Promises to Pay
When I sit down and think about what a dollar really is; I am amazed at how simple the answer is. In simple terms a dollar is a "Promise To Pay." When examined from this point of view one begins to understand to true meaning of deficits. Now compound a promise to pay, one trillion times, seven trillion times or fifty trillion times. Gets a little frightening doesn't it?
When the owners of those "Promises To Pay" finally decide to collect on their debts what will they decide to settle for in payment? What do they want, as final payment, for having been so kind by accumulating our debt for all these years? The important point to remember is the fact that they have not been paid but only accepted a "Promise To Pay" as a pacifier for their goods and services. The story gets a little interesting when we look at it from this perspective. Just what could these owners of our "Promises To Pay" buy with their paper? I think the answer is anything they want! I think it is important to realize that the dollar is not payment but a pacifier until the possessor of that dollar decides what he wants to ultimately take in exchange for his products and service.
Now take a society that has temporarily lost its mind and gone on a buying binge where they are buying foreign goods and services at a deficit rate of $1.5 billion "Promises To Pay" everyday. Just exactly what are these people buying that is so important in their daily lives that they will eventually be selling their most prized and valuable assets, down the road, in exchange, to settle these outstanding "Promises To Pay?'
The most frightening point to this whole topic is the choice that the owners of these "Promises To Pay" will have when the time comes to rid themselves of these promises. These entities will have the option to purchase anything they want Will they be like the consumers in the U.S., a kid in the candy store, or will they be intelligent and purchase the items that they will absolutely need to maintain or achieve the standard of living they now have or want to achieve? My suspicion is that they will understand what they need and make very prudent purchases.
In today's world, nations are approaching a point in time where the true leaders recognize the shortcomings of their nations and are taking the appropriate steps necessary to guarantee that their people have a sufficient supply of natural resources to meet the growing demands of their people. This new supply shall be purchased with the hoard of dollars that they have now accumulated.
China has made a $5.5 Billion bid to buy Noranda. They are going after the largest mining company in Canada and they are only spending a small fraction of the "Promises To Pay" that they have accumulated. We bought worthless toys and widgets from them and they are now buying hard core, and might I say "dwindling supply" natural resources from the rest of the world. I think that the exchange of widgets for natural resources will be of much greater benefit to China than the U.S.
We have now approached a point in time where these holders of our debt are seeing the writing on the wall and they have decided that now is the time to begin to cash in their paper. The only recourse our officials have to stop this redistribution of assets is to tempt these people with a sweeter pacifier; this pacifier is rising interest rates. The only tool left to postpone this liquidation of dollars and subsequent purchase of natural resources is rising interest rates. How high will the rates ultimately go? I think a whole lot higher than the masses, who are buying these toys and widgets, can even begin to comprehend. I believe that the next five years will bring about dramatic changes in our lives and the purchases that we make. I believe that five years from now, as we compete for a supply of oil and natural resources that are simply not there, we will fully regret the day that we outsourced our manufacturing facilities and our jobs to these foreign countries.
The only way out of this mess, from my perspective, is the create something that the rest of the world must buy from U.S. I see the U.S. developing into a service sector attempting to absorb all the lost manufacturing and financial jobs of the past. The problem with the service sector is the fact that this does not create wealth but redistributes wealth.
I see true wealth as being created, through the making of goods, which is manufacturing; the growing of crops, which is agricultural; the creation of technology and the mining of natural resources. I am sure there are other areas but I hope I have been able to get my point across.
The more outsourcing that goes on in the U.S. the more wealth creation we send overseas. Personally, I hope we come to our senses and change the pattern of the future; if it is not already too late.
Hopefully, I have the problems of my e-mail list fixed. I have sent out two updates, if you have not received them then you need to contact me. Likewise, if you want on the list then, just e-mail me. Sorry for any inconveniences.
12 November 2004