America's Debt Dependence ... And Downfall?

As I write this in mid-October 2013, the USA government has just voted to allow its 'debt ceiling' to be raised. Actually the debt ceiling has been removed and a time limit of three months has been set for agreeing a new debt ceiling. As soon as the debt limit was removed, the American government went out and borrowed over $300 billion so that it could replenish its emergency cash fund ready for the next crisis.

Each month, each week, each day, the American national debt is added to by the government going out and borrowing so that it can continue to spend more money than it can bring in from extortion. (I take the view that taxation is extortion as it is a demand for money that no one has voluntarily agreed to pay but which they have no choice but to pay under penalty of having it taken from them anyway and/or losing their liberty.)

If I told you I had a neighbor who consistently, every month, spent more money than they had coming in in salary, and that they were borrowing all the time so that they could do this, you would think several things. You would think that this person had a psychological problem, at least to the extent that they were unable to behave with financial responsibility and self-control. You would also think that at some point lenders would begin to cease lending to this person because they would start having doubts that their money would ever be paid back to them.

At this point it's worth mentioning that a major lender to the US government is it's own central bank, the Federal Reserve (which is no more an independent institution than is any other country's central bank). To buy government debt, the Fed simply creates new money, new dollars. This ability of nations to create the money that they lend to themselves is the only real difference between debt-junky nations and debt-junky individuals.

The last thing you might think about my over-spending, over-borrowing neighbor is that one day it will all end in tears. It will end in disaster. My neighbor will have 'a day of reckoning' when they will have to face up to the fact that, regardless of whether or not they can for the time being borrow more money, they can never repay their debt, and either they must go bankrupt and lose everything, or they must default on their debt and try to cling on to whatever money and possessions they can stop creditors from laying claim to.

As America keeps borrowing at artificially suppressed interest rates, it can keep the Ponzi scheme going - taking new money off lenders to pay interest on money borrowed in the past. When interest rates rise, however, the USA (like other debt-addicted nations around the world - America is by no means an isolated case) will be borrowing money not to repay its existing debts, but merely to pay the interest on its existing debts. At that point it becomes clear to lenders that if they lend to the USA, they will never get their money back. In that situation three things can happen - a) America cannot borrow, and therefore cannot service its existing debts, b) it offers to pay higher interest on the money it borrows, in which case it keeps the show on the road for a little longer, but makes the eventual debt it is unable to pay even greater, or c) it 'prints' (creates through the Fed) money in escalating amounts, without limit.

So the end game is either default or potentially unlimited money printing. In the former case, the USA loses credibility and status (not good for a country that likes to claim it is the world's dominant super-power, and that it has the right to impose - through economic and financial might - its whims, self-serving choices, invasions, interferences and dubiously-motivated diktats on the world, including on its own citizens). In the latter case, America's money becomes perceived as junk - either actually or potentially worthless - and therefore the issuer of that money also becomes perceived in the same way.

I believe that the point of no return has already been passed with regard to American politicians' uncontrollable addiction to spending, and to borrowing so that they can feed that addiction. The USA's debt will be defaulted on and/or the American dollar will be so devalued that on a global basis it will have a fraction of the purchasing-power that it has now.

As for the dollar being the world's reserve currency (which is what allows it to be printed/created in vast, seemingly limitless amounts and sold and used around the world at the moment), moves are already afoot in various nations (think China, think Russia, amongst many others) to remove this status from the dollar and to have some other currency or currencies to fulfill this role.

Just to finish, there is another exacerbating factor that makes America's demise not only seemingly inevitable, but which accelerates and deepens it. This is the demographic factor of having an ageing population that will need to be looked after, and therefore paid for, by existing and coming generations. Add this burden to the debt burden that existing and future generations will have to shoulder, and you have almost certain social and financial collapse and/or severe social unrest and disorder.


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