Fiscal Cliff and Confidence Issues

By now, many of you know that our entire financial system is based on 'faith and confidence'.  We have blogged on this many times because so many of us are quite clueless on how paper money actually works.

Paper money ONLY works as long as there is faith and confidence in the person/entity/government issuing the paper.

Think about it in REALLY simple terms;  If your father, who has millions of dollars in the bank and huge real estate holdings, were to give you an IOU that promises to pay you $10,000 in 5 years....that IOU would have much more value than one given to you by your 22 yr old college roommate who owns nothing but student loans and doesn't even have a job.

The same thing is true with paper money.  Paper money issued by Zimbabwe has almost NO VALUE because few have any faith and confidence in their government.

One day, possibly soon, the faith and confidence in the USA will falter.  We don't know the trigger (I hope it's the rapture) but when the confidence DOES start to wane the entire financial system could fall over with a HUGE CRASH!

So why is all this talk about 'fiscal cliffs' pretty interesting??  Because it could be another block being removed from the foundation of faith and confidence.  Have any of you ever played the game JENGA?

Here is some more foreshadowing in the news;

Is this fiscal cliff thing going to be resolved soon? If not, will all hell break loose in the markets?? -Jen

The cliff is really more of a slope because the cuts don’t hit all at once on Day One. The tax hikes – if they are allowed to take effect – would raise the average household tax bill by about $68 a week
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Financial markets are concerned about several different issues. Stock investors are worried that the capital gains tax rate will go up, which is why many are selling now before year's ends. (The Dow Jones industrial average is down 5 percent since Election Day.)

The more worrisome reactions would be from the bond market, where investors are still buying Treasury debt at record low interest rates. If they begin to fear that the U.S. government has lost control of its finances, those rates could go higher. That would be very bad news for the economy.

http://lifeinc.today.com/_news/2012/11/14/15169664-will-all-hell-break-loose-your-fiscal-cliff-questions-answered?

Why would investors currently be buying Treasury debt paying 1.5% per year when inflation is 5%?  Doesn't that guarantee they will lose purchasing power?

Yes it does.  So why do it?...because the world is SO SCARY that investors are willing to put their money in the LEAST WORST place just so the USA will promise to give them their money back in 10 years!!

Can you see the explosion that WILL HAPPEN when the LEAST WORST place (USA) begins to lose control of its finances...and investors begin to panic and DEMAND more interest than 1.5%?  What if they demand 7%?  What if they demand 12%??

Even if we took all the money from all the rich people in America and put that money in the U.S. government's checkbook...would that be enough to pay the interest on $16,000,000,000,000...plus put all the money into Social Security, plus fund all the old people's health insurance in Medicare, plus fund the U.S. military?

The short answer is....NO!