It’s tough to write about preparedness related stuff while keeping a positive tilt on things, and lately it’s all gotten to me. I look at the things that are making the news, and the things that don’t make headlines but should.
Why are we talking about some idiot congressman sending crotch shots to women he isn’t married to? Why aren’t we talking about things that are actually important, such as the fact that Greece (and half of Europe, quite frankly) is imploding? Or the fact that S&P has yet again issued warnings about downgrading our credit rating.
Go back a few years and you’ll hear them saying the same things about Greece. And now there is rioting in the streets there. But are we talking about it? Nope.
Warning: Currency Geekery Ahead (But it’s important stuff!)
Take a look at this chart. It’s a picture of the value of the US Dollar against the Swiss Franc, a historically stable currency, from 1992 to now. In ten years, we went from a high of around 1.80 Francs to the Dollar to 0.84 Francs to the Dollar today. That’s a 53% drop.
Think about that for a minute.
In ten years your dollar has lost half of its buying power.
But hey, that’s just against the Swiss Franc! What about everything else?
Check out this chart. Australian Dollar (Aussie) vs US Dollar, same time frame. In this chart, the US Dollar went from a value of 0.47 US Dollars per Aussie to $1.06 US Dollars per Australian Dollar. A drop in value of … 55.6%
Now we have two different currencies to compare against. The Franc, which is historically rock solid and stable, and the Australian Dollar which is a commodity currency.
Rudy’s Note: A commodity currency is the currency of a country that has a significant amount of commodities or natural resources, and the strength of that countries economy is usually pretty dependant upon the value of those resources on the open market.
The most common commodity currencies are the Australian Dollar (AUD), the Canadian Dollar (CAD) and the New Zealand Dollar (NZD)
Now if you recall, we talked about the European economy as well. It hasn’t fared much better against the Franc. Charts look pretty familiar, don’t they?
That’s a drop of 40% in value of the Euro against the Swiss Franc.
I know that’s a bunch of currency geekery, but the numbers are pretty straight forward. On the world market we have lost HALF of our buying power. And if you take a look back at the first chart, you can tell that this isn’t really a new problem, but a longer term trend.
Folks, our currency value IS our credit rating. As the value of our currency plummets, the value of the dollar we repay our debts with goes down. This leads to higher interest rates. It MUST. The market demands it.
The Fed can only keep this ball rolling for so long. And believe me, they’re going to do their best to do it. They will do WHATEVER they can. But these chickens will come home to roost.
The market demands it.
We can print money by fiat, but we can not change the rules by which economies operate in the same way. And like a pressure vessel that was pumped a little too full, when it blows, it’s gonna be ugly.
Let’s Put Some Real Numbers On This
Five years ago, Greek two year government bonds had a yield of about 4%. Today, they yield about 28%. This means that the Greek government is paying 28% interest on that sovereign debt. An increase of 600%.
Five years ago, US two year government bonds had a yield of about 5%. Through the Fed interventions and rate drops, it currently yields 0.44%. Guess what happens when we get downgraded and market forces take over? Can you say 30% interest rates?
So what does that mean in concrete numbers?
Today we pay about 3% (blended rate) on the national debt. In FY 2010 we spent $414 Billion on 13,561 Billion in debt (13.5 Trillion). If we apply similar increases based on bond market yields, we end up with a blended rate of about 18%.
Using FY 2010 as a basis, that would mean spending 2.44 TRILLION DOLLARS in interest payments alone. Oh, by the way, TOTAL federal revenue including Social Security and FICA taxes in FY 2010 was a glorious 2.16 Trillion.
Look at that again. 2.4 trillion in interest alone on 2.16 trillion revenue.
That’s paying about 13% more in interest payments alone than the government brings in. In household numbers, this is just like making $45,000 a year and paying $50,800 every year for your credit card’s minimum payment. MINIMUM payment, since this is only interest, and is putting exactly $0 against the principal debt.
And that’s not even the worst case scenario. That scenario is actually reasonable based on what we are seeing today in other parts of the world. And it doesn’t include the fact that the clowns in Washington are spending more money than an entire Navy full of drunken sailors and can’t seem to stop.
Which means that we’re rolling down hill faster and that snowball of debt is growing. When it hits and explodes, it’ll hurt. The longer it rolls down hill and the larger it gets, it’ll hurt more.