What They Owe

Column by Jim Davies.

Exclusive to STR

There was a lot of fuss recently about something they call the “debt ceiling.” Supposedly, it's a kind of limit to what the FedGov can borrow. It's all a load of horsefeathers, of course, because whenever they find the limit inconvenient, they will raise it – as they have already done, 95 times in a row [5]. One of the key features of government is that by nature, it cannot be limited. It governs. If it were limited, the limiter would be governing instead, and people would witter about how to limit the limiter.

Curiously, I never seem to see any dollar figures mentioned, so I don't know what the alleged ceiling is now, or may be tomorrow--but no matter. Some far more important figures are well published at that most useful web site, www.usdebtclock.org [6].

It's a busy page, with all kinds of useful numbers displayed in real time, dancing and jiggling as they increase by the second – always they increase, never fall. At the top left is what the FedGov owes its creditors, misleadingly but commonly called the “National” Debt. It will be bigger when you read it, but right now it's $16,962,283,573,554. Around $17T, for short.

Compare it with what Americans produce (including, alas, government services counted at cost) – that's the GDP and is $15,931,077,184,000 or some $16T for short. Some think the ratio between those (17:16, or 106%) is significant; I don't. Much more significant is the ratio between the debt and the income that has to service it – interest and principal repayment. Those revenues are $2.73T, so the ratio is 17:2.73 or 621%. Oops!

In an idle moment, I got to wonder how they could repay this massive loan, from those annual revenues – all of which are already spoken for, and then some. First option: They could stop all other spending cold, and wipe down the debt in a bit over six years; nearer seven years to allow for the interest that will accumulate on the declining balance while they do so. So taxpayers would suffer the same level of confiscation as today, but see absolutely no benefit returned of any kind; no military “protection,” no NSA spying (looks a pretty good option, so far!), no welfare, no “social security,” no alphabet soup of agencies to trip us up . . . yes, I'd say that's definitely a proposition worth examining. However, I'll be surprised if enough other people agree with me to make it politically feasible . . . or even to get it on the agenda.

Alternatively they could compromise. Slash the spend by some percentage less than 100, and pay off the loan over a period longer than seven years. Using an online mortgage calculator, I found out that if they took a bit under 30% of the revenues (cutting spending by that amount) and applied it to paying off the debt, they could do it in about 30 years. A wide variety of other combinations exist, of course, but consider that one: It assumes voters would consent to being taxed $100 but rewarded with only $70 worth of goodies, and that would go on for a whole generation, 30 years. Would they buy it? So long as they perceived that government brings some value, my guess is that they would absolutely not. A 30% benefit cut would have them out screaming on the streets, vigorously emulating a bunch of angry Greeks [7].

So the ugly truth of the matter is that if the FedGov pays down their debt, they will have a rebellion of tax-feeders, while if they increase taxes in order to do so, they'll have a rebellion of tax-payers. So they have no feasible repayment option. They are up a creek, sans paddle.

Okay, second option: don't repay it, just keep it rollin' along like the mighty Mississippi. That works, provided the creditors agree. So who are these creditors, and will they agree?

This source [8] says they are:

. . . and I'm sorry to say I think they will agree. The Fed will agree because it's a creature of Congress; if it should ever fail to cooperate, its plug can be pulled and all that lucrative source of profits known as fractional reserve banking will be history. Incidentally, there's a hoary old fiction still doing the rounds, that huge savings would result if the FedGov did its own money counterfeiting like all other governments, instead of using the “private” Federal Reserve. Not true. The Fed holds only $1.8T out of the $17T, or 10.6%, and the interest paid on it is a tiny fraction of the total federal spend; on top of which, counterfeiting is not a zero-cost activity. If the Feds took it over, its cost would double for sure, due to the Bureaucratic Rule of Two.

The Social Security trust fund will agree because the news that it is worthless would risk awakening the voting public. Will large holders of T-bills agree, institutions that have undertaken to pay pensions to millions of dependents? It rather depends on what they see as alternatives. If the alternative is a repudiation of the debt (see below), which would wipe out all or most of their supposed assets, then yes, I think they will agree.

How about foreign investors, like the Chinese government; will they agree? Seems to me that if they didn't, they would likewise lose what they had supposed to be a large, secure asset and with it, a highly lucrative trading partner. They may not like it or trust it but, like old age, the alternative is worse yet.

Now to the third option: repudiate, or abrogate the debt. Just tell those creditors “Sorry, folks – we're outta cash.”

This is the moral option, because all those creditors bought the debt knowing full well that both interest and principal could be paid only by stealing it. They are partners in larceny. Further, repudiation would make certain that no real person would ever lend the FedGov money again – and for as long as it survives (not long), that would be much healthier.

It would cause a huge disruption, however. The China trade is beneficial to both parties, and it would be placed in severe jeopardy. We might find the supply of cheap goodies dries up like a closed faucet. Worse: all those private pension funds will go broke and their dependents will starve, because the funds' income comes from interest paid on their supposed assets, and if the assets are wiped off the books, they won't receive any. That will leave their pensioners to the mercies of their families, if any; and the families would not be any better able to shoulder the burden than they are today because merely repudiating the debt won't cut taxes or get government out of their way.

Nonetheless, a big majority of the holders are government outfits. Ten, eleven trillion out of the 17? More? Hard to tell. To them, it's merely an accounting change. Nothing in their real status, to the extent they have one, would change. “Social Security,” for example, does not rely at all on its alleged trust fund, invested in Treasury debt; it pays Peter by robbing Paul, and has done lo! these many decades despite the pretense of its “insurance” name.

The point is that abrogating the debt will not solve any real-world problem. Yes, it's the right thing to do, but no, it won't change the burden of taxes and regulations, which is what really needs fixing. And since government totally depends on taxes and lives, breathes and has its being by generating regulations, the real fix is here [9].

Such total elimination of government will include, of course, an abrogation of its debt – but the ill effects noted above will not result because as well as the debt repudiation, there will be an end to taxes, and that will nearly double everyone's net take-home pay. Pensioners will lose their receipts from private pension funds invested in T-bills, and Social Security too will vanish, but working families will have ample extra money to keep elderly parents out of penury.

And so sanity will return to the human race, after ten millennia [10] of madness.