US Debt Reaches Tipping Point

By Dr. Jeffrey Lewis   Mar 26 2010 3:20PM

Even the most statist economists can understand that a country’s debt has reached its saturation point once the change in Gross Domestic Product is less than the change in the federal debt. However, now the metrics of the American economy look even worse than the picture painted above. For each new dollar in federal debt, with productivity as measured by an increase or decrease in the GDP, 45 cents of wealth is destroyed.

Calculating the Loss

Economists would argue that the United States has long been on the road to wealth destruction. In 1966, each dollar in debt added just $.90 in productivity, with the remaining $.10 lost in translation. By the 1980s and throughout the period of Reaganomics, the United States generated just $.30 in productivity for each $1 in new debt as the ratio became worse for the American tax payer.

If you fast forward just 30 years, today each $1 in debt results in negative growth for the American economy at a loss of 45 cents on the dollar. Much of the loss has to do with the cost of borrowing and the fact that the US economy is already overleveraged.

What the Debt Means in Real Terms

To put the numbers into context, stimulus and other government measures meant to improve economic conditions actually do exactly the opposite. While we may have generated some return on government debt in the 1960s, losing only a dime for each dollar, today we lose $1.45 in GDP for each $1 in debt. 

The government can no longer spend itself out of recession, no matter how hard it tries. In fact, as we continue to spend more and more, we push the federal government even closer to default, with the weaknesses in the economy draining more money from the system than is originally added.

The Spotlight is on Precious Metals

With the economy now treading water as the swimming pool is spiraling into the drain, the only seemingly positive part of the news (for precious metal investors, at least) is that commodities are sure to rise in price.

As wealth is destroyed while deficits and debt climb, the value of silver will grow, as it retains its wealth, regardless of the greater changes in the US economy. Truly, there is no better time to own gold and silver as a hedge against government spending, debt and inflation, as well as to realize the full benefit of a commodity that has intrinsic value. Unlike the dollar, the government and the unproductive elements of the economy, silver will never be worth nothing.

Cashing In

Even though our debt reached its saturation point more than 40 years ago, it is certain that government will continue these failed policies for years to come. If they weren't productive then and the government was still willing to continue, why would the government now stop, even when spending is not only bankrupting the economy, but providing negative returns? In moving forward, the government will do what is has been doing since the beginning of time: spending and inflating. Gold and silver will continue its historical trend as well, providing a fail-safe against the plague of debt.

Silver’s Role in a Barter Economy

Make no mistake about it: silver is an investment for trying times. As one the most beautifully shiny metals, silver's true economic beauty shines through in a world ruined by rampant inflation and growing debt.

The Barter Economy

A barter economy is one of the most primitive economic models, wherein goods and services are traded, with each party believing it received the better end of the bargain. An example would be that of a plumber and an electrician. The plumber can fix pipes, install a toilet and improve the general condition of a variety of plumbing, but likely could not rewire the light switch. The electrician, on the other hand, can install wiring, fix blown fuses, and attach a generator to the main electrical system of a home. Luckily, the plumber needs some electrical work done and the electrical needs a new toilet installed, and each needs roughly the same value of labor. They strike the deal, work for each other and each leaves happy with the arrangement.

Where the Barter Economy Fails

In the example above, the plumber and the electrician needed roughly the same amount of labor performed, thus striking a deal that was a mutually beneficial trade.  But what if the electrician needed a drain unplugged while the plumber wanted electrical wire installed throughout an entire pole barn? The electrician would need just a few minutes of labor, while the plumber would need several hours. It is certain that the electrician wouldn't be willing to trade hours for minutes, and even more unlikely he would want to accept the promise of more work from the plumber in the future. The promise, no matter how honest or genuine, pays no immediate benefits or any advantage for the cost of time.

The Barter Economy in History

The barter economy may have been a mainstay when people lived in caves and ate rats, but it's hardly liquid enough for the rapid changes of today's society. Despite being outdated and relatively unworkable in modern times, the barter economy always experienced a resurgence after a change in economic order. For example, after a natural disaster, the two people above may agree on a deal, needing the service done at any cost.

In perfectly peaceful and prosperous times, the above arrangement appears ridiculous. To work, the barter economy needs a middle man: a medium of exchange.

Precious Metals and Silver

A medium of exchange is paramount to the success of any economy. It allows the plumber who needs 15 hours of labor to strike a deal with the electrician who needs 15 minutes of labor without promises or guarantees. The plumber, for instance, may strike a deal with the electrician with the above specified amount of labor and offer an additional 16 ounces of silver to make up the differential. The electrician, knowing the value of silver on the marketplace, can use the metal to provide his family with other needs, and he would accept the deal, gaining employment, wealth, and capital.

An Example of History

Though the full example above is a bit of a simplistic stretch on the workings of the economy, the value of a medium of exchange is not overrated. Precious metals have more value in bad times than in good, and gold and silver always appear first as a proper medium of exchange. 

You can't fake gold or silver, you can't dilute them, nor can you create more of them – thus making precious metals the perfect currency. In addition, since silver is relatively inexpensive compared to gold or platinum, it is easier to make change and conduct other functions of ordinary business. 

Precious metals have been and will be important as an immediate of exchange in the future. There is no better time than now to secure that medium of exchange before the next inevitable economic depression arrives full-tilt.

Dr. Jeff Lewis

****

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-R eview.com