Intro to Free Trade & Free Markets Part 2

More links on the way..wanted to get it out there...this election will determine if we address the coming econ horror show or if we just continue on and over the cliff....

The problem is really rather simple.

If the United States federal government cannot pay its bills, the United States federal government will cease to exist, not just as a functioning entity, but eventually as anything of meaning at all.

It would undo the very basis of our functioning as a nation-state...from my first blog...it would be totally, totally nefasto...subversive evil. 

Consider for a second what it would mean that the federal government had diminished capacity to hand out Medicare, Medicaid, Social Security checks, food stamp cards, let alone pay the bills for the federal court system, the federal prison system, the United States military, the pensions and salaries of the federal government employees, and all the rest.

Imagine food stamp recipients receiving 20% less in purchasing power…somebody would go hungry. Imagine hospitals and pharmaceutical companies being paid late or with insufficient funds trying to maintain their supply chain to produce needed pharmaceuticals.

The US would be a giant version of the Naples bus system that a few years ago, having not paid its bills for quite some time, had no fuel...and the buses couldn't go out....and, I've got a story about the water supply there as well.

Didn't think I would ever have to compare the mighty US to what is essentially a city run along third-world lines such as Naples...but I was wrong. Very, very wrong.

A crippling blow to the functioning of United States federal government would not necessarily need a dollar that had no purchasing power whatsoever. The crippling blow would only need a substantial reduction that shredded the supply chain for services and product essential to keeping the US running as a nation-state.

There are two ways for this to come about. Both are not merely highly likely but virtually unavoidable.

The first way involves the role of United States dollar as a reserve currency and the second involves the capacity of United States government to pay its interest payments on its debt.

Let's start with the first way: the role of United States dollar as a reserve currency. 

What does that mean?

It means that America's dollars are not just used domestically but are used internationally as the vehicle of exchange whenever a foreign country buys or sells something from another country. They change their money into dollars and then change the dollars into the currency of the second country.

Why do they do that?

They do that because it is impossible to run foreign-exchange markets that constantly compare every currency with every other currency. Therefore governments exchange their money for dollars in every transaction that is international.

As a result of that, there is an enormous amount of dollars floating around the world doing the job as this intermediary currency. It makes the dollar more valuable, and it makes our exports more expensive as a result, while making imports cheaper, making it harder to grow our US economy and get the tax dollars to pay our bills.

For various reasons, other countries' governments have sought for quite some time to exchange their own money directly with the money of other countries. Russia with China and Japan with India, for example.

They have begun to do this.  There is also BitCoin and the International Monetary Fund's own "currency".

When the major trading countries of the world succeed in making the dollar relatively unnecessary for international exchange, the United States dollar will lose its reserve currency status. We will then lose about 20% of our purchasing power because the demand for dollars will go down. People will sell them into a market that needs fewer of them.

The United Kingdom has a currency called the pound. This currency was the international reserve currency until it began losing that role in the 60s and finally lost the role completely by the mid-70s.

As a result of that, the pound lost 20% of its value, and the UK was thrown into economic chaos.

It got so bad that the UK government could not pay bills for the medical system. When you went to the hospital in England, you had to take along your own lunch and your own dinner and sometimes your own bed sheets. Too often, there weren't any.

Our government would have to raise taxes but it wouldn't be able to.

Why not?

If the government raised taxes, it would choke the economy further. The loss of 20% of purchasing power would affect every industry and every corporation and consumer making them instantly poorer.

The economy would shrink rapidly and raising taxes would be absolutely impossible. The government would not also be able to print more money. Or, it could but to no avail.

We will get to an explanation of this in the subsequent blogs, but our government doesn't actually print money. Our Federal Reserve Bank, a privately held bank, not owned by our government, prints our money.

The Federal Reserve Bank can only print so much money without endangering itself as a financial institution and they can only buy so much of our debt and we will go into that in a subsequent blog.

The second scenario involves the destruction of the dollar through simple incapacity to pay the interest on our debt.

Even during the Clinton years, US federal government accumulated $1 trillion of debt. It was about 100 billion and little more per year. From Bush through Obama, the debt has gone up, in essence, astronomically.

The Federal Reserve bank, as I mentioned above, now buys our debt (called "quantitative easing"). This means that it prints out money and takes in our debt. 

If the Fed didn't do that, then the amount of interest we would have to offer to get our debt purchased on the world credit market would be much higher.

That would mean that all interest paid for money on loan in America, for example bank deposits, would go up quite a bit. In the '70s, when the Federal Reserve raised the rates on loans, banks offered interest on deposits of more than 5%...even 6 to 7%. Treasury bills, the actual promissary note of the US gov, offered 10%.

With interest rates that high, our economy would crash because no one could afford to do business as we have been doing. The dollar would increase in value in an economic scenario known as deflation. It would mean that dollars were worth more and goods worth less.

The price of houses would go down, but would be less affordable because of the high interest rates on mortgages. The actual mortgage payment would go up. When you went to sell your house, the house would be "under water", meaning worth less than the mortgage that allowed you to purchase it in the first place.

Banks would become insolvent. The backbone, the essential institutions permitting our economy to function, would be ripped up. Think of 2008.

If and when, not that far away, the US federal government can no longer pay the interest on its debt, then the dollar itself will be refused as currency. The dollar will be seen as funny money, internationally for sure, and even nationally.

This is part of the scenario ZeroHedge has called the coming "Great Generation-Long Depression". Or something like that.."the Humongous Depression"...(started in 1987!)

So now, having alerted you to the grim reality of impending doom regarding our dollar, the lifeblood of our economic system, we will now go over and begin to look at some of the basic concepts of free trade and free market and understand how they've been misused to allow this crisis scenario to develop.

Not a happy task.