Have you struggled to explain the global economic death sprial to somebody else? I certainly have. That's why I spend a few weeks boiling the situation down to a Mr. Rogers-level explanation. I wrote the following essay specifically to help people explain to their friends, family and coworkers what the hell is going on. I'm going to turn this into a simple video presentation that can be freely shared by all, but first I'd love to get some feedback. Please let me know of any factual errors, conceptual gaps, or other glaring omissions/problems.
ECONOMIC ARMAGEDDON AND YOU
Meet Uncle Sam. He has a lot of bills to pay: wars, entitlement programs, government payroll … These things take money. About 3 and a half trillion dollars per year, actually.
The problem is that Uncle Sam’s income is only a little over 2 trillion dollars per year. To pay the rest of his bills, he does what most Americans do: he borrows money.
When Uncle Sam takes out a loan, he calls it a “bond.” Whether the bond is held by a bank, an investor, or a foreign government makes no difference: Uncle Sam has to pay it back eventually, and in the meantime he has to pay interest, just as you do on your credit card bill or mortgage.
Ever think about paying your Visa Card with your Master Card? That’s what Uncle Sam does. He takes out new loans – new bonds – so that he can make payments on the old ones.
All those loans and all that interest adds up. Right now, Uncle Sam owes about 14 trillion dollars. To put that in perspective, 14 trillion dollars is about the same as the GDP – the total value of all the goods and services produced by the American economy in an entire year.
It’s such a huge amount of money that Uncle Sam is starting to have trouble just paying the interest on his loans: that’s like having trouble making the minimum payment on a credit card – it starts making the people lending the money nervous.
Because Uncle Sam is starting to make lenders nervous, he’s having trouble borrowing money. If he can’t borrow money, he can’t make his payments. If he can’t make his payments, the banks, investors and foreign governments that he borrowed from won’t be able to pay their bills either.
If banks can’t pay their bills, you won’t be able to cash your paycheck, withdraw your savings, or take out a loan.
If investors can’t pay their bills, corporations won’t be able to pay their employees.
If foreign governments can’t pay their bills, their own banks and investors start having the same problems.
Uncle Sam doesn’t want to be responsible for those kinds of problems. Fortunately, he has one more way to make money: just make it! Uncle Sam runs the printing presses that create money. These days, it isn’t really a printing press, it’s just a computer. Uncle Sam can push a few buttons and – like magic – money is created and deposited into banks. Uncle Sam calls that magic trick “Quantitative Easing.”
The problem is that the more of something there is, the less it’s worth. The 1909 Honus Wagner baseball card wouldn’t be worth 2.3 million dollars if it weren’t so rare. Same goes for the US dollar: the more dollars there are, the less each one will buy.
That’s why commodities like gasoline, food and gold keep going up in price. They’re not worth more, your money is just worth less. This process is called inflation.
This is one part of the problem: Uncle Sam has run out of people to borrow from, and has to print money to pay his bills, thereby making your money worth less.
Remember the foreign governments that lent money to Uncle Sam? When they lent money to the American government, something interesting happened. It made the US look richer, and their countries look poorer.
As long as other countries look poor and America looks rich, one dollar of our money buys a lot of their money, so they can pay their workers only a few pennies a day. With such low labor costs, they can sell products in America for lower prices than any American manufacturer.
If American companies want to stay in business, the easiest way for them to compete is to move their factories overseas, and pay their workers over a few pennies a day too.
When American companies start moving their operations to other countries, Americans lose their jobs. The people that still have jobs are so desperate to keep them that they’ll work longer hours for less pay. When you’re earning fewer dollars, and your dollars are worth less, that’s called stagflation.
When people are out of work, or earning less, they can’t pay their taxes, and they collect unemployment payments. This means that Uncle Sam has even less income, and even more expenses.
The difference between Uncle Sam’s income and his expenses is called the annual deficit. The bigger the deficit grows, the harder it is for Uncle Sam to make the payments on the national debt.
If you can’t make the minimum payments on your credit card, the bank will stop letting you use it, and they’ll start hassling you about paying your bill. That’s what’s happening to Uncle Sam right now.
Uncle Sam’s only way out is to stop spending so much money. But if he does that, he’ll make people angry.
Uncle Sam can’t bear to make people angry. He’d rather just pretend that nothing’s wrong as long as he can.
Sooner or later, though, the whole house of cards is going to fall down. Uncle Sam won’t pay his bills, which means that banks, businesses and foreign governments won’t be able to pay their bills, which means that – all over the world – people like you and me won’t be able to pay our bills.
That’s called a global economic collapse, and it’s really scary. It’s never happened before, so nobody really knows how bad it will be, how long it will last, or even how we’ll eventually get out of it.
Maybe Uncle Sam will decide that he’d rather make a few million people angry today than destroy the lives of billions of people tomorrow. Don’t count on it.
Instead, do whatever you can to prepare now. While your credit cards and bank accounts still work, turn your soon-to-be-worthless dollars into tangibles – things that have real value because they’re useful: land, food, tools, and things to protect yourself with. If you live in a city, make plans to go somewhere else once things get bad. If you have any money left, buy some of what’s getting to be worth more and more as the dollar is worth less and less: gold and silver.
For more information, check out these websites.
Good luck. And may God help us all.