This is the second article in a series on money and economic questions. The article will be in a Frequently Asked Questions (FAQ) format. St. Louis investors should recognize the importance of these answers as they progress through a very tumultuous investment period.
How can the U.S. escape its debt problem?
Debt will only go away by one of two methods: a) default (non-payment), b) payment. Government and Federal Reserve action has forestalled the failure of illiquid institutions. As we move further into the economic doldrums, more institutions will fail and the authorities will be unable to rescue them. The debt owed by the U.S. Government can only go away through these two methods.
Those that argue that the government can simply pay back its gargantuan debt through inflated dollars need to consider that even governments and central banks have limits to the credit they are capable of creating.
What is a greater danger, inflation or deflation?
Presently, deflation is a far greater danger due to the reduction in the amount of outstanding credit. There are many more reasons to argue for a deflationary environment. A deflationary environment means something totally different for investors than they have witnessed in several generations. Being prepared for this economic environment is something few investment advisers recognize.
Can't the government or the Fed stop deflation by merely giving money to the public?
Deflation is a monetary and psychological event. In the book, Escaping Oz, we stipulated an economic law saying deflation is a lack of confidence. That is the psychological event. The monetary event is the contraction of credit and increases in personal savings. If the public were simply given money by the authorities in a deflationary environment, much of it would be hoarded or used to pay off existing debt. The net effect monetarily would not be the one desired by government or Fed authorities.
Jim Mosquera is the author of Escaping Oz: Protecting your wealth during the financial crisis and is the publisher of The Sentinel Financial Report.
Comments