We are enjoying the greatest standard of living the world has ever known. But, how could we not be when our economy is propped up with $17 TRILLION DOLLARS we’ve borrowed from our children and grandchildren? Yes, the lifestyle we are currently enjoying is at the expense of future generations, many of whom are not yet born.
[dropcap]L[/dropcap]et me simplify what I’m talking about by bringing the situation down to the impact this can have on a single family. Suppose Mom and Dad are enjoying a great standard of living because their parents and grandparents worked hard and invested well. Suppose they have an excellent credit rating based on the way the family has always handled its affairs. This has enabled them to buy bigger and better houses, drive nicer cars, and have many other trappings that their ancestors didn’t have because they weren’t willing to go in debt to do so.
Mom and Dad are enjoying a better life than their parents, and they see no reason their children and grandchildren will not be able to do the same. They are living up the fruits of prior generation’s labor because their parents and grandparents saved and invested. But there is a problem! In addition to what they inherited and what they are adding with their own earnings, they are also enjoying an even greater standard of living because their good credit has enabled them to borrow additional money to support an even better lifestyle.
Instead of leaving a legacy like their parents and grandparents had left them, Mom and Dad will leave their children and grandchildren a lot of material things, but also debt that will have to be repaid. Under this circumstance, their beneficiaries will have little choice except to live on less than their earnings while they pay off the debt their parents ran up while living a lifestyle they didn’t earn. How do you think this is going to go over with the children and grandchildren?
Isn’t this what we are doing as a nation? Aren’t we enjoying a lifestyle we haven’t earned at the expense of our children and grandchildren? Well, the answer to these questions could be either yes or no depending on how you look at it. If you measure our national debt as a percentage of Gross Domestic Product, (GDP) we aren’t as far in debt today as we were immediately following WWII when the debt reached a high of 117.5 percent of GDP. But there’s a big difference. By the end of the war, our industrial machine and its accompanying production jobs were in high gear, and we were producing goods at an unprecedented level. When the massive industrial complex built during the war was converted to domestic production, our economy boomed and the debt was reduced dramatically, not in outstanding dollars, but as a percentage of GDP. Today however, much of what we buy is manufactured abroad, not made here in the USA. United States consumption without U.S. production creates a transfer of U.S. dollars to foreign producers and this gradually erodes our economy.
On the other hand, if you compare our debt by using what a dollar could buy then compared to now, it’s a totally different picture. As inflation pushes the GDP higher in terms of dollars, the dollar amount of the debt can grow without increasing the percentage of GDP. For example, if you look back over the past century, inflation has pushed the price of an item costing $20 in 1913 to an unbelievable amount of $473.03 in 2013. Even with the inflated amount of the nation’s GDP growing dramatically, the national debt has grown even more rapidly, from a low of 32.5 percent in 1981 to 102.7 percent today. This growth has come primarily from the expansion of programs such as Social Security, Medicare, Medicaid, Prescription Drug Coverage, food stamps, and aid to families with dependent children, housing subsidies, environmental initiatives, and the list goes on and on. Couple this with the high unemployment and lack of production we have experienced over the past several years and it’s a recipe for economic disaster.
The problem is, as good as it feels, we don’t have the industrial complex and associated employment to support what is being spent. A tremendous amount of our post WWII manufacturing has been shipped to other countries and service related jobs simply don’t produce anything of lasting substance. We lack the ability to retire this huge debt through any means other than repaying it with highly inflated dollars. The dollar has already been weakened to an unprecedented low, and in 2011, for the first time in the nation’s history, its credit rating was lowered. Congress seems increasingly reluctant to keep raising the debt ceiling, which is the nation’s credit limit. There are currently deep concerns of another possible downgrade in the near future. If you want to see how fast the debt is growing, go to www.free-press.biz/usa/national-debt.htm and just watch the debt clock for a few minutes.
Let’s go back to our hypothetical family discussed earlier. If Mom and Dad continue to borrow and spend, the people lending them money will begin to get nervous about their ability to repay the loans and eventually become concerned enough to cut off their credit. When this happens, Mom and Dad are forced to come back to reality, lower their standard of living and start retiring their debts. We saw this happen in the recent economic crash. That’s how the market works for you and me, but that’s not the way it works for the federal government. You see, Mom and Dad don’t have the ability to print money to pay their debts, but the federal government does. It’s when a country tries to print its way out of debt that problems escalate, inflation spirals, and citizens suffer.
The best example of this is what happened to the African country of Zimbabwe between 1980 and April 2009. In 1983 the exchange rate between a Zimbabwean dollar and a U.S. dollar was one to one. By 1997 a U.S. dollar was worth 10 Zimbabwean dollars. By 2000 one U.S. dollar could be exchanged for 100 Zimbabwean dollars. Then as the government kept printing more and more money, inflation really started to ramp up. In June 2002 a U.S. dollar was worth 1,000 Zimbabwean dollars and by March 2003 that number had jumped to 10,000 Zimbabwean dollars. Wow, you say! That’s unbelievable. And it is, except that was just the beginning of the spiral. The government kept printing money and as any economist knows, sustained growth in the money supply will result in high sustained inflation. In spite of being devalued in August 2006 and again in August 2008, by February 2009, one U.S. dollar was worth 300 trillion Zimbabwean dollars, and the currency was devalued once more. By April 12, 2009, the currency was completely worthless and it was abandoned. Transactions today are carried out using foreign currencies. I have a 100 trillion dollar Zimbabwe note taped to the wall in my office as a reminder of what can and did happen to a currency that was worth the same as U.S. currency just 30 years ago.
For an extended period, the Federal Reserve has been buying $85 billion dollars per month of government debt with newly printed money. This expansion of the money supply will eventually show up in the form of higher inflation. This bond buying has artificially held down interest rates, but even with the low rates, the interest on the national debt is more than the total budgets of many government agencies such as the Department of Agriculture, Department of Labor, Veterans Affairs, Transportation, Education and Homeland Security. This interest expense buys us nothing and deprives us from enjoying the real benefits we would see if the money could be used to purchase things we need today.
Back to Mom and Dad! Do you remember what gasoline cost per gallon just five years ago compared to the price today? How about groceries, clothing, education, health care and just about anything else you can think of? I recently ate at one of my favorite restaurants and the price of an appetizer I really like had jumped from $7.95 to $9.95 in the past year. Last week I went through the drive thru of a fast food restaurant and picked up two meals and two drinks. The bill was over $20. Just a couple of years ago I remembered buying these for just over $10. Is this inflation or price gouging? You be the judge. Look at what you are spending today compared to just five years ago.
I point this out, not to scare you, but rather to get you thinking. It has only been a little over 30 years since inflation was rampant in the early 1980’s and interest rates shot up to over 21 percent. That was a scary time for those of us who lived through it. Imagine if inflation were to reach 21 percent per day the way it did in Zimbabwe before the total collapse of their currency. Could it happen here? Probably not, but unless we get our financial house in balance the resulting economic impact of continuing to print money could be devastating and result in a dramatic lowering of our standard of living for many years to come. The sooner we accept the fact that we are living above our means and start scaling back to what we can afford, the less impact there will be on our standard of living. This is true whether we’re talking about a single family or a nation. The time to make hard choices is while they are still choices, not after they cease to be choices and are forced upon us.
