By Doug Casey
The overleveraging of the U.S. federal, state, and local governments, some corporations, and consumers is well known.
This has long been the case, and most people are bored by the topic. If debt is a problem, it has been manageable for so long that it no longer seems like a problem. U.S. government debt has become an abstraction; it has no more meaning to the average investor than the prospect of a comet smacking into the earth in the next hundred millennia.
Many financial commentators believe that debt doesn’t matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” that trivialize the topic. Actually, some people owe it to other people. There will be big transfers of wealth depending on what happens. More exactly, since Americans don’t save anymore, that dishonest phrase about how we owe it to ourselves isn’t even true in a manner of speaking; we owe most of it to the Chinese and Japanese.
Another chestnut is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the debt, which is questionable. And at this point, government deficits are likely to balloon, not contract. Even with artificially low interest rates.
One way of putting an annual deficit of, say, $700 billion into perspective is to compare it to the value of all publicly traded stocks in the U.S., which are worth roughly $20 trillion. The current U.S. government debt of $18 trillion is rapidly approaching the stock value of all public corporations — and that’s true even with stocks at bubble-like highs. If the annual deficit continues at the $700 billion rate — in fact it is likely to accelerate — the government will borrow the equivalent of the entire equity capital base of the country, which has taken more than 200 years to accumulate, in only 29 years.
You should keep all this in the context of the nature of debt; it can be insidious.
The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; debt reduces it.
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If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.
Of course, debt is not in itself necessarily a bad thing. Not all debt is for consumption; it can be used to finance capital goods intended to produce further wealth. But most U.S. debt today finances consumption — home mortgages, car loans, student loans, and credit card debt, among other things.
Government Debt
It took the U.S. government from 1791 to 1916 (125 years) to accumulate $1 billion in debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981. Only four and half years later, the debt had doubled to $2 trillion in April 1986. Four more years added another trillion by 1990, and then, in only 34 months, it reached $4.2 trillion in February 1993. The exponential growth continued unabated. U.S. government debt stood at $18 trillion in 2015. Off-balance sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.
When interest rates rise again, even to their historical average, the U.S. government will find most of its tax revenue is going just to pay interest. There will be little left over for the military and domestic transfer payments.
When the government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game.
In principle, an unsustainable amount of government debt should be a matter of concern only to the government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its debt indirectly, therefore, becomes everyone’s burden.
As I’ve said before, I think the U.S. government should default on not just some, but all of its debt.
There are at least three reasons for that. First is to avoid turning future generations into serfs. Second is to punish those who have enabled the State by lending it money. Third is to make it impossible for the State to borrow in the future, at least for a while.
The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.
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The “debt” is an illusion. It does not in reality exist. It is against the laws of Nature to loan an imaginary currency, and expect peoples labor in return at Usury rates.
The elephant in the room is the fact that sovereign governments never need to go into debt in their own currency in order to create their own money supply. The Federal Reserve Act of 1913, which officially privatized the US money supply, by granting the exclusive right by private banks to create money as debt, has been the biggest financial scam of all time.
The same bunch tried it twice before 1913, we still had some Honorable Statesmen back then. They got rid of it twice. Then, Woodrow wilson agreed to sell America out so that they would make him president. They did, and he did.
Fractional reserve banking, banks create money out of thin air by marking a ledger on pushing a few computer buttons. Then loan you this fake money, and want you to pay it back in real money plus interest!
The creation of money by private banks is all a big scam.
If the public masses knew, they’d riot!
“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford, founder of the Ford Motor Company.
I believe Thomas Edison was against it as well.
Only problem is that too many people believe in this false debt. Not only that, but financial elites would definitely demand all “fiat debts” be payed whether they are forced to fight tooth and nail for it, or not. Get your assets out of dodge while you can.
I had a great-great grandfather who was a wealthy man until he got up one morning in 1929 and the banker was still wealthy, but he was not.
In fact, the deficits are not 700 billion but closer to 500 billion a year, since the peak of 1.4 trillion was reached with Bush’s 8th budget 7 years ago.
” In fact, you need a war to really get a big deficit. The peak deficits came during World War I (17% of GDP in 1919) and World War II (24% in 1945), as the chart shows. The deficits of the Great Depression only came to about five percent of GDP, and the big $1.4 trillion deficit for FY 2009 amounted to 9.8% of GDP. In 2015 it is estimated that the federal deficit will have reduced to 3.24 percent GDP.”
What matters is not the size of the debt but its percentage of GDP. As long a the economy is growing, the burden of debt, if held even, becomes smaller and smaller. In fact, all Democratic Presidents since WWII have overseen a reduction in debt burden while all Republican Presidents have presided over increases.
The US could, by establishing a single payer health plan, save about 600 billion a year (private insurance overhead is 20% vs. 2% for Medicare: 18% x 3 trillion is about 600 billion), or 20% more than the current deficits. Another 40 billion a year could be saved by repealing the prohibition of Medicare to negotiate drug prices. Another 180 billion could be saved by ending subsidies to wealthy industries like the banks, energy, and Big Ag. So there is savings of 800 billion a year, leaving a surplus of 300 billion a year. This is how the other 34 advanced nations have healthcare costs (with superior results) of half of the US costs. Stop giving away hundreds of billions to rich industries!
Here is a simple plan: single payer plus eliminate subsidies to profitable corporations would save 800 billion.
Cut US defense by 50% (currently at 1 trilliion), leaving it still the largest in the world….this would give us 1.3 trillion a year in surpluses.
With those surpluses,we could
provide universal healthcare coverage(cost 300 billion)
pay down debt at rate of 1 trillion a year, eliminating it in 18 years.
Not complicated: single payer; end subsidies to wealthy corporations. Result: universal healthcare and pay off debt within one generation.
Government doesn’t run anything well, just look at how they run The Veterans Administration & V.A. Hospitals.
Do you use the internet, gps, roads, bridges? All were built by the government. With the VA, it has a record of top-rated treatment, with the problem being that since the early 90’s, despite millions of new wounded vets, the Republicans have refused adequate funding.
One way to prove the government “doesn’t run anything well” is to underfund it and then complain that it isn’t doing its job. Among government successes: Social Security, Medicare, Medicaid, etc.
If you want the VA to provide top rated treatment to all vets in a timely fashion, vote out the Republicans who have been refusing to fund it to hire more doctors, nurses, and processors.
The two criminal wars started by Bush created millions of new vets needing treatment, but Republicans continue to reject Democrat’s requests for adequate funding.
If you want to destroy a program, refuse to fund it adequately. Then blame the government for the failure rather than the deliberate underfunding.
Private healthcare insurance has an overhead of 20%, meaning for every dollar taken in, 80 cents is spent on healthcare. Medicare has a 2% overhead, meaning that for every dollar spent 98 cents if for healthcare (all private). Clearly, it is the private sector which is wasting funds, raising the price of healthcare. If we had Medicare for all, with government administraition of payment, it would cost an additional 300 billion (insuring 10
% currently uninsured) but save 600 billion (18% savings x 3 trillion healthcare costs), leaving a surplus of 300 billion plus 100% coverage.
When the corporations hijack and control government, you can expect things to be run badly; likewise, when those who proclaim government is the enemy take power, you can expect they will prove that government is wasteful.
Government runs many programs well, much better than private interests. You use these programs on a daily basis. But we get it: you hate government, which you blame for all evil, even as you use government to make your complaint or get to work or protect yourself from theft, fraud, or fire. The conviction that government cannot work is a self-fulfilling prophecy.
I see you are still caught in the left / right – Dem / Repub false paradigm. 8 most horrible words: I’m from government and here to help you!
If you disapprove of government programs, get off the internet, shut down your gps, and stay off the goddamned roads!
Here are the most dangerous words: The government is evil: elect me to run it.
The US government is not in charge of the US money supply. it is created by private banks as debt.
So-called “Government” is actually a private corporation.
Interesting observation 🙂 It certainly has been privatized for quite a while. Voting in elections is for idiots.
It has been since The Organic Act of 1871 created DC: District of Criminals
It seems pretty silly working and slaving for paper notes.
USE PLATINUM TRILLION DOLLAR COIN TO PAY OFF AMERICA’S DEBTS:
What about using the platinum trillion dollar coin, which Congress has already passed legislation for, and has already used it once. The legislation says that Congress can tell the Department of the Treasury to mint a coin worth a trillion dollars. The platinum coin doesn’t have to COST a trillion dollars to create, it just has to be designated as being worth a trillion dollars. At this point in time, and because the debt now stands at almost 19 trillion dollars, we’ll have to mint 19 of those coins. After the coins are created, the are sent to the Federal Reserve, which has to use these coins to retire our country’s debt.
For more information, check out: “Platinum Trillion Dollar Coin.”