Lamenting Bailouts

Written by Robert Jackson Smith on Friday, 02 December 2011. Posted in Economy, Business

bailoutsSome people are lamenting the bailouts the Fed has been making because the bailouts are ultimately falling on taxpayers, but in 2010, personal income tax was estimated to be $1.4 trillion or roughly 23.7 percent of the government’s spending ($5.9 trillion), so the rest of the money must have come from someplace else.

Lenders, i.e., entities that are buying U.S. Treasury Securities, covered much of the remaining shortfall. According to some estimates in 2011, the U.S. government will borrow roughly 45.9 percent of its expenditures. Unfortunately, this still isn’t enough to cover everything the U.S. government is spending.

And so the U.S. government has called on its agent, the Federal Reserve, to print more money (QE3?). When more money is printed, the loss of purchasing power is spread out over a much larger constituency—it’s spread out over all U.S. dollar users worldwide. In short, U.S. dollar users are subsidizing the U.S. government by using U.S. dollars of ever-decreasing value. In turn, the Fed/U.S. government is bailing out U.S. corporations and banks, foreign central banks, and fighting wars with U.S. materiel and soldiers, to name a few things.

On the other hand, as the U.S. dollar purchases less, U.S. citizens (indeed, all U.S. dollar holders) become poorer and that makes it more difficult for U.S. taxpayers to pay taxes. They have to spend more of their income on gasoline and food, for example, and their incomes don’t rise as fast as their costs rise. Also, more people are out of work. As tax revenues decline, the U.S. government must make up for this shortfall by borrowing more, taxing more, or printing more money (all 3 courses of action have been going on for quite some time).

Of course, as U.S. citizens become poorer, they can afford to lend the U.S. government less. And foreigners who see what is becoming of their claims to their principal and interest in ever-cheaper U.S. dollars are less inclined to lend money to the U.S. government as well. At some point, the Fed/U.S. government will not be able to borrow enough money to cover its budget and the U.S. dollar will be shunned worldwide.

Out of necessity, more money will be printed to cover the budget deficits when borrowing is no longer possible. In my opinion, the burden on U.S. taxpayers to pay more in direct taxes will not increase. The burden on all U.S. dollar holders will increase as the quantity of U.S. dollars balloons. In short, U.S. dollar holders will become poorer (at the expense of the U.S. government). Businesses will hire fewer employees, consumers will purchase fewer goods, and entrepreneurs will start fewer businesses.

Unless and until the U.S. government/Fed cuts spending and balances the Federal budget, the borrowing and printing will continue…until the dollar is printed out of existence. Sure, it may take five to ten years, but it will happen. At that point, the taxpayers will lament that they don’t have any money worth paying in taxes. How will the U.S. government collect taxes then?

Watch Hugo Chavez in the meantime to get an eye towards government behavior as the government becomes ever more socialistic and closer to consuming the wealth of the nation. It nationalizes more and more and if it pays for the items it seizes, it does so with ever depreciating currency units. Power becomes more centralized. Critics of government policy are excluded from the political process. Total control over the economy is the ultimate goal of governments run amok. When the government does take over the economy, there will be other things to lament—mostly shortages and a lack of freedom to do anything about them.

About the Author

Robert Jackson Smith

Robert Jackson Smith

Robert Jackson Smith is a contributor to Inflationomics.com.

Copyright © Inflationomics.com. Used with permission.

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