The Road to Perpetual Debt - Art#16 Part II

PRESENT: The US Economy - Art#2

FUTURE: Getting Ready for Hard Times - Art#16

CHANGING COURSE: Strategy for Tax and Welfare Reform  and The final article -- Part 4 of Article 16 (The most popular article on this website)

THE US ECONOMY

Aside from the many notable qualities that distinguish and contribute to US economic successes, such as Constitutional guarantees of: freedom of speech, individual rights to own property, enforceable contracts and the rule of law, pluralism and a representative democracy; the dominant role of the US Dollar (USD) in international trade is a unique contributing asset that is often unrecognized. This dominance (sometimes referred to as dollar hegemony) is the willingness of foreigners to accept an infinite supply of US fiat Dollars in payment for goods, services and a finite supply of natural resources. The perceived generosity of the US to share this benefit with less fortunate countries has helped global economic growth.

In 2005, the US Economy continued the recovery that began following the 9/11 attacks in 2001. Over 2 million new jobs were created, housing set new records and corporate profits rose. A less accommodative Federal Reserve, notwithstanding, stimulus from the tax cuts, low long-term interest rates, relatively mild inflation at the consumer level and new debt were evident by the creation of high levels of liquidity throughout the economy. Foreign investments in US equities and debt instruments contributed significantly to buoyancy in the US economy. Nonetheless, challenges to long-term US economic prosperity continue to be largely ignored. Since 1970, US economic activity has become increasingly more dependent on tax induced domestic debt and foreign capital inflows despite the competitive advantage the US economy has enjoyed since WWII with the advance of US dollar hegemony.

Vitriolic partisan politics have demolished any hopes of real tax, welfare and Social Security reform during a Bush administration. Borders remain unprotected against an illegal migrant worker invasion. Debt, deficits and un-funded entitlement liabilities such as social security, medicare, medicaid and the earned income tax credit (EITC) continue to rise beyond sustainable levels. The Republicans are acting like Democrats and Democrats are acting like lunatics. While the politicians argue, challenges to a vigorous future for the US economy continue to mount.

As long as the US continues to enjoy the competitive advantage of fiat dollars as the surrogate global currency, and as long as our trading partners and their respective central banks willingly loan money to and reinvest their surplus US trade Dollars in the USA, the global economy will likely remain sustainable until a global currency evolves.

The fiat US Dollar, while no longer backed by gold,  is supported by the perception of goodwill, trade, industry, technological innovation, diplomacy and the mightiest military force ever assembled under a single banner. Domestic partisan politics notwithstanding, the US government will do whatever it takes to secure its long-term strategic interests. Leaders of the world are aware of this fact, even if the vast majority of Americans are not. Another fact, not widely discussed, is the USA must be doing a great number of things RIGHT! The vast hordes wishing to relocate here provide ample evidence this is true.

CHALLENGES TO THE US ECONOMY

Among the many perils facing American economic prosperity, none - including international terrorism; are more dangerous than inflation, debtism and an abrupt demise of dollar hegemony. Prior to discussion of these topics an example of their interrelationships may be instructive.

In 1970 (the year prior to President Nixon taking the US off the gold standard agreed to at Bretton Woods following WWII) the price of gold was $35.00 per ounce, the price of Saudi crude light oil was $1.80 per barrel. Currently, the approximate price of gold is $550.00 and Saudi crude is $64.00. In 1970 a US one hundred dollar bill ($100.00) would purchase 2.86 ounces of gold or 55.6 barrels of oil.

In 2006 a $100.00 bill will purchase only 18% of 1 oz of gold or only 1.6 barrels of oil. Stated in a different manner. 2.86 ounces of gold will buy almost sixteen $100.00 bills and 55.6 barrels of oil will buy over thirty-six $100 bills. Conversely, 2.86 ounces of gold will now buy 24.2 barrels of oil or 15 times the number of barrels a $100.00 bill will purchase. The current cost of producing a $100.00 bill is 6 cents. The result of this phenomenon is that although the US dollar has lost over 80% of domestic purchasing power in the past 35 years the US government can still buy 1.6 barrels of imported crude for a 6 cent $100 bill and 1 oz of gold for only 33 cents.

Despite the obvious economic advantages to the US Economy because of Dollar hegemony, US government DEBT has SOARED from 389 BILLIONS since 1970 to over $8 TRILLION; almost TWO-THOUSAND PERCENT. The 8 TRILLION is miniscule compared to over 50 TRILLION in un-funded entitlement liabilities reported by government accounting authorities.

INFLATION - The loss of constant purchasing value of the dollar, caused by an increase in the supply of money and debt creation by a financial system.

In the past 35 years (1970-2005) the price of goods and services $100.00 will purchase has inflated 400%. During this same period, the number of $100.00 bills, 1 oz of gold will purchase has increased 1,442%. The number of dollars, 1 barrel of light-sweet crude will purchase has skyrocketed by 3,456%. The number of barrels of sweet crude, 1 oz of gold will purchase has declined from 19.4 barrels in 1970 to only 8.4 barrels in 2005. While gold has remained a relative "store of value" domestically, it has lost significant ground in the price of the most vital US import. I have emphasized these points to demonstrate that while Americans may be inattentive to the destructive forces of inflation and the one-sidedness of dollar hegemony, OPEC (Oil Exporting Countries) most certainly are aware and have acted accordingly.

The foregoing facts attest the time-tested reality that gold represents real money and fiat dollars are simply a transitory, domestic means of exchange, or a global point of reference accepted to facilitate international transactions. With this knowledge, perhaps the following quotations may be more easily understood and appreciated:

"I place economy among the first and most important virtues and public debt as the greatest dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt. If we can prevent the government from wasting the labor of the people, under the pretense of caring for them they will be happy." Thomas Jefferson (1743 - 1826)

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Lord John Maynard Keynes (1883-1946), renowned British economist.

These gentlemen knew the true meaning of retaining a store of value in establishing a nation's currency. Jefferson, in particular, wanted US money to represent a real store of value, backed by the force of LAW. That is why Gold and Silver (historical stores of value) were incorporated in the US Constitution. Article I, Section 8 (1) The Congress shall have the Power: ....(5) To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. and Section 10 (1) No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit: make any Thing but gold and silver Coin as Tender in Payment of Debts; pass any Bill of Attainder, ex-post facto law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

President Roosevelt not only infringed on US Constitutional Law, he ignored the pronouncements of predecessors much wiser than he. This and other "New Deal" social legislation, of questionable constitutional authority (Social Security, eg.) has relegated the US into Debtor nation status and has resulted in a less bright future for our progeny. Unless significant changes in tax and welfare law are enacted, soon; neither of which are likely to occur in the current political environment, economic destruction and social chaos will be the likely outcome.  NOTE: Addition of Judge Alito to the Supreme Court may alter the destructive course we are on, but it is doubtful. International Corporations and BIG money rule!

GENERAL DIRECTORY to Debtism Articles

About Debtism.com

John Koraska on Social Security

Debtism - The Legacy of Perpetual Debt - Art#1

Exposes "Unconstitutionality" of Tax and Welfare Laws

The US Economy - Art#2

Sitting on a Powder Keg of Compounding DEBT

Social Security Tax Reform - Art#3

Put EQUITY back into the Program

Eliminate Corporate Income Tax - Art#4

Replace with a 2% Tax on Gross Corporate Revenues

Where is the Outrage - Art#5

Social Security Freeloaders - Art#6

Double taxation of dividends - Art#7

Social Security Income Tax Ceiling - Art#8

The Social Security Slush Fund - Art#9

Social Security Welfare or Fraud - Art#10

The Truth About Social Security - Art#11

Facts Every Worker Should Know!

EITC, Illegal Aliens and Minimum Wage - Art#12

Social Security Reform OR Perpetual Debt ? - Art#13

Unsustainable Debt Threatens US Prosperity

The Social Security Surplus Myth Art#14

There is NO Social Security Trust Fund SURPLUS

Strategy for Tax and Welfare Reform Art#15

Getting Ready for Hard Times Art#16

Getting Ready for Hard Times Part 2 Art#16

The Road to Perpetual Debt

Getting Ready for Hard Times Part 3 Art#16

Principles of a Fair Tax System

Getting Ready for Hard Times Part 4 Art#16
Critique of the 2006 Social Security Trustees Report

Doing Your Part to Improve America

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