How to prepare your family to survive and thrive in todays uncertain world

The Inevitable Debt Bomb

Full disclosure time. I’ve been in a pretty big funk lately. There’s a number of reasons, and probably quite a few that I don’t know about. All in all, I haven’t felt the writing muse for a while.

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.

Got preps?

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15 Responses to The Inevitable Debt Bomb

  1. the government stupidieos made the sled and put it on the steep ice covered hill and then gave us a shove down hill and the ignorant politicians refuse to admit it is their fault or that only they can stop the long slid into the sea.
    It is sort of like forced suicide UNTIL someone speaks with force to them they will keep forcing the Kool-aid down our throats. we are the ones that need to wake up and do what is necessary to remove everyone of the bums.
    too many sheeple and no one with some real backbonea to step forward that throw the dictators out.

  2. I completely agree with you. But it really seems that the majority of our country just doesn’t understand all this, doesn’t realize how unstable the situation is. And nobody in Washington wants to fix it, or if they do, they aren’t explaining it well enough so EVERYBODY gets it!

  3. Thanks for quantifying this in such an easy to understand manor. A lot of us put our heads in the sand when it comes to the economy and finance simply because it’s too difficult to sort through the data to come up with relevant, meaningful information. Ultimately though, these are the indicators that tell us what’s on the horizon.

    FWIW: When I start feeling overwhelmed by all of the bad news, I try to focus on the preps I enjoy. Your articles about bee keeping, homesteading and sustainable living are great and probably easier to write about.

    When are you going to start a YouTube channel? :-)

    • I’m not really one for YouTube, though I’ve considered doing an irregular podcast or something though.

  4. Rudy, people are struggling to pay for gas and food. US Corporations pay little or no income tax. The economy cannot be carried by the middle class. It’s not going to get better.

  5. I dont know..like some said ..people dont understand,,dont want to hear about it..dont believe it or just dont want to believe it..so be it..they have been warned for yrs now

  6. Rudy – Great post, simple and straight forward. This thing is spinning out of control, out of the control of the ‘money changers’ and many people will be devoured because of it. I think it’s broken so bad that man can’t fix it. When?, is the next question. Have you run possible scenarios of what the explosion looks like? I’m positive it will not be a rerun of the 1930’s because we were a moral society back then, and we are basically paying people through government employment and programs to be civil now. So what if the whole world claimed bankruptcy, closed down all the banks from local to international and whatever you physically have in your possession is what you have to start over with? Hmmm…I gotta get another hoe and a couple of axe handles.

  7. Thank you for the presentation, Rudy. This subject is terribly sobering. Terrifying, really.

    Remember the old song, 16 Tons, sung by Tennessee Ernie Ford? I often think that the “company store” that ensnared the miners in the old days has morphed into a much more dangerous form: the advertizing/media/corporate/credit “company store” that has trapped so many people and families in debt. Whatever happened to the idea that a person–or a country–does not spend money he does not have? America is such a beautiful place. We are founded on noble principles. There are still many fine people who work hard and live ethical lives. Is it too late to change the direction of this country?

  8. Rudy I did not know you trade Forex. Its good if you only get into sell trades. people just need to get ready if you did not live thru the depresion, you will be able to get a front row seat for this one, something about history repeat? comes to mind

    • I don’t actively trade anymore, but my Dad still does, and I know how to interpret charts, etc.

      In any case, history does have a habit of rolling back around, for sure…

  9. I think people are becoming aware to some degree but fear paralyzes them. This information has been out there for all to see for the past several years but too many still think the government will come to the rescue. It’s easier to live in denial than it is to become proactive and get creative in terms of self-sustainable living. I’ve re-emerged on my old community blog for a local newspaper and am slowly introducing the idea of being prepared, frugal, staying out of debt and living off the grid as much as possible. The liklihood of finding like-minded folks in my neck of the woods is about 80/20 at this point with a small percentage on board. We’re out there and increasing in number.

    Staying out of debt on an individual level is paramount and people still don’t get it.