Here’s a thought–how could inflation affect your credit score and could inflation push you towards credit repair–or even worse, bankruptcy?
Don’t look now but Inflation is raring its ugly head–and it already having an impact on your life! If you’ve not thought about inflation recently, it might be time to revisit the topic–understand how it’ll affect you and what to do about it.
So here’s why it’s happening. The last time we saw huge inflation, Richard Nixon took us off the Gold Standard in 1971 so we could spend more money to finance the Vietnam war as well as underwrite the expansion of corporations globally. Under the monetary policy, the US was required to keep a certain percentage of Gold stored in a vault to back to a total of paper money in circulation. This was to keep spending in check. Once Nixon changed the system, the printing presses kicked into high gear and supply expanded–causing the value to decrease and triggering inflation. If you recall in the 1970′s, mortgage interest rates hit 18% with inflation was running 14% annually. Unfortunately for you and me, that also killed the economy as unemployment rates surged to an unheard level of 9 percent.
It was during this time-frame words were created like “Stagflation” and the “Misery Index” to describe the dismal state of the Economy. Thank you, Richard Nixon, who started it and Jimmy Carter who EXPANDED it like no one else until now. I suppose a bit of gratitude must be paid to Ronald Reagan in figuring out how to get out of that mess.
So here’s what’s happening today–the US spends more than it takes in from Tax revenue. It’s called deficit spending (the difference between spending and Tax revenue received) and the national debt (accumulation of all the deficit spending added together since 1890). Back in 1970 we had a total national debt of $381 Billion and spend $2.8 billion more than we brought in. By comparison, in 2010 we have a national debt of $14.0 Trillion and spend $1.3 Trillion more than we collected. If your interested in going back to 1890 and seeing how the debt has grown and under what party, visit US Government Spending.com.
Somehow money to make up the difference must be found so behold a Treasury auctions. The Treasury sells bonds to other nations in exchange for the right to print and spend that money. I’m sure you heard that China owns almost $1.0 Trillion of our debt. Throw in Japan, the UK and most recently our national banking system who used TARP money to circulate back to the Treasury.
If you’re thinking it looks like a Ponzi Scheme, you are absolutely correct except the games been rigged in America’s favor for all these years. Due to its AAA rating, the US can get interest rates as low as 3.21 percent. So if you need to pay interest on a national debt of $14.0 Trillion, it’s in the range of only $196.0 Billion in 2010 (According to the US Government Spending.com). Contrast that to a nation like Portugal who’s sucking canal water as a nation. Their actual closed a few weeks ago and the interest rate on their debt (Junk Bond Status) was 7.81 percent. If America had that bad of a credit rating, we’d be paying $1.09 Trillion per year!! If we only took in $2.10 trillion in all of 2010, you cannot survive to pay half of that in interest.
Yet, that’s exactly what the US is facing. In fact, China has already downgraded our AAA credit rating to A+ with a negative outlook. However, Standards and Poor’s must be in bed with leaders to sit on their hands and wait.
But what happens when those buyers of the Treasury bills (T-Bills) lose confidence in and stop showing up at the auctions? Can America go through its own credit repair? Well, not exactly but yet, that’s exactly what’s going on these days. Buyers like China have stopped showing up at the Treasury actions.
So–what does that mean? It means that no one has confidence enough in the direction America is headed to invest in our nation. They’ve stopped showing up to support America financially. So who’s buying the debt? Ummm, actually the Fed (which is not federal, not a bank and has no money) is purchasing the debt and turning it into money. Have you heard of QE2? That’s short for Quantitative Easing (printing and creating money out of thin air) which is a fancy word to confuse the average Joe lunch-bucket. But everyone is now feeling the effect–especially Joe lunch-bucket as inflation has begun to explode on the scene. The current QE2 runs out in June of 2011 and look for the FED to float the idea of QE3–which would be disastrous for the American workers.
UN Announces Highest Food Prices since the 1970′s-A sign that inflation/Credit score problems are here
The UN Announced on March 9th that food prices hit a record high in February–no good if you value your Credit Score. Why? Because higher food, energy and cost of living will eat up the money you normally use as a cushion. For example, how much you paying for gasoline to drive to work these days? Have you noticed the cost of groceries at the local Safeway, Kroger or Jewel lately? how about the price of clothing as textile prices soar. The only reason the Government could possibly say inflation in “In Check” is because of the housing implosion where the 31% drop in home-prices since 2007 have offset the rise in all other daily living necessities.
What can you do about it? We need to address the moves to make to avoid trashing your credit score and weather this coming storm.