WE CAN'T PAY IT OFF
by John Finger
October 5, 2005

Besides having been a crooked president who managed to do a few good things, President Nixon took the United States off the gold standard, turning the U.S. dollar into a fiat currency. A fiat currency, for those of you who don't know, has nothing to back it up. It's just paper, unredeemable for gold or anything else of true value. Since Nixon took us off the gold standard in 1971, the U.S. dollar has lost over 70% of its purchasing power. The government has been able to borrow and spend money at will, borrowing from the kids and grandchildren in order to buy votes today. Our national debt stands at nearly $8 trillion. Our federal deficit, which had been scheduled to decline this year, will be about the same as last year (over $450 billion) after the disastrous costs of the hurricanes are added in. President Bush continually declines to say how we'll pay for the costs. But one rule has become much more clear: when Democrats are in control, we pay for the costs of government and our ballooning debt. When Republicans are in control, our kids and grandchildren pay.

The trade deficit is also a national disgrace. It runs over $500 billion a year and shows no signs of letting up, even with a weakening dollar. Even with declining real wages in America, we can’tcompete with the Far East or Latin America, where most workers are willing to work for 1/10 of what Americans earn, and they don't demand benefits, either.

Social Security faces a deficit starting in 2018. It has no surplus now, since those funds go into the Treasury coffers with an IOU. But the baby-boomer retirement will put an extra strain on the system. And our true crisis, Medicare, is 10 times worse than the Social Security.

All these debts keep piling up. Who�s buying it? Nations with assets, that's who. China, Japan and India are among the heaviest buyers of U.S. debt. Over 52% of U.S. debt is now held by foreigners. If they ever decide to sell their debt, the dollar would plunge, causing a massive inflation in the U.S. Besides, do we really want so many dollars held by communist nations such as China? Isn�t that detrimental to our national security?

One foreigner who�s willing to vote with his feet is Venezuelan President Hugo Chavez. He's selling his dollar reserves, pulling his country's money out the the U.S. and investing it in Europe. But, so far, other countries haven't followed his lead.

Suppose for a minute that foreign nations remain faithful to the dollar. Do we really believe that our government will have the financial wherewithal to repay its debts? We have explosive debts now: how can we repay those debts and future debts when the unprecedented burden of retiring baby-boomers hits the system? We can�t. One of two things will happen: either the Federal Reserve will embark on a system of hyper-inflation, such as what Germany saw in the 1920s, or our own government will default on its uncontrollable debt. There's no magic number to tell us when either one of those will happen. But anyone who reads between the lines can figure it out, and neither scenario will be pretty - especially if both occur.

U.S. bonds are considered the safest investment around. They are given top ratings by all ratings firms and are considered the least likely to default. But the pressure on the almighty dollar is building at such a rapid pace - $1.8 billion a day in trade deficits and over $1 billion a day in budget deficits - that the bond will have to cry �Uncle� at some point. It may be a year from now or ten years from now, but it will happen. I predict that by the time President Bush leaves office, the U.S. Treasury bond will no longer be rated investment grade.

Imagine what it will be like when you get no Social Security check. Or when your military pension stops. Or you can’tafford the medicine you need to stay alive. Or, if you do get a check, it will be virtually worthless due to hyperinflation. We are headed to a system where those who have money - real money, that is - live, and those without it die. We've seen it with the government�s reaction to Hurricane Katrina. Expect it to be far worse when Hurricane Uncle Sam hits.

© 2005 John Finger
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John Finger
The Money Management Firm, Inc.
(719) 499-8056
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