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Each year, our country proudly celebrates its independence on the
4th of July. I am a flag-waving American that still believes our
nation is one of the greatest nations in our world’s history. But I
can’t let my patriotism result in my clients losing money.
For investors to be successful, they must understand the major
forces that will shape our nation and the world over the next 10-20
years. And chief among these are the twin forces of debt and
inflation.
I believe the single greatest threat to retirees and near-retirees
is America’s loss of its independence. The Bible has a proverb that
says, “The rich rule over the poor, and the borrower is servant to
the lender.” It’s true for individuals and it’s true for nations. As
a nation, we have become the servant and have lost our independence.
It wasn’t always this way. Back in 1914 we became the lender instead
of the borrower for the first time in our nation’s history. By 1983,
the United States was the largest lender in the world! But just two
years later, in 1985, the nation became a borrower instead of a
lender. Now, in less than 25 years, we have become the biggest
borrower in the history of the world. We are becoming totally
dependent on other nations.
It’s easy for us as individuals to borrow money for homes, cars,
furniture, etc. But debt isn’t free. I have to pay interest to each
lender. And the more I borrow compared to what I make, the harder it
will be to make the monthly payments. Eventually, I may have to
borrow from one lender to make the payment to another.
If that’s the case, before long my lenders will foreclose on my
house, my car, etc. In fact, when the bubble starts to burst, the
lenders are going to rush in, each trying to get the little that is
left before the others do.
That’s the problem with debt. It’s very easy to get and extremely
difficult to pay back. But there are those that chose to live
beneath their means, actually save money and lend to others. They
become the ones in charge.
It works the same way with nations. Looking back in history, it’s
the nations that lived beneath their means that became dominant in
the world. They are the ones who lent money to other nations and the
more a nation owed them, the more control they had over that nation.
That’s the situation our country was in for much of the 20th
century.
My concern is that it may be another century before we regain our
independence. As a country, we are borrowing from Peter to pay Paul.
The numbers are staggering. Our nation’s debt is 9 times higher in
2006 than it was in 1990. The average amount of debt increased over
27% per year and is now $8.5 trillion. If you add in future Medicare
and Social Security obligations, the debt is estimated at $67
trillion.
When we buy more from another country than we sell that other
country, we have to borrow to make up the difference. Total it all
up and it’s called the Balance of Trade or the Trade Deficit.
Last year, we bought $750 billion more than we sold--$200 billion of
that just from China. Over the past 10 years, our accumulated trade
deficit has grown to $3 trillion dollars. But at the current rate of
growth, our trade deficit will double in only 4 years. We are
dependent on other nations loaning us that money. The question is
whether other countries will continue to want to do so.
Would you invest all your money in a company with a balance sheet
that looked like America’s? Probably not. And that’s the point. At
some time in the future, unless things change, other nations will no
longer be willing to fund our debt. And when that day comes, it will
have a drastic impact on our economy.
There is one big difference between the debt of an individual and
that of a nation. The nation can print more money; you and I can’t.
Printing more money results in higher inflation. That’s why it’s
important to understand both forces. I’ll talk about inflation next
week.
Nationally-syndicated financial columnist and Certified Financial
Planner® Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. He’ll answer your financial question – FREE at
www.guardingyourwealth.com. |
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