Inflation & the Four Outcomes of the European Debt Crises
Inflation can be deadly to your financial well being. We’ve been discussing the factors which could bring serious inflation to this country soon. Friday, we looked at the reasons that Europe’s sovereign debt crises will be our debt and inflation crises soon. Today, we’ll follow up by looking at the four possible outcomes that could happen when our creditors begin to scrutinize the US fiscal and monetary position.
There Are Only Four Possible Outcomes
1) The US Government tightens its belt and balances the budget. Neither political party has done this, is calling for this, or has the willpower to do this. It would mean drastic government worker (and whole department) layoffs and cuts to social security and Medicare that are politically unpopular and would push us into a much worse economy.
2) The people & governments of the world decide they will sell off other more productive assets in order to support our insatiable need for debt. It is true that the US Dollar falling will be hard on the rest of the world and so there is reason for them to not want it to fall, but do you really think they are going to sacrifice everything that they have so that our Dollar will stay strong?
3) Much higher interest rates. The more grotesque the US Debt becomes… the higher interest rate people will demand in order to lend us more money. This means waves of inflation. Think about credit card offers. If you are a good credit risk, companies will offer you low interest rate credit cards. If you are overloaded with debt, if you get any offers at all, they will be for extremely high interest credit cards.
4) The US Government will print lots more currency to buy its own debt! They have already printed over a TRILLION new Dollars in the last couple years that didn’t exist before. This is fiat currency that is only valuable if the rest of the world agrees it’s worth something. The more we print, the more the world will decide that holding their wealth in US Dollars is like playing Russian Roulette. Eventually the chamber with the bullet will come up and they will get their heads blown off. (Sorry for the graphic illustration, but the stakes are this high!)
As stated above, the first two are incredibly unlikely to happen. They simply won’t happen. The rest of the world is not going to sacrifice themselves so that the US can live in luxury. And although politicians will eventually be forced to make hard choices, they will not do this until the market forces them to do so and by then it will be far too late.
The last two options are likely to both happen. Either of these options causes a chain reaction which will be devastating to the purchasing power of the US Dollar as inflation kicks in. Remember, we have this huge deficit of $1.5T each year with historically tiny interest rates. Our government is assuming that rates which haven’t been this low since the 1950’s are going to stay this low for the foreseeable future. This thinking is absurdly Pollyanna. As interest rates rise the US Government deficit will balloon. This will lower the value of the Dollar. Instead of having to borrow $1.5T each year, we will have to borrow $2T, or $3T. Again, this is money that simply does not exist in the world. Where’s it going to come from?
Because others will not be buying the debt at low enough interest rates, our government will feel the need to print more currency to buy its own debt. This will scare people around the world and cause them to sell the Dollar. Again, this will lower the value of the Dollar and mean serious inflation.
This becomes a vicious downward spiral as higher interest rates cause more currency printing, which leads to higher interest rates…well you get the idea.
What this means to you is that your Dollars will not be able to buy what they used to. What used to be cheap and easy to afford will soon cost you many of your hard earned Dollars. Your bills to live a simple life could cost more than your paycheck! This isn’t the Government’s problem, this is YOUR PROBLEM! The economy will be in a tailspin and panic will be in the air. Many, many people will be desperate and hungry.
But this can also be the greatest opportunity of your life!
If you place your savings in real money that has inherent value, these things will increase as the Dollar decreases in value. While the price of everything else around you falls in value, your savings will increase in value! You will have money to help others when they are the most desperate for help. You will have money to buy real assets that others are desperate to sell. You will have money to pay off the debt that has been a weight around your neck. There is the potential for someone of fairly average means to become quite wealthy as the Dollar drops in value and real assets go on sale. Your neighbors will only own Dollars which will be worth little. If you have understanding of the times we are in, you can invest in assets which appreciate even while most fall drastically in value.
We’ll next look at the effects to you of this kind of inflation (but hopefully we’ll get some economic outlook videos made by then since it’s been a while.)
This is Part 9 of the series Hyperinflation and the Dollar. To continue with this series, click on Pt 10. To use this as a growth tool to better understand your own calling, please read Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7 and Pt 8.
Photo credit: evilsigntist