Much of the western world is in debt. Here I am concentrating on the USA because it is in more debt than most and because, as the largest economy and the most powerful nation on Earth militarily, its future affects everybody.
The total government debt in the USA is now about $14.3 trillion and the population is 313 million. Dividing one by the other gives $45,000 of government debt for every man, woman and child – about $180,000 per family. In the long term this money has to be paid back to the nations, banks and other institutions who have lent the money – and with interest. The longer it takes to pay back the larger the interest.
The government does not have enough money to pay its bills - e.g. salaries and pensions of state employees. Frequently, as on August 2 2011, it has to ask Congress for permission to borrow the shortfall.
The government does not have enough money to pay its bills - e.g. salaries and pensions of state employees. Frequently, as on August 2 2011, it has to ask Congress for permission to borrow the shortfall.
How are US citizens going to payback all this public debt? Through taxes; but the citizens themselves are in debt (mortgages, car loans etc.) to the tune of $7,800 per capita, say $30,000 per family.
In addition to the government and personal debt the US is running a large trade deficit. In May 2011 $50 billion exited the US financial system as payment for imports exceeded revenue from exports.
If foreign creditors asked for their money back the value of the dollar would collapse: the US would be unable to afford imports, including energy, raw materials, foods and consumer goods, and the US banks would be unable to invest in US industry because they would have no money to lend. If the government tried to print the money in this situation there would be hyperinflation and astronomical interest rates.
So why do foreign nations continue to put money into the USA by buying government bonds and investing in US industry, or at least retain their existing dollar holdings?
Because if they did not their own dollar investments would suffer as the dollar collapsed. And I believe every country in the world has major dollar investments because the dollar has become the main currency by which oil, gas, precious metals, corn etc. are traded and by which goods are bought and sold internationally. This situation has arisen over the last century because the US economy and entrepreneurial spirit have grown to dwarf that of any other nation.
It is a precarious situation. It only takes one country to suddenly withdraw substantial dollar reserves and this would be perceived as a signal to panic by others, setting off a financial chain reaction and the downfall of most economies worldwide. This could happen if, say, Saudi Arabia was taken over by a hostile jihad group wanting to destroy western civilisation. Evidently such groups do not care if they themselves suffer (or rather the leaders do not suffer but their brainwashed subjects do).
The only way of preventing this would be to freeze assets, unless of course this caused other nations to stop investing in dollars for fear that their own assets would be frozen.
Overall President Obama is saddled with a problem which in the main he did not create and which it is in almost everyone’s interest to have solved.
John
Author, 2077 AD
cosmik.jo@gmail.com
