Sunday, April 11, 2010

The Government's Goal: Inflate Away The Debt

The Federal budget is $3.6 trillion. Federal revenues are $2.4 trillion. Even the math-challenged among us can see that this has lead to a budget deficit of $1.2 trillion.

In other words, one-third of the federal budget is deficit-driven spending, and it financed through the sale of US Treasuries.

However, the government not only needs to sell bonds to finance its deficit, it also needs to pay off the holders of presently maturing bonds.

Decades of accruing deficits have led to a national debt that will likely reach $14 trillion by year's end – roughly equal to GDP.

With the economy creeping along due only to the government's deficit spending, we will not grow our way out of our mounting debt troubles. In other words, economic growth will not offset our burdensome debt-to-GDP ratio.

The Federal Reserve and the government know this. So their only hope is to attempt to inflate their way out the burgeoning crisis. That's because inflation reduces the value of the dollar.

Since our debts are based on a specific dollar amount and not a specific value, the less our dollars are worth, the easier it will be for us to pay off our debts.

Neither the Fed nor the government will admit this, but that's the reality.

Inflation will hurt those who have avoided debt and instead saved money. And it is the very thing that so many economists — not to mention most Americans — fear. Yet, that is the objective of those in charge. So, all we can do is try to prepare ourselves.

This is not an environment for savers. Holding dollars is punitive in an inflationary environment since money can lose value rapidly.

The Fed will continue to print dollars backed by nothing, with no consideration of their relation to the goods or services in our economy. And they will then repay holders of US debt with devalued money.

Unfortunately, millions of those people are Americans.

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