Illusions

The USA Today’s Headline blared that the United States really owes $ 65 trillion dollars. China at the same time dropped 97 % of its T bills. Yet people still got up, went to work, bought groceries and did all the things needed to be done with paper money.

The truth is our financial system is based on illusions, many of them good, no matter what the the purest say. With gold banking there was depression after depression caused by gold flowing west to pay farmers at harvest time and gold flowing overseas to buy products in boom times causing havoc in the banking system. Thus the move to paper or fiat money, backed by the full faith and credit of a government was made.

And especially illusionary is the paper money system, even when handled by adults who understand that it’s real money because of the full faith and credit of a government. The dollar’s strong, now the euro’s weak; the dollar’s weak, now the euro’s strong, all of them are phantoms and non-winners to hold as cash. That's because they're all being issued at some rate of inflation and the term strong and weak is relative.

Also the amount of perceived national debt can be illusionary. Japan has twice the debt per GDP that we do. It has to pay for social services because it's the oldest per capita industrial country on earth. They owe the money to themselves it's said so this is alright, but so do we.

How can it be? Don’t we owe trillions overseas? Yes, in dollars. We didn't borrow the Chinese yuan or British pounds or euros. The truth is we borrowed back our own dollars that we had spent overseas. The Chinese want us to buy their products, and we can’t do so without issuing new or borrowing back this currency. If they, of course, bought American, we would not have to do so, so what kind of hypocrites are they to complain about our deficits.

In fact, the reason we issued so much currency to begin with (we call it borrowing, how's that for an illusion) was so that they could have the capital to build their manufacturing plants because no one wanted yuan before their build up as an industrial power. They were then supposed to buy American and everyone would walk off holding hands into the sunset with both of us having balanced, profitable trade. Except they did not do it and now we are the villains, not them.

Too, when the economic crisis hit because countries of free choice bought bad investment products, the U.S. ponied up $9 trillion in pledges to save the day. The rest of the world put up $1 trillion, and now they complain about our weak dollar.

And there is not much they can do about it. Unfortunately when a country owes huge sums of money and can pay its debt by printing more money, you are flat out of luck when it is also more powerful militarily then the rest of the world combined.

Still for the future of our citizens we must get our house in order. The U.S. could borrow $400 billion a year adjusting for inflation every year from now until forever with no problems. It is inconceivable that politicians issue so much currency yearly giving us a $ 1.7 trillion a year deficit when the consequences of this for our own economy in trade deficits, economic bubbles and inflation transfers wealth from the middle class making them eventually an underclass is staggering.

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