Oct 11th 2016: National Debt

Quite frankly I find economic theory a lot of smoke and mirrors. Economists can pretend to be able to predict the future but in reality their guesses amount to so much meteorology. While it is possible to look into the past and take a stab at future events, when offered a completely new economic paradigm they are in the same boat as the rest of us. To say the economy is doing well or poorly at any given instance shows no great insight. What is clear without benefit of the opinion of any economist is that if I make minimum wage ($7.25 per hour) and a gallon of gasoline costs me $2.39 per gallon I am in trouble.

Using the same simple logic, if (as the OMB reports in 2015) the government had an income of 3.8 trillion dollars and unsecured debt of 18.9 trillion dollars we are in trouble. As long as the debt has been increasing at an tremendous rate we, as a country, have made the minimum credit card payment. Not being a clairvoyant economist I cannot predict when this state of affairs becomes catastrophic, but it doesn’t seem good to me.

A number of years ago the fight for a balanced budget amendment to the Constitution was introduced, and then bandied about, and then forgotten. It seemed irresponsible to me that the government would for any reason want to spend more money than it had until I looked at the problem a little more closely. In 2015, when the revenues for this country were 3.2 trillion dollars, we still managed to create a deficit of 438.9 billion dollars. There is indeed a benefit for certain members of the economy and certain institutions that this debt be created and perpetuated. Rather than pay down the debt we continue to create more debt. And here is the reason.

Whenever the government spends more money than it has they issue treasury bonds. These treasury bonds can only be purchased by accredited investors. Although the debt is unsecured in a sense, these investors can count on payment of interest on the bonds because they come out of government revenue. Simply put, our taxes pay the interest to financial institutions and accredited investors.

To me this is one of the clearest indications that our government favors certain members of our economy. While Reagan’s Trickle Down Theory and Atlas Shrugged by Ann Rand indicate that if you take care of the upper strata of society they will grow the economy and thereby support those citizens that are below them financially, 40 years of history tend to indicate that that is not true. In my earlier blog I indicated that I felt that the government should treat everyone equally. What this means in this case is that those at the top of the economic food chain should be treated no differently than those at the bottom. Although it seems like an attack on the rich I don’t see any choice but to look for a balanced budget amendment.

While a balanced budget amendment would stop the increase in our debt it still leaves us with an 18.9 trillion dollar debt and a 223.45 million dollar minimum credit card payment. In my previous blog I mentioned that government revenue should come from two sources, a fee based system and an enterprise based system. In essence a fee based system charges the same total amount for each citizen for all the services of government. In terms of a balanced budget, by knowing the number of citizens you have, you know the base line for operating the government. In the current income based system it is impossible to estimate what the government revenue will be until you have already spent the money. In the enterprise system the government undertakes those projects that will return revenue. As I envision it, the government is for all intents and purposes running a very large business. This would be the place for investors to capitalize the government and expect a return. In my mind this is infinitely preferable to debt, however the argument against it is that it is equivalent to socialism.

The Tennessee Valley Authority and Amtrak are two government run enterprises, that while successful, have not always been profitable.These two examples, while not the only ones, show the model of how the enterprise system could work. In the case of the Tennessee Valley Authority, it succeeded in employing people during the depression, reclaiming over used agricultural land and producing electrical power, but was criticized for competing with established businesses. Amtrak shows that while not profitable, it is sustainable due to its association with the government (thus a secure investment).

The choice becomes : a government that is equitable, capable of sustained enterprise and large accomplishment with a vehicle for secure investment; or a government that favors certain citizens over others .

Not so incidentally, debt encourages inflation. It is beneficial for debt repayment to be at a higher inflation rate than what it was when the debt was first established. That is to say, if you borrow money the debt decreases as the inflation rate goes up. Because of this mathematical axiom large debt makes deflation impossible. The optimal situation for our economy is for the cost of living to go down, that is deflate. As long as the debt exists at the current level and continues to rise that is impossible. Simply put if I am making the federal minimum wage ($7.25 per hour) I want a gallon of gasoline to deflate to 23.9 cents per gallon. By lowering the cost of living, wages can also decrease. Decreased wages with high buying power make us competitive with foreign producers. And while I am not an economist, I certainly hope I sound like one.

If the federal debt is paid down the argument goes that most of the debt is held by foreign powers. The last figures that I saw on debt ownership placed foreign powers at 12%. And the amount that we borrowed from the Social Security Fund at 35%. Paying down the debt also refinances Social Security.

I think these are sufficient reasons to prove the need for a balanced budget and debt reduction. At next blog I will tell you how the enterprise system can pay down the debt.

Thank you for your indulgence, may God bless America.

Paul Joseph Nels Dudley

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