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Thursday, March 3, 2011

Gold and debt. What is the problem with debt anyway?

Gold stater comment: What is the problem with debt? What's the big deal? What's so bad about owing trillions of dollars anyway? So what if the US government can't pay back 14 trillion dollars in Federal debt? So what if they can't pay back 65 trillion they supposedly owe the social security system?

The first problem is that most people can't articulate what the problem is. This gives the debtor license to create doubt about the problem. If you have to ask what the big deal is, well, that's the big deal.

The problem is not that complicated. It's this: debt is a measure of risk. What does that mean? A small debt represents a small risk. The risk is that the debt will not be repaid. When the debt is not repaid, the person owed may not be able to repay his debts. A negative ripple effect is created.

A big debt represents a big risk. Here's the rub: at a governmental level, and even at the level of a large bank or insurance company, the large level of debt presents a risk - because of negative ripple effects - to the entire economic system.

Now, sophisticated people will smile at the naivete of this analysis. They know that a big debt can always be "RESTRUCTURED." What does this mean? It means that the banks who are owed money will continue to receive some interest payments while the cost of the debt will be shifted from the Government banking Institutions to those who pay into the governmental system: YOU and Me, the TAXPAYER.

Wait, how is it shifted to the taxpayer? I don't have more debt. No, but when the government bails out its banks, it does so by printing dollars. Those newly printed trillions flood into the system and all goods that you purchase that are denominated in dollars become that much more expensive: gas, food, heating oil, health care, education, housing.

And all those things are excluded when the government computes the cost of living (CPI), so that they can claim nothing is more expensive.

In this way massive risk when it pays off is kept in the vaults of the Governmental Banking Affiliates, and when it doesn't it is shifted back to the Tax Payers.

Well, the US taxpayer has had a pretty good run, you may observe. The lifestyle of the average citizen has been getting progressively better. Whatever form this "RESTRUCTURING" has taken, so far it's had a good result.

Yes, this is true. Because so far, the entire system has been able to bear the brunt of greater and greater debt/risk. The debt/risk is now enormous. It is so great, that people are beginning to realize that their own children will have a markedly more distressed lifestyle. In fact most of this generation will have to go $200,000 dollars into debt just to get through college. Then more to go to grad school.

Well, too bad, you might say. We still have it pretty good compared to, let's say, Rwanda. And that's true. But here's the problem: all that pesky debt/risk is growing larger and larger by the second because of INTEREST PAYMENTS.

I won't bore you with statistics here. But it should be clear, that at some point, the DEBT/RISK grows so big that the system actually collapses.

Are we close to that point? Here's the trick: we can never know for sure, until it happens.

It almost happened two years ago. But we bailed out the Governmental Banking Affiliates by charging the taxpayers with 3 trillion dollars of additional debt. So far, so good.

What happens when the system needs the next bailout? Who knows.

If you think the system may be getting close to the point that it can no longer bear the brunt of the risk/debt: buy gold. If not, don't bother.

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