The winners and losers when world governments play with money - image

Debt and Confidence

The winners and losers when world governments play with money

This is an important month for the U.S. economy. As I write this on Monday evening, the U.S. government is approaching the end of its fiscal year and the newspapers are filled with speculation on whether Congress can come to an agreement to keep the government in operation.

Because Democrats and Republicans can't agree on how to spend our tax dollars, they usually pass a provision that allows the government to continue conducting business how it did the year prior. This year, however, “Obamacare”goes into effect. Republicans are doing everything they can to leverage the pending government shut down to delay that bill going into effect.

But that is only the first show. The second show, and arguably the much bigger show, is the need to raise the government debt ceiling by mid-October. We've been down this road before and last time our credit rating was downgraded. Essentially, the U.S. government is up to its eyes in deficit spending, and raising the debt ceiling is like using a credit card to pay off more credit cards. If Congress can't agree on how to keep paying our bills, there’ll be economic hell to pay.

The definition of poor

In looking at the position of our government this week, I'm reminded of the words my rich dad said to me decades ago regarding the game of debt: "The more people you're indebted to, the poorer you are. And the more people you have indebted to you, the wealthier you are. That's the game."

When looking at the world today, many say that the U.S. is the wealthiest country in the world. But are we really? How can we be so far in debt yet still be wealthy?

Rich dad went on to say, "We're all in debt to someone else. The problems occur when the debt gets out of balance. Unfortunately, the poor people of this world have been run over so hard by the game that they often can't get any deeper into debt. The same is true for poor countries. If you have too much debt, the world takes everything you have, including your time, work, home, life, confidence, and even your dignity.”

The key ingredient is confidence

Rich dad explained to me that our currency isn't an instrument of equity but instead an instrument of debt. Every dollar used to be backed by gold or silver. Today, every dollar is an IOU guaranteed to be paid by the taxpayers of the issuing country. As long as the world has confidence in the American taxpayer to work and pay for this IOU called money, the world has confidence in our dollar. If the key element of confidence suddenly disappears, the economy comes down like a house of cards.

The last time the world economy faced the prospect of the U.S. government not paying its bills in 2011, our economy suffered as our credit rating was downgraded, the DOW Jones plunged 5.6%, US Treasury yields plummeted, and government borrowing costs increased by $1.3 billion.

This time the stakes are higher. The U.S. is in a fragile recovery after one of the biggest financial crises in our history. Confidence is not high. The world doesn't want to see us play another game of chicken with the debt we owe them.

So again, are we rich or poor as a country?

The winners and losers

When it comes to global economic game of chicken, who are the winners and losers?

In the case of IOU money, as confidence in the dollar is lost, the value of the dollar goes down. It takes more money to buy the same things. In that scenario, savers are losers. Those that follow the old advice of go to school, get a job, save your money, buy a house, and invest in a diversified portfolio of stocks, bonds, and mutual funds are losers. In short, those who follow traditional investing advice are losers.

The winners are those who understand how debt and money actually work in today's world. Those who invest in assets that they can control and that go up in value with inflation, and those who invest for cash flow, are the ones that win. Those who are financially educated and able to technically trade on the volatility of the markets win. In short, those who follow the new rules of money are winners.

The good news is that you can be among the winners, and there is still time. The first step is financial education to understand how money and debt really works. I encourage you to start today.

Original publish date: October 01, 2013

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