Thursday, July 14, 2011

Brother, Can You Spare A Trillion?

As I write this, the two wings of the One Zioparty are pretending to disagree on the financial elephant in the room: the debt load of the United States of America. As we hear endlessly on the mainstream media (MSM), it's approximately $14.5-trillion. A "trillion" is a "1" followed by 12 zeroes, a million millions.

To put this number in perspective, we can consider the "gross domestic product" of the U.S. In 2010, that number was ~$14.7-trillion. In other words, everything we built or otherwise produced ("goods and services") for the entire year, the output of all 153-million working people in America, produced revenues just slightly higher than what we owe in borrowed money. By itself, this is horrific.

However, there is also interest (usury) constantly accruing on this money. In 2010, we paid approximately $414-billion to cover this additional liability.

The dog-and-pony show we're now seeing in Washington is a reflection of this debt load. The U.S. Treasury has to periodically (biweekly, monthly, etc.) pay out certain obligations. These include the costs of social services, military operations, and...principal and interest on any debt.

There are essentially three ways for the Federal government to cover indebtedness: decrease spending, increase revenues or print more money. Of these, the Feds are always loathe to cut spending, because spending money garners votes (and, for some in government, results in kickbacks).

Increasing revenues involves increasing taxes, and while this can be a political nightmare, there are a LOT of taxes (and fees, which are de facto taxes) imposed by the Feds, and they are often raised quietly. In 2010, Washington collected about $2.16-trillion in taxes, but spent $1.2-trillion over that sum.

Lastly, the Federal government (or actually, its agent, the FED; the Federal Reserve Bank, which is neither a branch of the government, nor does it keep anything of value in reserve), has the unique ability to literally create money out of thin air.

Before 1913, when the Federal Reserve Act was illegally passed by Congress in violation of Article I, Section 8 of the Constitution, the money of the U.S. was backed by, or coined in, gold (and silver). These metals had secure purchasing power by weight, and the number of dollars in circulations was tied to the physical precious metals held in reserve by the Federal government. The paper money issued against those metals was labeled as either silver or gold "certificates", meaning they could be exchanged at any time for a specific weight of those metals.

Today, the "money" in circulation in America carries the label "Federal Reserve Note". A "note" is an instrument of debt. The FED charges the taxpayers $0.02 per paper bill produced, plus interest (the Treasury still coins money, but "street coins" are no longer produced in silver or gold). Because they are not backed by anything but "the full faith and credit of the U.S.", these notes are properly called "fiat money", worthless in themselves. They are the basis of all financial transactions in this country. Since 1900, mainly due to its transformation into fiat currency, the dollar has lost over 98% of its purchasing power.

Right now, Congress and the President are pretending to disagree about increasing the "debt ceiling". The Democrats want to add $2-trillion to the existing debt in order "to meet obligations". The Republicans, in the role of devil's advocate, want spending cuts which match the increase, at which point they will vote to raise the debt. This is where the disconnect comes into play.

Suppose you earn $50,000 per year. Your current debt load is, say, $5,000. You decide you want to buy a used car and increase your debt to $7,500. Your spouse says, fine, but we have to cut our spending by $2,500 to cover the increased debt. This is akin to saying that, yes, we can borrow an additional $2,500, but we will also drop $2,500 from our outlays. So the question that begs asking is, why not just redirect the $2,500 reduction in spending to pay for the car?

The answer, apart from the problem of already taking in less than they spend, is that Congress wants more money to spend now, and wants to pay it back later. That way, they say, we're only obligated to "small" payments over time, but we can cover our "obligations" now. The problem, of course, is not just that we are avoiding current liability, we're increasing future liability, PLUS, based on past performance, the government will continue to do this every fiscal year. They have willing allies in the MSM who are Chicken Little-ing about the devastating consequences of not giving Congress and the President more money.

In fact, the best possible action could be to fail to raise the debt ceiling. If this happens, two cascading results will follow. First, domestic budgetary obligations will still be met, for now, by increasing the money supply (this will further destroy the fiat dollar, but will mildly cushion the coming Crash). Dollars spent within the U.S. will still buy goods (which will continue to increase in price, the consequence of money supply inflation). Checks will still go out. But we will see a rapid decrease in available Federal government programs, either by abolition or offloading them onto the States. This will be politically based, with cuts against groups who are unlikely to vote in large numbers. Eventually, this will include cuts to the bone in "essential" programs, mostly New Deal leftovers like Social Security and unemployment compensation. Soon enough, the U.S. will be plagued by civil unrest leading to internal warfare as businesses shut down, the dollar goes into hyperinflation, and unemployment spikes.

Second, on the world stage, all of the creditor and other nations which continued to lend to the U.S., and/or float their currencies against the dollar (under the remnants of the Bretton-Woods Agreement) will experience meltdown. Economies around the world will collapse, and wars and other violence will break out as those in power scramble to maintain control.

Because we are past the financial tipping point, these things will happen no matter whether or not the debt ceiling is raised. Temporary injections of loan monies will only postpone the inevitable reality of collapse and crash-and-burn. We will be in "interesting times", as the Chinese say. Although I would have preferred to live out my later years in a quiet and secure America like that of 1900, I feel we've dealt with enough anticipation and trepidation, and the time for massive change is at hand, and welcome. Things will get much more difficult before they get better, so it's time to steel ourselves and take the plunge.

"No" to the debt ceiling increase.