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Article by Joe Caner  11-20-04

The recent rapid run-up of the national debt will put downward pressure on the value of the dollar, which is in fact already losing value against every major currency. Interest rate will rise in order to attract lenders to purchase our increasing amount of debt. Higher interest rates will also be needed to counter the effects of our currency devaluation which will further increase rates. Higher total debt also effect our credit worthiness. It reduces our credit score because of the increased risk of default. Higher risk investment require higher rates of return which will in turn drive up interest.

Higher interest rate will increase the costs of doing business. Loans are needed in order to finance the investment in new plant and equipment, and to build inventories. This will have a chilling effect on hiring and economic growth.

A cheaper dollar will make our goods and services more attractive on the world market, but it is unlikely that we will fully capitalize on this opportunity because most managers are by nature risk adverse. They will be slow to invest due to the higher financing costs and uncertain returns.

The weaker dollar will mean that the cost of goods and services will be higher to the American consumer. This is called inflation. Inflation also adds upward pressure to interest rates. Presumably rates will stabilize at some higher point, but it's anyone's guess where. There is one thing I can tell you for certain. It's a very bad time to have an adjustable rate mortgage. If you do not have a fixed rate, I'd recommend refinancing. Soon.

Oh yeah. Home prices will stagnate, and very likely begin to decline because the increasing cost of money will depress prices. The increased cost of money will decrease the affordability of large ticket items such as housing. This will also depress the new housing market which has been a the bright spot in our otherwise jobless recovery.

At some point, one would assume that governmental spending would have to be curtailed, and/or taxes will need to be raised in order slow the rate of debt accumulation. Either option will further depress our economy by reducing the amount being spent on goods and services.

This sounds like a lot of gloom and doom, but it is not necessarily the only outcome.  Although we are currently heading along this vector, other factors that are yet to occur or be identified can exacerbate or improve the situation. For instance, our more attractively priced goods and services could have a better than expected effect on our economic growth which in turn would raise governmental income without unduly depressing the economy. Oil prices could continue to rise which would depress the economy, and drive up both interest and inflations rates. The economy is a chaotic system with lots of variables. I know it sounds like I am equivocating, but it's kind of hard to give a definitive projection. All you can do is ride the trends, and keep your eyes open for important developments that could cause a deflection in those trends. Currently, the trend does not look good. There seems to be a lot more downside risk than upside potential.

The massive increase in the national debt is going is to make America relatively poorer. We will have fewer options to increase the size of the standing Army, purchase new weapon systems, or pay for social programs such as universal health coverage. We wont have the recourses.  An increasing percentage of federal expenditures will be required just to service the national debt. Not to retire it. Just to pay off the interest. If we continue along this vector, servicing the national debt will become the largest single expenditure of the US government 

Have I cheered you up yet?

 

Comments and more information below.

Fractional Reserve Banking/Paper money is evil. In a paper money system its mathematically certain that most of the people in the society will have a huge debt. The reason for this is that borrowing is the only way money can be created in a flat-money system and since there is always interest attached there is always more debt created than money. Thus it's certain that everyone will owe money to the banks and eventually its mathematically certain that they'll go into default at some point - even the entire US government.
 
I dare you to read what some of these famous people say about paper money -
 

 

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