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‘Why America Is Going Broke’

Posted by John T. Reed on

There is a nice summary of the road to bankruptcy the US federal government is on in today’s Wall Street Journal. Title is “Why America Is Going Broke.” Google that to read it.

It has a simple line graph where the red line is entitlements, blue is defense, and yellow is all else. The blue line had been falling or flat since the 1950s. When I was in the Army in the 1960s, defense was the biggest expense in the budget.

The entitlement spending that ate America

Now, defense is about 3% of the GDP; entitlements are 15% and climbing at about a 40º angle. Even Obama admitted that this is “unsustainable.”

Stated simply, the U.S. government does not have and cannot get the money to pay the entitlements. Government money comes from three sources: tax revenues, selling bonds (borrowing), or “printing” money which causes inflation. 

If you don’t have it, you must ‘print’ it, and that destroys it

Raising taxes enough to cover this increase in spending is impossible. We have already had failed bond auctions, that is, the public declined to buy all the bonds the U.S. government wanted to sell. So the U.S. Federal Reserve Bank bought the bonds, with checks drawn on an empty bank account (that do not bounce).

That is what the phrase “printing” money means: the Fed buying bonds with money conjured out of thin air. “Printing” money to get the U.S. government the money it needs to pay entitlements has the far worse effect of making all your cash and other dollar-denominated assets worthless.

That is where we are going. The world has never had such extreme advance notice of a financial crisis. And the first words of my book about it are “It can happen tomorrow.” That means you need to prepare today, but the vast majority of people want to wait until it gets closer. In other words, they are sure they have plenty of time left.

Based on what?

Better to have it and not need it

This is an insurance issue. And insurance is monumentally brutal to those who are a minute late but easy on those who are years early. If you prepare early, you are out the relatively little money “insuring” yourself against it costs. If you prepare late—a contradiction in terms—you are out everything you now own that is denominated in dollars.

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