If an individual misses a home-mortgage payment, guess what will happen? Miss a few more payments and a bank or other lender will take possession of the individual’s home.
What is the case with government debt? When government goes into debt, there are few, if any, initial consequences.
When President Andrew Jackson left office in 1837, the United States had no national debt. By 1981, 144 years later, the national debt reached $1 trillion.
Today, 36 years after 1981, the national debt is $20 trillion.
America’s debt is largely financed by the purchase of American “treasuries” (bonds, bills, and notes).
During World War II, Americans bought war bonds to help defeat Germany and Japan.
Buying war bonds was considered a patriotic duty. Famous individuals (like Hollywood actors) implored Americans to buy war bonds. Americans responded enthusiastically. If they had not, taxes would have had to go much higher to pay for the war. And who bought these war bonds? Answer: Almost all of the buyers were Americans.
Today’s $20 trillion debt is financed by bond-buyers, most of whom are residents of China, Japan, Europe and the United States.
Is buying American bonds really a safe practice?
Debt is not a problem until and unless it becomes a problem.
What would happen if buyers of American bonds decided that America, for some reason, was not a safe place for buying bonds?
If the event of such an occurrence, investors might just dump American bonds. Demand for bonds would drop. A bond worth $100,000 might fall to $1,000.
In an economic crisis, holders of American dollars might lose confidence in the American currency and rush to sell whatever dollar holdings they have. Such action would be called a “speculative attack” on the dollar.
As holders of dollars engaged in massive selling, the dollar, against other currencies, would tumble. For example, today it takes $1.27 to buy a British pound. A sinking dollar might mean that the cost of a British pound would be $2.25.
Look at the euro. Today, a euro costs $1.11. If the dollar were under attack, a euro might rise to $2.50.
A declining dollar might mean that a trip to London or Paris would become too expensive. The same would be true for Americans who wanted to buy French wine or German cars.
To protect the value of the dollar, the U.S. Federal Reserve, a federally-established bank, could raise interest rates. If interest rates went from about one percent, where they are today (in terms of what is called the “federal funds” rate), to 10 percent, foreigners might want to buy American bonds. A yield of 10 percent on a presumably safe investment would be very attractive.
High interest rates, however, could mean that a home mortgage that now has an interest rate of four percent – about $1,400 a month for a 30-year fixed rate mortgage on a $1 million dollar loan – might rise to $14,000 a month. How many Americans could afford a mortgage that required a payment of $14,000 a month? (A payment of $14,000 a month would require a borrower to pay $50 million over 30 years.)
High interest rates would bring housing construction to a halt. Car loans and other loans might not be affordable.
The consequences of high interest rates would be that construction workers, automobile workers, and others would lose their jobs, creating a severe recession or an economic depression. Unemployment could reach 30 percent or higher as it did in the 1930s.
There may never be a day of reckoning over America’s current massive debt. But history teaches otherwise.
In 1940, when Great Britain was already fighting in World War II, a British pound cost $4.03. After the war (in 1945), a British pound cost $2.80. As the post-war years continued, Britain repeatedly devalued the pound so that it now costs, as stated above, $1.27.
In this writer’s opinion, the United States is operating like someone who has used a credit card to buy a Rolls-Royce. Eventually, the bill comes due.
If one looks at the value of the 1970 American dollar, today that dollar is worth 15 cents.
American’s ought to be prepared for an economic collapse. In such a case, it might be wise to own gold because no one might want worthless dollars.
Be prepared for America to become the next Greece.
Are you listening, Donald Trump?