Wednesday, January 7, 2009

New Money

Some of you may be worried about the budget deficit that seems to grow larger and larger by the day. Every time I read an new article, the deficit has expanded again. Now it sits at $1.2 Trillion. That's before Obama's new stimulus package, which could double the deficit.

Where will the money come from?

Taxes will likely increase, regardless of what Obama is telling the people, but tax increases certainly won't make any kind of dent in a deficit like this.

The government will borrow a great deal of money to cover the deficit. Like anyone who possesses a credit card, the US government has a credit limit. It's not an explicitly stated limit, but the credit markets provide that there is an implicit credit limit, where at some point there will be no more investors willing to lend to a government that is so far in debt. While I don't exactly know what that limit might be, I know that point is approaching faster every day.

In the meantime, the last means of covering the budget deficit is to simply print more money. The government continues to dilute the national wealth by printing more dollars. But I don't think we've seen anything yet. If, as I suppose, the US were to reach its credit limit at some future point and could no longer borrow money, the government would run out of options other than to print more money.

An increase in printing money = a decrease in the value of a dollar = an increase in inflation. The faster money is printed, the faster inflation will increase. Should we be frightened?

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