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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: John Vosilla who wrote (135006)	7/26/2013 2:16:10 PM
From: RetiredNow	Read Replies (1) \| Respond to of 149317

John, I was doing a thought experiment on US debt the other day and here's what I came up with. Think about a publicly traded company that is continually losing money. They have a continual cash outflow situation. They have been unable to grow or innovate their way to profitability. However, they have an intense desire to keep the company afloat for many reasons. So they have a couple of key options to cover those cash outflows. They can raise capital through selling debt or through selling more stock. In both cases, they can sell as much as their is market demand for it. When market demand for it peters out. Sometimes, when a company runs up too much debt, they switch to selling more stock, which is dilutive to shareholders, but enables them to pay back the debt so they can reduce their cash outflows by the amount of the interest payments. It also allows them to then raise more debt again. This game goes on until shareholder value becomes extraordinarily diluted, lenders stop lending, and the capital markets refuse to buy any newly issued stock. Then the company folds or is acquired. All of this is similar to what is going on with the US. The US has debt, which we issue to cover the excess of Congress' cash outflows over their inflows. Already, the US has experienced market saturation of US debt, so the Fed has had to step in over the last year to buy 80% and more of all ongoing US debt auctions. This is what is commonly referred to as QE. The US has not company stock, but it does have the US currency, which it creates out of thin air in order to buy up the US debt as part of QE operations. In the process, this finances US deficits, squeezes interest rates to historic lows, and creates inflation in the housing, bond, and stock markets. So it all is an amazing soporific, feel good scenario. This can go on for a very long time. Much longer than most people realize. I wouldn't be surprised if we can keep this up for another 5 years. Eventually, though, not only will the global debt markets not want US debt anymore, which is already happening as major sovereign debt investors diversify away from the US debt, but eventually the global currency markets will get saturated with US dollars. You can see evidence of this in very simple ways. When Bernanke talks of tapering, the USD goes up in value relative to other currencies, because tapering means less printing and fewer USDs to go around. When they promise more QE, the USD falls in value, because more USDs will flood the markets. So when will the markets get saturated with USDs and what will be the impact? My guess is as follows. It will be years before USDs are so flooded in the global markets that people lose confidence in the dollar. So don't hold your breath waiting. But when it happens, the impact will be a sharply falling dollar over years, which will leave the American people impoverished as their ability to buy all those nice shiny things from exporting countries gets squashed by an increasingly worthless dollar. So in conclusion, at a corporation that is losing money, the shareholders find their stock value going down as net losses are covered up with share dilution through stock issuance and through accumulation of debt, which lowers the book value of the company. The investors are impoverished. At a country level, the citizens find their wealth evaporating as deficit spending is covered up with currency printing and the accumulation of debt, which robs future growth to pay for growth today, while simultaneously lowering the value of the dollar and eroding the purchasing power of the citizen. What a world we live in, eh? Anyway, don't expect the hyperinflation scenarios folks are worried about. I think it far more likely we get robbed in a barely noticeable way, as we have over the last 90 years of Fed induced inflation....and this can go on for a very long time, since we are the reserve currency.