16A041 About That Twenty Trillion by Jim Davies, 11/15/2016    


The last year the FedGov didn't owe anyone any money was 1836. According to that very useful compendium web site US Debt Clock, at this writing it's $19,806,622,000,000 and change... no, make that $19,806,623,000,000 because it took me a few seconds to type that sentence. When you read it, it will be even closer to $20 trillion. Does it matter?

Statists don't care, they say not. Their event horizon is four years, so it's a fair gamble (though getting riskier every year) that the financial system won't collapse on their political watch. After all, it's being going on for 180 years. Me, I don't think it's quite that simple.

First, the timing of that collapse is not in their hands but in ours, who are bringing about a free society by introducing one friend a year to the Freedom Academy. If that's happening at the suggested rate, government will be out of business eleven years from now. In the later stages of that process, as envisioned in my Transition to Liberty, government fiat money will lose all its purchasing power because an exponentially growing "White Market" will be choosing its own media of exchange, probably gold and silver and maybe Bitcoin. The implosion of that government debt will be monumental, and wholly beyond government control.

When it happens, those who own it will be Sadly Out of Luck. 28% of it belongs to the "Social Security Trust" and other "government trust funds" so there will be nothing to pay State pensioners. Another 13% of it is held by the Federal Reserve, so banking as we now know it will be history. State and local governments own about 12% so they will be flat broke, and something like a further tenth by private pension funds, so those retirees too may be obliged to ask their children for help. 33% belongs to foreign governments, who will be up creeks sans paddles and the residue is owned by private (presumably, wealthy) investors. They won't be wealthy any longer.

None of this will matter much to those re-educated in the Academy or one like it, for we will already have learned to shift for ourselves - and if elderly, that may mean either reverse mortgaging their home if they own one (and paying off existing mortages with worthless "dollars" will be a pleasurable solution for many) or appealing to the kids; and that will not be all that tough for the kids, because they will no longer have taxes to pay so their incomes will have doubled, more or less. Provided familiy members are on good terms, as they should be, no great hardship will ensue - except for government people who postponed joining the Academy. Boo, hoo. Much better to get aboard today.

Second, the size and instability of the FedGov's humongous debt does matter currently, while we await that happy day, because of how it functions. It's composed of Treasury notes that fall due at several points of time; five years, ten, thirty and so on. Every year, some of them must be returned to their owners. Let's say the average is 20 years; then the FedGov has somehow to find a trillion dollars a year to honor its obligation. Since it takes in only $3.3 trillion as taxes and every cent of those (and more) is spoken for already, it can't be done that way. Instead, they "roll it over" by selling a fresh trillion in future bonds, and using the receipts to pay off those that are maturing. This trick works, but only for as long as there are willing buyers. Now, why would anyone buy a T-bill that offers a derisory rate of interest?

The answer so far is that it's been regarded as a very safe place to park money. But what backs it, really? - the FedGov has few readily saleable assets (Bill Sardi may disagree, but I think he's too optimistic) but just the power to tax. Investors know that if push comes to shove, the taxpayer will be forced to return their money. Or so it has always been, to date. In the future, however, as fewer and fewer are willing to work for government and so to collect those taxes, that power will evaporate. Then the rollover trick will cease to work.

For regular investors, that is - including managers of private pension funds. However as we saw most of the $20T is actually owned by other governments; foreign, state, local and, incestuously, Federal ones too, for example its SS "Trust Fund" and its nominally independent Federal Reserve. Will they all decline to buy, when tax begins to be uncollectable? - yes they will, in my opinion, unless directly controlled from D.C. And when that stage is reached, the Feds will be buying all their own debt and inflation will run away. That, with its corollary of paychecks composed of worthless paper, will have the very useful effect of turbocharging the rush to exit government service, in a virtuous circle spinning ever faster.

Last week, a new President was elected who has hinted, during the campaign, that he might negotiate with some creditors to cut the government's debt by 15%. Donald Trump has experience of this kind of thing and he's the first to suggest it. Should it happen, it will give a useful turn to that spin; once it's clear that lending money to the government is like pouring it down a sewer, all rollover refinancing is likely to stop dead. Bring it on!

So, which is it; does the $20T FedGov debt matter, or not?

To statists, it matters enormously, because left alone it will eventually bring them down in ruin and mayhem. The only way to avoid declaring (confessing!) bankruptcy is to go on increasing the debt, and so far there's every sign that it will grow bigger yet, by their failure to balance their annual budgets. If and when interest rates rise to a sensible market level such as 3%, even the interest on $20 trillion or more will rise to $600 billion a year, or one-fifth of current revenues, so that too will have to be financed by more sales of debt. That is the vicious cycle, the vortex into which they are poised to fall. It's been developing over many decades and is completely unsustainable.

But to us who are working towards a free society, I'd say that on the whole it does not much matter. Its inevitable collapse we shall help along, and it will help us, as above, in an unique and agreeable synergy.

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