Let us assume that U.S is some individual person so that it can become easier for you to understand ...
(U.S) has lots of bills to pay For.eg.
Homeland security, Pensions, Foreign Aid, Medicare, DOT , NASA, NOAA, NIS, FAA, FEMA, FTC, FSA, Defense, Farm subsidies, Federal salaries, Medicaide, Veteran's benefits, Highway system, USPS, FBI, CIA, NSA, DOD n Foreign wars etc etc etc...
the sum of all the bills is around almost 4trillion dollars worth every year and his income is little over 2.2trillion dollars per year, now to make difference the deficit of almost 2trillion dollars he does what most americans do ie it borrows money... when U.S takes up the loan it calls it 'A bond' i,e U.S issues bond to borrow money. This bonds are held by
Banks, Investors or even by
Foreign governments. U.S has to promise to pay interest on every bond just like you do while taking any loans.
now the prob arises here, sometimes you think of paying your loans or mortgage by credit cards ryt??? the same thing he does. he takes up new loans i,e
new bonds to make payments on old bonds.
now all dos loans n specially the interest to be paid keeps on adding. Right now U.S owes about 14 trillion dollars, 14trillion dollars is about the same as GDP of America ie Gross Domestic Product (total value of all goods n services produced by american economy in an entire year) which means
DEBT = ENTIRE GDP.
Its really a big money. now U.S is running out of people to borrow from to clear this debt and also having trouble of paying interest on its loans. RBS came out with solution ie
either cut spending or increases taxes;/bt if it stops spending then people on whom he spends will start complaining that they dont have money to spend n if it raises taxes dan people will have really less money in hand to spend ...!!
So, U.S chooses an easiest way to make money or say make payments, he calls up FEDERAL RESERVES wic is central bank n just like magic dollars were created and deposited all over America. but this lead to inflation because flow of dollars became more than goods available to in market dats y commodities lyk
gassoline, food , oil n gold became more expensive, this happened because U.S implemented its money making magic by approaching FEDERAL RESERVES.
Remember the foriegn government that lend money to U.S ??? something interesting took place at that time, It made U.S look richer n der countries look poorer, n when a country looks poorer tha America; one dollar ie american money buys lot of other countries money For eg. If 1$ was equal to INR 45 then now 1$ will be equal to INR 50 wic means Americans can buy 5 more INR for same 1$ .... Americans can pay INDIAN workers a few penny a day because they are getting Rupee at cheaper rate. This ultimately pulls down labour cost of the company n the manufacturer can sell their products in America at lower prices than any other American manufacturer can. Now, the easiest way for American manufacturers to compete is to move their companies
overseasn pay their workers a few penny's a day.
But, this leads to recession in America becz Americans loose their jobs n no job means no tax to be paid to government no tax means decrease in income from taxation (major part of earning for any government) n the people who lost their jobs start collecting government benifits lyk
medicaide and unemployment..
This means U.S has less income n has to spend more n at such times people who still have their jobs are desperate to keep their jobs n can do more work even for lesser money.
When dollars are of less worth n inflow of the same has stopped this leads to
STAGFLATION i,e inflation + recession = STAGFLATION.
U.S now is in big trouble,
he cant raise taxes nor cut spending to without making recession averse and he cant approach federal reserves to create more money without making inflation averse. for now what he can do is keep borrowing more money but as he is not able to pay the interest on loans he already has it can just push towards the bankruptcy wic is worst.
Its not too long within just few months or say few years a day will come when he wont be able to pay his bills anymore.. wen dat happens BANKS, INVESTORS n FOREIGN GOVERNMENTS who are counting out that money; wont be able to pay their own bills.. You see Governments, Banks n Corporation dont have much money, what they have is nothing but debt to each other.
If one stops payment the whole chain defaults .. If investors stops paying bills the corporation wont pay to their employees ... If banks are not able to pay their bills, u wont be able to take more loans, use ur credit cards or even retrieve ur savings.. If foreign government dont pay their bills their own banks and corporations will have d same problems that is what we call
A GLOBAL ECONOMIC COLLAPSE .
It never happened before so nobody knows how long will it last for n how to overcome it, the house of cards has already been fallen down, their is no painless way to build it back.
ALL WE CAN DO IS JUST EDUCATE EACH OTHER ABOUT WHATS ACTUALLY GOING ON AND TO PREPARE FOR THE WORSE.
