Monday, August 1, 2011

About the National Debt

We hear a lot about our national debt lately. We are told more revenue (which means taxes and fees) and cutting spending will pay of the debt. This is a lie. While we definitely need to downsize government and cut spending, that alone will not do it.
When the government wants more money, the U.S. government swaps U.S. Treasury bonds for "Federal Reserve notes", thus creating more government debt.  Usually the money isn't even printed up - most of the time it is just electronically credited to the government.  The Federal Reserve creates these "Federal Reserve notes" out of thin air.  These Federal Reserve notes are backed by nothing and have no intrinsic value of their own.
The Federal Reserve then sells these U.S. Treasury bonds to investors, other nations (such as China) or sometimes they "sell" them back to themselves.  In fact, the Federal Reserve has been gobbling up a whole lot of U.S. Treasuries lately.  Some refer to this as "monetizing the debt", but that is not quite an accurate statement. That is, when the government gets $10 billion from the Federal Reserve there is interest on the money.
To put it another way, every dollar created is created with debt owed. The rate of return or how much extra you get back on a 10 year treasury bond is about 4.5%. That is $45 million on that ten billion the government had created. The rates of return on treasuries vary depending on the treasury maturity length.  To simply state it, every dollar in circulation has a percentage of debt that is owed by the government. And since the government debt is ours, we owe this debt.
When the Federal Reserve creates money this way, it does not also create the money to pay the interest on the debt that has been created.  Eventually this puts pressure on the U.S. government to borrow even more money to keep the game going.  So what this creates is a spiral where the U.S. government must keep borrowing increasingly larger amounts of money, where the money supply is endlessly expanding and where the value of the U.S. dollar is destined to continue going down forever.
According to Treasury Direct, the June 2011 interest on outstanding debt is $110,536,850,221.63! The total interest expense for fiscal year 2011 on outstanding debt is $385,871,949,498.62. That is over $385 billion dollars. This equals about 3% interest.
The following table shows the amount of interest only paid on the debt since 2000.
Total Interest Paid on National Debt

When you take the $3.465 trillion spent in 2010 that is 12% that went to interest alone on the $14 trillion debt at roughly 2.7% annually.
Another way that money comes into existence with debt is Fractional Reserve Banking. According to the New York Federal Reserve Bank, fractional reserve banking can be explained this way-
"If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000)." If a bank then has a $1 million in deposits they can loan out up to $10 million. All of this is at interest.
There is also a 9:1 ratio with money deposited in the central bank. That means that if a bank deposits $10,000 in the central bank they can loan up to $90,000 on that money. The 1:9 ratio then follows each time the credit from those loans are credited to a bank; say $15,000 for a car, the bank receiving the money can make the loan of $13,500 on that $15,000 deposit. It follows, the more money that is loaned on credit, the more money in the supply, all of this money is created as debt. And all of it with interest on the original principal created out of nothing.
As you see, not only is the amount of the debt our public servants accumulated beyond repayment, as long as the money is created as debt, with interest due, we can never pay off the debt.  What would happen if the debt were paid off?
Let us pretend that the US sold Alaska and Hawaii for $14 trillion and paid the debt in full. This would cause a sharp contraction in the money supply. It would cause a $14 trillion contraction which would lead to deflation.  Prices would drop as would paychecks. And since there would be less total money there would be fewer loans. This would lead to business, state, cities and federal government being short on cash and credit. This is clearly an oversimplification, since much of this money is held by external governments. However, this shows that we cannot just pay it all off.
If the pay off were slow, then deflation would in turn be slow. This would allow for a more realistic adjustment and more money to be created by private debt. That is debt such as you and I have on our mortgages, cars and credit cards.
So is there a way out of this mess?
The book, "The History of the Money Changers” is a concise and good overview for beginners. It also reaches the same conclusions that Bill Still and many others have reached. The writer states that Milton Friedman came up with the same conclusion. That conclusion is that a public debt-free currency like the Greenback is issued by the U.S. Treasury and used to pay off the national debt as fractional reserve banking is ended.
In my research, I have discovered those critics who currently condemn the monetary system almost universally suggest that the only solution is to restore a gold backed currency. I don’t think any readers of this timeline can be in any doubt, that such a system will be open to abuse by those very people who abuse it today. Indeed if we introduced a currency backed by chairs, I believe we would find ourselves with nothing to sit on!
The only monetary system that seems to have worked in history is one which is backed by the goodwill of a government and is debt free, such as President Lincoln’s, “Greenbacks.” Fortunately, the Nobel Peace Prize winning economist, Milton Friedman came up with an ingenious solution of wresting back control of the money supply from the bankers, paying off all outstanding debt, and preventing inflation or deflation whilst this process is completed. I summarize this below.
Using America as the example here, Friedman suggests that debt free United States notes be issued to pay off the United States Bonds (debts) on the open market. In conjunction with this, the reserve requirements of the day to day bank the regular person banks with be proportionally raised so the amount of money in circulation remains constant.
As those people holding bonds are paid off in United States notes, they will deposit the money in the bank they bank with, thus making available the currency then needed by these banks to increase their reserves. Once all these United States bonds are paid off with United States notes, the banks will be at 100% reserve banking instead of the fractional reserve system and then fractional reserve banking can be outlawed.
If necessary, the remaining liabilities of financial institutions could be assumed or acquired by the United States government in a one-off operation. Therefore these institutions would eventually be paid off with United States notes for the purpose of keeping the total money supply stable.
The Federal Reserve Act of 1913 and the National Banking Act of 1864 must also be repealed and all monetary power transferred back to the Treasury Department. The effects of this will be seen very soon by the average person as their taxes would start to go down as they would no longer be paying interest on debt based money to a handful of central bankers.
A law must be passed to ensure that no banker or any person in any way affiliated with financial institutions, be allowed to regulate banking. Also the United States must withdraw from all international debt based central banking operations ie. the IMF; the BIS; and the World Bank.
If all the countries of the world adopted the conclusions above, then humanity will at last be free of these central bankers and their debt based currency. It’s a lovely idea, but first we have to get it past our corrupt politicians many of whom are quite aware of the scam that plays us on a daily basis, however rather than do the job we have elected them to do, they keep their mouths shut and instead look after themselves and their families, whilst the rest of us continue to be exploited.”
– Andrew Hitchcock, “History of the Money Changers”

However, it will not be easy or safe to end the central bank. In 1791 the First Bank of the United States was formed but intense opposition to foreign ownership by President Jefferson and others helped kill it by 1811. A Second Bank of the United States was formed in 1816 and this time they secured a 20-year charter. However, President Andrew Jackson was also opposed to foreign ownership and withdrew the federal deposits in 1832 as part of his plan to kill the bank charter in 1836.
An attempt to assassinate Jackson in 1834 left him wounded but more determined than ever to stop the central bank. Thirty years later President Lincoln refused to pay international bankers extremely high interest rates during the Civil War and ordered the printing of government bonds. With the help of Russian Czar Alexander II who also blocked a similar national bank from being set up in Russia by the international bankers they were able to survive the economic squeeze.
Both Lincoln and Alexander II were assassinated. In 1881 James Garfield became president and he was dedicated to restoring the right of the federal government to issue money like Lincoln did in the Civil War and he was also assassinated.
Years later John F. Kennedy opposed a private national bank and was assassinated in 1963 and Ronald Reagan opposed a private national bank and in 1981 an attempt was made to assassinate him. Coincidence or not the opposition to a privately owned national bank was a common characteristic to all these successful assassinations and assassination attempts.
Additionally, the banks can call in the loans and quit making new ones contracting the money supply as we seen in the Great Depression.  The difference with the plan noted above, the government could actually print enough debt free money to help offset the problems that would be found.
As President Lincoln said “The money powers prey upon the nation in times of peace and conspire against it in times of adversity. The banking powers are more despotic than a monarchy, more insolent than autocracy, more selfish than bureaucracy. They denounce as public enemies all who question their methods or throw light upon their crimes. I have two great enemies, the Southern Army in front of me and the bankers in the rear. Of the two, the one at my rear is my greatest foe. Corporations have been enthroned, and an era of corruption in high places will follow. The money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few, and the Republic is destroyed."

1 comment:

  1. Think about what you are saying. If all money is backed by debt, then how would you pay the debt off with out incurring more debt? An increase in the National Debt is equivalent to finding more gold in the Gold Standard.