Effor.com

I read a good article today in the NY Times.  Here’s the opening paragraph:

If the United States were any other country, these would surely be days of panic and austerity in Washington. With debts spiraling higher, a trade deficit exceeding $700 billion a year, and its currency plunging for years, the government would be forced to cut spending and jack up interest rates in a frantic bid to attract investment.

Very true, unfortunately the day when we’ll be forced to do just that is coming.  It might be later this year, or it may be 10 or more years away, but no one that I’m aware of has repealed the law of supply and demand.

The article mentions this, saying on page 2: Yes, foreigners have been lending alarming amounts of money to Americans, who have spent extravagantly in excess of their means, economists say. One day, balance will be restored in line with the basic laws of economics — perhaps chaotically, and probably via a substantial fall in the dollar’s value.  (emphasis mine)

If you want to know why the dollar is eventually doomed, read this:  When Americans head to the mall, backed by foreign largesse, they drive there burning gasoline made from oil pumped abroad, notably the Middle East. They drive home carrying electronics and clothing churned out in Chinese and Japanese factories. Making these goods absorbs commodities — energy from Australia and Africa; cotton from Texas and California; iron ore from Brazil and India.

That explains a lot to those unfamiliar with international finance - it even touches (in part) on why commodity prices have risen so drastically in the past few years.

Regardless of when it happens, we will eventually be forced to raise interest rates and borrow less from overseas.  Even if we eventually do that, inflation will still be rampant - it’s the only way the government can pay its’ debts. 

Inflation makes old debt cheaper to pay off, because you’re paying it off with inflated dollars.  Neat scheme (everyone from the Pharaoh’s to the Romans, to us has tried it) but it always fails.  No nation has ever inflated it’s way to prosperity.  And all paper money eventually returns to its’ intrinsic value - zero.

gk

Tags: Debt, dollar, Inflation, interest rates

This entry was posted on Saturday, May 17th, 2008 at 9:38 pm and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.