Friday, August 19, 2011

Is the answer to print?

Looking at America’s debt figures always comes as a shock. They are truly staggering and rather incomprehensible to a normal citizen. To date, America’s debt stands at approximately $15 trillion, and has topped 100% of GDP. Amazingly, these numbers look set to keep on rising. Some analysts predict that American debt will increase to $19 trillion by 2015. I thought to myself – How in the world are they going to pay up?

At present, America’s economic outlook is grim at best. Stubbornly high unemployment figures, a recent credit rating downgrade and shaky unconfident markets do not exactly paint a very pretty picture of the current state of the US economy. In the meantime, while their economy is spluttering along, other countries are coming up from behind looking to catch up.  Frankly speaking, they look very ill positioned to pay off anything.

Despite this, America still has an ace up its sleeve. When the time comes for America to pay its bills, it can actually just print more of the dollar. Of course, the Fed would not just churn out $15 trillion worth of currency, as the fact remains that paper money has to be backed by gold. Doing so without increasing their gold reserves would cause the greenback to become banana money – completely worthless. However, by printing dollars in a controlled manner, America will be able to pay off some of its debt, because it’s denominated in USD. Going by the basic demand and supply principles of economics, increasing the supply of the dollar would cause it to depreciate relative to other currencies. Although holders of American debt would be getting their money back, its true value would have decreased.

As it would no longer be as favourable to convert American currency into other currencies, the best way to make full use of these dollars would be to spend it in America. Its export markets will start to grow again, which will hopefully stimulate its economy further to generate more cash to pay up.

Obviously, printing obscene amounts of money is not a long-term solution, nor is it enough to pay off everything. Congress needs to start rolling out a series of policies and plans that will make the American economy structurally sound. Without a firm foundation to back it, even this ace will not be able to save them.

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