The national debt...

...and why it will never be paid off.

Every election time there are some politicians, usually first timers, who make big news with speeches that advocate a “responsible fiscal policy” and “living within our means as a nation” or “if I ran my business like the government, I’d be out of business” or the best one, "Washington is drunk on debt and we need to reign it in and pay the debt down".

These are all things which sound really good on flyers or sound bites, but they have about as much to do with reality as someone tying wings to their backs and trying to soar like an eagle - as soon as the idea is put to reality, it crashes spectacularly.

Here’s why.

When uncle Sammy wants money to pay bills, such as government salaries, roads, bridges, the military, so called entitlement programs such as social security, Medicare, etc, Sammy can dip into the coffers where it collects taxes and pay some of the bills. However. A long, long time ago, in this very same galaxy, the American public decided that we want more stuff than what we are willing to pay taxes for. We like stuff in this country, we like nice safe roads, we like a nice safe airline industry that doesn’t allow chickens on airplanes, we like safe bridges, safe drinking water, we like the idea (despite the grumblings) of a social welfare safety net because despite the fact that millions of people think it is a moochers paradise, their parents and grandparents benefit from them and they will too when they retire… we like all those things and wars. We love spending money on kicking some behinds - it makes us feel very superior to spend money on sending the young people to war.

So, we sent politicians to DC who made those things happen. WE as in the American public, we sent them there. These are the things we want. We support companies that have a lot of clout in DC and we are ok with them having a lot of clout to get laws passed that makes the executives of those companies more money because we keep sending the same politicians to DC to write the same laws over and over again. So, we, the public, decided that we like stuff. We like it. We like things that make life better and easier and none of those things would have happened had we, the public, not sent representatives to DC to pass laws that allowed companies to create an environment where we have nice stuff. But, nice things cost money. Programs cost money. Overpasses, bridges, roads, buildings, police, fire, military, social programs, overseas safe travels thanks to our foreign aid programs, the extended security services which keep us safe, the hundreds of billions of dollars we spend on corporate welfare, on bank bailouts, on ongoing pet projects every lawmaker wants to bring back to their districts, which even those grumbling the loudest about welfare and moochers and taxes want (and they don't grumble about THOSE expenditures because it benefits them directly), totaling hundreds of billions every year, things which people use and don't even think about, they cost money. It's always easy to say that the debt is due to people who are far away and look different - it is never easy to say, well, we wanted a new upscale shopping district, so we got a new overpass off the highway costing 55 million dollars and yay for us because now we benefit. Those expenditures added to the debt are ok... a food stamp card for a welfare mom across the country working two jobs, trying to raise her kid on her on somehow is... wrong. I don't understand that. Anyway, all those programs, they cost a LOT of money. A lot more than what we are willing to pay for in taxes and the worst of us are people who always grumble about how much tax they pay because they benefit proportionally a lot more from the system than most of us.

So, Uncle Sammy is in a tight spot. We’re telling him we want all these things, but we don’t want to pay for them. So, what’s a good politician to do? Well, he does what we do when we want more stuff and don’t have the money, he borrows it from the banks! Aha! But where do the banks get the money? Certainly not from the public, we don’t want to do business with banks that lend money to uncles Sam, we want a nice, clean conscience so we can tell each other over thanksgiving dinner how we can’t stand what this country is coming to, "why if you can believe it, cousin, they are just giving money away up in DC like nothing! And they’re giving it to a bunch of poor people, who really should be working for a living like us! Why, if I ran my business that way, I’d be out of business! What we need is tax breaks for people like us, not those people… By the way, did you SEE that new airport addition? My god, it looks amazing. It's about time. The old airport was so ... unfriendly to use. We need a new airport badly."

So, what’s a bank to do… well, the 1913 Federal Reserve Act gives the FED a unique power that calls for just such an occasion to be implemented. The Federal Reserve can go to the treasury and say, "Hey Mr. Uncle Sammy treasury, I will give you 100 billion dollars in a loan so you can do all those things your constituents want but don't want to pay for. Here you go, a nice, crisp new 100-billion-dollar bill and all you have to do in return is to give me an IOU. Don't worry, I trust you, after all, loaning money to the US government backed by the taxpayer is the best credit risk there is in the world." So, Uncle Sammy prints up an IOU, called a Federal Savings Bond, which is nice pieces of paper with drawings on it and voila, the FED can lend Uncle Sammy virtually unlimited amounts of currency against those IOUs.

So, but where does FED get the money from?! Do they have a huge basement just full of hundreds of billions of dollars? Just a secret stash somewhere in the New York Fed office? Well… almost. They have a computer. And on the computer, they can make up anything they want and they kind of make up all this currency out of nothing. It is just made up on the spot. Out of nothing. FIAT - a Latin term, meaning existing by decree and the FED is able to use this FIAT monetary system to make up as much money as it wants to. The public debt, the bonds, the IOUs that the treasury handed over to the FED as collateral, serves as the originator of the new money that didn’t exist before. So ... the money didn't exist before - the treasury makes up some IOUs - hands them over to the FED and the FED prints (electronically) 100 billion dollars of new money and sends it over to Uncle Sammy. And that, is how the government borrows money into existence.

Ah, but now there is a problem. The FED does not want to hold onto the bonds and wait for Uncle Sammy to repay them because the FED knows where that money came from and knows that if it wants to be repaid for the loan it gave to Uncle Sammy with the made up money, the FED will have to make up more money in the future because.. . well, Uncle Sammy is a little short. By about 33 trillion dollars.

So, the FED gives the bonds over to its select member banks, which then proceed to sell those bonds at a profit to anyone who is willing to buy them and despite what people think, the VAST majority of the government debt, most of the 33+ trillion dollars of debt, is not owned by the Chinese government. It’s owned by us - the American public. We buy them through our 401(k)s, through our retirement accounts, through our investments, grandparents buy them in $50 increments for their new grandkids' birthdays causing the new parents to roll their eyes because they asked for diapers and feeding bottle and strollers and not a piece of IOU from some weirdo named Uncle Sammy. In short, we own our own debt.

And here is why it can never be repaid. Suppose uncle Sammy had only borrowed 100 dollars into existence through this method and spent it on a project but then promised to pay it back plus interest. If that’s the only 100 dollars in existence but it is borrowed into existence and is promised to be paid back plus interest, where do you get the interest from? Well you have to borrow it into existence and then the next payment and the next payment and it just keeps going on and on. Not to mention the little problem that creeps up which is, if every single dollar in existence is borrowed into existence, and it is promised to be repaid with interest, not only where does the interest come from (because think about it, when you borrow money into existence from a bank by buying a car, the bank doesn't give you enough to pay back the interest, too, does it, you have to come up with that on your own and where would you get that interest from, why from other people who borrowed it into existence, etc) and... if every dollar is borrowed into existence as debt, if that debt is paid back, that dollar no longer exists because it is wiped out with the debt so if the federal debt is repaid in a large amount, it will cause a huge run on the system due to all of a sudden a lot less currency being available in circulation... the mind boggles.

Paying the debt down means we as a nation have to accept the idea of our government instituting drastic austerity measures that we as a nation would never accept. It means having to be willing to accept a level of lifestyle that we normally associate with 3rd world countries. In the 1980s the dictator of Romania instituted punitive austerity measures and policies that he imposed on his country, which were so severe so he can repay the foreign debt of the country that a large percentage of the 24 million inhabitants of the country were brought to the brink of starvation. He sold everything to pay off the debt including almost all the food the nation produced, and he did pay off the debt … and about 6 months later after the last debt payment was made, he was put against the wall and shot by a firing squad in the December 1989 revolution. People don't like to suffer. And why should we? After all, it is all just made up money. Made up by the Federal Reserve against funny looking pieces of paper Uncle Sammy gives in return.

We cannot pay the debt back, ever. Nor should we try. It is an unreasonable and unrealistic expectation that can never take place because the nature of our monetary system does not allow it to be paid back. Not even paid down a little. It’s a physical impossibility. It will just keep growing and growing and growing until such time that there will be so much US currency in circulation to service the debt that our money will lose all its value. Then our descendants have to come up with a new monetary system.

BUT - that doesn't mean as individuals we shouldn't budget our money. We're not the federal government and we don't have a seat at the FED discount window - we can't issue pieces of paper as IOUs to pay our bills. So, let's keep budgeting and saving money and accumulating real, valuable properties which keep their values regardless of how much Uncle Sammy spends next year.