Because we purchase so much more product from China than they do from us, there’s a $300B shortfall. Right off of the bat our economy (GDP) shrinks by this amount. By shrink I mean that if the $300B stayed in the U.S. the money would keep going round and round in our own economic cycle. Meaning when I eat at a restaurant, the restaurant uses my money to pay their employees, the employees go out and buy clothes, food, gas, etc., and the places they spend their money keep it going on down the line as they pay their employees and their suppliers, etc. Although kind of strange to think about but the money finds its way back at one time or another which means I’ll once again have money to go out to a restaurant again.
Our money would keep going around taking care of everyone along the way but because we give 300 billion dollars to China a bunch of our money leaves the money cycle we’d been tapping into. Sometimes it takes a while before we begin feeling the pinch but it will happen. What’s even worse is that we continue sending money away every year so the pinch we feel today will turn into a punch down the road. We’d better hope we don’t end up getting knocked out!
Our government is $14.94T in debt (and growing). Foreign investors are owed $4.5T while the rest of it is owed to the taxpayers (i.e. Social Security Trust Fund, T-Bills, etc.). This means a few things. First of all there really isn’t money in our Social Security Fund even though politicians are saying there is. What they’re doing is crediting money to the fund that is actually borrowed cash. This would be like you or I trying to get a loan and the bank finds out that all of the money we said we have in savings is actually money we had borrowed. Good luck getting the loan.
Secondly, just like a consumer gets upside down and can barely pay the interests on a loan, our federal government is in the same situation; this is why are debt is growing so quickly. A good place to see how much the growing daily is to go to the website: www.UWSA.com. Make sure you take a Prozac before taking a look!
Our government collects around $4.6T dollars in taxes which is 30.8% of our GDP. If you reference the amount we owe ($14.94T) and how fast it’s growing we couldn’t even throw everything we sold (GDP) against it. As consumers we wouldn’t survive if we owed four times what we made (and growing). Bottom line, we would have to file for bankruptcy.
To try and avoid the appearance of being broke and getting everyone scared, the government pumps money into our economy. The problem is the money being pumped in is borrowed. This is a good parable as to why pumping borrowed money into the economy doesn’t work:
A businessman is traveling and he’s tired so he stops at the next town along his route. It’s a small town and it only has one hotel. He checks into the hotel and gives the manager $100 for the room. When the businessman heads up stairs the hotel manager goes across the street and gives the bakery owner the $100 because he owed her for bagels and muffins that he provided at his hotel. When he leaves, the bakery owner drives to the farmer’s house because she had been borrowing milk and eggs from him. So she gives him the $100 and heads back to her shop. The farmer sneaks off and goes to see a prostitute that he owed $100. The prostitute then takes the $100 to the hotel manager because she had been using a room on credit. A couple of minutes later the businessman comes back down stairs and says he wants his money back because the room was disgusting. So the hotel manager apologizes and gives the businessman his $100 back. The businessman then gets in his car and drives away with the cash.
Let’s take a look at what just happened; everyone thinks they’re out of debt yet the money left with the businessman. This is what pseudo money is all about. The $100 people owed one another needs to come from their economic circle without outside interference. Meaning the $100 they thought they had is now gone and it will never come back. Their circle of money (GDP) shrunk by $100 and it’s no longer in the system to where they
could make money off of it.
If the money was real and not temporarily borrowed the $100 would have kept going round and round within their community which is what sustains economies. So in the short-term everyone thinks they’re okay but eventually they’ll feel the pinch and not even know where it’s coming from. This is the game our politicians are playing on us. They just worry about the short-term because that’s what affects their jobs. They’re either naïve and should be kicked out of office or they’re unethical and should be kicked out of office. Our politicians are letting future generations suffer. The problem is that it’s reached a point where the future is now.
Another example of how our economy shrinks is when we outsource work. We often hire Hispanic labor because it’s less expensive for us and its hard work that we don’t like to do anymore. The problem with this scenario is that a lot of the money we pay these workers leaves our economy and never comes back. It’s the same problem that I mentioned above because even though everyone feels like it’s a good deal it will eventually destroy us.
One of our negative human traits is that we live with tunnel vision. We think we have a micro existence when it’s actually a macro world where everything is connected. Although hard to believe, almost every time we try to negotiate a better deal for ourselves, we will someday feel the negative consequences from it. Once again, on the short-term it’s nice but “all good things shall pass.” If we continue thinking short-term we aren’t going to make it.
I apologize if it seems like I’m beating a dead horse but a clear understanding of how our economy deteriorates and leads towards bankruptcy is too important a topic to not drill home. Consider the great Roman Empire. They had it all at least until the citizens of Rome began getting comfortable in their upgraded lifestyles. Much like we are today, the
work they were doing had evolved to a point where very few of them were willing to do the tough jobs. So they went outside of Rome to entice workers to come in and work for them. These workers had to live outside of the city because it was too expensive to live in Rome; plus Rome was over-crowded anyway.
These people were glad to get the work as their living standards were much worse than the citizens of Rome. So here we go again. These new workers were taking the money they made back to their communities and most of it never made it back to the city’s economy. Every dollar that seeped out eventually caught up to all of the Roman citizens and they never knew what hit them. Bottom line…the great Roman Empire fell. It wasn’t the only reason for their demise but it was a contributing factor.
Keep in mind one very crucial point that I haven’t mentioned yet regarding these cause and effect scenarios and that is even though the outsourced workers benefited from the arrangement on a short-term basis the money eventually dried up so even the communities outside of Rome fell.
As I mentioned above, we’re all connected. Even now, China’s economy is starting to struggle because one of their greatest customers (U.S.) no longer has the same amount of money to spend. The moral of the story…everything is connected.
Our economy is in big trouble but our government knows that most Americans don’t understand gross domestic product, how our economy works, how much our trade deficit is, how we don’t have money in our social security fund, etc. As a matter of fact they think we’re so stupid that we couldn’t eventually figure out there’s no way we can save our economy without radical changes because it’s declining at too fast of a rate (i.e. size of our government, interest rates on debt, trade deficits, etc.). Even if we dropped unemployment down to 5% our GDP would only go up from $14.6T to $15T. If we took all the money the U.S. produced in a year (instead of just taxes off of it) we’d still be in debt.
Another real problem we have but unfortunately no easy solution to is the wage disparity that exists between how much an average American makes compared to salaries in other countries. It’s the reason people buy goods from places like China and Taiwan because the labor factor allows them to offer much lower prices than we can. One solution to this is to reduce our salaries to where the price of our goods and services would become more competitive. I’d better move on to another possible solution as I don’t see this idea catching on!
We could tack on large import fees on foreign goods but this isn’t good for trade relations and they could end up doing the same to us which negates what we’d be trying to accomplish. So although unions bring this up a lot, I personally think it would hurt us in the long run by not gaining anything in increased trade, just jacked-up prices going both directions.
Another idea that might be more realistic (and that you and I have control over) is to change our buying habits. If we buy goods and services from American companies we’ll get money back into our economy. Not only will this help us sustain our economy but even grow it because people will have more money to invest back into it through spending money through goods and services which eventually creates more jobs. It’s a beautiful cycle when run correctly!
I realize we would be paying more for products so we couldn’t buy as many things but the result from this isn’t as bad as the alternative. I don’t know about you but I have too much stuff. I look around at what I have and know that at one point I was glad I bought it but now I hardly notice the item anymore; this reminds me that everything loses its luster. We need to focus on the fact there is a difference between wants and needs. I think we need to flip these priorities around so we don’t lose everything we own.
I also think we need to do our best to purchase from our own communities even if it means we pay more. Even though places like Costco and Wal-Mart provide jobs at their stores, in the end the profits go back to their headquarters. Plus, especially in Wal-Mart’s case, billions of dollars make their way to China as that is where they source most of their goods. If we purchased from local businesses we’d increase our local economy which is the best way to secure our livelihood.
The founder of Wal-Mart (Sam Walton) was proud of offering American made products to his customers; most of his commercials were red, white, and blue. Somewhere along the way Wal-Mart’s Officers moved away from Mr. Walton’s ideas and pursued the lowest prices possible. I can’t blame them because we certainly bought in to their strategy; we were just naïve about the consequences.
Let me wrap up with this and you can believe me if you want, but my calculations show that unless we do something drastic, we will be bankrupt within seven years sooner if China decides we are no longer worth investing in. Fortunately we have a little leverage with them right now because we are a very good customer of theirs. The interesting thing here is that the best thing we can do for ourselves which will hurt on the short-term, is to no longer be a good customer of theirs.
My recommendation for you is to figure out how to prepare your family to survive a depression because it's coming unless we purse radical reforms very soon.