184069
184975
Economics-101

This will end badly

This week I would like to provide you with some graphs and a short video clip to further illustrate the point that I’ve been making since I started this column. Below we have a chart of the US deficit indicating the point in time when Obama came into office in February of 2009. Mr. Obama swore that he would cut the deficit in half by the end of his first term in office. Well, we are rapidly approaching the end of his first term and all the president has been able to accomplish is to increase the deficit by 50%! Now that’s just the deficit. Under Mr. Obama’s watch, the US national debt has risen from under $11 trillion to its’ present level of $16 trillion. The United States cannot pay off this debt. It is mathematically impossible.

 

Let’s come at this from a different angle. Let’s say we have a Canadian citizen who makes $100,000 per year and has accumulated debt of $1 billion. This person can’t pay off this debt with their income. The interest that builds on the debt will outpace the paying down of the principal. When it comes to financing debt, households are very similar to countries. Where an individual will have to declare bankruptcy, a country will inflate its way out of the debt. What do I mean by inflate your way out of debt? Central banks print enormous amounts of their currency to the point that the currency becomes almost or absolutely worthless. That is what every major central bank around the globe is doing today. The greatest money printer of them all is the US. Don’t forget, US debt is owed in US dollars. When the currency becomes worthless, the debt is voided.

As I have said in previous articles, when a currency is backed by nothing it ultimately becomes worth nothing. This has happened time and time again throughout history. There’s nothing new here. The only difference this time is that it is happening on a global scale. 

If you don’t understand the financial crises in Europe, have a quick peek at the clip below. It will all become crystal clear after watching this.



More Economics 101 articles

182585
About the Author

Derrick Nicholson is a Currency Strategist. He has been in the industry for the past 20 years, and specializes in mitigating currency risk for companies doing business outside of Canada.

Questions and inquiries can be directed to Derrick at [email protected].

 



183776
The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

Previous Stories



183538


182242