trade balance. That spending will end in a heartbeat if there is any kind of confidence loss.

The path the US is on now this is inevitable. It is not possible to print yourself to prosperity. But this can end in so many ways its difficult to predict. The only thing that is 100% certain is that it is impossible for this to go on, so something must happen.

The post Inflation is Inevitable appeared first on Penury Street.


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