Blog | Personal Finance

The Boiling Point

Lately the news in the economy has seemed like smooth sailing. The Dow is up 78 percent from its low in March 2009. Consumer spending is on the rise. Industrial output is growing. And banks are loosening their purse strings.

On the surface it does appear that the economy is beginning to come back. But all this news doesn't take into account the dangerous under currents that are still brewing beneath the relatively calm economic surface.

The next few months will be watershed moments for the US economy for a couple reasons.

The Federal Debt Ceiling

A battle is quietly ramping up over the Federal debt ceiling between the now Republican-controlled Congress and the Democratic-controlled White House. The Federal debt ceiling sets the limit on deficit spending for the Federal government and can only be raised by an act of Congress. It's estimated that the US will reach its deficit spending limit this spring, effectively freezing the country's ability spend unless the debt ceiling is raised.

On one side, President Obama and his team are arguing the need to raise the debt ceiling or risk defaulting on government loans. They argue that any default on loans would be catastrophic for the US economy, causing interest rates to skyrocket and the economy to potentially plummet back into a recession—or worse.

On the other side, the Republicans, led by Presidential hopeful Tim Pawlenty and New Jersey Governor Chris Christie, argue that all tax revenues should be directed towards paying down debt and that a massive restructuring of government spending needs to be implemented now rather than later.

Whatever the outcome of this showdown, the implications will be massive. One course will continue the reckless spending and devaluation of the dollar by printing more dollars to cover debt. The other course will risk default on Federal loans and undercutting the world's confidence in the dollar, risking a potential currency collapse and an economic depression.

China and US Relations

One country that will be paying very close attention to the US debt ceiling is China. The country is already expressing the need to move beyond the US currency as the world's reserve currency, what the Chinese President Hu Jintao called a "product of the past." According to The Wall Street Journal, China's President is laying out steps to make the Yuan a global currency and continuing a policy of downplaying the viability of the US dollar as the foundation of the future world economy.

Both the US and China have been bickering over currency policy for the last year as China battled inflation and the US currency weakened. China has blamed the Fed's quantitative easing program, a.k.a printing money, for weakening the dollar and raising export prices while the US has blamed China for artificially keeping their currency weak.

Mr. Hu is visiting the White House this week to meet with President Obama on a host of issues, including the US dollar and economic ties between the US and China. It will be interesting to see what kind of news comes from that meeting.

Regardless, the outcome of the debt ceiling battle between the White House and the Congress will have major implications for China and their position on the dollar. It will be something to keep an eye on.

Catch-22

Joseph Heller wrote a classic book about WWII fighter pilots called Catch-22, the book coined the phrase "Catch-22". In the book the catch-22 was that in order to be relieved of fighter pilot duty you had to be mentally insane, but if you were able to claim you were mentally insane, it was proof that you actually weren't and you had to fly.

Basically, it was damned if you do, damned if you don't.

Today, the US economy is facing the same dilemma. While things may be improving in the short term, the underlying fundamentals of our economy are treacherous. Unemployment and debt are at unmanageable levels. Other economies are nipping at our heals and asserting their power. And the ability of the US consumer to support an over-bloated government is disappearing.

Everything that goes up must go down. The dollar is toast. It's only a matter of time.

So, while you still have time, I encourage you to continue your financial education. Remember that wealth never disappears, it's simply transferred. The biggest wealth transfer in history is still coming, and you can be on the receiving end. But you must be aware of what is happening around you and you must be financially intelligent.

Don't buy into the hype the mainstream news puts out. Dig deep, read as much as you can, and understand that all that glitters isn't gold.