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Be Patriotic, Be Stingy

By: Steve Johnson

3/14/2008 - 12 Comments

Changing your spending habits may not be enough. It will take convincing your neighbors, extended family, employers and the government to slow down on the spending and save more money.

The total US obligated debt is around 70 trillion dollars when added together,
- 1.1 trillion in personal credit card debt
- 9.1 trillion in federal debt
- 41 trillion in entitlement debt (social security, Medicare)
- 10 trillion in home equity debt
- 9 trillion in corporate debt

The US GDP in 2007 was as 13.5 trillion, which means our debt is 5 times our annual income.  No other nation has ever owed as much money to as many people in the history of the world.

The Federal government will soon be forced to raise interest rates to compete with global investors to continue to buy US dollar based equities. If global investors stop buying US bonds, the long term interest rates will rise as investors seek higher yielding opportunities abroad. Higher interest rates will compound the declining housing market.

Increase Savings

An increase in US savings will help offset the millions around the world that are moving their savings to other currencies and other foreign equity markets.  The world is facing a currency crisis as the value of the dollar continues to fall against the major currencies of the world. 

It’s true, being stringy will push the economy into a recession because the economy is 75% consumer driven, but because we don’t manufacture products anymore, the money we are spending is leaving the country as fast as it leaves our hand.  With a $60 billion per month trade deficit, we need to increase our saving rate to support the value of the dollar and reduce the impact of the global selloff of dollars.

The Politicians Are Wrong

The politicians continue to tell us to spend more money in order to keep the US economy out of a recession, but spending more money is only pushing the US farther into debt. Here are a few reasons why this misguided information is being feed to the public. First of all politicians are primarily motivated to get elected and in their pursuit, they are not focused on the long term prosperity of the US economy. Second, they believe that because the US government does not have an end date, we can continue to borrow indefinitely. And third, because of the historical leadership of the economists like Allan Greenspan, they trust the economic leadership to keep the US economy afloat.

The Global Economy Has Changed Things

The economic leaders like Allan Greenspan were successful in the past because they were supported by the high value of the dollar around the world. This high value of the dollar which is recognized by the world as the reserve currency by institutions like the World Bank and International Monetary Foundation (IMF), has allowed the US to borrow money for nearly 40 years. 

But, the interlacing of the major financial institutions of the world, brought about by the last decade of globalization, has exposed the real value of the dollar.  Two-thirds of the dollars in print are used outside of the US.  If the dollars’ value continues to drop against major currencies, these dollars will be sold back to the US – which will create a lot of inflation.  The cost of imported products could increase by three times what they are today.

The Federal Reserve is losing its ability to control the economy. They used to maintain economic growth by manipulation of the Federal interest rates. But, with the dollar weakening, they are losing control. They used to be able to lower the interest rate and force the world banks to follow their actions, because the dollar is the reserve currency of the world. More and more nations like those that are part of OPEC, are one-by-one refusing to follow the US Federal Reserve and instead shifting to other currencies like the Euro to buy/sell international products.

As the major financial institutions turn from the dollar as the world reserve currency, the Federal Reserve is losing influence and power – and will soon be unable to prop up the US economy.

Global Value Equalization

These are 146 major currencies in the world today and the values against each other are in constant fluctuation. The free trade trend of the past decade, where products are sold for the same price on a common market, is forcing currencies to find their rightful value. What is happening is the global market is forcing the value of the dollar into its actual value – which the US Federal Reserve cannot control.

The US dollar is overvalued against the world currencies and the adjustment is not going to be fun for anyone, because the entire world is full of dollars.

Increasing the savings rate in America will help save the country from the potential economic meltdown.  Be patriot, be stingy.

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