Certain financial writers have been making a little news recently with sensational articles suggesting that the American economy is likely, in one popular writer’s opinion certainly, to collapse in the course of the next year—not sometime in some uncertain future time frame but over the next few months. What evidence does he have and how likely is it?
Escalating National Debt
Some of the major facts facing our economy are clear. One reason for fearing an actual collapse, rather than the existing persistent decline as debt service uses an increasing portion of the nation’s income, is that the size of the debt accelerates over time.
The national debt is sky rocketing and its escalation is near the tipping point where it will accelerate so fast it will be unstoppable. Factors beyond the Federal Reserve’s capacity to control will at some time push up interest rates dramatically if unchecked soon.
Changing Value of the Dollar
Over the last few months news articles from liberal to conservative sources (MSNBC to Fox Business) and newspapers of all kinds have posted articles pro and con about the danger of a turn from the dollar as a world standard.
At least one country, China, is already calling for the dollar to be replaced as the world’s standard currency. Even in the United States the potential for our internal money system to be replaced or at least diluted is seen in the surprising rise in the use of the international form of money known as bitcoins!
If you think bitcoins are frivilous, think about this. Just this past week Dell Computers announced that they would begin taking bitcoins in place of dollars! Who will be next? And will our government soon lose control of our currency altogether?
One of the less known but remarkable factors, is that America’s ability to cope by printing more money may be in jeopardy. But it would be if the dollar were not the currency standard.
The impact of such a change would be significant. One very important impact would be the increased cost of financing budget and trade deficits.
Uncertain Role of the Dollar
While a lot of people scoff at the idea that the big old government could be compared to a family situation when it comes to debt, the basic problem is clearly parallel. When debt gets too big there is not enough income to reduce it and it skyrockets.
If anyone looks at the rising cost of living in America they have to be alarmed. Inflation is more than government stats suggest and government swallowing of resources is reducing income as well. No matter how you look at it, there are storm clouds gathering.
Government leaders brag about reducing deficit spending (although their pretensions are extremely minimal). But the cost of interest on the debt in addition to the still huge deficit each year makes the rate of increase in debt continue to rise anyway. Even worse they continue to adopt massively expensive new programs their income cannot support.
As far back as March 2, 2011, Barry Eichengreen, George C. Pardee and Helen N. Pardee professor of economics and political science at the University of California, Berkeley, in a Wall Stree Journal article discussed the impending rise in prices for Americans because of our declining dollar. He also noted that our next economic bubble will not find so many Chinese dollars at hand to help us out.
Be Ready, No Matter What
What should we expect? Is a collapse eminent? I try to remain optimistic and hope that sounder minds will prevail so we will be able to cope with all these dangers. After all, there have always been people predicting the end of mankind in every generation.
The truth is, no one can be certain what lies ahead. The only thing we can know for sure is that due diligence calls on us to think rationally and be ready for whatever comes.
It may be impossible to know exactly how these forces are going to interact in the coming months, but we can take steps to deal with the increasingly challenging outside world by attending to our personal world. If we do that I think all may go well.
