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How to Survive Decades of Debt and Dollar Doubts

Guest post by: Michael Farrell

Article Overview: The annualized government borrowings for 2009 will total $5T explains Mike Farrell with aspenIbiz. At this time, 40% of the US Gov’ts budget is being spent to pay interest on its debt. At current budget and spending levels, little to none of the debt is being repaid putting us in a position where there will be Decades of Debt. Due to the magnitude of this debt, inflation will be very high, and the strain of this high inflation, will put the status of the US Dollar as the world’s reserve currency, in question. Both of these concerns generate Dollar Doubts. Read this article to understand the implications of Decades of Debt and Dollar Doubts as well as explore alternative wealth creating strategies.

How to Survive Decades of Debt and Dollar Doubts

You are a new hard working entrepreneur ... you will toil long hours, you have sizeable amounts of money at risk, you have people and inventory to manage, and you undertake a commute to your store location every day.

You have high hopes but things seem a little tenuous ... next you view this headline on TV, or listen to it on the radio, or you read it inside the newspaper in the news stand over in the corner of your store ... "Decades of Debt and Dollar Doubts."

Wow ... you wonder, what does this headline mean? You are asking, "Is my company venture going to be worth it?" "How do I survive in this business climate?" "How do I get ahead in this kind of economic environment?"

Let me present some insight and share my experience with you.

Over the previous year, the amount of borrowing by Uncle Sam (to fund operations of the government and stimulate several sectors of the economy) is absolutely unsustainable.

Here are several facts to help you decide if you agree.

The US Government has two main methods to gain working capital ... revenue by taxing and funds by borrowing.

The Government borrows money through an auction activity and supplies collateral or issues an IOU ... these are Bills, Notes, and Bonds.

Recently, the US Treasury auctioned $207B in various Bills, Notes, and Bonds in one week ... and this was just a few weeks after it had auctioned $250B in another one week time period.

If you took several of these weekly auctions and annualized the amount, it would be $5T just for 2009.

As part of issuing these IOUs and in exchange for obtaining funds to spend, the US Government agrees to pay back the amount borrowed at some pre-defined time (such as in three months, or in 52 weeks, or in 10 years) and to disburse interest on the sum borrowed at some frequency (for example monthly, quarterly, semi-annually).

Combining the recently borrowed amounts mentioned above with the amounts borrowed in previous years ... it has been determined it will take 40% of the USAs annual Gross Domestic Product (the equivalent to a company's gross earnings) just to pay the interest amount.

If it requires 40% of the US Government's funding (both revenue and borrowings) just to pay interest on the amount the Government has borrowed and if government spending stays the same, there are very little funds left to repay the principal amount borrowed. If very little to none of the borrowed amount is repaid every year, and we have increased the IOUs by $5T of debt in just this one year, we will continue to be in debt not just a few years but decades ... hence there will be Decades of Debt.

So how do Dollar Doubts figure in to this situation?

To begin with ... the US Dollar obtained status as the world's reserve currency about 50 years ago. This means that all the major commodities like oil, gold, wheat and other like items that are bought and sold around the world, are priced and traded in US Dollars ... hence a lot of US Dollars are exchanging hands daily all around the globe, 24X7 ... adding meaning to the phrase, money never sleeps. All of this commerce in US Dollars keeps the need high for US Dollars and ensures there is no doubt as to the strength of the Dollar based on the demand.

What then would cause there to be doubt about the strength of the Dollar?

A critical participant at the middle of these activities will be the Federal Reserve Bank ... which is not a government agency but a private organization that does have a charter from the US Government to perform many central banking activities such as the banking business of the US Government.

Implied in the charter for the Federal Reserve is an objective to maintain the buying power of the US Dollar, often referred to as a strong Dollar policy ... this would help make available price stability, financial prosperity, in addition to political tranquility.

The Feds accomplish this objective by controlling the amount of money that is supplied to the economy. For example, if the Feds print and distribute an amount of money above and beyond its reserves, it has increased the supply of money. With more money in the economic system pursuing a consistent and reasonable amount of goods and services, prices will increase. It is all about supply and demand ... a consistent supply of goods and services with an increased demand, because of the increased money supply, will cause an increase in prices ... hence inflation.

Deflation takes place when the opposite happens. The Feds reduce the money supply by taking money out of the economic system. If the quantity of goods and services produced by the economy stays reasonable and consistent, then there is less demand for these goods and services because there is a reduced amount of money available to buy them and prices will reduce ... hence deflation.

What if the Federal Reserve began an effort to reduce the amount of US Government debt thereby not having the Decades of Debt hanging over the heads of the US citizens and the US Government?

How could the Fed magically obtain all the funds needed to return the principal to the people and firms that loaned money to the US Government?

There are only two ways to make this happen ... raise taxes or print more money. There is a limit to the amount of taxes that can be raised ... think tax payer revolt! Since raising taxes is not very desirable, printing money becomes the other way to obtain these funds. As explained above, this would increase the money supply and generate inflation.

Now, let's go back to the US Dollar being the world's reserve currency.

If the money supply is increased because there are more US Dollars in circulation (as a result, for example, of the effort to reduce the quantity of debt referred to earlier as the Decades of Debt) and if there is essentially the identical supply of goods and services, it would take more inflated US Dollars to buy a barrel of oil; and it would take more US Dollars to purchase an ounce of gold; and it would take more US Dollars to purchase a bushel of wheat; and so forth.

Since it would take more US Dollars to buy a barrel of oil or an ounce of gold or a bushel of wheat, each US Dollar must be worth less than they were worth prior to the time when extra money was printed thereby increasing the money supply.

If there was a massive increase in the supply of money, due to the massive amount of debt to be reduced, the inflation could be huge, hence threatening price stability, financial prosperity, and political tranquility.

All of this inflation leads to a massively weaker US Dollar. With the US Dollar being massively weaker, its status as the world's reserve currency begins to be in doubt. Hence with Decades of Debt, being repaid by a weaker US Dollar and with the status of the US Dollar as the world's reserve currency being questioned, there are many facets of Dollar Doubts.

For now, it seems as thought everything within the international financial markets revolve around the actions from the Federal Reserve.

So for now, we need to trust the correct people will do the right thing.

However, many of my acquaintances and colleagues are asking what they should do to protect themselves from yet again one more approaching crisis.

Quite a few of them are evaluating alternative wealth creating strategies outside of the US Dollar ... outside of dollar-denominated assets ... maybe emerging markets ... perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants ... perhaps precious metals, water rights, oil, natural gas, potash mines, or gold mines ... things hard to build, difficult to substitute, and expensive to replace ... definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

Now when you see the headline "Decades of Debt and Dollar Doubts" you will have a better awareness of what this means and an awareness of some alternative wealth creating strategies to consider.

Also, you can join me in obtaining additional financial literacy ... Steve Forbes says "more financial education and the resulting empowerment will open our eyes to alternative wealth creating strategies" and these will be the keys to a recovery from this financial crisis.

In addition, a good book to read would be "Biography of the Dollar" by Craig Karmin.

Farrell, a former engineer with General Dynamics and management consultant at Deloitte ... is on a mission to empower individuals by increasing their financial literacy, improve their ability for personal sustainability, and contribute to the program that has a goal of creating 100 Millionaires by 2012.

You can find out more about financial education, alternative wealth creating strategies, Internet Marketing opportunities, and the global economy by reading updates that will be posted at Farrell's blog over the next few weeks.

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Article Tags: Alternative wealth creating strategies, Financial education, Government debt, Internet Marketing opportunities, Mike Farrell with aspenIbiz, US Dollar policy



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