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. 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.

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.

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 says they are:

Foreign Investors $5.7T
The "Social Security Trust Fund" 2.8
Federal Reserve 1.8
Private funds and investors 1.4
FedGov staff retirement funds 1.2
Mutual Funds 0.9
State & local governments 0.7
Other 2.4
Total $16.9T

. . . 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.

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 of madness.


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Jim Davies's picture
Columns on STR: 243

Jim Davies is a retired businessman in New Hampshire who led the development of an on-line school of liberty in 2006, and who wrote A Vision of Liberty" , "Transition to Liberty" and, in 2010, "Denial of Liberty" and "To FREEDOM from Fascism, America!" He started The Zero Government Blog in the same year.
In 2012 Jim launched http://TinyURL.com/QuitGov , to help lead government workers to an honest life.
In 2013 he wrote his fifth book, a concise and rational introduction to the Christian religion called "Which Church (if any)?"


Emmett Harris's picture

Good article, Jim.

Thunderbolt's picture

Ahhh, yes, Jim, the taxes! Root of all Evil, indeed. They are right to fear Bitcoins, which appear to be climbing rapidly. I am hoping that some form of anonymity for the coins is forthcoming soon, either Zerocoin or the browser fix discussed by Cody Wilson of 3D printing fame. An anonymous, untraceable currency is essential to starving the beast. Tolfa is more essential. What if someone were to send a Tolfa C.D. to every teenager in America! Made in China, that might cost only a penny or two each.

Jim Davies's picture

Thanks Emmett, and thank you T-bolt for an extraordinarily creative idea!
TOLFA is spreading geometrically by having each graduate introduce one friend a year to the course, and that will continue and is fully sufficient, by doubling the number of graduates annually. The reason a person undertakes the study is that his friend, for whose opinion he has some regard, recommends it - along, of course, with some underlying interest in ideas about freedom.
But you're saying, scatter-shot the school on CDs - so as to give that process a boost. Catch people who are "ready" for what it teaches but who do not happen, right now, to have a friend who just graduated and who thinks to invite him. Mail out ten million, generate instantly perhaps ten thousand new students - who will accelerate the standard growth process, perhaps bringing forward E-Day by a year or two.
That's the best idea I've seen in the seven years since it launched. Well done, indeed!
Tell me more about that "penny or two each"?

Alex R. Knight III's picture

I second that emotion, Jim and Thunderbolt:  Getting a TOLFA CD into the hands of every teen in Amerika would definitely revolutionize things.  And further, think of how many other hands those original CDs, and the additional ones burned from the downloads, would fall into.  Then there'd also be the huge uptick in traffic on the Web version.  Is that ten million figure accurate?  I expect there are probably more teenagers than that out there, but how do we make this happen?  An Indiegogo campaign, or something similar, perhaps?

Jim Davies's picture

No, Alex, the 10M was a figure plucked frm the air. Taking teens as one decade out of 8 (longevity being about 85, I think) 320/8 = 40 million.
Mailing a CD to each might run 75 cents a pop, hence $30M required. A tad heavy even for Indiegogo, perhaps? - but first let's hear from T-bolt about that "penny or two."
The web site is no longer on the critical path. it's useful for quick reference, but since replication is taking place by handing CDs, it's not actually needed and I've contemplated taking it down for a year or so now. Eventually the Feds may do it for us....

Thunderbolt's picture

No word back yet on the actual cost, Jim and Alex. I know it was very tiny. One could burn the empty CD's here and then send a bunch of them to a single person to hand out at a high school graduation, when you have them where you want them. That would essentially eliminate the mailing cost factor.

Thunderbolt's picture

Looks like blank ones can be had for about five cents. The Chinese, however, love to haggle.

Glock27's picture

Great ideas for expansion, simply great.

Jim Davies's picture

As I said above on November 9th, this idea could give things a valuable boost; it might bring forward E-Day several months, maybe a year or so. But don't let's go overboard; it can never do more than that. It's very important to understand that fact. There is one way to cause all government workers to quit their jobs, and one only: one-to-one replication.  ANY kind of broadcast or "shotgun" approach cannot do it - for several solid reasons. I've thought about this for several years and have never been more certain of anything. Anyone who disagrees has almost certainly failed to think it through.

But let's get a handle on the cost. There are about 40 million teens. Let's say distribution of CDs is by direct snail-mail. My experience of direct mail says that while a good offer is accepted at a "par" rate of 1%, here the offer is very unfamiliar and we should not count on more than a tenth of that. So one such mailing will generate 40,000 new students.

The cost elements are the recorded CD, an envelope, postage, and name & address label. http://www.mailingjet.com/direct-mail-costs/bulk-mail-postage says that standard bulk rate for letters is 24.2 cents each. Nonprofit is less, but nonpofit means getting government approval as a charity. No thanks. Suppose the CD costs 10 cents, ready to go, and the envelope 4 cents in bulk. The label will cost 5 cents.


Label               5
Envelope          4
CD                 10
Postage          24

Total              43 cents

= $430 per thousand, in the mail. And that would be a real bargain.

So after due testing, the 40 million can be reached for only $17,200,000 or (17200 / 40 =) $430 per student.

$17 million is a drop in the bucket to a few people, and maybe one or two of them are libertarians. Suppose you were one such. Would you drop 17 mill to bring forward E-Day by a year or so?

Perhaps so; it's not impossible. Anyone in touch with such a person is asked to put to him the proposition. I'll be happy to help prepare.