Thursday, February 10, 2011

Debt and Depression: Our Present and Future

In my last post I tried to be as clear as I could be regarding inflation in the U.S. To reprise: Inflation isn’t here now, even though some prices of important products in our economy are rising. We may get inflation, but don’t get excited about it until it happens (which doesn’t mean that we shouldn’t get excited and angry about actions taken by BO, the Treasury, the Congress, and the Fed that will lead to inflation).

My unhappiness with the inflation hawks is that their constant focus on inflation detracts from other issues. Inflation is not the only bad economic calamity that can afflict us. Right now the increasing level of debt being taken on by the Federal Government is a greater threat. As Yaron Brook has stated, the level of debt the U.S. Federal Government has taken on and will take on will likely result in an economic depression. The consequences will be no better than the results of the current recession or the 20C depression. Our economic and political leaders resist learning from experience. We will experience long-term suffering.

There are two recent bits of information that prompt me to write this post. First, I saw the news release that the Congressional Budget Office expects that Social Security, which is now running a deficit, will continue to do so. That is, Social Security will be a drain on the Federal Budget from now on. It was expected that Social Security would no longer produce a surplus for our Presidents and Congress to play with at some point but not for another few years. Because of the recession, and the very low levels of employment and consequently lower Social Security tax collections, deficits for that “entitlement” program began last year. Add to that the deficits in the Medicare system and you have reached the stage where the major entitlements are drawing on the general fund.

The other piece of information I learned was that the actual federal debt level is significantly higher than the figures that Washington bandies about. The figure they use is high enough, shamefully high, dangerously high. The reputed Treasury Debt, the amount authorized by law, which we will reach shortly, is $14.3T. When you add in bailouts, Fannie Mae, Freddie Mac, student loans and other “off-balance” sheet funding, it becomes $20.173T, which is 44.75% higher. Supposedly, the deficit for the last fiscal year was something like $1T, but when you look at the actual Treasury balance sheet, the obligations of the Treasury grew by $3.3T. In other words, our debt, which is threatening to put us into a severe depression, is growing faster than the politicians will admit. We look more like Greece than Germany.

Looking forward, we see that the spending programs that BO has pushed into law will continue to add piles of debt, that the growth of the numbers of Americans over 65 will require more and more spending (Medicare will be the biggest drain!), that the unfunded entitlement of retired federal workers pensions and medical benefits will add more demand on the federal budget, and there will be more disasters in the economy that the government will feel required to remedy by spending money it doesn’t have.

The damage that this debt exacts is two fold. First, it removes savings from the economy that could have gone to productive activities. We are being deprived of the possibility of improving our lives, or even maintaining our standard of living. When government officials admit that it could be years before employment reaches earlier levels, it is this drain on savings that is really the reason. Second, it will increase the amount of interest payments that the federal budget has to cover. Currently, and for the last few years, the Fed has done all it could to keep interest rates low, very low, often near zero. But the Fed is not omnipotent, although it seems to think that it is all knowing. As the U.S. Federal Government continues to need to sell more and more bonds to cover its obligations, the only way that it will be able to attract more savings will be to raise the interest rate it offers. Even the U.S. Government must compete for money on the market. Since the market is international, neither the Treasury nor the Fed can control the real interest rate that the market will demand. When interest rates go up, the drain and strain on the Federal Budget will be immense. The federal politicians and bureaucrats, who look no further than their own immediate whims and power, will be surprised, and will have no means of acting to counter (although some will want to push for higher levels of inflation, which will make things worse, of course). When interest rates go up, all of those who trusted the government and bought the Treasury Bonds that financed all of the spending, will see their beloved assets fall in (dollar) value. It will be a just reward.

Debt is the threat. Debt is the danger. And we are not focusing on it. We are allowing it to sneak up on us. Wake up and pay attention.

What to do? That is, what is the solution? First, what the politicians and bureaucrats propose isn’t a solution. We will be in worse shape with more laws, more regulations, more spending, and more made-up money by the Fed.

Many focus on the spending and suggest that we should stop spending on Social Security and Medicare, not to mention BO’s massive programs. While we will have to stop the spending, this battle is a very difficult one. Included in the resistance to this idea are all of those who are depending upon those programs. Part of the solution will have to be some way to avoid massive losses of older people.

I think that there are other things to do first. These steps aren’t easy either, in the political sense, but they don’t threaten to destroy people and the results will include the solution to our problems. What do we do? We free the economy. We get rid of regulations and government interference. We get rid of many government employees. I wrote about this before, so I won’t repeat myself. But the point is that with a productive economy, we can clean up the debt and find a way out of the obligations that the government has foolishly undertaken.

To achieve the goal of freeing up the economy to be productive we have to teach our fellow man the truth about capitalism, both its moral worth and its real success. That means we ourselves must know about it. Learn what capitalism is. Learn how it functions. Learn its history. Learn how the economy you live in works. We cannot teach what we do not know. I assume most of you have read and understood “Capitalism: The Unknown Ideal”. If you haven’t, read “The Capitalist Manifesto”. Read Hazlitt and Bastiat.  Read the great Austrian economists, von Mises and his predecessors.  Read “Meltdown” by Thomas Woods. Keep an eye on the debt, the money supply, and the prices you pay. Realize that there is no free market in the United States.  None.  Every market has elements of government controls and interference. Talk to your neighbor and the man in the street. Remind them that capitalism has been attacked and subverted for over a century in the U.S. Spread the word. Capitalism can save us. Only capitalism can save us. The others have tried and failed. Let’s return to our greatness.


  1. So, a couple hours after I post this I find that Yaron Brook and Don Watkins published an article on "The Road To Socialized Medicine Is Paved With Pre-existing Conditions" ( The connection? They point out that the market for medical services has been corrupted by a century of government inteference. There is no free market in the U.S.

  2. Can you provide some sources for these figures?

    Treasury Debt: $14.3T/ $20.173T
    deficit for the last fiscal year? $1T/ $3.3T.