We're All Pawns in an Enormous Financial Experiment

If we have to pay 4% a year on 30 trillion of debt, the annual interest will be $1.4T which is about 2x our defense budget.

 

To put this in context, here in the USA we are still paying interest, not principle, on the money they borrowed to fight WW I.

They created a bank cartel (the FED) to artificially inflate the currency so that they could continually decrease the value of debt. The price for that was allowing the banks to run on fractional reserve banking and being able to create currency out of thin fucking air. Now the US gov't and the FED are like drunken enablers, one dragging the other into ever bigger binges. At some point the amount of alcohol needed to float the party is going to be so large that the taxpayers will be paying for bread with wheelbarrows full of money.

Here is what is sad, is that our quality of life goes down. Your great grandparents lived pretty well, considering, and the quality of their goods was remarkably high. Furniture, clothes, tableware, everything was well made.

Your grands saw the same thing, and had a place at the lake with a single earner.

Your parents may have had a place at the lake but they both worked their ass off.

You and your spouse will work forever, and you will never get that lake house.

Your kids...well they won't get their own house. Hope you got a spare bedroom.

 

ninja
??

 

And as each day ticks by that 4% figure seems like a dream.

I’ve watched what happens to companies whose mission in life was to operate JUST to service their debt. One of the CEO’s killed himself. Not a pretty sight.

 

Right!!! And this downward mobility is going to create some real nasty kids. Smash and grabs anybody?

 

There's a crucial difference between personal and government finances.
Unlike you or I, countries don't (or shouldn't) die.
This means they have no actual requirement to repay the borrowed capital.

They are however required to make the interest payments.
What a government does is borrow 100 from A @ 2% for 10 years; make 10 payments of 2.00 interest annually, then seek to borrow (from B) another 100 to repay the first 100.
Problems begin when B demands a higher rate of return than A.
Money borrowed 10 years ago at 2 or 3% is now having to be refinanced at 4 or 5%.

So where does government money come from? What backs a modern fiat currency?
Some people still think it's gold. An amazing number have no idea at all.

A modern fiat currency is backed by the Governments' ongoing ability to raise and collect tax revenues running into an infinite future.
There are cultural differences around the world, but the amount of tax a government can extract from an economy (that is as measured by GDP) is basically fixed (about 32% in UK, 23% in US, 48% in Scandinavian countries).
This explains why politicians are so obsessed by rising GDP figures and why recessions are a stake through the heart. They must collect more taxes to pay the rising interest payments on the rising debt.
It becomes an exponential process - exponential process have a tendency to go boom!

So how do you prepare if you believe in a coming financial apocalypse?
As a street-punter there's not much you can do; you will be unable to avoid the storm completely. But you could:
1) spend less money
2) pay down debt
3) save cash (even better - physical assets of some kind)
4) in an inflationary future - buy more of the things you know you will need in the future, eg buy 3 tubes of toothpaste instead of one.

 

Nice summary.

Let’s remember there are all sorts of other distortions that occur with government debt. You are crowding out private investment thus slowing growth. “You can’t spend your way to greatness.”

The other thing is that you (with a progressive tax code) you are taking from the relatively more productive and giving it to the less productive. Govt spending has the opposite of the supposed Keynesian effect. It’s a drag in an economy.

But the biggest sin is igniting inflation. Horrible.

 

Everyone should read ONE book: The Creature from Jekyll Island

You will forever wish we were back on a metals based currency standard, and if you are a US citizen, any faith you have in the competency of the government to handle anything financial will be forever shaken.

 

What, hasn't everyone been stacking silver and gold? (I haven't... Got wiped out once already, they're still in my life, so - I'm not going to be too affected either way. Too valuable to discard. Hopefully they don't know all about my personality... ;-) Anyone remember the IPCRESS file?)

 

Good point. I trust The Fed (reserve bank) as much as I trust the pharma companies today.

 

The beauty of a metals-based standard is less about inflation and more about chaining government spending down. You see, if the florin/mark/dinar de jour has to be backed by a given amount of pricy metal, the government can't just automagically create 16 billion to buy an aircraft carrier. They have to live within their means and budget. Deficit spending is remarkably hard to do. Just imagine how many people would be alive today if some countries not named couldn't just spend billions on military arms at will.

 

The US has the largest gold reserves in the world at 8,133 metric tons. At current prices, that is worth a little over $487 billion. There is not enough gold in the world to cover the US economy, much less anyone else.

 

Which would be fine if gold was valued at about $120,000 per ounce.
(only about 70 times the current market price)
That's what makes the goldbugs' dick hard or pussy wet!

I think there's a chart somewhere on the internet that shows that the purchasing power of USD has dropped about 98% since the Fed Reserve was created.

A 50-fold loss in purchasing power; 70-fold rise in gold price...
The two numbers aren't a million miles apart....

 

It’s funny after all these years we still lack a cohesive and robust macroeconomic theory.

Jessica is right about “the money supply”. It must grow as an economy does. Hence the gold standard is limited. However, fiat currency, as we plainly see, can become worthless Monopoly money.

Give me Milton Friedman blended with Arthur Laffer. It’s about the best we got macro thinking-wise.

 

Part of the point is to have physical specie, or in the general sense a "real" estate. Assets are not devalued. A Lamborghini? That mostly devalues. A Boeing 747? Devalues. (Depreciation, and assuming normal use for the Lambo. Not all Lamborghinis are gaining value.)
But when you only have paper - it's worth what people will give you for it. Not worth anything, if the government is destroyed, broke, or tyrannical (tyrant can decide you have no money - Looking at you, Canada. This INCLUDES ACCESS TO YOUR MONEY. Distinction without a difference.)

 

I understand there are real risks out there. However, this original post is completely over the top and so beyond conspiratorial it can't be taken seriously.

 

Inflation is a conspiracy to you LockedTower?