Friday, October 3, 2008

The Worthless American Dollar: Part Two

From the 06 October 2008 Greater Niagara Newspapers

By Bob Confer

Last week’s column focused on recent trends in attempted economic recovery and how they cause short-term inflation. The column ended with the prediction that the wide variety of bailouts deployed by the government this year will create real inflation in excess of 20% over the next two years.

Not to further your anxiety over our economy’s health, but you must know that inflation will not end there and we will see a rather prolonged and agonizing decrease in the value of the Dollar. This decline will go on for decades and it will be, once again, the fault of Big Government. Just as it has this year with its attempted salvation of Wall Street and Main Street, Uncle Sam will have no choice but to let fly with the printing presses to satisfy its Messiah Complex.

This constant increase in monetary supply will start in ten years and the expenditure of these increasingly-worthless dollars will be focused on our aging Baby Boomer population. There are 79 million Boomers in America, representing over a quarter of the total US population. They are on the brink of retirement and, therefore, entitlement. The oldest of the Boomers reach 62 years of age this year, the year they can start receiving Social Security. These Boomers are only 3 years away from Medicare and 3 to 5 years away from the Normal Retirement Age.

So, you can consider the floodgates now open. And, oh, what a flood it will be! The money to pay for all their benefits has to come from somewhere and the current “somewhere” is just about dried up. As a matter of fact, Medicare will be insolvent within a decade. It’s already paying out more than it takes in and its treasury will be completely dried up by the end of 2018. Social Security faces similar danger: In 2017 it will begin to face an input/output imbalance, one that will completely empty its reserves just 32 years from now.

With the piggy banks empty, the government will have to either cut benefits, initiate a major reform of the system, or find some money. Looking at the three options, cuts are a real long-term possibility only for X’s and Y’s now supposedly paying for their own Social Security. But that’s out of sight out of mind because it won’t occur, if it does at all, until 2041.The second option, the reformation of social welfare, is currently out of the question because it won’t occur until the financial crisis has actually happened. That’s just the way our government works. It’s a reactive, not proactive entity, one that thinks only in the short-term. That’s why FDR (Social Security) and LBJ (Medicare) so willingly signed our nation away. The long-term results meant nothing to them or their administrations, so why worry? That’s the same psychological underpinnings behind Bush, Paulson, and Bernanke so willingly dumping $2.5 trillion of fiat money into the economy this year. Someone else further down the road will pick up the pieces.

That leaves the need for more greenbacks as the only way out - and easiest way out - for our poorly-led nation to weather the storm. The Government really can’t tax anymore than it already does to fill these accounts. Doing so would kill the lower and middle classes who, as I mentioned in last week’s column, have fewer dollars to spare as they face decreasing purchasing power in the wake of government-created inflation. So, rather than taking money, it will resort to making money (which, ironically, really has the same effect on the individual as an increase in taxes).

But how much will the Mint need to produce? That’s where the economics start to get a little dicey. Over the next few decades, Social Security will grow from 4% to 6% of our economy. Medicare will grow from 3% to 11%. Basically, just these two facets of Big Government will more than double in aggregate, becoming 18% of our total economy. All things being equal, that will require the creation of $60 trillion in new dollars to prop up those faltering systems. That’s an average of $2.6 trillion per year over the 23 years immediately following the year 2018, when Medicare first needs it.

Realize that our money supply grew by $2.5 trillion this year which has been and will be responsible for inflation levels many of us have never experienced in our lifetimes. Unless Washington wakes up and reforms social welfare, such pain will be the norm of our lives in the not-so-distant future.

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