By The Prophet of Life
Congress has kicked the can down the road and, at the last minute, voted to end the Government Shut Down and postpone the Debt Ceiling date to four months from now. Despite all the bickering in Congress, and the media blitz about the Debt Ceiling, most Americans don’t really know what it is. I thought I’d take a few moments to explain what it is, how it works, where it comes from and how it affects everyone in America.
All U.S. currency is backed by the full faith and credit of the United States Government. It may not say it on the bills, but in reality, that’s how it works. What happens if consumers lose faith in U.S. Currency? What happens if investors lose faith? The Debt Ceiling is associated with the concept of full faith and credit and affects the net worth of every American.
The Debt Ceiling is the threshold of debt the U.S. Government is allowed to hold. Theoretically, The Government is not allowed to spend beyond that amount. The Debt Ceiling was established in 1917 to allow the government to finance long term projects instead of having to pass a bill every time they needed to fund something. The U.S. Treasury can then sell bonds to finance government spending up to the amount of the debt ceiling. Investors from all over the world buy those bonds because they have faith the government of the United States will pay what is owed on the bonds when they come due. Where did the concept of full faith and credit come from?
In 1913 Congress established the Federal Reserve, a private company owned by member banks. The Federal Reserve held and distributed bank notes (paper money) printed by the U.S. Government. All bills were redeemable in gold. Some of the money even stated that right on the bill. This was known as The Gold Standard. The Gold Standard arose because since the 1600’s a nation’s wealth was measured in the amount of gold it had. When nations had a trade imbalance or had debts between each other, they could be settled in gold. The U.S. Government settled it’s debts in gold and the full faith and credit of the U.S. Government was as solid as gold.
In 1933 The U.S. Government went off the Gold Standard. U.S. currency was no longer backed by gold. People couldn’t exchange their currency for gold and the money was reduced to the status of a promissory note, a promise to pay instead of a guarantee of redemption for something of actual value. This was the beginning of a paper economy. Bills were really just a medium of exchange. The actual value of all bills whether a one dollar or five thousand dollar bill was the value of paper they were printed on. The perceived value came from an agreed upon exchange rate. A big part of any government’s exchange rate was determined by how stable the government was and it’s ability to pay it’s debts. Since the end of World War Two, U.S. currency has been the preferred currency for investors around the globe.
The paper economy still exists today, except it exists in electronic form. It exists in virtually every nation in the world. Banks and corporations are international and exchange vast sums between each other via electronic transfer, often at night while we sleep. The stock market and bond markets are all run electronically. People invest in America through stocks, bonds and the holding and exchanging of U.S. currency literally based on faith.
If the Debt Ceiling is not agreed upon by congress when the next round of bills come due, the U.S. Treasury will be prohibited from selling bonds. The Government will not be able to pay all of its debts and there is no mechanism to determine which bills the government will pay. Worldwide credit ratings for the U.S. will fall. Our currency, stocks (which invest in our companies) and bonds (which our government uses to pay its debts) will decline. When the perceived value of our stocks, bonds and currency declines, their actual value declines, because they have no actual value. If enough people opt out of an agreed upon value of a currency, the currency can become devalued, even to the point of being worthless.
The U.S. stock market, bond market and currency will likely take a hit that will be far worse than the one it took in 2007-2008. People who have their savings invested in U.S. Socks, bonds or who hold U.S. currency, will lose a lot of their assets. This includes U.S. citizens and people all over the world who participated in the agreed upon value. This will likely trigger a global recession or possibly trigger a global depression.
To try and offset the global devaluing of the U.S. currency to the point of being worthless, the U.S. Government will likely elect to prioritize paying the interest on its debts. Because of a huge imbalance in trade, China holds a majority of the Debt the United States owes. This means that the government will be forced to choose between paying the interests on the debt and issuing money to a critical program (like Social Security for instance).
By neglecting to do their duty, a duty they swore to do when taking office, the U.S. Congress is playing with fire. Investors across the globe notice the political game of chicken being played in Congress every time the Debt Ceiling Deadline approaches. Every time this happens America loses a little bit of credibility with current and perspective investors. As long as Congress continue concentrating their efforts on political reprisals instead of on the business of The People of The United States of America, America will continue to seem more of a joke to the world instead of a stable place to keep their money. America knows it. Investors are worried and the world is watching.
If this scenario keeps being repeated and / or if Congress allows the Debt Ceiling to come crashing down, years from now, when your children ask you when the U.S. lost its leadership position in the world economy, you can tell them about these times and the Congress that was too short sighted to see or care about the consequences of their selfish actions.
In True Faith,
The Prophet of Life
Like us on Faceboo: https://www.facebook.com/pages/The-Prophet-of-Life/247637471924814
All Contents Copyright 2013, Love Force International Publishing Company. All Rights Reserved.