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The Millenial’s Guide to How and Why the Government Will Default

I’m going to stick to the facts in this post. A lot of people assume I have some political motivation for writing stuff like this. Personally, I don’t consider that to be the case. You might not hear the story below on CNN or read it in the Huffington Post, but that doesn’t mean it’s not true. If you are under the impression that in order for something to be true, it must already be familiar to you (or come from a source that is already familiar to you), please read about the phenomenon known as normalcy bias.

President Obama has done a lot of talk about default in the past few weeks. The fact is that the government does not necessarily have to default now, but it will default in the future. A future default on US government obligations is inevitable. It’s a foregone conclusion. It’s “baked in the cake.”

It’s important to understand that sovereign debt default is not a rare occurrence in human history. In fact, it happens all the time. The US is not immune to it for any reason. Anyone who tells you that it can’t happen here because this is AMERICA is either delusional or a political operative. It’s superstitious to believe there is something inherently special about this country which prevents perfectly plausible things from happening to it. Maybe the Tooth Fairy protects America from default? Hey, maybe it’s the ghost of John Maynard Keynes!

The Why

President Obama has said that “this is not a banana republic,” and “America pays its debts,” but these are very misleading statements. I would go so far as to call them lies, because what he means by “paying for obligations,” or “paying the debt,” is very different than what most Americans think when they hear those terms. The US Government does not pay any of its debts and it never has. The Treasury pays the interest on the debt because it has to; but when the principal comes due, it simply issues new debt. This is not what most people think when they hear the words “paying debt.” If you owe Capital One and you borrow the money you owe from American Express, is that paying debt? No, it’s obviously accumulating new debt. In fact, the government even borrows the interest it owes when it comes due. This is why the President says the government is going to default without an increase in the debt ceiling. Have you ever wondered why the national debt never decreases? Maybe you won’t wonder anymore.

When I tell people that the government never pays its obligations, they think it’s some kind of conspiracy theory; but it’s actually common knowledge. If you don’t believe me, just keep up with the financial press and the numbers for a couple months and you’ll see what’s going on. Chances are, you don’t do this presently, so why would you assume I’m wrong? Is it because you like the guy they elected President last year? What does that have to do with anything? If you were being honest, you would admit that you don’t know; but you hope it’s not true. Hope is a great thing. Hey, I’ve got an idea! Why don’t you bet your whole financial future on it? Sound like a plan?

You’ll also hear that the national debt is about $17 trillion dollars right now. Here’s the thing about that: it’s a lie. The national debt is actually over $200 trillion. Again, this is common knowledge. Congress knows about it, the President knows about it, and the media knows about it. So how much money is that? It’s only over twice the amount of real wealth in the country (look at total national assets on this). Basically, over the next 75 years, the government has promised to pay Baby Boomers (and others) about $130 trillion. Taxpayers started paying for this generation a few years ago and the payments will continue for the next 10-20 years until we’re paying $3 trillion a year in entitlements. SS and Medicare already started to go into the red, so it’s not something that’s way off in the future. By the way, Obamacare also adds to the debt.

Finally, the government is paying about $200 billion in interest right now. The interest rate that the government pays on its debt is conveniently set by the Federal Reserve, and the Fed conveniently has that rate of interest at effectively zero. It’s been at zero for years. Do you ever wonder why savings accounts pay about 0.45% interest when they used to pay 5-6%? Since the official inflation rate is near 2%, you’re actually losing money¬†if you keep it in a savings account. Have you ever wondered why this is the case? Do the math. If the government had to pay 5% interest on the national debt, it would be paying $850 billion a year in interest. Since the (official) debt is on a trajectory to hit $20 trillion, the government would soon be paying $1 trillion a year just to service it. Do you think we can afford that? President Obama says we can’t even afford $200 billion without borrowing more money.

If you’re upset already, I’m sorry. I am just doing math and presenting facts here. Let’s recap: the government never pays its debts, it’s in it for over $200 trillion and it can’t afford an interest rate of even 5%, which is historically a very low rate. Call me a Tea Party nut, but the critical thinking center of my brain is telling me this can’t work.

The How

How will the government default? That’s easy, let Alan Greenspan tell you. I’ll ruin it for you: they’re going to print the money. The checks will keep going out, but they just won’t buy anything. This is already happening. Take my mother’s case as anecdotal evidence. She’s been receiving Social Security checks for about five years, but she hasn’t really received a cost of living increase that has kept pace with the rising costs of food and energy. For a few years, she didn’t receive any cost of living increase at all.

Am I saying the Fed is going to print the entire $200 trillion? Not really. They’ll try, but they won’t quite get that far because printing pieces of paper doesn’t have any effect at all on the amount of real wealth in a society. I assume you don’t need proof of this, but if printing pieces of paper created wealth, why do we have to work? Think about that one for a while. Anyway, an increase in real wealth is the very thing we’d need to cover all these obligations.

What Does It Mean?

I’ve just demonstrated that the government won’t be paying all its obligations. It will kick the can as far down the road as it can, but the can will eventually get Too Big To Kick (TBTK), and the government will default on some or all of its obligations by inflation. To be clear, when we’re talking about obligations, we’re talking about things like Social Security, Medicare, Medicaid, Obamacare, VA benefits, government pensions and food stamps. In other words: everything. In other words: don’t become dependent on this stuff. It doesn’t matter if you think the government has to pay. It doesn’t matter if you think it can’t happen. It doesn’t even matter if you think the government paying is the right thing to do. None of that matters. All that matters is reality.

Am I saying that I don’t want poor people to get their benefits? Am I saying that I want to put people out on the street? Re-read the post up to this point. I am merely describing what is, not making a claim about what ought to be. Many times, when I confront people with these facts, they jump all over me for not being a humanitarian. They think people should really, really get these benefits, but what I’m discussing here is a reality. It’s not really open for debate as facts are not open for debate. What’s more, people don’t even debate this stuff. No one is denying that interest rates are artificially low, or that the unfunded liabilities exist, or even that the government doesn’t pay the debt. All they say is that, for some reason, it doesn’t matter. They’ll say it can’t happen here. This is America, and America pays its bills!

They’re right. America does pay its bills…for now. Then one day, all of a sudden; it doesn’t. I’d give some thought to what that means for you and your family.

Comments

  1. Cathy says:

    yes sad to say all of this is true and it will soon be reality. Wake up people.

  2. Aaron says:

    Loved it John!

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