The Country's Debt Default CAN Affect Us

OK, we've all heard a lot of drivel about how the country's debt default - if it occurs - won't be a big deal for most Americans on a day-to-day basis.

Let me point out how that's wrong - probably.

The biggest single way that a debt default could affect everyday folks, every day, is in a way you might not expect. I mention it because I haven't heard anyone else talk about it. That effect? Gas prices.

OK, how can gas prices be effected by the country being unable to pay its debts? Well this gets a little clunky, but let me try.

Investors throughout the world invest their money where they think they'll get the most return, i.e., make the most money on their money. So if you're a big-money person in England and you buy Euros with your Pounds, because you believe Euros will go up in value and it turns out you're right, you've made money. If Euros go down, when compared to Pounds, you've lost money.

If lots of investors buy Euros, the value of the Euro will go up (all currency values go up and down and the value of those currencies are as compared to others). If very few investors buy Euros, the value of the Euro reduces. Currencies are, in this way, like any other commodity. If demand is high the price goes up. As an example if a lot of Americans want to buy Euros and are willing to spend their dollars for them, the Euro (and I'm making up these numbers) might be worth $1.10. If very few Americans buy the Euro, it could be worth 95 cents.

OK, the same thing's true of dollars.

So if the government issuing Dollars, the U.S., defaults on its debt, there's less confidence in that economy in the rest of the world. The result is that the dollar is worth less (not worthless, just worth less) than it would otherwise be.

So what does that have to do with the price of tea in China? A great deal, actually, but we're talking about the price of gas in the U.S., and it has a lot to do with that, as well.

Oil prices are - by international agreement and custom - denominated in dollars. The price of anyting, or its value works the same way as currencies. A loaf of bread we buy from France could be worth $3.00, but if a Dollar were only worth half as much as it is, that same loaf would cost $6.00.

As by now you're perceived, the same thing is true of gas. If the Dollar is worth less, as it would be after a default (or after the threat of a default is really serious as it isn't yet, as of this writing) the value of oil - and thus of gas - is worth more against that Dollar, so the price of gas goes up in "dollar terms."

There are other ways that such a default can affect us, but you've probably heard about them already, e.g., increasing interest on home loans, etc.

But I'm not applying for a home loan this week and I suspect you're not either. But my suspicion is just as strong that you'll be buying gas.

Thanks for reading and let me invite you to two other places. First, please check our posting in April of last year to get to our magazine columns and books that are available on Amazon. Also, the radio program that we do on Wednesday nights is available at http://GoingBeyondRadio.com/JeffBushman  We won't be on live this Wednesday night, but our archived shows are all there.

If you'd like to write to me, please do so at tjbradio@gmail.com. Thanks again.