Spend first, pay later

The International Business Times has just reported that House Majority Leader, Steny Hoyer, says Congress may need to raise the U.S. federal debt ceiling by $1.8 trillion.
 
“It is December,” House Appropriations Committee Chairman Dave Obey said, “we don’t really have a choice. The bill’s already been run up; the credit card has already been used. When you get the bill in the mail you need to pay it,” he added.
 
By “pay it”, Obey means borrow for it.
 
Obey’s words perfectly encapsulate what has become the government’s chief fiscal operating principle: spend first, figure out where the money is going to come from later.
 
But while the American government may be in the habit of kicking into the future the question of how it can pay its bills, other nations are beginning to ask America this very question.
 
Last month President Obama visited China and found Chinese officials taking a keen interest in his healthcare reform plans. The Chinese’s interest in healthcare did not center around the usual questions that have been preoccupying Americans. Instead, one participant in the talks recalled, “They wanted to know, in painstaking detail, how the health care plan would affect the deficit…”
 
It is not surprising that China should take more of an interest than most Americans in this crucial question. After all, the United States already owes China two Trillion dollars and could be forced to beg for at least half that much again if Obama’s health care promises are realized. “Like any banker,” the NYT reported, “they wanted evidence that the United States had a plan to pay them back.”
 
A brief survey of America’s financial foolishness will show that China has ample grounds for worrying that America might extend itself so far that it is left with no mechanism for paying back its creditors.
 
A legacy of foolishness
 
When George Bush took office in 2001, he inherited a national debt equivalent to 57.4% of America’s yearly GDP. But he also inherited a budget surplus of $128 billion – the second successive surplus after roughly 30 years of budget deficits.
 
(A budget deficit occurs whenever a country spends more money during a year than it has taken in. A budget surplus occurs every time the country takes in more money than it has spent during a year. The national debt is the accumulation of all the unpaid deficits in a nation’s history. Servicing the interest on the debt becomes a central part of successive budgets, making it progressively harder to achieve a budget surplus.)
 
Instead of building on the opportunity afforded by the surplus and reducing the national debt, Bush quickly ran up unprecedented deficits. Not only did he engage in foreign wars costing hundreds of billions, but he also initiated an array of new government goodies on a scale unseen since the days of Franklin Roosevelt. His Medicare Prescription Drug Act alone will cost more than $1 trillion by the end of the decade, possibly a lot more as the baby boomers begin accessing it.
 
Far too few people asked where the money for all of Bush’s new programs was going to come from. The answer, of course, is that it could only come from running up huge budget deficits and digging the nation deeper into debt.
 
When Obama took office in early 2009, the economy was crippling under the weight of so much unpayable debt. Blaming his predecessors for the recession he inherited, Obama allegedly set out to correct their foolish choices. Among the irresponsibilities he pledge not to repeat was the practice of promising financial commitments the country could not afford. As Obama said in a speech to the Joint Session of Congress: “Now, part of the reason I faced a trillion-dollar deficit when I walked in the door of the White House is because too many initiatives over the last decade were not paid for — from the Iraq war to tax breaks for the wealthy.”
 
Spending as if there is no tomorrow
 
Obama’s curious method for correcting his predecessors’ mistakes has been to perpetuate their disastrous policies to an unprecedented extreme. In an attempt to stimulate the economy out of the recession (a recession caused, principally, by so much unpayble debt), Obama borrowed more federal funds than any President in the nation’s history. Hardly had he settled into the White House when he signed two new bills, the $787B stimulus and the $410B omnibus, which together equal the $1.2T deficit he "inherited." Consequently, when the 2009 fiscal year finally ended this October, America had run up an all time record deficit of $1.58 trillion – 3.4 times the $459B deficit of 2008, and 10 times the $160B deficit of 2007.
 
The impulse behind Obama’s borrowing spree is an economic theory known as Keynesianism. John Maynard Keynes (1883 –1946) argued that a failing economy could be revived by governments injecting money into it. As the new money began circulating, Keynes theorized, it would reach people who would spend it, creating economic growth and more revenue for the state coffers.
 
Selling ourselves into slavery
 
Keynesianism has an air of plausibility about it until we stop to ask where the money actually comes from that government so generously pumps into the economy. The answer, of course, is that it can only come from debt. However, given the inflationary implications of debt (see section below on how the Government gets money), even this indirectly comes out of the pockets of citizens in the form of currency devaluation.
 
If the amount of money that the government desires exceeds the amount that American banks are willing to loan, then the government will go, hat in hand, to foreign banks. This is exactly what the Obama and Bush administrations have done, with the result that China and other foreign holders of America’s national debt are owed a combined total of about $3.3 trillion. Just to put this problem in perspective, America’s national debt is larger than the total economies of China, the United Kingdom, and Australia combined and is quickly approaching or exceeding the USA's 14 trillion GDP. (It appears less than that in charts, because the government has been cooking the books since the Clinton Administration. They are not counting Social Security and Medicare obligations as part of the debt.) If the pattern continues over the next decade, the government will borrow approximately $1.72 million every minute.
 
The result is essentially that the American government has sold its people into slavery. Those who will be hit the hardest with this debt servitude are those future generations of Americans who will be crippled by their obligation to service the interest on such an extortionate debt. But it is not just the burden to pay the debt that will cripple successive generations. They will also face the much more terrifying prospect of holding a devalued currency, since devaluation is always the result of pumping so much debt-money into the economy over long periods of time.
 
How the government gets money
 
There are only three ways that a government can get funds to inject into the economy: tax, print or borrow. If government raises its funds through taxation, then it can only inject into the economy what it has first suctioned out. Although Western governments make liberal use of this option, the amount of revenue that is available through taxation is necessarily limited. For example, in order for America to meet its present commitments through taxes alone, the federal tax rate for each American household would have to increase by 42% by 2040 (a figure does not take into account the liabilities to business, and therefore to tax revenue, that always come as the corollary of burdensome taxation).
 
The other option is that government can print money ex nihilo. The problem is that governments which do that have never been able to resist the temptation to completely debase their currency, resulting in hyperinflation. All Western governments have handed over the authority to create money to private central banks (America’s version of this is called the Federal Reserve). But the banks do not create money through printing presses. Instead, they create new money electronically every time they issue a loan for more money than they actually have on deposit. The reason they can get away with this is because only a small percentage of commerce takes place with actual physical money. The commercial banks in America end up creating $98 for every $1 held on deposit, which means that most of the money in circulation is actually debt money. Since every loan increases the money supply (a supply that is represented in bank ledgers rather than hard cash), it also depreciates the relative value of the currency held by everyone else. Thus, central banking is also inflationary. However, the requirement to pay interest curtails the borrowing to a certain degree. On the other hand, when governments print money or mint debased coinage, as in Weimar Germany and the last three centuries of the Roman Empire, they tend to completely debase the currency in a shorter period of time than generally happens under a central banking system.
 
What this means is that if the American government wants more money to spend then it can raise through taxation, the only option is to go to the banks and ask for a loan.
 
The hidden tax
 
By letting its currency depreciate, the American government is actually engaged in a form of hidden taxation. When every new injection of debt money arrives into circulation, those who first access it (in this case, the government and its favoured constituencies) are able to use the currency before the inflationary consequences are realised. By the time the new money trickles down to ordinary people (and poor people are usually the last to access it unless they are on government subsidies), it has lost much of its value. If this be doubted, one need only compare the purchasing power of the dollar today with twenty or even ten years ago. This is why Keynes, in one of his rare moments of insight, referred to inflation as a form of hidden taxation.
 
Of course, inflation happens every time someone takes out a loan that they fail to pay back, but because this is usually in small amounts, the effect it has in debauching the nation’s currency is small and only realized over long periods of time. The real danger occurs when government borrows gargantuan sums that it has no way of paying back, which is exactly what America is doing at an accelerated rate.
 
Naturally, this cannot go on forever. A fool may be able to defer the consequences of irresponsible choices, but God has designed the world in such a way that eventually judgment day arrives. For America, that day will come when the government is finally unable to service the interest on so much debt. Once that point is reached, China will no longer want to lend to America, and lawmakers will suddenly find that they have to live within their means. However, because the currency will then be so devalued, having a balanced budget will be impossible without curtailing around 97% of government’s obligations. Consider that at the moment the government collects approximately only about $2 trillion each year in total tax revenue (revenue that can actually do something since the dollar still has purchasing power), but needs at least $34 trillion just to meet the unfunded liabilities of medicare.
How long will America be able to go on like this? The history of national currencies and central banking over the last two hundred years shows that the national currency collapses when the combined national public and private debt meets or exceeds the GDP of the nation. The one exception to this was when the USA's national debt was 110% of GDP a few years after the end of WWII (ironically, this resulted more from FDR's social programs than from the war itself). However, as a result of winning the war, the USA owned nearly all of the world's silver and gold, controlled a large part of its oil, and was able to establish the US Dollar as the reserve currency of the world during post war negotiations. This gave America a little more time to play with.Then again, the USA should have hit the tipping point in the late 1970's, but two factors gave it a thirty year life extension. First, the baby boomers produced an economic boom lasting about twenty six years. Secondly, the use of the US Dollar as the international reserve currency has meant that America’s ponzi scheme has been exported to a larger population than just the USA. This has encouraged foreign investors and buyers of US Debt. However, both these factors are soon to change. The baby boomers are retiring (and cashing in on their social security as they do so) while confidence in the dollar as a reserve currency (and therefore in US investments) is quickly running out.
 
A time is fast approaching when the Congress will not be able to simply raise the debt ceiling to pay its bills. When that happens, America will have no choice but to have the money in hand before it runs up the bill. However, by then the government will be lucky to even have money that still has value.
 
 

Part of this article was originally written for the monthly Christian Voice newsletter (http://www.christianvoice.org.uk/) and is reprinted here with permission.

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