economic crisis newspaper headlines
economic crisis newspaper headlines
Decades of Debt and Dollar Doubts
You are a hard working entrepreneur … you work long hours, you have large amounts of capital at risk, you have people and inventory to manage, and you undertake a commute to your store location every day.
You have high hopes but things seem a little tenuous … then you see this headline on TV, or hear it on the radio, or you read it in the newspaper over in the corner of your store … “Decades of Debt and Dollar Doubts”.
Wow … you wonder, what does this headline mean? You are asking, “Is my business venture going to be worth it?” “How do I survive in this business climate?” “How do I get ahead in this kind of economic environment?”
Let me offer some insight and share my experience with you.
Over the past year, the amount of borrowing by Uncle Sam (to fund operations of the government and stimulate various sectors of the economy) is absolutely unsustainable.
Here are some facts to help you decide if you agree.
The US Government has two primary ways to obtain working capital … revenue by taxing and funds by borrowing.
The Government borrows money through an auction activity and provides collateral or issues an IOU … these are Bills, Notes, and Bonds.
Recently, the US Treasury auctioned $207B in various Bills, Notes, and Bonds in one week … and this was just a few weeks after it had auctioned $250B in one week.
If you took several of these weekly auctions and annualized the amount, it would be $5T just for 2009.
As part of issuing these IOUs, and in exchange for obtaining funds to spend, the US Government agrees to pay back the amount borrowed at some pre-defined time (such as in three months, or in 52 weeks, or in 10 years) and to pay interest on the amount borrowed at some frequency (such as monthly, quarterly, semi-annually).
Combining the recently borrowed amounts mentioned above with the amounts borrowed in previous years … it has been determined it will take 40% of the USAs annual Gross Domestic Product (the equivalent to a company’s gross earnings) just to pay the interest amount.
If it takes 40% of the US Government’s funding (both revenue and borrowings) just to pay interest on the amount the Government has borrowed, and if government spending stays the same, there is very little money left to repay the principal amount borrowed. If very little to none of the borrowed amount is repaid every year, and we have increased the IOUs by $5T of debt in just this one year, we will continue to be in debt not just a few years, but decades … hence there will be Decades of Debt.
So how do Dollar Doubts figure in to this situation?
For starters … the US Dollar obtained status as the world’s reserve currency about 50 years ago. This means that all the major commodities like oil, gold, wheat, and other like items that are bought and sold around the world, are priced and traded in US Dollars … hence a lot of US Dollars are exchanging hands daily all around the world, 24X7 … adding meaning to the phrase, money never sleeps. All of this commerce in US Dollars keeps the demand high for US Dollars and ensures there is no doubt as to the strength of the Dollar based on the demand.
What then would cause there to be doubt about the strength of the Dollar?
A key participant at the center of these activities is the Federal Reserve Bank … which is not a government agency but a private organization that does have a charter from the US Government to perform a number of central banking activities including the banking business of the US Government.
Implied in the charter for the Federal Reserve is an objective to maintain the purchasing power of the US Dollar, often referred to as a strong Dollar policy … this would help provide price stability, economic prosperity, and political tranquility.
The Feds accomplish this objective by controlling the amount of money that is supplied to the economy. For example, if the Feds print and distribute an amount of money above and beyond its reserves, it has increased the supply of money. With more money in the economic system pursuing a consistent and reasonable amount of goods and services, prices will increase. It is all about supply and demand … consistent supply with an increased demand, because of the increased money supply, will cause an increase in prices … hence inflation.
Deflation occurs when the opposite happens. The Feds reduce the money supply by taking money out of the economic system. If the amount of goods and services produced by the economy stays reasonable and consistent, then there is less demand for these goods and services because there is a reduced amount of money available to purchase them and prices will decrease … hence deflation.
What if the Federal Reserve began an effort to reduce the amount of US Government debt thereby not having the Decades of Debt hanging over the heads of the US citizens and the US Government?
How would the Fed magically obtain all the funds necessary to return the principal to the people and firms that loaned money to the US Government?
There are only two ways to make this happen … raise taxes or print more money. There is a limit to the amount of taxes that can be raised … think tax payer revolt! Since raising taxes is not very desirable, printing money becomes the other way to obtain these funds. As explained above, this would increase the money supply and generate inflation.
Now, let’s go back to the US Dollar being the world’s reserve currency.
If the money supply is increased because there are more US Dollars in circulation (as a result, for example, of the effort to reduce the amount of debt referred to earlier as the Decades of Debt) and if there is essentially the same supply of goods and services, it would take more inflated US Dollars to buy a barrel of oil; and it would take more US Dollars to buy an ounce of gold; and it would take more US Dollars to buy a bushel of wheat; and so forth.
Since it would take more US Dollars to buy a barrel of oil or an ounce of gold or a bushel of wheat, each US Dollar must be worth less than they were worth prior to the time when extra money was printed thereby increasing the money supply.
If there was a massive increase in the supply of money, due to the massive amount of debt to be reduced, the inflation could be massive, hence threatening price stability, economic prosperity, and political tranquility.
All of this inflation leads to a massively weaker US Dollar. With the US Dollar being massively weaker, its status as the world’s reserve currency begins to be in doubt. Hence with Decades of Debt, being repaid by a weaker US Dollar and with the status of the US Dollar as the world’s reserve currency being questioned, there many facets of Dollar Doubts.
For now, it seems as thought everything in the global financial markets revolve around the actions of the Federal Reserve.
So for now, we must trust the correct people are going to do the right thing.
Many of my friends and colleagues are asking what they should do to protect themselves from yet again another upcoming crisis.
Many are evaluating alternative wealth creating strategies outside of the US Dollar … outside of dollar-denominated assets … perhaps emerging markets … perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, water rights, oil, natural gas, potash mines, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
Now when you see the headline “Decades of Debt and Dollar Doubts” you will have a better understanding of what this means and an awareness of some alternative wealth creating strategies to consider.
Also, you can join me in obtaining additional financial literacy … Steve Forbes says “financial education and resulting empowerment” is the key to a recovery from this financial crisis.
In addition, a good book to read would be “Biography of the Dollar” by Craig Karmin.
I will continue to monitor developments in the mounting debt of the USA and its impact on King Dollar … and report on alternative wealth creating strategies in future articles and updates at my blog which is at http://aspenIbiz.blogspot.com .
Finally, if you are an entrepreneur, a business owner, employed in an 8-5 job, or recently retired, yet still wanting to be plugged-in to the next wave of economic prosperity, you can join me (follow aspenIbiz link below) in pursuing opportunities in the Internet Marketing industry.
About the Author
Early in his career, Mike was an engineer with a large aerospace company. For many years, he was with a “marquee” consulting firm where he worked extensively with clients all around the world and became know as an American globalist. Most recently he has been providing technology, business, and management advisory services as a self-employed entrepreneur.
Economics using supply/demand/prices to explain headlines?
Explain the economic reasoning behind the following newspaper headlines, in terms of Supply and Demand and prices:
a)“Weather Slows Fishing: Seafood Prices Double”
b)“Sugar: Crisis of Plenty”
c)“Minimum Wage Costs Jobs” (think about artificial pricing (price supports and ceilings) vs. the equilibrium of supply and demand.
d)“Bountiful Wheat Crop is Hurting Growers”
a)
Bad weather slows fishing, the supply of fish and other seafood at any price is lower than before. That is, teh supply curve shifts left, and given unchanged demand, price of seafood rises.
b)
Crisis of plenty means that supply keeps increasing. At any price, the supply of sugar has increased, supply curve shifts right. Hence, given unchanged demand, prices fall. As the supply curve keeps shifting right, the price keeps falling.
c)
The Minimum wage is a price above the market clearing wage (where quantity demanded = quantity supplied). It now becomes illegal to employ people at below this minimum; in effect the portion of the supply curve below the minimum wages is no longer relevant, the new supply curve is now the horizontal minimum wage until it meets the original supply curve.
Now, the equilibrium will be at the minimum wage, but at this price teh quantity demanded is lower than the original equilibrium. Hence the quantity (of jobs) falls. Unemployment rises. Minimum wage costs jobs.
d)
Bountiful crop means a huge increase in supply. The supply curve shifts right and prices fall.
Hope that helped.
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