How the debt and dollar crisis is unavoidable. Part 2.

 INTEREST PAYMENTS TO EXPLODE

EXPORTED INFLATED DOLLARS TO RETURN HOME

The 1970's saw an average inflation rate of 6.8% and a peak in 1979 of 13%. In 1980 it was 12.5 %. Some of this was due to the policy of OPEC, the "Organization of oil exporting countries", seeking to control the price of oil by production regulation. Before OPEC, the price was set by the New York and London commodity markets and was manipulated to never account for the inflation of the currency. The 1970's saw an increase in the price of imported oil and a embargo in 1974, in reaction to U.S. policy in Israel and an effort to offset inflation of dollars that was the currency that oil was traded in.

Also in the 1970's we saw the introduction of the "Clean Air Act" and OSHA, the "Occupational health and safety act" The increase in energy price and stability,  coupled with these new laws, which were often implemented without any consideration for the ability of many foundries, steel mills and other manufactures to absorb these costs quickly began the deindustrialization of the backbone of a manufacturing economy. Small operators were first to go, but in 2 decades these industries were importing products from Japan and soon China, after the Nixon's softening relations in 1972. 

Manufacturers soon realized they could import products for less costs and avoid the risks of government regulation, labor disputes and unstable material prices. The economy transitioned to a consumer market and manufacturing was replaced by services, entertainment and paper financial transactions. I argue that wealth is created by the combination of materials and labor to produce a product of more value than the imputed materials and labor. China is a perfect example of that reality, as it was for the United States in late 19th and 20th centuries.

At the same time government realized that the combination of lower priced imports and the exporting of inflated U.S. dollars to pay for those goods, kept domestic inflation under control. This was also coupled with taking out of the price index items like energy and other costs that reveal actual inflation.

Exporting countries soon found they had lots of dollars and often placed them to earn some interest on U.S. debt. Government debt was advertised as the safest investment in the world, even though, due to inflation, its buying power was steadily decreasing.

The dissolving of the Soviet Union in 1991, was an opportunity to change direction and address the unsustainable path of debt. It was labeled, " The peace dividend" and the government came close to balancing the budget in 1993, but it was short lived, as there are incentives for more spending and debt. More spending often translates to more political power and more debt is a major industry of Investment Banks who earn steady commissions on all those transactions.

Soon after the collapse of the Soviet Union, many in government saw the opportunity of being the only remaining Superpower to use that power to fashion the world as they saw fit. Again the ability to finance, now war and and rapidly increasing debt was aided by exporting inflated dollars around the world. 

As the 21st century arrived it was becoming apparent to many that the country was on an unsustainable financial path. This coupled with the increase in policy of the U.S. to intervene in the financial and political affairs of other countries to force social, and cultural changes and assume control of the resources of other countries. It began a period of endless war and support for war, all financed with more debt.

The U.S. dollar which was the world reserve currency due to its being, "as good as gold" was now often used as a weapon to force submission to U.S. will and soon there was in increase in resistance to that policy.  This resistance was coming from allies and competitors. 

Japan, China and other holders of U.S. debt began to feel U.S. debt may not be a good investment and started lower their holdings of that debt. At one time transactions in world trade were conducted in over 80%  with dollars, it is now near 50%. Settlements are increasingly being made in other currencies and in platforms not controlled by the U.S. and EU. 

The interest on the debt is now exploding and is the biggest item in the budget and it is about to get much bigger when debt that matures that was 1%, is now going to be over 4%.  $9.3 trillion matures in the next 12 months and 70% of U.S. debt mature in the next 5 years, all at much higher rates than before. This can only result in more deficit spending and more debt, an unsustainable reality.

The other shoe that will drop is that as the world moves away from the dollar transactions and liquidates U.S. debt, where are all those exported dollars going to go? They are going to attempt to be repatriated back to the U.S., one way or another.

We have seen gold buying by central banks around the world with Gold now trading at over $3350. an oz., silver is now beginning to also increase as is other stores of value.  Much of this is caused by the liquidation of dollar reserves into precious metals and other assets.

It took 50 years for the U.S. to export inflated dollars around the world, but it will not take 50 years for holders to attempt cash out. While they can spend those dollars on many things around the world, it may be a declining demand for dollars and then there will be attempts to use them in the U.S.  The U.S. stock market may explode and real estate prices increase, at least until the desire to unload those dollars in realized. 

It is possible that real estate will become unaffordable for Americans and Stocks will be in the stratosphere, but when those dollars are finally repatriated, demand will inevitably disappear and those exported dollars will evaporate, like the dew exposed to the morning sun.