Here is how it works. When China purchases a U.S. bond, what they are buying is debt. In other words, when China buys a $1 million dollar bond at 3% interest, they are letting us borrow $1 million but as we pay it back, we must pay them an extra 3%. That extra 3% is what it cost us to borrow the money; after all, China doesn’t want to give us $1 million dollars for free. This system works just fine until we borrow more money than we make and paying the money back to China becomes difficult. What is even more difficult is paying back that extra 3%. If we don’t pay the interest, China won’t give us any more money because, like I already said, they don’t want to lend money for free. The more debt we take on the less likely it is that we will be able to pay it back accordingly and thus the reason for a lower credit score; we simply cannot be trusted with borrowing money.
Here is how the downgrade hurts us. When AAA is stamped on all the IOUs (U.S. Treasury notes and bonds) then China knows that we are good for our debts and they have confidence that we will pay them back along with the interest. When the AAA rating gets downgraded to AA+, that is a signal to China that we might not be able to pay them back as well as we thought we could. China is not going to have much confidence that we will pay them back so they will be tempted to stop loaning us money. A big problem for us is that we still need to borrow money just to pay for all the commitments we have already made. This commitment includes both interest and principal being paid back to the lender. Since the lower credit rating is signaling to China that there is more risk associated with our bonds or debt, we must raise the interest rate in order to persuade China to buy them anyway. In essence, we are giving China a raise for loaning us their money in order to make them feel better about it.
Lets say that we offer China an extra 9% of the money they loan us. China might like the sound of getting 9% instead of a 3% return meaning that for every $1 we borrow, we would now have to pay back $1.09. Here is a big problem: if we borrow $1 but we have to pay back $1.09, where does that extra 9 cents come from? The answer is YOU and your children and then THEIR children.
Recently, the chairman of the Federal Reserve said that if needed, the Federal Reserve would buy America’s debt. This is what we call monetizing debt. Basically, we print our own money and buy our debt from ourselves: that way we have new money to pay off debtors like China. Recall how I said China was upset. When we monetize our debt we literally create money out of thin air and we use this new money to pay China. When we print money like this, we are inflating the supply of our currency, which brings the value of our dollar down. As we monetize our debt and make payments to China, each payment of $1 million is worth less than the previous payment of $1 million. In the end, China is angry and prices will go up as the amount of money in circulation increases.
The direct impact this has on you is that YOUR dollars are worth less. This means you have to spend more dollars to buy food, gas, clothing, cars. That is inflation, which is an indirect “tax” on each of you.
The only way to solve this financial problem is to cap the debt and cut the spending in an effort to balance the budget. Only then can we hope for financial stability. Some people say that we should not balance the budget. I really do not know why anyone would want to live in a country that can’t be responsible with the people’s money. Some people say that the government should spend more in order to stimulate the economy. This just doesn’t work.
The government is, by nature, a consumer and it doesn’t produce anything but rather it secures our safety and our liberty (or at least that’s what a legitimate government does according to our Declaration of Independence).The argument is that if we borrow money and use it on “shovel ready” jobs such as bridges and roads, then people will have work and money to spend in their local economy. The flaw in this thinking is that in order to assume this will work, one would have to assume that the health of the economy is directly related to the amount of dollars that can be pumped onto it. If the federal government really believed that “stimulus” packages and bailouts work, then they would have cut each American a check for $2500 instead of sending it to government and corporate fat cats to “stimulate” the economy.
The law of supply and demand for products is entirely left out of this theory of “stimulus”. However, assimilating our policy to those laws of economics are what drives production, lowers unemployment and facilitates the exchange of money through commerce and wages. This is why it is important for America to have manufacturing and production jobs. If we are a consumer nation and not producing anything, then we will always have to borrow money to buy things, which is exactly the box Washington D.C. has been putting this country in for decades.
Cutting spending is the other factor. This might be a good start: the U.S. should stop paying 22% of the United Nations’ budget. How about we start cutting some foreign aid that all to often winds up going to countries that are notorious for corruption, like Mexico? A few years ago we sent billions of dollars plus aircraft and small arms to Mexico to help them secure their southern border- forget about America right Washington?
How about we pull some of our troops back from Japan, German, Italy, Qatar, Thailand, Belgium and should I keep going? We are phasing out military cooks and military police and hiring private contractors and paying them hundreds of thousands of dollars to do what an 18 year old would love to do for a thousand dollars a month with full benefits and free travel around the world. We send billions of dollars to countries all over the world, we send them our jobs, and then we take the youngest and the brightest America has to offer, put them in military uniforms and send them too. All too often the money we send them is misused, abused and the troops we send around the world aren’t appreciated. This isn’t the only answer to the problem but it is a small part of the answer. We could also start closing unnecessary military installations both abroad and in the United States, or at least relocate them to the Mexico/U.S. border.
To reiterate: We spend billions taking care of other people around the world but put ourselves in situations where we have to raise our own interest rates to cover the cost of borrowing money from China just so we can take care of everybody else but ourselves. Then we are the ones who get stuck with the bill by paying higher interest rates with an ever-inflating supply of currency. It has to stop. I’m not by any means an isolationist but I think a little common sense would tell us to start putting America first if we want to have an America at all in the future.
I’m sick of this nonsense that operating for the self-preservation of our country and our freedom is illogical and not compassionate. People who feel the way I do about some of this have recently been described in the media as “zombies,” “cannibals,” and even “vampires” all because we want the madness to stop. Sorry mainstream media, but we aren’t the monsters; the real economic monsters are in Washington D.C banning light bulbs (Republicans), sending guns across the border to Mexico (Democrats) and raiding Amish and organic groceries to keep them from selling milk (Bureaucrats). Our elected leaders in the federal government opt out of nearly everything they force on us such as individual healthcare mandates and social security taxes but then turn around and opt into retirement benefits for life and we pay for all of that too. Meanwhile, back home, the rest of us are bracing ourselves for yet another round of economic beatings.