What is the
federal debt crisis?
What is the
federal debt solution?
occur when federal deficits are lower than in the previous year. Because of inflation and population increases, the debt/money supply must grow significantly, merely for the economy to remain static.
Here is the train of logic that will allow you to predict our
- All forms of
actually are forms of debt. Currency, bank accounts,
market accounts, bonds and notes -- all are
and all are debt. The key difference among these forms of
is liquidity. A dollar bill (which is a debt of the U.S. government) is among most liquid, and long-term bank CD's are among least liquid, but all are debt and all are
- Economies are measured in terms of
GPD and GNP are two of the thousands of economic measures, nearly all of which are measured in terms of
A larger economy requires more debt/money than does a smaller economy. Therefore, a growing economy requires a growing supply of debt/money.
- For an economy to grow, the
supply must keep up with population growth,
and the current account deficit
flowing out of the U.S.). Example: If population grows 1%,
is at 3%, the current account deficit is 1.4% and GDP is to grow 3%, the supply of debt/money must grow at least 8.7%. (1.01 x 1.03 x 1.014 x 1.03 = 8.7%).
- The current (June, 2008) U.S. federal debt is 9.4 trillion. A federal debt growth of 8.7%% requires a deficit of slightly above $800 billion.
- "The Bush administration sent its final budget request to Congress last week, projecting that the deficit for all of 2008 will total $410 billion." (Associated Press, February 12, 2008.) In the unlikely event the deficit actually turns out to be $410 billion, something in the above equation must change, because even zero economic growth requires a deficit of more than $500 billion (1.01 x 1.03 x 1.014 x $9.4 trillion - $9.4 trillion = $500 billion).
- Obviously, the economy is far more complex than one simple equation, and other factors may stimulate or repress economic growth. But fundamentally, significant debt growth is required for economic growth.
Every year, the federal government budget rises, as does the
U.S. Federal debt. Every year, the media, the politicians and the "experts" tell us the rise in the
U.S. Federal debt is a crisis. Every year, we search for a "federal debt
Yet somehow, we never seem to find that federal debt
So, have we reached the point of federal government budget crisis? Or is this just a sensationalist myth?
To answer that question, we first must clarify what we mean by a federal government budget crisis. The book:
FREE MONEY offers several possibilities. Is a federal government budget crisis the point at which:
- The federal government is unable to pay its bills?
- Our children and grandchildren are forced to pay down the U.S. Federal debt?
- Foreign governments refuse to buy our bonds?
- Inflation no longer can be controlled?
- We enter a
recession or a
- Our currency becomes worthless?
Can you think of any other "crises" the federal budget deficit and the U.S. federal debt might cause?
We'll examine each possibility, but first, a discussion of money. Every form of money is a form of debt. In today's economy, there is no money that is not debt.
Your savings and checking accounts are
and debt. Your bank owes you the money in those accounts.
market account and travelers' checks are
and debt. Even a dollar bill is debt. Consider the history of the dollar bill. At one time, you could take a $5 silver certificate to a federal bank and be given $5 worth of silver. That silver certificate stated the federal government owed you silver.
Today's dollar bills ("bill" is a word signifying debt) are printed "Federal reserve note ("note" is another word signifying debt). But what does the Federal government owe you, the holder of a dollar bill? What is it that gives a dollar bill its value?
The federal government owes you, not silver or gold or any other tangible asset, but "full faith and credit." This means the government guarantees you always will be able to use that debt certificate to pay your taxes and other debts. This is the most valuable collateral anyone could have in today's world.
Because we understand that all
is a form of debt, the word "debt" doesn't carry such ominous meanings. The owner of a debt, i.e. the owner of
is a creditor. The more
a creditor has, the richer is the creditor.
This means, the more debt in the economy, the richer is the economy. But what about the debtors? Their debt makes them poorer. The ideal situation would be for all residents of the U.S. to be wealthy creditors and some other entity -- an entity that is not negatively affected by debt -- to be the debtor.
Is there such an entity? Yes, the federal government. It has the unlimited ability to create
to pay its debts. No federal check ever has bounced. Even during the worst of the Great Depression, the federal government was able to spend
for public works projects and to arm for World War II. The federal government is the only entity in America with the unlimited ability to service any debt of any size.
Now let us discuss the questions about a federal debt crisis:
The simple answer is, it hasn't happened yet.
Not even during the darkest days of the Great Depression, has the federal government been unable to pay its debts. Not even during the greatest federal budget deficits in our history (the 20 years beginning with 1980, when the federal debt grew an astounding 600%), has the federal government been unable to pay its debts.
Why? Because the U.S. government has the unlimited ability to print
Even with a $9+ trillion dollar debt, no government check has bounced, nor is there any likelihood one will. The government just keeps printing the
to service its debts.
That is the reason why comparisons between personal debt and U.S. federal debt are misleading. Only the federal government has the unlimited ability to create money.
Of course, the fact that bankruptcy hasn't happened yet is not proof it can't happen in the future. Let's say "it hasn't happened yet" is just one bit of evidence a federal budget defict will not force the government into bankruptcy.
Again, we come to that pesky, it hasn't happened yet. In fact, tax rates are lower today than they were in the 1940s. We are the children and grandchildren of those World War II people who ran huge federal budget deficits. Some of us are the children of the people who, during the Reagan administration, ran the largest federal budget deficits in our history.
Is anyone asking us to pay the U.S. federal debt? No. Why not? Because we don't owe it. You and I and our children are not the federal government and we are not the debtors. Mostly, we are the creditors.
But is that proof we never will be asked to pay the U.S. federal debt? Again, no. But it is one more bit of evidence, the U.S. federal debt is not in crisis.
Once again, we come to that it hasn't happened yet. And once again, we must admit this is not, in of itself, definitive proof. But the bits of evidence are piling up.
Foreign governments do not buy our bonds out of kindness. International finance is not a charity affair. Foreign governments underwrite U.S. federal debt, because U.S. federal debt is a good investment.
A good investment has acceptable risk and reward. U.S. federal debt is low risk, because the world believes we will not renege on our debt (meaning we always will accept dollars in payment of debt), and we will keep
inflation under control.
U.S. federal debt has acceptable reward, because interest rates are kept high enough to attract investors. In the unlikely event foreigners would stop buying our bonds, the federal government merely would raise interest rates and bring the buyers back.
History shows there is no relationship between
inflation and the federal budget deficit. During the Carter administration, the federal budget deficit was comparitively low, while
inflation was high. During the Reagan administration, the federal budget deficit was enormous, while
The absolute prevention and cure for
inflation is interest rate control. " Inflation" is defined as money losing value. Raising interest rates increases the value of money.
Exactly the opposite is true. History shows, every depression has begun with a series of federal budget surpluses. Every recovery has begun with budget deficits. The most recent
recession began with the Clinton surpluses, and ended with the Bush federal budget deficits. The reason: A growing economy requires a growing supply of money. Surpluses remove money from the economy, and federal budget deficits pump money into the conomy. There is a direct historical relationship between federal budget deficits and GDP growth.
Who can forget the frightening picture of pre-war Germans carrying wheelbarrows filled with worthless money. Money becomes worthless when there is too little demand for money. Demand falls when interest rates are too low. The reward for owning money does not overcome the risk.
The German hyper- inflation was not caused by government budget deficits. The
inflation came first; the deficits after as the government tried to print enough money to overcome inflation. The Germans immediately should have raised interest rates to a level where people would want to own German money.
Inflation always can be prevented and cured with interest rate control.
In short, the federal government is not like you or me or the cities or states or, indeed, any other entity in America. The federal government uniquely has the power to create all the money it needs, to service any size federal debt and to prevent inflation.
In 1980, the U.S. federal debt was less than $1 trillion. Today the U.S. federal debt exceeds $9 trillion. We had no difficulty servicing the U.S federal debt in 1980. We have no difficulty now. And we would have no difficulty were the debt to rise another 8-fold.
In the book: FREE MONEY you will see why we are not in a federal government budget crisis. That is a myth, unsupported by historical fact.
What do these data tell you?
U. S. Federal Debt reduced 29%. Depression began 1819.
U. S. Federal Debt reduced 99%. Depression began 1837.
U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
U. S. Federal Debt reduced 57%. Depression began 1893.
U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%.
Recession began 2001
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Rodger Malcolm Mitchell