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Wake Up America, One US Until National Debt Tears Us Apart

William L. Kovacs

May 2021

Wake Up America, One US Until National Debt Tears Us Apart

There is no polite way to say this – “Wake Up America,” a federal default on the national debt will directly hurt anyone who has or expects some form of retirement income. Don’t expect government to look out for you. Government will do what is best for it, citizens be damned. Citizens are mere commodities that send money, in the form of taxes, to the government for its discretionary use.

To remain in power the 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 astronomical proportions and the federal government is forced to take action, it will take the easiest path which is to default 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 will be directly impacted by a default.

Identifying who is impacted by a federal default is a critical piece of information that should be given directly to citizens.  Unless our government addresses the issue, the national debt will continue to increase. The Congressional Budget Office estimates the debt will be double the nation’s GDP by 2051, or $ 42 trillion or more.

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 at a fierce pace. Interest rates hit 20% in the late 1970s 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.

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. $ 21trillion of the debt is owned by the public or 78% of the debt. $7 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 and loaned that 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, 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 by insurance companies.

$147 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. All these payments are long-term payments to individuals who depend on those payments for survival.

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

The federal government is in a predicament that it cannot get out of without actually making fiscally sound decisions that address the long-term sustainability of the country. As the federal government creates new multi-billion- and trillion-dollar programs, it moves closer to a default. If the Federal Reserve can keep interest payments around zero, debt is manageable since there is little interest due. Every 1% increase in interest rates raises the debt over a few years by trillions.

. The federal government is pitting Americans against Americans as to who gets a piece of the pie and when the pie is divided. Does the federal government give away the entire pie now and let those who invested in the nation live without pensions? Does the federal government opt to forgive student loans, authorize child care and universal basic income for all? Should the federal government support illegal immigrants with food, shelter, clothing, health care, education and basic income by putting social security recipients at risk?  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 USA?

Tough questions that must be answered.

The federal government is now an entity separate from its people. It lives in a world that does not exist for ordinary people who must survive without the ability to tax others. If the national debt is not addressed soon, “we the people” will live in involuntary servitude to the federal government.

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  • Modern Monetary Theory: A Banana Republic with No Bananas

Modern Monetary Theory: A Banana Republic with No Bananas

William L. Kovacs

May 2021

Modern Monetary Theory: A Banana Republic with No Bananas

Part I of this series charted the massive increase in the debt of the U.S., by both political parties, over the last twenty years. Now with the Progressives in total control of the federal government, far-Left economists and socialist politicians like Bernie Sanders advance Modern Monetary Theory (“MMT”) as a justification to continue unlimited spending without any consequences to the nation. If the Progressives are correct, there is a free lunch for all, most of the time. If the Progressives are wrong, the U.S. becomes a “Banana Republic.”

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.

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. 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 for any cause.

MMT argues government debt is irrelevant

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 (printed 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

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 money for other purposes.

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 own promises based on the creditworthiness of the U.S. which is constantly printing more money out of thin air and transferring 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 U.S. 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 be 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 the services government wants them to buy. Such a system could be termed communism but MMT is too misleading for such a serious term. A better description is that MMT promotes a Banana Republic without any bananas to back its currency.