Some with credit cards "Borrow to consume" - or like a junkie buying
drugs on credit from the drug pusher. The person quickly loses the
principal they borrowed (squandering it, not investing it) and after
that they must repay the loan plus interest. This is the story of a
country, the United States of America.

America borrows from China and Asia as they are the biggest buyers of US
Treasury Notes. The American consumer meanwhile is buying much more from
Asia than it is selling, the "trade deficit" (7% of the GDP), and the US
Government is spending the borrowed money from Asia on paying for social
security and a war in Iraq. This has been going on for many years, and
the cumulative US debt is now over $8 trillion, of which Asia holds at
least $1 trillion.

To keep Asia lending to the US, the Fed (the private bank that makes
dollars) is raising interest rates to keep the lenders lending. But in
the long run that will only make the borrowing more expensive for the
borrower, the US taxpayer.

There are only limited solutions to this problem.

One solution is to print dollars and use them to pay off the debts:
creating run-away inflation. The other solution is to tax people very
heavily to remove the dollars from their pockets, and then to give these
dollars back to the Asians to pay off all the debts that have piled up.
That would lead to deflation and the economy would grind to a complete
halt as dollar hoarding businessmen refuse to buy anything at all while
prices are dropping (the Great Depression of the 1930's).

Printing money is the better choice of the government. First because the
suffering of the foreigners who hold depreciating dollars is not as bad
as having all the problem paid for by the American voters! The inflation
choice is also better because in inflation periods the incentive of
businessmen is to get rid of depreciating dollars as quickly as possible
by buying and selling hard assets that while they continually appreciate
in price, meaning a lot of wild economic activity (very bad, but it is
at least better than no activity at all, like the Great Depression).

Meanwhile the policy of the Chinese government is subsidizing domestic
dollar investment and increased Chinese exports to the US by an exchange
peg that, in effect, is providing bonus Yuan's to all who exchange
dollars for Yuan. This "expense" is paid for by all Yuan holders in
general (although it is a loss of appreciation in value which the
average Chinese may not even notice they are missing), and the
"windfall" of it goes to those growing Chinese companies engaged in
international export or who are receiving capital investment (new
factories, equipment, etc.). Hence, China by this policy invests in its
growing manufacturing base and export businesses with a sensible "pay as
you go" system that their public can afford, and will lead to dramatic
current and future growth.

In contrast, the US government's policy is to put punishing taxes on any
of its growing businesses and to borrow from foreigners in order to
subsidize a welfare system and to pay for military exercises.  This
reduces the nation's investment in job-producing capital and leads to
dramatically reduced growth.

There are serious problems ahead if things continue this way!

Current Articles:
http://news.bbc.co.uk/2/hi/business/4772049.stm
http://www.atimes.com/atimes/China_Business/GI28Cb02.html
http://www.bloomberg.com/apps/news?pid=10000087&sid=alZ839ZOOSeo&refer=top_world_news
http://www.moneyweek.com/file/12641/how-the-dollars-collapse-will-lead-to-a-new-gold-standard.html