Originally posted by jpm06002
The US is trillions in debt.. and we continue to make more debt. We continue to spend more than we can afford. When does this end? My credit card has a 1k limit and then I get cut off. When do people stop lending to us? How are we still being loaned money? Our money sources should be afraid they won't get paid back.. no?
Everyone always talks about the debt.. and how we are doomed. The children have to inherit this awful debt etc but I do not really know what this means. What are the possible scenarios of the future?
Well, this is a complex question. One way to think about it is to study "fractional reserve banking" and what that really means. But that takes a long time, so let's try to use a few metaphors and examples to make it as simple as possible. Bear with me for a minute.
To put it in simplistic terms, for every $10 dollars the bank gets in deposits, etc., it can lend out $9 and must keep $1 as a reserve in its vault. (It can actually lend more, but let's keep it simple for the sake of example). Most people think this means that when the bank gets a deposit of $10, it lends out $9, and keeps $1 in its vault. But what it REALLY means is that for every $10 dollars the banks in total (i.e., the whole banking and financial system) get as actual money, the system can create $90 out of thin air and lend it out. Just stop and digest that for a moment. What this means is that for every $90 out there, there really is only $10 of "real" cash that can actually be withdrawn from a bank, a mutual fund, a market, etc. at any given time.
Moreover, financial institutions can create this fake "money" called "credit" not only based on cash deposits, but on assets which are valued in very vague ways. Like home mortages...during the boom years, you could get a line of credit in the form of a second mortgage on your home based on a "value" for that home that might be much higher than it would ever actually sell for. And really, most people don't even technically "own" their own homes anyway..how many have actual deed in hand? Most put a tiny bit down, again based on an insanely optimistic, non-realistic home valuation compared with what it can fetch a year or two later, meawhile incurring their own debts. See how sketchy this is starting to get? See how many "promises to pay" are out there chasing how few actual dollars?
So in the most recent boom, all this fake "money" was created out of nothing. I'm not even going to get into derivatives and foreign exchange, which allow the ratios to go from 1:10 to something more like 1:100 or even more once all the paper grinds its way through the system. But the "real" value is still only that initial $1...unless uncle sam cranks up the old printing presses and makes another dollar. Then people can go back to lending fake money ("credit") based on the new dollar. But this brings its own problems (inflation)...you've effectively just doubled the money supply. What if you have to do it again? It doesn't take long to get to an Argentina or Weimar situation.
Another way to think of it...imagine there is a massive game of musical chairs with 100 players and one chair. While the music is playing, everyone feels fine, because they think, "well, I'm just such a swell, smart, lucky and skillfill guy that when the music finally does stop, I can feel it in my bones I'll be the one to get the single chair." As long as the music goes on, everything seems fine. But when the music suddenly stops, 99 people (none of whom are named "Goldman" or "Sachs," most likely) are simply out of luck, left there twistin' in the wind with no chair.
This is basically what happened with the Financial Shock in autumn '08. Since then, you've had the govervenment (Lil' slugger Timmy Giethner, Obama, Ben Bernanke, and other assorted friends) whistling frantically and manically playing the old tissue-over-a-comb thing desperately to try and convince people the music really hasn't stopped. Meanwhile in the back printing press room they are desperately trying to cobble together a few extra chairs (that is to say, toss money in every direction) so they can convince people the game is still going on, the music is still playing, and everything is getting back to normal. Slowly, slugglishly, punch-drunkenly, the 99 chairless players start to circle around, because after all what else can they do? Even given this, the damage is massive...there are a lot of people sitting down with their heads in their hands, or wandering away hopeessly, or arguing at each other. In some areas, its worse than others...is order breaking down? Hard to say...
So will they be able to trigger up enough chairs and get the band going again so it looks like a real solid game? This is the question the world is asking itself right now. One thing we can be sure of...each time we reach a crisis point and "solve" it by making an even bigger bubble (say, 2 chairs and 200 musical-chairs players instead of 1 chair and 100 players), the potential for destruction gets more massive, the smarter people get less inclined to play, and the entire system gets wobblier and wobblier until finally it really does crash for good.
[edit on 12/10/09 by silent thunder]