Topic: Monetary Policy
Why We Cannot Pay Off The National Debt
Can we ever balance the budget or have a surplus going toward the national debt? Every time our Federal government has attempted to do this it has failed and has put the economy in a recession.
by JJJ
(libertarian)
Sunday, March 2, 2008

When I was a child, I always found it fascinating to watch the cartoon where the cartoon character would be riding a horse while holding a stick with a carrot on the end. The horse would see that carrot and instinctively move toward it. But every time the horse moved, so did the carrot! The most important thing to that horse was the carrot right in front of him, so much so that he didn't even notice the person riding on him.

I was amazed to find out that our country is very similar to that horse. Whether Democrat, Republican, or Independent, all instinctively would agree that we need to balance the budget and pay down the debt. However, every time our country has run a surplus and began to pay down the debt, a recession was sure to follow and we were unable to continue paying it down..

So where is the problem? Why can't we just pay down the federal debt and have no drastic consequences like when your family pays down your personal debts?

First, we will need to understand a little about how money comes into existence.

Every dollar note comes into existence through one of the twelve Federal Reserve Banks loaning out money at a particular rate. Only those notes can be used to pay off the debt with a particular Federal Reserve Bank. So essentially this "money" is created out of thin air, and then loaned out into society.

Then that "money" is further expanded in private banks through a practice called "fractional reserve banking". According to the New York Federal Reserve Bank,

"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)."

According to private sector calculations(since M3 is no longer released by the Federal Reserve) there is estimated to be 14.6 trillion dollars(electronic and dollar bills) in circulation today(a significant amount of that is being held by foreign countries so in reality, there is even less being circulated in the U.S. economy).

Every time the money supply increases, it pushes prices up. Let's say you grow corn. If you produce 100,000 bushels a year at $2.12 per bushel, you make $212,000 in gross sales in which you then deduct costs to determine your income. However, there is a limited amount of corn you produce. You cannot just decide one year that you will produce 200,000 bushels with the same amount of land and labor put into it. So each bushel has a real value as land is limited and your labor and time is limited. So if the government borrows one trillion dollars from the Federal Reserve and they then spend 100 billion on corn, there is now less corn that year and the usual purchasers, such as cereal factories, etc, now have to pay a higher amount to buy the same amount of corn as they would have before since the supply has been decreased. So the price rises and we see inflation. Then as the private banks expand that one trillion dollars to ten trillion dollars, the price of corn and other commodities will continue to rise(or one could say that the value of the dollar has declined).

So if the money supply is expanded through debt creation, which results in inflation, then when you try to pay off debt, the money supply will in return contract, which will result in deflation. So when any significant amount of debt is paid off that is more then being created at a given time, this will cause there to be up to ten times less the amount of money that is paid off. So if the United States Government paid down all of it's debt today, which is 9.3 trillion, this would cause the money supply to contract by upwards of 93 trillion dollars. That would mean a 64% decrease in the money supply. So the price of everything would then need to decrease to 1/3rd their current value(payroll included). During that adjusting period, very few things would be exchanged back and forth which would translate into many people losing their jobs and taking very large pay cuts and also not being able to purchase the basic amenities as they are priced 64% too high. People would feel like they just don't have enough money. Companies wouldn't have enough money to pay their employees and many jobs that are currently paid below 17$/hour would need to be adjusted below the minimum wage rate.

This would translate into a recession the equivalent of the Great Depression. Likewise any amount of paying down the federal debt will cause this deflation to occur proportional to the amount being paid off.

So what is the solution? Unfortunately there is no easy answer. One proposal has been that of allowing the private sector to produce competing currencies. This way if the U.S. dollar spins into an inflation free-fall, Americans have an alternative they can fall back on.

For instance, suppose I owned a business. There is a very attractive private currency called the "Liberty Dollar". This is a currency backed 100% by silver. So I could set my prices to also accept "Liberty Dollars". Then if the U.S. dollar inflates or deflates, depending on the Federal Reserve policies, my customers would still have a currency that they could pay with. I would still have a currency I could pay my workers with. I would still have a currency that I could purchase my products with. I could set my prices once and never need to worry about needing to raise them. As I find more efficient ways to produce and deliver my product over time, I would then be able to continually decrease my prices. Likewise, as my employees become more productive, I can measurably determine what increase in pay that they are worth. Productive exchanges would still thrive even though the U.S. Dollar is in no way included in these exchanges. Now if a whole community was completely on a silver or gold or commodity backed currency, then the Federal Reserve's decisions, whether ill or good, would have little bearing on that community.

©2008 JJJ, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Sunday, March 2, 2008
Last modified: Monday, December 22, 2008

The views expressed in this article are those of JJJ only and do not represent the views of Nolan Chart, LLC or its affiliates. JJJ is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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Reader Comments:

Posted By: Ivan from Oregon
Date: 2008-03-02 08:54:17

Well done.  See also

Money Q&A For Dummies

and the article on Gold Standard Confusion

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Posted By: Ayn R. Key
Date: 2008-03-04 20:24:40

There is only one way to eliminate the debt: repudiation.  It will be painful, but in the long run it's our only hope.

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Posted By: Deb V.
Date: 2008-03-08 16:59:32

Theres a new book out called One Nation Under Debt that explains how and why the U.S. paid off its first national debt, the one it racked up in three wars of independence, buying Louisiana, and so forth. Finished paying it all off during Jackson's admin. Lots of new data but the book is also a great read.

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Posted By: Jeremiah Johnson
Date: 2008-10-13 18:26:31

The only true way to eliminate the debt is to eliminate legal tender laws.  Then people can transit their prices to commodities and the free market could determine what our money is.  As long as we are exchanging federal reserve notes(fiat money), we will always have a national debt. 

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Posted By: Corwin
Date: 2009-01-22 11:58:11

I am following your description of how dollars are formed.  What I don't understand is how currency is destroyed  if the government pays its debt.

If I am a creditor and I get my money, I don't destroy it.  I spend it again.

So if the government pays its debts, wouldn't the banks recirculate the same money by passing it to commercial and consumer borrowers?

Finally, I don't put enough faith in the integrity of businesses to allow them to create competing currencies.  I don't really even trust the American government.

Other countries have competing currencies, so why don't we use theirs if the greenback does the Zimbabwe thing?

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Posted By: Asrellim
Date: 2009-02-25 19:38:22

Don't see why the government couldn't do the same thing to corn with money that isn't borrowed, but is instead paid using tax revenue. And besides that if it's necessary to create inflation to have enough economic growth and paying off the debt reduces inflation too much couldn't we just change the reserve ratio?  The reserve ratio also impacts inflation.  If paying off the debt is causing too much inflation, just cancel it out by changing the reserve ratio.

Ultimately there is no good reason to have national debt. It wastes money due to interest payments.  It would be better for the government to pay for things with its own money.  Maybe we can't do that right away, but when we get another surplus we should immediately start paying off the debt, until its gone.  Then, the government should start saving money, that is it should put some money away and not spend it that year just in case it needs more money in the future. That way if there's a recession the government can increase spending by reaching into its savings instead of by borrowing money.

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Posted By: Jeremiah Johnson
Date: 2009-10-15 15:10:28

Asrellim,

Thank you for your input.  The whole point of this article was to show that with the current debt-based money system we have today, it is essentially impossible to pay off government debt.  It is the entire system that needs to change altogether. 

 

Suppose we lived on an island with 100 people and the only place you could get money was from you.  But you had to borrow it from me to be able to go out and spend it on things people produced.  Could you imagine that you would ever be out of debt at any point?  When the total money in the system is always equal to the amount owed, there is no possible way of paying it back.  These notes we use are "FEDERAL RESERVE NOTES".  NOTE in law is an instrument of debt.  As long as we are using NOTES as money, and our government is the source by which all NOTES are originally obtained from the central bank, do you imagine the government could ever pay back all of those and STILL use NOTES as money?  In other words, when all the NOTES are paid back, there is NO MORE MONEY LEFT if that is what we are using as money. 

 

So again, if we are using FEDERAL RESERVE NOTES as money, we cannot have a fiscally responsible government. 

I am certainly supportive of a fiscally responsible government, but that requires changing everything about our system. 

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Posted By: Kapt. Blasto
Date: 2009-10-17 04:52:55

Look, I don't know if anyone is going to read this...but over on a diffrent website I put the article about HOW EXACTLY TO PAY OFF THE NATIONAL DEBT....WITH ONE COIN.

And the thing is...You don't need to Hyperinflate currecny, tax  the citizenry or the domestic corporations to oblivion, lower standard of living, lie about cutting spending  in the name of eliminating waste/fraud/abuse...

And you dont have to repeal the 16th ammendment, nor remove the federal reserve to do it...

In fact...It might be just as painless and as easy as 1,2,3

It's a step by step instructional, that I put up on at least TWO places...One is Newsvine, and the other is on the front page of channel comments on DefeatTheDebt.com's Youtube Channel page, (but you'll have to read each part, from bottom up...that's how YT puts the comments.)

Now...I already know your first inclination is to dismiss everything I say. It's BS, I guess you exclaim....And even if you do find yourself THERE, reading it...you'll cry "Balderdash! Can't happen! THEY won't let it...happen!"

Now, we've had for the last 97 years the FED, and the IRS.  The Patriot community has decried these two entities as the evil agents of the NWO...in fact, a growing majority of folks, many you might find in the "Tea Parties", who, see the vast growing power that both the FED and the IRS, and government in general,  have in our lives...and want to see them, and the Congress, as well as every politican...sent straight to h-e-double hockey sticks, never to suffer them again...

Well, let me give you the driving force behind my "One Coin" solution...I asked myself, You know...we have the FED and the IRS...and we have this National Debt, and "Toxic Assets", and a growing Tax burden...What happens if we had the RIGHT TOOLS to defeat this monster....but we have it hardwired in our heads to use these two tools (FED and IRS) THE COMPLETELY WRONG WAY, and every way we have thought of Debt Reduction, spending cuts, tax raises, money manipulation...has been based upon SEEING these TWO POWERFUL TOOLS for revenue generation, and debt reduction, THE WRONG WAY...and that's why we've been driving debt up to unimaginable levels...

So when I placed my solution online...It gets ignored. And if pressed, all I would get as an excuse..."Look, buddy, why don't you just concentrate on your little warehouse job, and...just let the EXPERTS handle everything, OK? They know what they are doing, unlike you...who can't seem to do your little job right"

But...It figures...the people who I think are experts, are just as blind as the politicians, who are just as blind as economists, just as blind as the "Tea Party" Protestors, just as blind as the men who belive they run the whole world....all are just as blind, if not blinder than Stevie Wonder...and I'll bet if he was read to, this proposal, not only would HE get it....even Stevie Wonder could tell you about the Laws behind it, that would make it work, unlike our own lawmakers...who just couldn't, wouldn't, and would steadfastly REFUSE, at every chance possible, to get it.

These lawmakers and economists, would be like Charles Naughton, playing Caligula in the 1953 Richard Burton-Jean Simmons movie "The Robe", where, in the scene that Marsellus attempts to hand the robe to Caligula...Caligula recoils in horror, "Get it Away from me! It's bewitched! remove it!!!"

And the simple suggestion would be this:  Instead of taxing everybody, to pay back the bonds, through the Central Bank the FED, the source of money...Tax the Fed, instead, and allow accounts to accumulate revenue from the unpaid taxes the Fed hasn't yet submitted.

If that last idea has you scratching your head, asking "How?", well, you can always go and look at my page:  kaptblasto.newsvine.com, or you can go on the DefeatTheDebt.com's youtube channel page and see at the bottom of the channel page, my plan there as well.

It has been way too long to keep sufferinng like we are.

 

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Posted By: Kapt. Blasto
Date: 2009-10-17 04:58:46

Oh...I'm sorry. It wasn't Charles Naughton, playing Caligula...

According to IMDb, it was Jay Robinson.

My apologies.

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Posted By: Bob Snodgrass
Date: 2009-11-02 10:36:44

 

You should study history. The US national debt was completely paid off in 1835, during Andrew Jackson's second term as President. Jackson was a smart, interesting and evil man, the only President who had killed a man in a duel, something that he enjoyed discussing. In his "farewell address" which was written by his factotum Roger Taney (later author of the Dred Scott decision) and never given orally, Jackson was especially proud of his lifetime work of Indian removal, removal from lands that the Indians had held for centuries, for the benefit of white land speculators and sharecroppers. Long before the trail of tears, he had a record of killing Indians, getting them to sign treaties that were never honored, and repeatedly breaking his promises.

 

Jackson believed in hard money. He was pleased once the national debt was paid down and wanted to go further, to eliminate paper money. He couldn't do that, but he did sponsor a law requiring that all land purchases from the government had to be paid in gold or silver. This caused a run on the banks and was a major factor in the Panic of 1837- in fact that double dip depression from 1837-43 may have been the second worst depression in US history. The great depression of the 30s was more severe and lasted longer. Both were preceded by a big run up in commodity prices- the bubble commodity of the 1830s was cotton and the US had a role analogous to OPEC.

 

However, it’s too simple to blame the Panic of 1837 on Jackson and his elimination of the Bank of America. The panic was preceded by an orgy of speculation and run up of debts contracted by both states and individuals. British investors had sunk lots of money into the booming American economy in the 1830s; of course they often used borrowed money and when the Bank of England tightened credit, state bond prices sank like stones. Nine states went into default- they had borrowed heavily to finance canals, roads and other improvements expecting increasing revenue in perpetuity (sound familiar?). Florida and Mississippi permanently repudiated their debts, infuriating creditors in England and the Netherlands. Excessive private and state debt was a major cause of the panic of 1837, federal debt was not.

 

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Posted By: Kapt. Blasto
Date: 2009-11-03 12:05:55

@ Mr. Bod Snodgrass,  and @JJJ:

It's interesting, Mr. Snodgrass,  that you pointed out that it was excessive STATE and PRIVATE debts that caused the 1837 panic.

And the reason why those debts were accumulated, due to specualtors defaulting, losing borrowed money, gambling on the market, and, due to states having to borrow heavily, to finance infrastructure, then repudiating it, figuring if they didn't, the tax burden they would have to impose would be too great to sustain  a local economy, that could generate ANY tax revenue, in the first place, (you did mention florida and mississippi repudiating the british and dutch underwriters, correct?)

Ok...well, what my "One Coin Solution" is, basically takes the whole compund-intrest-payments/taxation-penalties-simple intrest concept, and turns it on itself like a moebius strip.

Instead of having Congress, thru Treasury, sell bonds, to fed, charge them a TAX BILL instead.  Now, why do I say this? 

Despite all contentions to the Contrary, CONGRESS was the final author of the Federal Reserve Act, which was Created to be an OTHER, set apart from Congress, allowing for conditions where this OTHER can decide against the Will of Congress.

Even though the FED is answerable to itself, (for the purposes of monetary integrity against Congressional wrongs), CONGRESS STILL holds FED *Accountable* for its actions, and ultimately CONGRESS holds ITSELF *responsible* for the FED's actions.

And Despite all the stupidity of Congress, as we know they commit...When Congress placed this entity on the PRIVATE-SIDE, what would  have normally been a Government Agency, got DISGUISED as a PRIVATE FOR-PROFIT ENTITY in the form of a CENTRAL BANK!   In otherwords, folks...HERE IS THE 'OTHER' that CONGRESS can TAX...instead of you and me, and the Corporations.

Today...The FED is Congress' BANKER/CREDITOR. Tomorrow...why not let CONGRESS be FED's banker/creditor, instead?

A loan agreement (promissory note) is like a TAX BILL acceptance/paymnet, BUT IN REVERSE. ( maybe it's easier to think of a TAX BILLING as a PROMISSORY NOTE...with an extra step added at the start, to REVERSE the whole process...Or, Like a reverse mortgage, but you keep your home in the end of the term, AND YOU KEEP the money handed out from the 'other party'...)

First, understand this: GOVERNMENT is NOT a 'household among households' as the BANK wants those inside Government to think of themselves. Households CANNOT, either, impose taxes on other households, nor, set regulation that other households must follow. Government CAN!

All this problem of DEBT, that we are forced to try hopelessly to pay through TAXES, stems almost directly from this WRONG-HEADED-NESS that was put into GOVERNMENT( actually, We, the People, through our reps) by Some of We, the People, working through BANKS!

More comments to follow, soon.

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Posted By: Kapt. Blasto
Date: 2009-11-03 12:10:49

Plus...if this can be approved STATES can use something similar on the INDIVIDUAL CENTRAL BANK BRANCHES,

And the taxation system we now suffer under, COULD be used as a form of a savings plan, or a report of the monetary amount of whatever we paid into THIS CURRENT system, AN \'asset\' that could be used as collateral for a loan.

The pie grows, the right way!

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Posted By: the truth
Date: 2009-11-13 22:56:09

If every american paid $1000 a year for 4 years we could pay down the national debt.  As Americans we spend $1000 on gas, tv, cd's, movies, dinner, etc.  Just like paying off our own debts why not be part of America and help our country out.  Yes, some Americans do not have it to pay, well the million dollar baby actors, and pro sports players should help out, selfishness is going to ruin our country!  We can all donate to help the problem,

http://finance.yahoo.com/taxes/article/108141/donating-this-year-uncle-sam-needs-your-help?mod=taxes-advice_strategy

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