You know it really doesn't lookk good for the dollar going forward. One day our creditors, in unison, are going to say, "No more stinking dollars please, we have had our fill of them."

From Bill Buckler w/ credit to Investment Rarities where this article appeared.

The Life Blood Of the Debtocracy

For 50 years, not one Dollar of new debt created by the US government to fund the activities it does not wish to tax for has been repaid. The debt has simply been “re-financed” with new debt being sold to retire the existing debt. In any process of this nature, an ever larger amount of new debt has to be created simply because the old debt has created no real economic wealth while having to be serviced with interest. At an interest rate of 5 percent, interest charges on $US 280 Billion of government debt (its size in 1960) are $5.6 Billion. At $US 12,000 Billion, the interest charge at a 5 percent rate is $600 Billion.

The bigger the debt becomes, the bigger the chunk it takes out of the not-borrowed resources of government - the taxes and charges of all descriptions they collect. At present, total revenues from individual US federal income taxes come to just over $US 900 Billion a year. An average interest rate of 7.5 percent on Treasury debt of $US 12 TRILLION would require that ENTIRE sum in servicing costs. In September 1981, two-year Treasury yields peaked at 16.46 percent. In March 1989, two-year yields peaked at 9.68 percent. In the middle of 2007 at the dawn of what has since become the Global Financial Crisis (GFC), two-year yields were at 5.00 percent. Today, they are less than 1.0 percent. A reversion to even the rate levels of mid 2007, let alone the much higher levels of the early and late 1980s, would instantly produce a US government debt crisis of MASSIVE proportions.

The “system” and those who derive their power and influence from it depends on the ability to issue ever higher amounts of debt. Fifty years of ever increasing government debt in the US has produced a situation in which half of all annual government spending is done by means of borrowing. When the Fed lowered its funds rate to 1.0 percent to battle the last economic downturn in the early 2000s, the rate remained there for one year - from June 2003 to June 2004. The Fed lowered its rage to ZERO percent to battle the latest economic downturn on December 16, 2008. The first anniversary of that decision to eliminate interest rates from Fed reserves borrowed by US banks is just over two weeks away. The USDX dive on November 25 shows that the Fed’s “extended period” is being stretched very thin.

Elastic Currencies Result In Rigid Interest Rates

On November 16, Fed Chairman Ben Bernanke gave another speech to the Economic Club of New York. He said that the “safe haven” (there it is again) flows into the US Dollar of late 2008 - early 2009 had abated and that the US Dollar had “accordingly retraced its gains”. Leaving aside the fact that the US Dollar surge of late2008 - early 2009 was produced by a global scramble to “deleverage” (pay down or pay off $US denominated debt), the US Dollar has certainly been retracing its gains with a vengeance.

When Mr Bernanke made his remarks on November 16, the USDX stood at a 15 month low of 74.92. In a step unusual for a Fed Chairman, Mr Bernanke said that the US central bank would “continue to monitor these developments closely”. We assume the Fed is continuing to “monitor” the US Dollar, especially since the USDX is now below that November 16 level, closing on November 25 at 74.32.

Mr Bernanke is the latest in a long line of Fed chairmen whose REAL task has been to ensure that the US Dollar stays as “elastic” as possible. They have been very successful in this task, given the fact that it now takes a Dollar to buy not much more than a penny bought when they began their task in 1913.

The problem is that as the Dollar becomes ever more “elastic” and as debts based on it spiral ever higher, the interest rates which apply to this debt must be steadily lowered - to the point where they are rigid. That point was reached for the Fed a year ago. In a sane financial system, the opposite situation prevails.
The currency is rigid, being defined as a given amount of metal of fixed weight and fineness, while interest rates are set according to the individual circumstances of lender and borrower in an open market.

Swamping The Productive

According to the US Debt Clock (http://www.usdebtclock.org), the current US population is 308 million. Of that total population, just over 35 percent (108.7 million) are taxpayers. The rest are those who pay no net tax, government employees, dependents and those who are unemployed and/or on welfare. These percentages would be similar in any nation with a mature welfare state.

If you subtract Americans under 18 from the almost 200 million Americans who do not pay tax, the US is in a situation where many more people vote for a living than work for one. This too is an inevitable end result of any mature welfare state. The fact remains that in the US, 108 million productive people are supporting almost 200 million drones. Those same 108 million people are paying the ever increasing
interest bill on the so-called “public debt”. And finally, those same 108 million people are the only REAL source of the wherewithal to eventually repay the debt. At current levels of US federal government spending, it would take a cut of more than 50 percent just to balance it - especially after the servicing costs on the existing debt are taken into account. To actually BEGIN to pay the debt would take budget cuts even bigger than that. As long as more people vote for a living than work for one in the US, that simply is NOT going to happen. A productive minority CANNOT support a non productive majority.