Until Debt Do Us Part

For all intents and purposes the Constitution is a dead letter; meaningless words rendered useless on two hundred year old parchment paper.  The federal government was meant to be one of enumerated and limited powers.  Over the past 150 years, the words and meaning have been struck out, covered over with white out, reducing it to nothing more than mere parchment.

The people are guilty of aiding and abetting the demise of the Constitution, and the ideal of limited government and federalism.  The people have willingly reduced themselves from citizens to subjects, dependent upon government for their very subsistence.  The peoples’ lives, liberty, and property are no longer treasured freedoms worth protecting.  These things have been traded for government benefits to be named later.

Government is a reflection of the people.  People have turned to government to solve problems.  When government is seen as the ultimate solution provider to problems is it any wonder why liberty and rights are abridged or denied, all things economic are controlled by the central planners, and why the Supreme Court is viewed as the ultimate arbiter of all things constitutional.

The stark reality is too few people care about these things.  People have traded liberty for oppression and freedom for slavery.   Liberty and freedom requires civic duty and personal responsibility.  Civic duty is shunned and government action takes its place.  Personal responsibility is too daunting a task that leaves the individual with no one to blame for life’s successes and failures.  Government responsibility eliminates the burden of personal responsibility.

Civil society has failed because the people are unwilling to take personal responsibility for their own lives and prosperity.  If people cannot function without government intervention forcing social programs such as social security, Medicare, welfare, and now universal health care on society; then the people must admit they no longer treasure or want liberty and freedom.  The fallacy is the people believe trading liberty and freedom for social welfare programs and security is attainable through government force.   If civil society can’t provide and assist others in need, how can anyone believe government is capable of doing this successfully?

The truth can be reduced to a simple statement.  If people are not capable of self-governance and self-direction what makes anyone believe people are capable of governing or directing others.

Personally, I concede most people will not resume their civic duty and personal responsibilities until circumstances force it upon them.  Government intervention and power will continue to expand until the system collapses under its own weight.

Certain events will force people, willingly or not, to resume these responsibilities.  Those events are the economy, the national debt, the currency, fiscal policy, and the central planners’ control of the money supply and interest rates.  More people are attentive to this aspect of life compared to their own freedom, liberty, and constitutionally limited government.

Until Debt Do Us Part

The United States is broke.  Bankrupt.  The federal government’s debt is nearly $16 trillion.  The true debt including unfunded liabilities is closer to $120 trillion.  Because of people’s normalcy bias they simply cannot believe the unthinkable could happen.  People refuse to look at the facts and data candidly and reach an unbiased conclusion.

There are numerous debt related factors; monetary and fiscal policy, tax policy, currency, and money creation.  These items are tightly coupled with debt.  However, these items create conflicts between the government’s interests and the peoples’ interest.  In fact these interests are often diametrically opposed to one another.

Money is misunderstood by nearly everyone.  What is money?  More importantly what is a dollar?  Ask people these questions and you will hear a variety of answers.  Most of them will be wrong.  Today, people believe money is Federal Reserve notes (a.k.a. dollars).  But how does paper money that has no intrinsic value function in society.  How do paper dollars represent value?  Who defines that value?  Money is the intractable link between government interests and our interests.

Personally, I could care less what money medium is used to exchange goods and services in the marketplace.  Seashells would work.  So could pebbles.  So could bronze or brass.  Any of those could work, however the question is how is value established with any money medium?

Because central planners (government and the central banks) control the money medium, the volume of money, and the cost of money (i.e. interest rates) they control the marketplace.  In free markets real good and services are produced based on demand and price signals.  Supply meets demands at a price level that establishes equilibrium between the two.  Too much supply and prices must drop.  Too little supply and prices must rise.  Prices and price signals are a result of supply and demand for real goods and services.

Central planners control the allocation of a scarce resource called capital.  This is true from the very creation of money itself, to interest rates, to the allocation of capital toward government centric preferences.  Subsidies, grants, tax policy, and spending policy all impact how capital is allocated in the economy.  Government subsidizes one good or industry to the determinant of another good or industry.  Tax breaks for the rich or the poor or for favored businesses negatively impacts other taxpayers and businesses.  These policies are nothing more than government preferences and government interference in the economy.  These policies are often ideologically driven.  The results are disastrous.  Demand is propped up by the government.  Price signals are distorted.  Capital is mal-invested.

The central planners are also responsible for fiscal policy.  In the 78 years since Franklin D. Roosevelt removed the U.S. from the domestic gold standard in 1933, the U.S. has run a budget deficit 70 of 78 years.  This means the U.S. had to borrow and/or print money to fund government.  In many cases government simply borrowed the money.  Meanwhile, from 1940 to 2011 the gross federal debt has increased from $50 billion in 1940 to $15.5 trillion at the end of fiscal year 2011.  That is a 29,900% increase in the federal debt. The base money supply has increased from $7 billion in 1933 to $2.7 trillion at the end of 2011.  That is a 38,471% increase in the base money supply.

What does this mean to you?  First, since the central planners control the money supply they control the value of money.  From 1800 to 1913 a dollar increased its purchasing power.  What cost $1 in 1800 cost just 65 cents in 1913.  From 1913 to 2011 the dollar’s purchasing power has fallen almost 96%.  What cost you $1 in 1913 costs just over $22 in 2011.

Imagine if you were baking bread.  If the recipe called for baking the bread for 45 minutes at a certain temperature you would understand what that meant.  Imagine now if the definition of a minute was always changing.  What use to be a minute is 30 seconds and then a couple years later it is 10 seconds.  If the unit of measure is constantly changing how would a baker know how long to bake his bread?  If a minute is now 10 seconds then the same bread would take 270 minutes.

The value of money works the same way.  It is the central planners that are changing the unit of measure or in this case the unit of valuation.  There is a significant difference between the central planners controlling the money supply with a fiat currency than there is when the money is backed by something like gold.  With a gold standard the people control the purchasing power of money not the central planners.  That is a key distinction between the two.  You should consider who you want controlling the money supply.

As Ludwig Von Mises wrote in The Theory of Money and Credit, “The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties.”  In 1817, British economist David Ricardo wrote, “Experience shows that neither a state nor a bank ever has had the unrestricted power of issuing paper money without abusing that power; in all states, therefore, the issue of paper money ought to be under some check and control; and none seems to proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion.”

Mises and Ricardo illustrate the difference between governments issuing paper money backed by nothing of value versus a currency backed by something of value.  This fact is quite obvious based on the aforementioned dollar value comparison between 1800 and 1913, and 1913 to 2011.

Because the central planners constantly debase the currency it diminishes purchasing power.  The people are intractably linked to the central planners for two reasons.  First, they control the money supply and the cost of money.  Secondly, because through legal tender cases in the 1870s, the Supreme Court ruled that paper money could be used as legal tender for private and public debts.  This became more problematic in 1913 when the Federal Reserve Act was passed and the 16th amendment to the Constitution was ratified.  I cannot stress enough the debasement of the purchasing power from 1913 through 2011.

This becomes even more problematic for the people.  The government’s interests and the peoples’ interest conflict.  Government operates on what is called the monetary plane.  In other words they are dealing with things like the debt and money supply on a nominal basis.  The government only needs $1 to pay down $1 of debt regardless of the purchasing power of the monetary unit.  Likewise, banks only need $1 returned on their $1 loan in nominal terms.

The people operate on the physical plane.  In other words the people deal with things like debt, money, good and services on a real basis.  That is $1 today may purchase a loaf of bread, but in a year it make take $10 to purchase a loaf of bread.   This occurs through no fault of the people.  It occurs because of the central planners.

The rise in prices is the result of the government’s actions.  This occurs primarily due to deficit spending which results in government borrowing.  Government borrows money by selling U.S. securities.  In return, the debt is increased and some amount of interest must be paid in the future on the securities sold.  Moreover, if not enough buyers exist in the market for U.S. Securities the central bankers act as the buyer of last resort.  In other words, the government buys its own debt to borrow money and fund deficit spending.

Government debt has grown from $50 billion in 1940 to $15.5 trillion in 2011.  Because interest is due on the debt government must make interest payments.  We have another case where government’s interests conflict with the peoples’ interest (for the most part).  Government benefits from low interest rates because that reduces the interest payments on the outstanding debt.  As of 2011 the government pays approximately $250 billion per year in interest.  That is astonishingly low considering the outstanding debt.  This happens because the central planners keep interest rates artificially low.   This serves the government’s needs. If interest rates returned to their 30 year average the rates would be roughly 5%.  The interest payments on the debt would quadruple to $1 trillion per year.

However this contradicts the needs of the people.  To be precise it contradicts a certain subset of the peoples’ needs.  In society there are two groups of people; the debtors and the savers.  In other words, these are net producers (savers) and net consumers (debtors).  A net producer is someone who produces more than they consume.  Their excess production is their savings.  Likewise, a net consumer is someone who consumes more than they produce.  To consume more than you produce a person must fill that void with government assistance or with debt.

Anyone that has a bank account, certificate of deposit, money market account, or retirement account is a saver to some degree or another.  Assume a saver is risk intolerant and wants a safe place to keep his money.  The saver opens a bank savings account.  Over a period of time the savings account has $100,000.  The bank pays the saver interest.  The bank also loans some portion of this money and receives interest in return.  The inherent conflict comes from the central planners controlling the interest rates.  Because interests rates are kept artificially low to keep government interest payments on the debt lower the saver earns a pittance in interest.  Today, that rate is below 1%.   There is little incentive for the saver to deposit money with a bank.  This is also a nominal interest rate as it doesn’t reflect the realities of inflation.

To further exacerbate the situation the central planners print money.  When the money supply increases and the real goods and services don’t rise accordingly inflation occurs.  Because savers operate on a real basis (vs. a nominal basis) the monetary unit’s purchasing power is decreased.  The real interest rate is the nominal interest rate less the real inflation rate.  From 2000 to 2011 the real inflation rate has been bounded between 5 and 11%.  Assuming a 6% inflation rate, the real interest rate for the saver is negative 5% (1% nominal interest rate minus 6% inflation rate).  So, the saver is losing purchasing power by keeping his savings in a traditional bank account.  The saver is dis-incentivized.  To earn a real return on his savings the saver is forced to consider other opportunities such as the stock market, bond market, commodities, futures, precious metals, land or real estate, etc.  Of course, each alternative has its own risk/reward characteristics.

Again, this is due to government action and has nothing to do with the people.  The central planners set the interest rate.  The central planners control the money supply.  Politicians constantly and continuously deficit spend.  These things are the reason why the savers are punished and there is no incentive to save.

Likewise net consumers depend upon the central planners, in part or in whole, for their subsistence and/or they increase their debt.  When interest rates are kept artificially low it makes bank credit cheaper for everyone including the net consumers.  Total debt has grown to nearly $52 trillion.  The creditors have $52 trillion in rightful claims to money.  The base money supply is $2.7 trillion.   Likewise, those reliant upon the central planners’ social programs support government power to take property from the rightful owners of the property they produced and redistribute it to those that have absolutely no rightful claim to it.  Central planners are merely an agent of the net consumer to plunder property from net producers (savers) to give to net consumers (debtors).  Instead of the net consumer personally taking the property of another – which would be a crime – they turn to the central planners to commit the crime.  That crime is plunder.  Government institutes laws to empower themselves and use the law against the net producers to plunder their property.  Under the veil of legitimacy, government acts immorally by plundering property.

The central planners have three methods to raise revenue; tax, borrow, or inflate (print money).  We know the central planners cannot continue borrowing money.  First, this increases the national debt and secondly increases the interest payments due to the buyers of U.S. Securities.  Secondly, as debt increases the risk to buyers increase.  Buyers will demand more attractive interest rates to offset the risk.  The central planners’ zero-interest rate policy (ZIRP) is a self-induced trap as they must either raise interest rates to attract buyers to fund deficit spending or they may not be able to sell securities to raise funds.  (Note, don’t be surprised to see the central planners institute a negative interest rate policy where you will pay the bank money to hold your money.)  If interest rates are raised, the interest payments on the current debt increase.  If interest rates are not raised the central planners cannot sell securities.  In this case, the central planners will act as buyer of last resort.  Meaning, the Federal Reserve will print money to buy securities from the government.  This increases the Feds balance sheet while bringing in funds to the U.S. Treasury.  The result is inflation.

The central planners cannot tax the people at a rate to support deficit spending.  Over the past four years annual deficits have been running between $1 and $1.5 trillion.  The top 3.2% of income tax returns filed in 2008 represent 52% of all individual income taxes paid.  Assuming everything remains equal, if the top income tax rates were increased by 25% that would bring in an additional $481 billion per year.  That still leaves a deficit between $600 billion and $1.1 trillion.

Moreover, the central planners must tax the people for two primary reasons.  First, the people must be forced to pay taxes in the currency dictated by the central planners to force people to accept the currency.  Think about that for a moment.  The central planners must force compliance and acceptance of their currency on the people.  Again, this goes back to a key distinction between the central planners controlling the purchasing power of the monetary unit versus the people controlling it.  Secondly, the central planners need a mechanism to remove currency from circulation as a means to minimize inflation.

 Conclusion

The entire global monetary system is debt based.  All currencies are fiat.  The central planners’ interests conflicts with the peoples’ interests.  All private and public debt in the U.S. is denominated in the very currency in which most of the private savings/wealth is denominated in.  The central planners cannot raise sufficient revenue through taxation nor can government continue to borrow to fund deficit spending.

This leaves the central planners with one option: to print money.  As more money is printed and put into circulation it decreases the purchasing power of the currency.  Any savings will be debased or completely eliminated through inflation.  Those people relinquishing their liberty and freedom in exchange for government social programs and security are facing a rude awakening.  The central planners care about keeping power and winning elections.  The central planners will destroy the currency to save the system.  Most, if not all, of the savings/wealth in the country will be confiscated through inflation.  As a result people will be forced to take personal responsibility for their lives once again.  Those dependent upon government for their subsistence will be sacrificed upon government’s altar.  Civil society may not be so civil once the reality sets in.

It’s really a question of self-preservation.  Do you want to preserve your own life or be dependent on government to preserve your life?  As Ayn Rand said, “you can ignore reality, but you can’t ignore the consequences of ignoring reality.”  Eventually, the destructive Keynesian end game must come to an end.  It always does.

Meaningful change will not happen until debt does us part.

P.S. – I read an article a week or so ago that had a caption in it labeled Until Debt Do Us Part.  I want to acknowledge the use of it though I don’t specifically recall the article to give proper attribution.

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2 Comments

Filed under Economy

2 responses to “Until Debt Do Us Part

  1. Governments are not always created for those purposes laid out in the Declaration, i.e. “to secure our rights.” In some cases, governments are created specifically to allow some men to impose their wills upon other men, or to enable them to steal & plunder property through gradual steps & measures. I look at it like building a casino. The gambler may look at the casino as an opportunity to have fun & maybe make some easy money. But the proprietor looks at the gambler as a “sucker,” and the government looks at the casino as its willing agent to trick the gambler out of his own money. Should the proceeds from casino gambling then be used to fund our schools? You will be hard-pressed to find an average citizen who says, “no.”

    Our government for these united States were not formed by an overwhelming majority of well-intended “people” looking to cast of bad rulers for good ones. Instead, it was formed by a minority of people with a vision for how they would impose their will on the majority. If the majority had had a say, we might never have become the united States, and might still be under a king. Over the years, self-proclaimed “democrats” have pushed for greater suffrage rights for people who have less education & property ownership than those who have traditionally been in government. The more “democratic” our government has become, the more monarchical it has become. The people are lazy & don’t want self-government. They will always turn to a monarch to tell them what to do & take care of them.

    The problem of money is supply & distribution. If people behave predictably, government only has to print enough money to replace the amount that is naturally removed from circulation. But people don’t always behave predictably. Sometimes, new people immigrate into the country or emigrate out of it. In that case, there may be too little or too much money in circulation. Who controls the amount of money in circulation? If money were seashells, all someone would have to do is run to the beach to get enough to purchase a Lamborghini. If money was made of gold, then whoever controlled the mines would control the circulation & who could buy a Lamborghini. And if the money supply was regulated by banks, then the bankers would control how much money was in ciruclation, and would influence who could buy a Lamborghini. If you could pick who would be in control of the money supply, whom would you pick? If there are alot of people unable to afford Lamborghinis, they will be unhappy with the way things are, and will push for a collective body (government) that distributes the money more evenly. It’s no so bad if they can’t have a Lamborghini, just so long as nobody else can. Then, if you’re the government, you can shake down the Lamborghini company to make sure they donate to your candidates’ re-election campaigns, or run them out of business. Done properly, the people will applaud this cronyism, and that is be the nature of popular government–nothing more than gangsterism.

    To ask government to do otherwise is to ask politicians to vote only on principle, and not for their own political self-interest. Popular government doesn’t work that way, and always tends towards monarchy. Times will certainly get worse, but the people will never demand better government. Instead, they will scapegoat the problem, and insist that the government hasn’t done enough, and things would be better with a king. As long as your country is filled with a near-majority of consumers/debtors, you will never have good government unless you can guarantee they will elect a good king.

  2. The people of the western welfare states have become a cult of government supplied comfort.

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