A budget deficit is when you are spending more than you are taking in as income. When a government incurs several years of budget deficits, it then build a debt, which is the accumulation of the deficits. Government debt is the total amount owed by the central government, also called national debt. To cover the shortfall between spending and income, a government will issue government bonds and bills. These are promises by the government that the money that it borrows will be returned, with an interest payment as the cost of borrowing. Since all government debt is paid by income generated by the citizens of the country, this debt is really the burden of the taxpayers. In addition to outstanding securities issued by a government, it can be said that unfunded future liabilities are considered to be government debt, such as future pension plans and health costs.
I’m going to put aside my daily ranting about the stock market and the economy today to bring what I believe is an important story to the attention of my readers.
There is no doubt you’ve heard about how poorly the city of Detroit, Michigan is faring now that the automotive sector has all but closed up there.
Yesterday, news came that the city has started cutting off water to about 150,000 people. About half of the city’s 324,000 water customers are delinquent on paying their water bill, so the city is turning off their taps. (Source: Financial Post, June 24, 2014.)
In protest, residents are appealing to the United Nations High Commissioner for Human Rights, saying their human right to water has been denied. (Unfortunately, the right of access to water is not in our Constitution or our Charter of Rights.)
I think what’s happening in Detroit, while it’s not getting much publicity, is very important. It should be a warning to us all.
At the very core, it tells me that if a government is not taking in enough money to pay its bills, it will increase the financial burden on its citizens…and if you can’t pay, you’re cut off.
In the case of Detroit, last week, city council approved a nine-percent hike in what it charges for water. (And the government tells us inflation is below two percent!) This lesson teaches us that if you can’t pay the increased costs the government levies on you, it will cut you off.
Secondly, today’s citizens are responsible for the past actions (or should I say lack of actions) … Read More
The U.S. government, after winning World War II for the Allies, was very convincing. It told central banks around the world that they should hold the U.S. dollar as their reserve currency instead of gold, based on the idea the U.S. dollar would be backed by gold. Only limited amounts of U.S. dollars could be printed, because the currency was tied to gold bullion. Central banks bought into the idea.
Unfortunately, a few decades down the road, the concept of a U.S. dollar backed by gold was thrown out the window (thank you, President Nixon). Eventually we were introduced to the modern day printing press—printing money out of thin air at the will of the Federal Reserve without the U.S. dollar being tied to any “hard” currency like gold.
Why would anyone agree to this horrible idea?
Back in those days, the U.S. economy was prospering. Our government was in good shape and didn’t have much debt. And the logistics made sense, too, as time passed. Why wouldn’t a central bank have in its reserves the currency of the world’s strongest economy and military? Why wouldn’t a central banker keep U.S. dollars in his vault as opposed to hard-to-carry and hard-to-store gold?
Years have passed since the U.S. dollar “unglued” itself from gold. Things have changed, too. America is not so glorious anymore. Ever-rising debt and the never-ending printing of U.S. dollars have resulted in some countries changing their policy on U.S. dollar-backed reserves. And the fundamental factors that keep the U.S. dollar strong are deteriorating quickly.
The balance sheet of the U.S. economy does not look as good as … Read More
Why do only a few in the media and no politicians I can find seem to care about the warning bells being issued by the Chinese economy?
First, early this year, we heard the Chinese economy is going to grow at an embarrassingly slow pace in 2013 compared to its historical average. Forget a 10% economic growth rate and think seven percent or lower!
Now, we hear about more troubles…
Think the Detroit bankruptcy was bad news?
Local governments in the Chinese economy have piled up a huge sum of debt, and the central government is warning cities to manage their escalating debt.
China’s National Audit Office (NAO) announced this week it will be conducting a nationwide audit to assess the situation on local government debt. The reason for this? In 2010, the NAO found local governments in the Chinese economy owed 10.7 trillion yuan. Fast-forward to June of this year, and it turns out the number is about 12 trillion yuan. (Source: Xinhunet, July 28, 2013.)
Why does it matter to North American investors?
The Chinese economy is the second largest in the world; the U.S. is the largest. Economic issues in China will surely send “waves” towards us.
Dear reader, after the financial crisis, the developed countries in the global economy never really showed robust growth. This caused companies in the key stock indices to focus on emerging markets—they showed demand, and the Chinese economy was one of their main destinations.
As the economic slowdown deepens in China, and with possible credit issues in the country, it’s very likely that American companies in key stock indices … Read More
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