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.
"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.
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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.
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.
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?
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.
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.
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.
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.
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!
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.
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,
Don't you see you have bought into interpreting "The Debt" as an entity unto itself? That is exactly how those who ran it up WANT to you think, they don't want you ponder on how it got that way, or who gained from it; believe it, the debt is partially reflected right now as large amounts of money in someone's pocket and bank account.
So, if everyone in the US 'donated' $1000 a year for four years to the National Debt, sure it would be paid off, but who effectively would you have just rewarded with free cash from your donation. It is as if a local business squandered it money, and perhaps some of was stolen, and now it has a debt. Well, if everyon in the community just donated $100 to that business it too would solvent, and you would have effectively rewarded both its inept handling of its finances and rewarded the thieves that stole from it, and then you would encourage all (including law enforcement) to just forget how it got that way, all it took was Other People's Money to erase the debt caused by those affirmatively responsible for the condition.
With both the hypothetical business and the US, these are not non-profit institutions that only do good for people, they are ruthless, irresponsible, and profligate entities - who you would have rewarded for their actions, at the sweat of your and everyone else's brow.
Gary, in response to your comments..."such is, the human condition".
Look, the monetary system that we now operate under can be boiled down into four short terse words..."Pay back, with interest."
Everybody, at some level, does this. Whether rich or poor. Whatever race, creed, color, sex, or persuasion...everybody tries to payback their creditor. That's what powers the Dollar.
Now...you believe that, according to the Government, or rather Former President Carter, that the Dollar is powered by the GNP...well, that's only part of it. The Dollar is actually powered by the GNP's ABILITY TO FACILITATE AND PROVIDE you THE CAPABLITY to pay back what you owe to your creditors, and you, in turn, meeting that obligation. Some say this system is a DEBT-BASED system...while that may be roughly correct, it might be more complete to say that this system is a DEBT-PAYBACK-based-monetary system.
Even if you, reading this now, are personally debt-free, and have paid back all your PRIVATE DEBTS you owed, you're still not completely DEBT-FREE, because as a part of GOVERNMENT, (which you are, naturally, because WE, THE PEOPLE are the BOSS) you are still owing. This goverment owes 12 Trillion and each bit of that 12 Trillion comes in the form of BONDS, that Government allows private sector, and foreign entities to hold.
And that's the problem. BONDS.
I'll have to get into this later, right now, I have to go to work. I'll have to come back later on tonight or tomorrow, to explain further. I hope you'll take time to read it, and I look forward to any of your comments too.
Hey I was thinking on the idea of eliminating our national debt, as well as the absurd profits raked in by large corporations. An idea kinda popped into my head along the way. What if as a monetary/taxation policy, the federal government capped (and collected the excess) after-tax corporate income of corporations in the highest echelons of our taxation scale to say, the total number of shares outstanding (preferred & common). This would effectively stop large corporations from siphoning money out of the economy.
The reason I chosen total shares outstanding as measurement for the cap is simple: it guarantees that these excessively large corporations can still reinvest this money into the corporation, or pay dividends to shareholders, and to issue more shares requires a vote from the board of directors.
Initially, the money would be an impressive sum because corporations would not be able to adapt their business models quick enough, and could have the potential to pay off a large chunk of our national debt. The idea of "maximizing shareholder value" could only hold until the company has reached that (very high) level of after-tax profit.
In the time period after the cap has taken effect, corporations would begin to find ways to reduce their after tax profits as close to the limit as possible. This could result in higher wages for employees, which result in higher tax revenue from regular citizens. Another possible benefit from a cap could also inspire corporations to lower the prices of their products, saving the consumer money in that savings pay off consumer debt/buy more stuff. Corporations could also invest more money into R&D, giving our future a bright glow with the advent of new technologies.
A cap on after-tax profits would obviously have negative impacts on our economy as well. Corporations may try to hide profits abroad, but tighter corporate regulation can prevent this (in my opinion). The idea that a company would just "shut-down" after they reach the cap has been presented elsewhere, but a law can be written to prevent it. There may be situations where these large corporations would get capped, and then the next year they may lose money. In our current accounting system, there is already a provision for this called a Net Operating Loss (NOL) carry forward/back provision. These provisions allow corporations that suffer losses to use there loss reduce the future tax obligations or partially refund taxes previously paid. An additional provision to ensure that money taken as a result of the cap can be (partially) refunded to help reduce operating losses.
I guess from my idea you can probably tell I have the opinion that large corporations take away from the freedoms American citizens are entitled to. A life of debt is not what our forefathers had in mind when they founded our nation, and the fact that corps have a larger influence in Washington than a single US citizen scares me because our congressmen are supposed to represent the people, not the corporations.
Anywho, I just wanted to put this idea down on "paper" (well this is close enough). Keep in mind corporations who would be paying into this debt solution are in the highest tax brackets and are clearly making money. Please let me know what you think and maybe more possible negative (or positive) outcomes of this scenario.
I am delighted to discover another "Bill Greene" with conservative economic and political leanings. There can never be too many of us!
I don't wholly understand that multiplier effect on banking and federal reserve theories. Professor Charlie Williams at HBS tried to teach me how it worked, but it was just too abstract and hypothetical for me to follow-- especially in this post when working backwards as in debt repayment situations. However, one thing I think we could do about this skyrocketing national debt is to stop adding to it.
Perhaps if we could just balance the budget from now on, the existing debt would become a smaller and smaller percentage of our total economic picture. Because the debt will eventually come home to roost, it is essential to stop increasing it. Once that is established, we could worry about reducing it.
BTW-- I think in ordinary simple ways, the kinds of common sense ways that have always made the average person so much wiser than the abstract-thinking inmtellectuals who have casued so much trouble for us all. My ideas on this subject appear at www.thecommongenius.com
Here is what I don't get. Literally all of the wealth in the US is owned by about ten percent of the perple. This means that literally all of the debt is owned by the wealthy ten percenters. I am not in that ten percent. Why should I care how much the national debt is? It will never be my problem.
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