A Problem for the U.S. Dollar Worse than Debt

Interest-Rates / US Debt
Jun 10, 2010 - 12:28 PM
By: Q1_Publishing

$19.6 trillion. That’s the Treasury Department’s latest estimate of the national debt to reach by 2015.

The debt has many folks concerned, and rightly so. There is, however, a much bigger problem facing the country and the U.S. dollar.

You see, amassing debt is not good, but it’s hardly the end of the road for a government that’s still generally trusted by the financial community. For instance, Japan’s total debt is 181% of its GDP. That’s much larger relatively than Greece, Spain, Italy, or Hungary.

But while the debt has been attracting all the attention, the real risk to the value of the U.S. dollar is posed by the annual budget deficits. And a little known, tried-and-true equation shows the inflation is coming in a big way.

$100,000 a Second

In 2008 the great credit expansion came to an end. Companies going bust, personal bankruptcies soaring, and a general decline in economic activity has unleashed deflation on the world. The private sector had enough debt and, as a whole, didn’t want anymore.

The government, however, has stepped to keep the credit expansion going. The U.S. government is borrowing $100,000 a second to keep the bubble growing. And that’s where the problem lies.

The current budget situation is a tenuous one. Revenues are down and spending is up creating a massive deficit. Last year’s deficit came in at just over $1.4 trillion. The latest Congressional Budget Office (CBO) estimate of this year’s will be at $1.5 trillion.

And the trend is set to continue well into the future. The CBO’s estimates peg the total deficit spending over the next year to average $970 billion a year. And given the overly optimistic economic expectations including no recession, a record rebound in employment, and record low inflation and interest rates, the deficits will likely stay well over $1 trillion per year.

That’s where the real problem lies. As Peter Bernholz states in Monetary Regimes and Inflation: History, Economic and Political Relationships, “There has never occurred a hyperinflation in history which was not caused by a huge budget deficit of the state.â€