Government Debt Lunacy
Over the past few years, many experts have been warning of a crisis heading our way. More specifically, the concerns have centered on the inevitable collapse of the U.S. dollar. One of these individuals is former Congressman Ron Paul, who has stated that he believes the U.S. financial system is on the road to disaster. In this article, I’ll share some of his views and discuss what could happen if such a crisis materialized.
Currency Crisis
According to Congressman Paul, a U.S. currency crisis is inevitable. At one point in the 1980s, while riding on Marine One with President Reagan, the President said, “No great nation that has abandoned the gold standard has ever remained a great nation.” A few decades ago, former Fed Chairman, Alan Greenspan stated, “In the absence of the gold standard there is no way to protect savings form confiscation through inflation.” Without a gold standard, there is nothing to limit government spending. In short, as long as the government is able to overspend, the national debt will be the norm rather than the exception.
Since the gold standard was abandoned, what is backing our currency? Confidence! Without a hard asset backing up the dollar, it is supported only by the “full faith and credit of the federal government.” If the world lost confidence in the greenback, its value would plummet and life as we know it would be severely and forever altered. How will we know when the next crisis is about to emerge?
The first sign of a currency crisis, according to Paul, will be a precipitous decline in the value of the dollar. A collapse in our currency would result in a spike in inflation. It would also be accompanied by an increase in U.S. interest rates. Paul’s prediction, although rather dire, is for the collapse of the entire U.S. financial system. If this occurs, the systemic risk would be massive. If the U.S. financial system actually did collapse, it would take the entire global financial system with it. Why? Because there is over $18 trillion in U.S. debt outstanding, with China and Japan being the largest holders. A U.S. collapse would devastate the entire globe. Let’s turn our attention to the national debt, an issue which weighs heavily on the minds of millions of Americans.
U.S. National Debt
When the government spends more than it collects, the result is additional debt. From the signing of the Declaration of Independence in 1776 until 2008, the U.S. accumulated slightly over $10 trillion in federal debt. In the past seven years, the debt has nearly doubled to more than $18 trillion. By the year 2019, it is projected to exceed $20.3 trillion. When interest rates rise, the impact will be felt by the federal government as well as everyday Americans. First, it will increase the government’s cost of borrowing, which will cause the debt to rise even faster. It’s entirely possible that even a modest rise in interest rates could cause the debt to spiral out of control. This is because Washington is heavily dependent on borrowing to operate. Next, it will be much more difficult to expand or even maintain the welfare state. This fact alone will lead to mass riots as individuals who are dependent on a government check will take to the streets in protest. Also, the U.S. would have a more difficult time funding its presence (i.e. military bases) around the world. This would lead to a less stable socio-political environment and an uptick in radical behavior. Plus, a shortage in government revenue could result in a rather large tax increase and the eventual demise of the middle class. Finally, and as we’ve already seen, the federal government may decide to target 401ks and IRAs as a source of additional revenue. This could take the form of a tax or fee of some sort. Mr. Paul also mentioned the possibility of a tax on regular savings and other assets. If the government finds itself in a tight situation, as we’ve witnessed in the recent past, the potential intrusion could be severe.
Social Unrest
This discussion wouldn’t be complete without mentioning social unrest. As we’ve already seen, the match is lit and it wouldn’t take much for anarchy to manifest. In essence, there appears to be a significant amount of pent-up frustration among the electorate. For example, who expected the reaction in Ferguson, New York, or Baltimore? And this may only be the tip of the iceberg. A temporary government shutdown is also a distinct possibility. To this author, public protests seem to be on the rise and the bar of what’s reasonable appears to be quite low. Hence, I suspect this is only the beginning of more civil unrest in America.
Leave a Reply