First, don’t expect government to look out for you. Government will do what is best for itself, citizens be damned. Government will do whatever it takes to retain power, including incurring more debt, printing as much money as needed, notwithstanding its value, devaluing its currency, or even defaulting on its debt. If debt reaches unmanageable proportions and the federal government is forced to take action, it will take the easiest path to preserve its power, including defaulting on the debt owed to the general public, which is most likely, you the reader.

Part I of this series uses a chart to illustrate that the National Debt is bipartisan, both parties engage in massive spending without any known way to pay for it. Part II discusses the underlying assumption of the Progressives’ Modern Monetary Theory, i.e., massive debt is irrelevant if it is in the currency of the sovereign. The sovereign merely needs to print money from “thin air” to pay it off.

This Part III identifies who is impacted by a federal default. The consequences of default are a critical piece of information the federal government needs to tell citizens. Ignoring the massive national debt will only make a future crisis worse. The Congressional Budget Office estimates the debt will be double the nation’s GDP by 2051, or $42 trillion.

Interest payments in 2020 were $325 billion. They are estimated to rise to $928 billion by 2029. If the Fed raises rates only 1%, that will increase add another $19 trillion over ten years to the national debt.

Our elected representatives are doing nothing to address the national debt, not even bloviating about it. Even the Modern Monetary Theorists recognize that inflation is the one event that could upend their theory that debt does not matter to a country with its own currency. Inflation is starting to rise. More government giveaways and fewer commodities and products due to the pandemic will only fuel inflation. In the 1970s, interest rates hit 20% under President Carter. A twenty percent interest rate on bonds today would require the federal government to pay $6 trillion a year in interest, an amount larger than the budget of the U.S. The U.S. would be crushed by debts it could not pay. It would have to default or render the dollar worthless against world currencies.

A more realistic 2% or 3% interest rate could add another $38 trillion to the national debt in ten years.

So, who gets hurt if the federal government defaults on its debt obligations?

As of March 31, 2021, the U.S. National Debt exceeded $28 trillion. Twenty-one trillion of the debt is owned by the American public or 78% of the debt. Seven trillion of the debt is owed to foreign countries.

Put aside the $7 trillion in foreign debt. It will be renegotiated. The real concern is what happens to citizens whose retirement rests on the government’s promise to make payments on its financial obligations. Unfortunately, federal agencies collected trillions of excess dollars from federal programs like social security. These agencies then lend the money to the federal government to spend. The citizens paying these social security taxes only received promises from the federal government to repay the borrowed funds at some future time. That money, or a large portion of it, will be lost in a default.

There is nothing citizens can do about it if the federal government defaults. Yes, nothing! Government can change pension laws at will to relieve itself of a debt problem. Only the government is sovereign. Moreover, the doctrine of sovereign immunity protects the government from its citizens. Government wins, citizens, you lose. An easy proposition to understand.

The magnitude of what the federal government owes citizens is staggering:

• $10.81 trillion is owed to the Federal Reserve and government agencies that gave cash from certain programs like Social Security to the federal government to spend.
• $3.5 trillion is owed to mutual funds.
• $1.09 is owed to state and local government pension plans.
• $784 billion is owed to private pension plans.
• $253 billion is owed to insurance companies.
• $147 billion is owed to owners of U.S. Savings Bonds.
• $2.28 trillion is owed to a variety of individuals, government-sponsored enterprises, banks, and other investors.

Most of the beneficiaries of these debt instruments are Social Security recipients, pensioners, mutual funds investors, bondholders, and insurance companies. These beneficiaries are expecting repayment from the federal government for survival.

Would Social Security recipients, mutual fund investors, pensioners think the same about all the “free” federal money today if they knew their retirement savings were being put at risk by their government?

The federal government is pitting Americans against Americans as to who gets a piece of the American pie and when. Does the federal government give away the entire pie now, and let those who invested in the nation live without pensions? For how long can the federal government provide enhanced benefits to people with children, the unemployed, or provide a universal basic income for all? What happens to these people when the money runs out?  How high can taxes go before people abandon the country? How much can we cut from the military before the U.S. can no longer defend the itself?

Is a massive national debt what we should be leaving posterity? If the national debt is not addressed soon, our posterity will live in involuntary servitude to the federal government.

The post Who Pays When the US Government Defaults On its Debt? appeared first on The Libertarian Republic.

The U.S. Dollar has dropped to ninth place in the strongest dollars in the world, behind the likes of the Kuwaiti Dinar, Bahraini Dinar, Omani Rial, and some of the currencies of large countries like the Euro and the Pound Sterling. Our debt to GDP ratio is the seventh highest in the world. The U. S. has more debt than the next five largest debtors combined (Japan, China, United Kingdom, Italy, and France).

Is anyone, yes, anyone worried about the consequences?

Obviously not! The U.S. recently finished an election for president, the entire House of Representatives, and one-third of the Senate.  Not one candidate for federal office in 2020 made serious mention of our $28 trillion national debt. $24 trillion or 84% of our $28 trillion national debt has been created since the presidency of George W. Bush. Part I charts out the debt by president.

On top of the current debt, President-elect Biden is proposing $11 trillion in new spending. Every president has an excuse for massive debt. Trump had the pandemic; Obama the 2009 financial crisis; George W. Bush had 9/11. Biden just wants to spend so history remembers him as restructuring the country. Might history remember Biden as the president who destroyed the Dollar and bankrupted the nation?

What’s Modern Monetary Theory about?

MMT asserts when a nation has a sovereign currency, debt can be accumulated since it is owed to itself.  Money can be simply credited to another’s account (printing money in old-fashioned terms) without having to sell bonds that require interest payments. This magic process involves keystrokes on a computer. New digits are created electronically on a balance sheet allowing government to spend whatever it needs.

The foundation for such MMT magic is the belief that government creates all wealth by spending money into existence. Government spends to incentivize citizens to want more of what government wants us to have. And by commanding that all taxes be paid in the currency controlled by the government, everyone needs to earn money to pay taxes for the government services they want.

MMT economists view money creation as a valuable economic tool that does not automatically devalue currency when used to address an underperforming economy. By creating new money, jobs are created, and productivity increases. According to Federal Reserve chairs, “…government can print all the money it needs, and nothing bad happens.” Simply, MMT economists posit that when an economy has unemployment, government is not spending enough money and can spend until full employment is reached.

Under MMT, inflation is the primary risk of spending more than needed to reach full employment. When inflation occurs, MMT recognizes it will need to raise taxes and interest rates to control inflation, yet proponents ignore the implications of such recognition. However, as long as the Federal Reserve keeps interest rates near zero, there is not a need to repay the debt since no interest is due. But is there a point where the accumulated debt is so great that it cannot reasonably be serviced if interest rates rise?

Our Constitution does not authorize free money by keystroke

While our Constitution does not mandate any specific economic system, it does specify how government acquires, values, and spends our money. Politicians should understand how MMT squares with our constitutional structure before promising unlimited free money without increasing taxes or interest rates.

Our constitution starts with the words “We the People of the United States”  have created a government with certain limited powers. As to currency, our government is authorized to coin money, and regulate its value and relation to foreign currency. Our government can borrow money on the credit of the United States; however, money cannot be drawn from the treasury unless Appropriations are made by law and all expenditures accounted for. These limits impose constitutional accountability by limiting government action.

Since the currency of the United States is only as valuable as the credit of the government supporting it, there is no provision allowing government to magically create an unlimited money supply by a keystroke, and then by another keystroke use the magic money to pay bills or debt.

In the world of finance, MMT resembles a money-laundering scheme, i.e., concealing the origins of money, then passing it through a complex sequence of transfers to make the money appear legitimate. By illustration, the Federal Reserve creates money from” thin air” and transfers it to the Federal government through a series of transactions. It works like this—the Social Security Trust Fund collects more real money in taxes than it pays out. Social Security uses its excess money to purchase U.S. Treasuries from the federal government. This transaction immediately gives the federal government real money to spend. The Federal Reserve then buys the U.S. Treasuries from Social Security using the money it created out of thin air. The only real money is collected by Social Security and it goes to the Federal government, which immediately spends it. The risk of this money laundering scheme is that Social Security, its pensioners, and the Fed hold promises of repayment based on the creditworthiness of the U.S. which is constantly printing more money out of thin air and laundering it through the system.

As more dollars are made out of thin air, they become less valuable unless needed as a source of exchange in the United States. Since the Constitution contemplates international commerce and a valuable currency supported by the credit of its government, MMT is far outside the Constitutional framework that requires a strong currency for trading with the nations of the world. In fact, MMT will force the U.S. to become an insular society to ensure its currency remains valuable to citizens.

It is easy to see why Progressives are so enthralled with MMT. They believe since government creates all wealth, it has the right to tax back all wealth, after all, it’s the federal government’s money. Citizens merely exist to do what the government wants them to do. Citizens merely buy—and now are give—the services government wants them to buy or have. Such a system could be termed communism. Unfortunately, it is not communism; it is raw Democracy. People, through their representatives, just vote themselves money.

Franklin was right, we are heralding the end of the Republic.

The post I’ll Take My Share of the Money, Now! MMT Part II appeared first on The Libertarian Republic.

This Is Both Startling and Thrilling

It startles me because I wonder where it’s coming from. The best I can imagine is that it’s not talked about at home. If kids take the initiative now to learn about politics and philosophy, though, there’s hope that they will eventually see things in a different light after some life experience.

The worst I can imagine is that they’re learning about it, absent its inherent individual submissiveness and abdication of responsibility no doubt, from authority figures.

Nonetheless, I’m thrilled, as well. Having the opportunity to teach college students is one thing. Being able to convey to my own children the wisdom of the principles codified by our Founding Fathers is quite another. It’s a privilege.

My mind filled with these thoughts upon reading Peggy Noonan’s recent column in The Wall Street Journal. I’m not a regular reader of her weekend “Declarations,” but the highlighted “Less taxes and spending won’t resolve America’s crisis” caught my attention.

How Did We Get Here?

Initially, I thought to myself, “Great; another ‘conservative’ throwing in the towel on fiscal matters.” Sure enough, she taps out: “The federal government will not become smaller or less expensive in our lifetimes.”

A couple of years ago, a younger friend of mine expressed a similar sentiment when he asked, “Shouldn’t we just accept the government we have and work with it?” Even if I deemphasized my stance on one issue in favor of others, I can’t imagine so openly surrendering my principles in the process.

For the first time in a half-century, the GOP had control of Congress as the 21st century began, and for a majority of it, a Republican presidency. But far from being the “sober-minded … best stewards” of the government who look at spending “coolly,” they became drunk with the power of the purse. Spending rose an average of 7 percent per year, two to three times the rate of inflation.

Perhaps the saddest part of this commentary is that she predicates her entreaty on the certainty of a “terrible day” in our future, an act of war against us using nuclear or biological weapons. This is eerily reminiscent of the justifications we hear to maintain military spending more than twice as high as China, and more than the next seven countries combined.

Only those who live under a rock are unaware of the presence of such weapons. To exploit fears of such nightmare scenarios so that taxpayer resources can be politically directed toward “growing families” is unfortunate, to say the least. Not only should such appeals be rejected, but said defense spending should also be subject to greater spending discipline, especially when the Pentagon seems prone to losing track of almost a billion dollars.

On one of the tests in my macroeconomics class, a question states, “Discretionary fiscal policy is limited by the fact that roughly __% of the federal budget is dedicated to defense or is on autopilot: 30, 50, 70 or 90.” The answer is 70.

How to Combat Growing Expenditures

Rooting out “waste and fraud” is always a noble sentiment, but over the years it’s been reduced to little more than a political bromide intended to placate those committed to a constitutionally-sized government. If Republicans “naturally enjoy” this exercise, as Ms. Noonan alleges, they’ll work with President Trump in his effort to sell off the government’s $1.45 trillion student loan debt to private investors, just to name one example. They could even go a step further and help him make the Department of Education (DoE) leaner.

While abolishing the DoE altogether and returning that function to the states where it belongs is the ultimate goal, these practical baby steps would at least prove her right. The primary target of spending reform, however, should be that 70 percent.

Some of what should be done is simply common sense.

Life expectancy, for example, has increased by roughly a decade since the inception of both Social Security and Medicare. Logic dictates that the age of eligibility should follow suit. Also, we should have more choice about our participation in these programs and the way disbursements are administered.

Furthermore, there’s a popular myth that these entitlements have dedicated revenue streams: the payroll tax. The fact is barely a third of Medicare is funded that way, and if demographic trends don’t change, it’s currently projected that Social Security will also have to start dipping into general revenues to help pay out full benefits in fifteen years.

Mark J. Perry of the American Enterprise Institute has a wonderfully illuminative chart (see below) that shows the inflationary effects wrought by government involvement in some of these sectors. It eats into our ability to pursue other worthy personal ventures, not to mention the vicious cycle it perpetuates on the federal budget.

If we do not adequately address these problems, interest on the national debt will likely blow past 10 percent of the budget, and Ms. Noonan’s spending preferences will be further squeezed. This assumes, of course, that hers is not simply one of the initial “conservative” endorsements of the fantasy known as Modern Monetary Theory (MMT).

Where Do We Go from Here?

Ms. Noonan is correct in stating that Republicans are bigger proponents of free-market capitalism. One might quibble that her claim that progressives simply do “not love it” is too restrictive. Some on the left profess to, and genuinely enjoy prosperity, but their obliviousness regarding which policies support or impede it is often staggering.

If we’re stuck with a two-party system, Republicans need to be the party that aggressively represents and promotes independence and personal responsibility, not to mention logic and basic math. It’s been proven before, in 2006 and last year, that they can’t win elections maintaining or adding to the welfare state.

Something else we regularly hear misplaced grousing about is “gridlock.” But gridlock is good. The Founders set up our republic so that time would be required to deliberate changes to the people’s business, and thank goodness considering socialism is back in vogue. Its return is about as welcomed as that of the measles.

By that token, perhaps Ms. Noonan has a point that the government will not be right-sized in our lifetimes. At the same time we teach our kids about our federalist system, though, we should also impart upon them the ideal to work toward.

This article was originally published on FEE.org. Read the original article.

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