Meet Uncle Sam. He has a lot of bills to pay, almost four trillion dollars' worth every year. Uncle Sam's income is a little over two trillion dollars per year. To make up the difference, the deficit, he does what most Americans do: he borrows money.
When Uncle Sam takes out a loan, he calls it a bond. Bonds can be held by banks, investors or even foreign governments. Uncle Sam has to promise to pay interests on these bonds, just as you do on any loan you take out.
Ever think about paying your mortgage with your credit card? That's exactly what Uncle Sam does! He takes out new loans, new bonds, so that he can make payments on the old ones. All those loans, and especially all that interest adds up.
Right now, Uncle Sam owes about fourteen trillion dollars. To put that in perspective, fourteen trillion is about the same as National GDP: the total value of all the goods and services produced by American economy in an entire year. It's such a huge amount of money that Uncle Sam is starting to run out of people to borrow from. And he is having trouble just paying the interest on his loans.
The obvious solution would be to either cut spending or increase taxes. But if he cuts spending, the people that he's spending money on, would complain that they don't have money to spend, and that he was hurting the economy. If he tried to raise taxes, enough to close this gap, not only would people definitely have less money to spend, he'd probably have riots on his hands.
So, Uncle Sam chooses the easy way to make money: just make it. He calls up the Federal Reserve, which is our Central Bank, and like magic, Dollars are created and deposited into banks all around America. The problem is that the more of something there is, the less its worth. Same goes for the US Dollar. The more Dollars there are, the less each one will buy. That's why commodities like gasoline, food and gold become more expensive when Uncle Sam does his money-making magic. The commodities aren't really worth more. Your money is just worth less. That's called Inflation.
Remember the foreign governments that lent money to Uncle Sam? When they lent money to the American government, something interesting happened. It made the US look richer, and their countries look poorer. When a country looks poorer compared to America, one dollar of our money buys a lot of their money. So they can pay their workers only a few pennies a day. With such low labor costs, they can sell their products to America for lower prices than any American manufacturer can. The easiest way for American companies to compete, is to move their factories overseas, and pay their workers a few pennies a day too. This contributes to a recession.
Americans lose their jobs, stop paying taxes and start collecting government benefits, like Medicaid, under unemployment. This means that Uncle Sam has even less income and even more expenses. At the same time, the people who still have jobs are desperate to keep them. So they tend to do more work but not to get paid any more. When your dollars are worth less, and you're not earning more of them, that's called Stagflation. And this is why Uncle Sam is in Catch-22.
He can't raise taxes or cut spending without making the recession worse. And he can't have the Federal Reserve create more money without making inflation worse. For now, he can keep on borrowing money, but since he can't even pay the interest on the loans he already has, it just makes his inevitable bankruptcy even worse.
Whether it's in two months or two years, the day will come when Uncle Sam can no longer pay his bills. When that happens, the banks, investors and foreign governments who are counting on that money, won't be able to pay their bills.
You see, just like Uncle Sam, governments, banks and corporations don't actually have much money. Mostly, all they have is debt to each other. If one link in the debt chain stops paying, defaults, the whole thing falls apart. If investors can't pay their bills, corporations won't be able to pay their employees. If banks can't pay their bills, you won't be able to take out a loan, use a credit card, or even withdraw your savings. If foreign governments can't pay their bills, their own banks and corporations will have the same problems. That's called a Global Economic Collapse.
It's never happened before. So nobody really knows how bad it will be; how long it will last; or even how we'll eventually get out of it. The house of cards has already been built. There's no painless way to dismantle it now. All we can do is to educate each other about what's actually going on, and to prepare for what may be very extraordinary circumstances.
- 「左右為難、進退維谷的局面」- Catch-22
And this is why Uncle Sam is in Catch-22.