The Online Investing AI Blog

The new record breaking budget deficit of $1.8 trillion could have massive repercussions for the economies of this country and for the entire world. The future deficits are expected to rise. This deficit might be the straw that breaks the dollar’s back.

Image courtesy of The Heritage Foundation

There have been many factors that have been putting pressure on the dollar, going back nearly 100 years when the government started running a deficit. It’s been a free ride for the last century because the dollar was the default currency for the world. America was the most powerful economic superpower, and the only country that was a military threat was the USSR. It was like having an infinite line of credit; we could print as much money as we wanted.

What has changed?

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As the effects of the government stimulus plan are seen, there are more and more signs that the recession is ending. The media is quick to pick up on any changes and report that the economy is recovering. This article at Yahoo Finances is all about the improving housing market. Yet I think that all the positive news is only one side of the story.

The other side is that the fundamentals have not really changed. Unemployment is high, and is rising. There is no evidence that it will improve. All of the improvements in the economy are from government spending: Cash for Clunkers, First Time Home Buyers Plan, etc. These measures are good at getting people who aren’t financially responsible to spend money. It is a short term improvement but will have a longer term negative effect.

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Recently, as the stock market soars, there has been a large amount of news about how well the economy is doing. They say that the housing market has hit bottom, and that the economy is recovering. However, this article by the Associated Press is about how unemployment is rising.

Regardless of what the newspapers say, it is important to look at the fundamentals that drive the economy. The government has created massive band-aids to prevent a depression, and they seem to have worked. But it is important to understand the difference between a recovery and a temporary band-aid.

What effect will the band-aid have?

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In the olden days (circa 1970), people expected the government and other institutions to take care of them. They depended on the government to educate them through the school system. The depended on Social Security and their company’s pension plan for retirement income. And they depended on Medicare and Medicaid to handle their medical expenses.

How times have changed. Since those good old days, the dollar was taken off the gold standard. That means that the government could print as much money as it wanted. It could pay its own deficit with the money that it printed. This means that there is no limit to the amount of money that the government can spend. And that’s why it is spending money faster and faster. It is spending money that it doesn’t even have.

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Many people were horrified by Bernie’s Madoff theft of over $50 billion of investor money. They thought that the SEC and the government would protect them from such a massive and obvious scam. It’s true that he will probably spend the rest of his life in jail. However, that won’t help the people who lost all the money.

What many people don’t know (or choose to ignore) is that the Medicare and Medicaid liabilities are 1,000 times greater than the Madoff scam. These liabilities are currently estimated at $62 trillion. It’s gotten to the point that these sums are so big that we can’t even imagine them.

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It looks like Bernie Madoff will spend the rest of his life in prison. That was after stealing $50 billion of investor’s money. Did you know that there is a Ponzi scheme that is 200 times bigger than Madoff’s? It’s called Social Security.

Social Security currently has liabililites of $10 trillion. Many people think that there is a certain amount of money set aside to pay back this massive debt. Guess what. There isn’t. The government already spent the money. Just like Bernie Madoff.

This point of this post is not to be critical of the government. America is the best country in the world, and has perhaps the best government system. But the day of reconing is soon upon us; the govenment has borrowed more money than it can pay back. And people counting on Social Security are likely to be left holding the (empty) bag.

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I don’t pretend to be an expert on macroeconomic policy and I certainly am not an expert of the gold standard, so take this post with a grain of salt or a fleck of gold dust.

The gold standard meant that each paper dollar was backed by dollar of gold held in Fort Knox, or some other federal gold reserve facility. The standard also kept the government budget in check, say gold standard bearers.

In case you haven’t notice, we’re running a bit of a deficit.

The logical conclusion would be to go back on the gold standard and the economic crisis will go away. Again, not an expert here, but this idea just doesn’t jibe. First, historically speaking, there were lots of economic panics while we were on the gold standard. Take the Great Depression. Please.

Secondly, like oil reliance, gold reliance can cause problems, too. Any disruption or threat of disruption to the gold supply can cause the economy to unhinge.

Third, the economy is no longer based on gold. I suppose at one time, especially in the west, gold was a precious commodity. At one time, economies were based on coconuts and ox hides. Should we go back to the coconut standard or the ox hide standard? Now, it’s fair to say that a few pounds of silicon are capable of producing far more value than a couple pounds of gold.

I believe the real economy is based on information and innovation today and there’s no way to equate that value with a lump of metal.

The gold standard is just an excuse for financial responsibility. And this blame goes all around: financial irresponsibility on the part of the citizens and businesses who look at government handouts as some type of bottomless piggy bank and fiscal irresponsibility on the part of our government and its agencies.

Going back to the way things were done in the past isn’t change. Let’s move from the gold standard to the bold standard.

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