Gift Cards and Federal Notes for the Holidays

With little fanfare in the US, another pair of countries have announced another move away from the dollar.  China and Japan will no longer use dollars to transact between the two countries.  This follows a similar agreement between China and Russia as well as talks developing with India and Brazil.  Smaller but still notable countries making noise along those lines also include Vietnam, Qatar and Iran.  So why should we care here in America?  To understand the problem, consider the sale of Holiday gift cards...

Gift cards (like rebates) work because the merchants that issue them expect a certain percentage to never be redeemed.  Thus, they can bring in cash and never worry about giving a portion of their customers anything in return.  To crunch the numbers, merchants have made $41 billion in "free money" by selling gift cards.

This is small potatoes though.  Uncle Sam has "sold" $4.45 TRILLION to foreign countries, in exchange for real goods and services, with the hope that they never redeem their gift certificates / Federal Reserve Notes.  Three of the biggest holders of those gift cards?  You guessed it: Brazil, China and Japan.

We're still pretty safe for the immediate future, but places that need dollars to do business are slowly becoming fewer.  Eventually places that *want* dollars will also diminish.  And when that happens, everyone who has dollars is going to come shopping at the US of A to redeem their coupons, competing with domestic demand and inflating prices through the roof.

Mom & Dad and the Credit Downgrade

The recent credit downgrade shouldn’t come as a surprise to anyone who has ever had to run a household budget. This probably explains why it’s absolutely shocking to politicos in Washington, but I digress. The media claims that the downgrade shouldn’t have happened because Congress ended up increasing the debt limit and that it was really caused by the debate that took place beforehand, shaking investor confidence. It actually happened because raising the debt ceiling did practically nothing to address our fundamental inability to pay for our bloated government.


Imagine Dad (Republicans) and Mom (Democrats) are faced with a dilemma; they’ve maxxed their credit cards. Naturally, a debate ensues (which probably includes some accusations and name calling, ignoring all the times they both agreed to spend more money). Mom tells Dad he needs to get a second job to pay for the credit card bills. Dad tells Mom she needs to start spending less money. Neither suggestion is well received. Finally, with the due date to pay the bills rapidly approaching, they reach a compromise. They agree to call the credit card company and increase their credit limit. In return they agree to consider establishing a balanced budget and they agree to consider maybe possibly spending less money… next year.

After watching this whole episode, the neighbors are well aware that Mom and Dad have made no attempt to live within their means. Furthermore, they’ve done absolutely nothing to reduce the likelihood of having this same argument next year when they max out their cards… again.

Why the downgrade after raising the debt ceiling? Because for once it looked like having a deadline was going to force the politicians to roll up their sleeves and face the grim reality that Uncle Sam spends like a drunken sailor (no offense; sailors are much more responsible even when intoxicated). Instead, they made some vague promises about the future and failed to make any fundamental changes today, kicking the can down the road. S&P downgraded the US of A because Congress just missed a huge opportunity to demonstrate real fiscal discipline.