The US Debt Crisis

by The Good Life on August 1, 2011

in Banter, Rants

Its quite interesting that I tweeted this weekend about two things.

And I got 4 retweets about the Travis Rice movie (fair play, its amazing) and the one about the US debt crisis got…… a big zero.  So obviously people are more interested in hollywood style snowboard films, and not whats happening in the economy.  I dont blame anyone.  The world economy especially in the US seems as backward as can be, so I wouldnt be too interested.  However, I guess we all should be interested, even if it means taking 3 minutes away from youtube and facebook to do it.

So whats the big news going down in the economy at the moment?  Well the Economist will be the pictures of choice to lead us through…

So this Tuesday the US government will default on its own debt, unless it raises the debt ceiling.  To break it down, the puts it like this as to the things they are arguing about.

“There are first as a fierce battle between those who believe America must put its finances back in order and those who fear that without more stimulus the world’s largest economy will slide back into recession, The first is favoured on Capitol Hill, the second pretty much by everyone else.”

So basically its a simple equation like this.  America spends too much, and the first option is to agree to put the spending levels down into line with the income.  It is a crazy situation, as if me and you were spending too much, without an adequate income, we would be called Bankrupt.  Well countries (those outside of the Euro that is for the time being) such as the US, have the choice to not go bankrupt, because they can print more money.  If we printed money, we would be arrested for forgery.  The US if they do that, will keep their Triple A rating.  Crazy.

So what are the two choices?

1) Well if they dont raise the debt ceiling then, the US go bankrput and one of the only ways to get themselves out of all this debt, is to devalue their currency, which is what Greece have been trying to do, but since they are in the Euro, they cant do that.

2) If they do raise the debt ceiling, and create more money…. well that leads to more money being in the market, and devalueing the money in your pocket.

So what does that mean?  Uhum…. the economist…

So thats what is being predicted.  That could also mean that the US economy and then in turn the world, could see a second recession, or double dip as many like to call it.

Jeff Randal of Sky News also found this funny little comment about the US economy

“In 1835, US federal debt was zero; the country owed nothing. Two centuries later, having become the richest and most powerful nation on earth, America is, quite literally, running out of cash. The problem was explained by Addison Wiggin and Bill Bonner in their best-seller Empire of Debt: not many people can afford to live like Americans; the trouble is, neither can they.”

After spending some time with American friends in the last few weeks, the one comment I have heard time and again, especially levelled at California is “its one of the only places in the world where people drive nicer cars then have houses” which I suppose is true, you get on the freeway out of LAX and everyone is driving a truck, Hummer or something with a engine north of 3 litres.  I always think, they cant all be actors and sports stars….. Anyways, I digress.  Thats the problem now, but whats caused it?

Well The past weeks I have been reading a book called..

Which is an interesting book if not a little text heavy, which doesnt make for easy reading, but its eye opening enough to keep you going.  It starts with the story of the British Empire, how it was once ruling across many countries, and had a very high percentage of well off middle class people, but through trying to do too much in the form of keeping up countries and staff in those countries and fighting the two world wars and more with too little income at home, the country eventually became broke, and had to take itself off the gold standard in order to devalue its currency which they did in 1931, and get back to some stable ground.  Doing all that though most of the empire was lost, and its power as the reserve currency of the world was lost.

Ring any bells?

The US is trying to keep up with Medicare, Social Costs, more people living longer, fighting two wars for nearly a decade, and well in the well trodden path fought by the British they took the dollar off the gold standard in 1971 with Richard Nixon at the helm and are now on the way to being bankrupt, and many observers believe its only a matter of time before they are.  Of course China are licking their lips waiting to feast on whatevers left.

Incase your wondering about the gold standard, that means that when on Gold Standard the banks needed to keep the same amount of gold in their reserves as they gave out.  So for example if you had 10 dollars in your pocket you could go in the bank and request your 10 dollars of gold.  Since its been off that, thats why we have seen such inflation, as now, you can have 10 dollars and request 100 dollars from the bank, if its for a house purchase or something.  If your an investment bank, you can leverage you 10 dollars up to 40 times.  No wonder these bubbles occur.

One of the authors interesting qoutes are this

“I expect the dollar to decline more.  When the British Pound was the reserve currency of the world, it toook 5 US dollars to buy a pound.  In the 80s it went down to nearly on par.  This meant that the pound in one century lost 80% of its value against the dollar, I expect the dollar to have a similar decline against the rest of the major currencies of the world in the coming years”

Anyways, other countries, feeling the heat are Italy, Spain and of course Greece who the economist so nicely depicted as

The Greeks are kinda of in the same boat as the states.  Too much out going, not enough incoming.  Execpt the problem is the Greeks are stuck in an economy with the rest of us.  They cant raise interest rates, they cant devalue their currency.  The only way to do it is borrow more money and hope they can bide their time until they become a good business again.  Its like watching the tide come in and Stavros the greek lying on the front of the beach.  He gets a shock when the sea gets to him first, he steps back, and time and time again, instead of just fixing the problem by moving to drier land.  Lets just hope for their sake, and all of Gerry the German, Pierre from Paris and the rest of us in Europe that their isnt a tsunami rolling into the beach anytime soon as it will drag the rest of the beach goers into the mess.

If you wondering what to do about it, the author of Rich Dad, Poor Dad Robert Kiyosaki came up with these words on his blog which you can read at

“Personally, I’m investing expecting inflation. That means I’m dumping dollars and moving into commodities and precious metals. I’m also buying real estate with other people’s money, locking in low interest rates and expecting inflation to pay off my debt with cheaper dollars.  It’s my belief that investing in assets that hedge against inflation is the best bet.  I may be wrong, but I feel safer with this strategy than with the prevailing one—saving dollars and investing in stocks, bonds, and mutual funds.”

With the deadline being Tuesday, someone made a mock up of an Economist once again summarises it very well if things dont get sorted out.

The last time i posted anything about Ecomonics I had a few people giving me all kinds of abuse on the comments below.  I am not an economist, nor studied it, just find the whole thing quite interesting at the moment, and anyone with a viewpoint feel free to chip in.  Or not.  I will post the Travis Rice trailer tommorow and normal service can be resumed.

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