Where's The Inflation... Here's The Answer...

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Where's The Inflation... Here's The Answer...

Post by sWamp-Ass on Mon Aug 13, 2012 11:47 am

For decades until 2009, all of those government-created dollars were being spent by Americans to buy foreign goods. In other words, Americans sent the government-created dollars out of their own private sector, putting them in the hands of, for example, Chinese exporters in the Chinese private sector. These Chinese businessmen swap the dollars (which they can't spend or use to pay taxes in China) for the Chinese Yuan, which they can spend and pay their taxes with, so the USSA dollars end up in the hands of the Chinese government (all three trillion of them). Meanwhile, the Chinese, in this case, suffer from inflation through the creation of their own currency that their government creates and swaps for those USD in the hands of private Chinese exporters.

The net effect is that the inflation that would otherwise be created by the U.S government's massive over-spending into the USSA economy is exported to China (and any other partners who have a trade surplus with us), and so the standard of living of Americans increases at the expense of improvements in the standard of living of Chinese.

The extent of this phenomenon -- the emptying of USSA dollars from private Americans ultimately to foreign sovereigns -- is measured by the trade deficit, which, like the public sector deficit, has been huge for a long time.

The creation of money by government spending doesn't contribute to inflation as long as foreigners are willing and able to take the American dollars out of American hands... but when they stop being willing or able, the game changes -- as every deficit dollar spent by the USSA government stays at home, and becomes American inflation.

That started happening in 2009, when the USSA federal deficit for the first time in decades exceeded the trade deficit, meaning that the government (USG) became a net-emitter of over three times more dollars than the US economy could emit to the rest of the world.

Only now can you understand the real reason for all those USSA govt. T-bill sales. The government isn't creating T-bills to fund it's spending. Government spends regardless. Rather, by turning the cash it spends into the private economy into non-spendable Treasuries, it drains those spendable dollars from the economy to hold off the inflation and currency collapse that it would otherwise be causing. Indeed, the figures show the total amount of USSA treasuries sold in the last three years far exceeds those bought by foreign sovereigns over the same period.

And so we can finally understand why we don't have inflation -- but may have crossed a Rubicon toward it. There will come a time -- it may already be upon us -- when all the American recipients of govt-printed dollars don't want to buy Treasuries with them any more. Indeed, if you were a banker (a likely ultimate beneficiary of current excessive government spending), why would you want to buy a piece of paper that can only be redeemed in the future for dollars of reduced value when, alternatively, you can buy real assets at knock-down prices that will hold their value? As more holders of cash wealth make that realization, government will no longer be able to drain the money it has created out of the system; asset prices will move up, and the inflation will take hold for everyone to see.

When that happens, not only the things that we buy as citizens, but also the things that the government buys, become more expensive. That gives our politicians two choices: either spend whatever it takes to buy what they think government needs, causing more inflation, and so on in a spiral out of control as every dollar it spends remains in the USSA private sector (as has been the case since 2009), or stop the destruction by cutting out all that federal spending that is not offset by revenues (currently 1.3 out of 3.6 trillion or 36 percent).

I suspect they'll stick with the devil they know.

But whether they do or not, with the economic turmoil and consequent social upheaval that this nation would then be facing, the one trillion dollar govt. real budget cut that Ron Paul has proposed to stop the death spiral might, with the benefit of hindsight, look like the best trillion the country shouldn't have spent.
Souce/More Here - Huff Post


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