It is clear that the United States has relied on a continuous cycle of debt growth to fuel its economy. The engine of the US economy has been the US consumer, and consumer debt had to expand at a rate that far outpaced negligible consumer income growth in order for the US economy to continue to "grow."
Expanding the amount of money and credit is easy under a fiat system when your currency is the world's reserve currency. The US has, for years, been able to create new money out of thin air at will, with no meaningful monetary penalty extracted by its trading partners.
Easy money at home gave rise to inflationary pressures in homegrown industries and services. Understanding full well there can be no economic growth where the purchasing power gained from expanding consumer credit is all but nullified by rising inflation, modern day economists, along with an all too eager public support seeking war-time government and profit thirsty CEO's, came up with a plan in 2001. It was full throttle ahead for the outsourcing movement.
With the prices of their big screen TV's and other imported goods falling, the American people were fooled into believing there was no inflation, as the rising costs of life's necessities back home had been camouflaged, as it were, by the falling costs for everything else. The average consumer was left par for the course after all was said and done, and feeling pretty good about things, as the easy flowing credit initially provided all the good, such as rising home values, and none of the bad.
More outsourcing meant more Americans losing their jobs, and joining their neighbors in the unemployment line, instead of the shopping mall checkout line. Jobs that used to support income growth, as well as a solid tax base for the cities, states and federal government, had been moved offshore, in the short-sighted search for votes and higher stock prices. There would soon be fewer American consumer dollars filling foreign coffers.
As more people struggled and were unable to make their mortgage payments, the economic realities of millions of Americans finally began to dawn on even the most optimistic. Housing prices would soon collapse, as fewer and fewer Americans could afford to pay sky-high prices. Greater fools are always milling around, but the jig was up on lending vast sums of cash to greater fools with no jobs.
Like the cheating student relying on the kindness of those sitting beside him during exam time for a passing grade, so too the US has relied on the kindness of foreigners for the maintenance of the American standard of living. But such fantasies can only last for so long. Like the parents of our little swindler, the American people, as well as America's foreign creditors, would soon learn that all was not what it was cranked up to be.
That is where we are today. The trillions borrowed by the US government and US consumer cannot be paid back with dollars of equal value. A country with no domestic savings from which to draw, angry foreign creditors and with a collapsing tax base has few options. US debts will have to be paid back with printed money. Money printing will cause a severe inflationary depression in the US, meaning it is time for Americans to hunker down. Americans need to reduce spending, buy some gold, and get rid of the gas-guzzlers and vacation homes -- downsizing is survival in the years ahead.
The worldwide crash in equity markets is the rest of the world coming to terms with this reality. A decoupling from the US, both financially and economically, would save the rest of the world -- home to well over 90% of the world's consumers -- but only if they move quickly. Akin to a drowning man holding on to the legs of a would-be survivor, the rest of the world, our would-be survivor in this case, has been trying to figure out how to be a hero. When the would-be hero realizes he too is at death's door, one swift kick jarring himself loose will be the only option.
It is time to extract a penalty and exercise that option. The US dollar has got to be replaced as the world's reserve currency.