Tuesday, April 3, 2012

Too Much Debt

Imaging the following happening in our country;
  • The government cuts social security and state pension payouts by 12% - the average monthly payout goes from $1,230 to $1,082.
  • The minimum hourly wage is cut by 22% - goes from $8.00 to $6.24
  • State governments immediately layoff 15,000 public workers and agree to a 20% reduction in the government workforce in the next 3 years.
  • Taxes are increase across the board – income, sales, and property
  • Our largest lenders (e.g. China) force our Congress to enact the above changes or they will not lend us any money.
  • The President resigns and an emergency election is held for a new leader.
  • Overall unemployment is 21% and for young people under 30, unemployment is 51%
  • Theft and robberies are up 10% over the prior year.
  • Riots break out in the largest cities
  • The price of a gallon of gas is over $9.00
All of this happens because the government spends way more than it takes in and our level of debt almost equals our GDP. 

Sounds wacko.  But this is pretty much what’s happening in Greece because of too much government debt.  Spain, Portugal, and Italy are not far off from this scenario.

Some will say it can’t happen here, but who really knows for sure.  Greece and other countries don’t have the luxury of having their own individual central bank like we do.  They need to get other countries to lend them actual real money.  But in this country, we have our own bank – The Fed. 

In 2011, the Federal Reserve was the largest buyer our debt buying up a whopping 61% of the newly issued debt from the Treasury.  How can that be?  If the government has to borrow to meet its obligations, where does the Fed get the money to lend to the government?  Well, it just makes it up – it credits a banks account with money and writes itself an IOU.   Sounds like a Ponzi scheme, but since there’s no one overseeing the Fed and there’s no organization to audit it, it can get away with it.

It’s scary because those IOU’s are piling up along with the public debt.   There are some in Congress who want to cut our government spending, start to audit the Fed, and start to rein in our debt.  It sounds reasonable to me and we’ve got to start somewhere.  But most don’t want to make the tough decisions.  Many want to maintain the status quo, keep handing out the freebies so they can get elected, vilify the people who want to cut spending, and kick the can down the road.  And there’s a large percent of the population who just want to keep what they’re getting from the government, some want more, and others could care less about the government’s debt.  

But bubbles tend to burst.  Unsustainable means stuff happens when the sustainable part stops working.   And looking at what’s going on in Greece is a snap shot of what could occur when that happens.

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