September 2, 2011 in Finance
The United States financial system is built upon debt. Because the United States has the world’s largest economy, this means the world’s economy is also built upon debt. This bothers so many Americans that representatives from a new party (The Tea Party) have almost acquired enough power in Congress to disrupt this system.
United States’ citizens, who have made a habit of complaining about unemployment, debt, money, war, religion, and healthcare, believe the only way to solve all of the problems they complain about is to destroy the debt system. Their actions, built upon their complaining attitudes, have brought the world’s economy to a breakpoint.
Lest my comments sound naïve, please allow me to explain. The crux of the argument between the Tea Party and the current point of view is that the United States financial system is not built upon a real asset. The Tea Party wants to return to a system built upon valuable metals such as gold or silver. The current system is built upon debt instruments.
The paper we use in the United States for trade is a debt note. That is why it says “Federal Reserve Note” across the top. We are writing a series of articles in the United States section of this website about this topic so we won’t repeat that information here. The short explanation is that whenever America needs more currency, the Federal Reserve Bank issues it. This currency comes into circulation as a debt instrument when someone borrows it. Those debts provide the asset base for the paper.
The Tea Party philosophy thinks this is not a real asset. They think this in spite of the fact that the United States has intermittently used this system since before the American Revolution.
I have considered this issue for quite a while. I have done taxes since the late 1970s and have run an accounting practice since 1993. I stayed away from debt for many years. Then, thanks to Robert Kiyosaki’s writings, I learned about good debt versus bad debt and I piled up the good debt in an effort to create wealth. Even though it took me a while to get through the learning curve, I see the value of debt.
However, just because it is a valuable tool, does that make it an asset?
That’s the question being debated in the United States and around the world. Today, the world’s economy says it is. My accounting brain has a difficult time calling debt, which is plainly a liability, an asset. Yet, that is what we do every time we use an American dollar to make a purchase.
After several weeks of wrangling with this issue, I think I’ve come up with an answer. I’ll write about that is a future article.