Saturday, October 17, 2009

Our Massive Debt

My friend Jim posted this link on Facebook. It is a cold dose of reality.

U.S. Debt Clock

Be sure to check out the last figure. It calculates the debt per citizen, what each of us owe some part of the world, probably China, which purchases our debt. This is why we will probably have escalating inflation in the future and why there are rumors of the world financiers wanting to no longer tie the dollar to oil.

This from U.S.A Today article in June, 2009.
The government's plan is to fight the sour economy now by spending money, and worry about the debt problem later. "If that's the price to keep from having the second Great Depression, it's a bargain," say Ken Goldstein, economist at The Conference Board.

Even ardent supporters of the government's plan, however, worry that massive U.S. debt could be inflationary. Every day, for example, the U.S. needs to borrow $15 billion to fund the deficit, says Axel Merk, portfolio manager of the Merk Hard Currency fund. "Someone has to buy all that," he says. More important, the U.S. has to repay it.

Inflation is a tempting choice to pay the nation's staggering debt, especially because the alternatives are to raise taxes or cut spending. Already, some economists are suggesting letting inflation take some of the bite out of government spending.

Kenneth Rogoff, chief economist at the International Monetary Fund, gently told Bloomberg News that a bit of inflation might be a good thing. "I'm advocating 6% inflation for at least a couple of years," said Rogoff, now a professor at Harvard University. "It would ameliorate the debt bomb and help us work through the deleveraging process."

The effects of inflation are cumulative. After five years of 6% inflation, $1 trillion would be worth $734 billion, a 27% drop. Even a 2% inflation rate would be a cumulative devaluation of 81% over 30 years.

1 comment: