What’s the expected 2011 U.S. budget deficit?
What percent of the 2011 budget is that?
40%. So out of every 10 dollars the government will spend this year they’ll get 6 from tax revenues. They have to borrow the other 4.
How will we get the money to make up the 4 out of 10 dollars?
By selling U.S. Treasuries, which are interest-bearing bonds.
Who’s going to buy all those U.S Treasuries?
The Federal Reserve.
What’s the Federal Reserve?
It’s the central bank of the United States. They print money, loan money to banks, and set interest rates to banks.
How will the Federal Reserve pay for all those U.S. Treasures?
By printing money.
So what’s the problem?
The Federal Reserve is printing this new money out of thin air. Money printing decreases the value of every dollar in existence. Devaluing currency inevitably leads to inflation, which we’re already seeing in higher food and commodity prices.
What’s so bad about inflation?
Inflation is most damaging to people on fixed incomes, to people whose assets are denominated in dollars, to investors holding bonds paying a fixed return in dollars, and especially to savers whose assets are in cash and cash equivalents like savings accounts, money market accounts, annuities, and oh yeah, U.S. Treasuries, which are bonds payable by the federal government.
At the extreme of money printing you get currency collapse and hyperinflation like Weimar Germany or Zimbabwe. That probably won’t happen, but why are we going down this path instead of getting our financial house in order?
But I thought inflation was low?
Official measures of inflation are low. In part that’s because of changes made in the Nineties to the way inflation is measured. John Williams of Shadowstats.com calculates inflation using the pre-Nineties formula. He finds that inflation is running about 4% higher than the government statistics show.
Grocery prices have been going up more than reflected in the official inflation rate. Too, some items should be more expensive, but manufacturers have been absorbing price increases in raw materials without passing on the costs to consumers. This has lead to margin compression that can’t last forever. At some point manufacturers will have to pass along those costs.
We’ve already seen increased prices and the same price being charged for smaller packages, like the ice cream that used to be 2 quarts but is now 1.5. Consumerist calls this the grocery store shrinkray.
So what are you doing to protect your savings from inflation and the remote possibility of currency collapse?
I’m buying gold and silver. The Federal Reserve can’t print gold and silver and therefore can’t devalue them.