After generations of excessive spending, America has entered what is perhaps the most dangerous period in its history. Congress has passed the biggest spending bill ever, to the tune of almost $1 trillion (including interest on the debt to finance it), an amount of money that’s really too big to truly appreciate or understand. Think of it this way: one trillion is a million times a million, or a thousand times a billion. Still hard to grasp, isn’t it?
Thinking about it another way, USA Today recently reported, “The federal government spent $952 billion in 2007 on elderly benefits.” That includes an average Social Security payment of $13,184.
However, the issue is not just about the growth of government and intrusion into our lives. It’s also about how much money is spent to support the services and activities of government and where it comes from.
The problems can’t be fixed with hype and salesmanship. That only goes so far, and when the string runs out, the Obama administration and the nation will pay a big price, which will inevitably show up in the form of inflation.
As the stimulus bill moved through Congress, the U.S. Treasury prepared for a record debt sale to finance the cost. However, one of the problems is that Americans don’t have the resources to buy enough of our bonds to cover the tab, which forces us to look to foreign investors and/or the Federal Reserve Bank.
Early this year The Financial Times observed:
“At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month.
“For (President) Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800 billion-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector cleanup.
“Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500 billion ($5.5 trillion) in Treasury debt.
“In recent years, demand for U.S. government debt has been stoked by developing countries running huge trade surpluses with the U.S. and recycling their dollars by buying Treasuries. (Think China). However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.”
In other words, we are financing an unprecedented amount of spending with borrowed money. That drives up the cost of borrowing and deprives capital markets of funds that are badly needed for the budget and to “stimulate” the economy.
What happens if the market does not soak up all the debt that’s needed to finance the entire stimulus effort, even with higher interest rates? The alternative is to print money and simply put it into circulation to pay the bills. Either way, it’s a nice trick if you can get away with it.
But, not so fast. There’s a penalty for doing this. It’s called inflation. But, not the sort of creeping inflation we have become accustomed to living with for the past 50 years. It more likely will be the double-digit inflation experienced during the Carter administration, including interest rates that soared to more than 20 percent.
Commenting on the situation, Dick Morris recently noted, “So Barack Obama and the Democrats are selling soothing syrup to their political base at a price of massive inflation and agony in the future. What Franklin Delano Roosevelt said in the first inaugural address holds doubly true today: ‘Faced by the failure of credit, they have proposed on the lending of more money.’” Morris has further stated in interviews that he expects the annual inflation rate to jump to around 20 percent in a couple of years because of the stimulus bill.
If that happens, it will affect every aspect of American life, from the value of savings and investments to the price of food. However, an even greater fear is that we could slip into the astronomical rates of hyperinflation if we don’t stop infusing massive amounts of debt and fiat currency into the U.S. monetary system.
The wheels have been put in motion for a disaster that will have an impact on the lives of all Americans in ways that we have never envisioned and for which we are completely unprepared.
Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his own blog, Opinionfest.com.