Alternatives For Funding The Government

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The national debt is about to hit $20 trillion (and a debt ceiling along with it).  The US has not paid a penny on its debt in decades and shows no ability to do so anytime soon.  Moreover, the US is issuing new debt to cover interest payments on the old debt.

 

The reality is that the US will never pay this debt down to an appreciable amount.  Since the US prints its own currency it has several alternatives all with risk.

 

First, just keeping issuing debt and "encourage" the Federal Reserve to never normalize interest rates.  Right now the annual budget is around $2.5 trillion of which about half is covered by issuing debt.  Just keep adding a $1 trillion plus each year to the debt.  If investors stop buying the debt have the Federal Reserve buy the debt by having the Treasury digitize the money and hand it over to the Federal Reserve.  Since the US is the world's reserve currency this option would work until other countries began to dump the dollar.

 

Second, simply forgo issuing treasuries and have the Treasury Department create money in which to plug all gaps.  There would be no interest because debt would not be issued.  Again, this works until the dollar collapses.

 

Third, force a massive 75% write down in the debt to bring it to a manageable level.  Investors would take a severe haircut.  However, this would likely impact our ability to issue debt at low interest rates in the future.

 

Whatever way we go each option poses significant risk.  Flood the country with dollars and we begin to look like Germany 1920s.   Monetize the debt through the Federal Reserve or simply digitize money out of thin air to pay for budget shortfalls and the dollar risks a total collapse on the world stage.

 

However, any belief that the US will ever pay down a penny of debt is just a fantasy.  Finally, with real productive economic growth barely moving hoping or planning for inflation will not happen.  Forced inflation could occur in the event the dollar falls significantly but that scenario would bring on an entire different set of problems. 

Comments

Dino Manalis Added Jul 7, 2017 - 9:38am
wE HAVE TO GRADUALLY TURN DEFICITS INTO SURPLUSES AND PAY DOWN THE DEBT BEFORE WE BECOME LIKE gREECE.  tHE DEBT CEILING NEEDS TO BE RAISED, BUT ALSO WE SHOULD IMPLEMENT A CAREFUL AND GRADUAL DEFICIT-REDUCTION PLAN, LIKE THE ONE ACHIEVED DURING THE cLINTON yEARS, WITHOUT HURTING THE POOR OR THE ECONOMY.  
Leroy Added Jul 7, 2017 - 9:59am
What we need is a voluntary tax.  One of the Scandinavian countries tried it and raised ~$1,300.  A tax like that won't work.   I am talking about a different tax, a surefire way to raise money to pay off the debt if the politicians don't spend it.
 
A lottery.  Even the poor will pay this tax gleefully.  Open it up to the world, and it will gleefully pay off our debt.  Maybe they get a visa instead of money. 
 
The states already do it.  Let's do it on a national or even international scale.  Let the fools be parted from their money.
Jeff Jackson Added Jul 7, 2017 - 10:23am
Auction off citizenship. The Chinese millionaires are buying up real estate in California like kids in a candy store. The reason the Chinese millionaires are doing this is because they know that at any second the Chinese government can take every cent that they have with few legal options to recover the money. They know their money is safe in the U.S. Why not make them pay for that privilege?
Base accepting immigrants on what they can contribute to paying off our national debt. Bring in the rested and the wealthy, and not the tired and poor, at least until we get things paid off. They can pay off our debt, the fill our banks with money, they spend money here, they hire American workers. Good lord George, I think we've finally found a use for the rich, and I'm beginning to like them even more now.
Leroy Added Jul 7, 2017 - 10:28am
Amen, Jeff.  But maybe not citizenship.  That way we can get them over and over again.
Jeff Jackson Added Jul 7, 2017 - 10:57am
Yes, Leroy even better, rent citizenship, say, a million bucks a year and a surcharge to keep their money in our banks. Yup we'll put a cash register at the feet the the Statue of Liberty. I love it Leroy.
The Burghal Hidage Added Jul 7, 2017 - 12:28pm
We have long since reached the stage that the collapse of the dollar is no longer a question of if, but when. It will happen.
You are correct that this debt is never going to be retired.  There is a saying in the world of finance. If you owe the bank $10,000 and you don't have it? You have a problem. If you owe the bank $10 million and you don't have it? The bank has a problem. This is the place at which we find ourselves, albeit on a much grander scale.
 
Although for the short term this would have horrendous consequence, for the long term the only real solution to this problem is let it fall and get it over with. Anything else is only forestalling the inevitable. When all of the dust settles you start over. How? I don't have the answer to this, but somehow this is what will have to occur.
 
As far as funding the government goes it must begin with a rethinking of the government's mission.  There is much assigned to the province of government which does not belong. A great deal of the expense involved would be reduced simply by removing government (specifically the federal government) from the equation altogether. 
 
Here is a thought to consider. Write and pass legislation that would completely negate all of federal taxing and borrowing authority. This would be step one.  Do likewise with the tax codes and borrowing authority of the individual states. Step two.
 
With these two steps accomplished the states would then establish a sales (consumption) tax. This applies uniformly to all who engage in the economy regardless of scale. If the wealthy spend more they pay more. If the poor spend less they pay less. This would be the only form of taxation. No income tax, no estate tax, no capital gains tax, property tax, payroll tax. All gone.
 
It would be left to the individual states to determine what rate their sales tax would be.  If places like New York or California still had a majority of their citizens willing to continue funding their version of a fool's paradise then so be it. It would be on them, no other states would subsidize their spending. In places where people decide they want more from government then they can pay for it. In places where people would prefer less from government then the tax rate would be less.
 
This system in turn would properly entrust the authority where it belongs, with the individual states. It would also spur competition between the states.  A business owner could find themselves in a high rate state, like New York, and see that in neighboring Pennsylvania, for example, the tax rate was considerably less. This would leave the option to relocate to Pennsylvania where A) the cost of doing business would be less, and B) where more opportunity would be found by virtue of the increased commerce commensurate with the lesser rate.
 
The final part of this plan would be the funding of the federal government. The federal budget would be predicated on a collection of say 2% of the states' revenue. I'm picking a number arbitrarily. That rate could be more, it could be less, but whatever it is set at is the cap. The federal government works on what it takes in, no borrowing. If states are doing well then this increases their contribution to the federal budget. If states don't do well they either plunge into ruin or they change their ways. In this plan the market dictates what happens and the federal government is dependant upon the states, not the other way around.
 
If the federal government were properly restricted to performing those functions for which they are constitutionally empowered only it would live on this diet.  Add a constitutional amendment requiring the approval of two thirds of the states to raise the cap for federal collections  and you just might have a system that is sustainable.
George N Romey Added Jul 7, 2017 - 1:01pm
First of all I think its time for a debt jubilee all around. The lenders took the chance let them take the severe haircut.  Just maybe if lenders take an 80% cut on all debt they will stop handing it over to politicians, corporations to complete usually disastrous long term acquisitions, and multiple credit cards, eight year car loans and lines of credit against personal real estate.  Finally we might learn the lesson of thrift again and have more normalized rates that reward savings.  Its not only the government debt that is unpayable so is most consumer debt and lots of corporate debt.  In the 1950s, 60s and 70s massive consumption was driven by savings and income, not a Visa or MasterCard. 
 
Second, withdrawal from all wars, conflicts, skirmishes, coos, regime change and meddling.  If it doesn't threaten our borders its not our business.  Why are we spending several times over compared to Russia?
 
The problem is that if the government collects any kind of special tax it will just get spent.  Only when the punch bowl gets taken away would there ever be any change? 
 
Finally, too many in Washington DC in both parties see no problem with adding billions of dollars a day because hey we can issue our own currency and isn't our debt someone's asset anyway? 
Autumn Cote Added Jul 7, 2017 - 1:18pm
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Bill Kamps Added Jul 7, 2017 - 1:56pm
The demise of the dollar has been predicted for about 50 years.  It may well happen some day, but that some day may be a long time in the future.   People have been predicting runaway inflation from the creation of more dollars for decades, but that hasn't happened yet either.  The smart money has been on the side of low inflation.
 
The problem Greece has  is that they cant issue their own currency, and they cant change its value relative to  gold, or  other currencies.
 
Currently we see gold at several year lows, interest rates at generational lows, and so the lenders are content that their interest will be paid.  Lenders can collect on their principal simply by selling bonds, and since they aren't selling at a discount, the lenders are content with the  risk.
 
It is unknown when or if the markets will decide there is a problem with US debt.  Right now there isnt.  At some point there might be. Decades worth of predictions have all been false.
George N Romey Added Jul 7, 2017 - 3:00pm
Bill think we've  doubled the debt twice in the past 16 years.  Think about how much we added from 1900 to 2000.  Can we continue to double the debt every decade? 
 
Add to the fact that Russia/China/Iran are starting to see a world in which the US does isn't a complete hegemonic.  The Fed hasn't been able to normalize interest rates or unload its massive balance sheet because both could crash the economy.
 
Its a new day.  Its assuming that in 1900 people wouldn't ultimately accept automobiles because they had been riding horses for centuries. 
 
If the government monetized the debt we have no assurance of what would happen to the dollar. The US will be in new territory.
Bill Kamps Added Jul 7, 2017 - 3:16pm
George, the truth is we dont know the answer.  In most situations a pile of debt is not a good thing.  However, this is a situation where the government can create its own money to pay the interest, and what are the limits on that?  The limits are what the world will accept, not what makes sense, in some rational sense. Since the dollar is the best currency of the lot, there is a lot of tolerance built into the system.
 
There is no law that says the Fed has to sell its bonds at any particular time.  Of course if  they dumped bonds on the market it would not be a good thing, and interest rates would rise unacceptably.  By  why cant the hold the bonds for a long time? what harm does it do?
 
Sure some countries dont like that the dollar is a reserve currency.  However the countries you mention, dont even have freely traded currencies.  Try to get the Ruble exchanged somewhere outside of Russia, you cant, it is more difficult than the Mexican Peso.  The  Chinese currency is the closest of the lot, and no one really wants that either. 
 
You are correct there are no assurances, none on life either. 
 
The best measure of whether there is too much debt, and inflation, is the interest people want for holding  the bonds.  Right now  they are at generational lows.  In the late 1970s interest rates were in the mid-teens on US bonds, those were more iffy times.  However, right now if people want  to loan the US gobs of money at low interest rates, why not take it ?
 
Nothing that is happening now is as bad as giving everyone holding bonds a haircut.  That would set off a worldwide depression.
 
 
George N Romey Added Jul 7, 2017 - 6:28pm
Donald throughout man there have been debt jubilees.  Once good credit possibilities are exhausted the urge is to consider more risky endeavors.  Think about consumer debt 50 years ago compared to now.  Eventually the system becomes overload and fails. If the Treasury and Federal Reserve had allowed for (control) failure of the financial system it was started anew.  However, they only ginned it up and kicked the can down the road.  The result today is that there is more leverage and higher risk than 2007-2008.  Everything in life is finite and so is credit expansion.  There will be another failure, likely far worse.  Its like a drug addict that keeps injecting heroin and going to rehab but failing again. Eventually the addict dies, and not in a very comfortable way.  
 
The question is will the Treasury again issue trillions in bailiouts and the Fed go on another bond buying spree taking their balance sheet into the tens of trillions?
Katharine Otto Added Jul 7, 2017 - 10:49pm
That government spending is out of control, and the government is desperate to "stimulate the economy" by "creating jobs" only tells me that the government is hard up for cash to meet its ongoing obligations. Probably most of the US debt is to ourselves, like retirees.  The international and state government bankruptcies and near bankruptcies coming down the pike are generally caused by public pension obligations. The government needs to quit making promises if it wants to retain any credibility.  
 
Contraction is already occurring, with business and personal bankruptcies, glutted markets, and regular people in so much debt already that they can't afford to buy more.  
 
It occurs to me that no one has the right to promise other people and expect to retain credibility.  I contend the US government does not have the right to obligate the unborn to fulfill its promises.  If the government can't live within its means, why should anyone else do it, and why do taxpayers put up with it?
Katharine Otto Added Jul 7, 2017 - 11:42pm
John G, If the government were to collapse, so would the debt. Who would be obligated to pay?  That's why these bankrupt countries' governments are allowed to remain in place, to collect the taxes that feed the central bankers.  Yes, I know I have it all wrong, but so does everyone else.  Government finance is a shell game, intended to confuse, since its inception.  Call it a conspiracy.
George N Romey Added Jul 8, 2017 - 2:00pm
Donald throughout mankind there has been "jubilee" or a total debt forgiveness to cleanse the system.  I agree, its time to start from zero.
Katharine Otto Added Jul 8, 2017 - 3:12pm
New Honesty, Donald and George,
You speak my language.  And John G., You've made a lot of statements about what idiots and victims others are, but I don't see you offering any better alternative. You say increase government spending?  Do you work for the Fed?  The more government spends, the more damage it does.
Doug Plumb Added Jul 8, 2017 - 6:30pm
re "Since the US prints its own currency it has several alternatives all with risk."
 
Bad premise. The US does NOT print its own currency.
 
George N Romey Added Jul 8, 2017 - 8:45pm
Donald don't argue.  John is a troll. He's been told that the Federal Reserve is about "federal" as Federal Express.  Anyone that thinks the US can print money eternally or simply monetize government shortfalls without the world seeing the end of the US economic empire isn't playing with a full deck.
Doug Plumb Added Jul 9, 2017 - 6:26am
George re "John is a troll. He's been told that the Federal Reserve is about "federal" as Federal Express.  Anyone that thinks the US can print money eternally or simply monetize government shortfalls without the world seeing the end of the US economic empire isn't playing with a full deck.  "
 
I don't know what it is that makes people believe this kind of nonsense or develop this unhealthy trust for government that almost borders on idolatry. Maybe John is an agent, paid to do this. There are millions of those online everywhere. Their repeating mantra is probably the only way of detecting them.
 
Katharine Otto Added Jul 9, 2017 - 9:56am
Donald,
Thank you for confirming and taking concepts that I've also embraced further.  I don't claim expertise but have read widely in an effort to discover what went so wrong with the so-called American Dream.
 
The Federal Reserve System is listed among "independent agencies" in the Library of Congress' list of government agencies.  www.loc.gov/global/executive/fed.html
Among the list of "independent agencies" are also the CIA, EPA, FCC, FTC, National Railroad Passenger Corporation (Amtrak), SEC, TVA, and the USPS, to name just a few.  While these agencies ostensibly operate under Executive and Congressional oversight (such as appointment of directors), their operations are shrouded in mystery.  
 
I agree the Fed is a Ponzi scheme, sanctioned by Congress because it gives Congress the ability to spend without restraint, as we are seeing.  A major function, I believe, is for it to fund Wall Street, as in "quantitative easing," when the money churners run short of cash.  Thus, American taxpayers, who are heavily invested in Wall Street for retirement and other nest eggs, don't want to see the Fed de-fanged. They distance themselves from knowing how their investments in high-dividend stocks are contributing to worldwide war, pollution, deforestation, oil, and other corporate-driven travesties.  The US government is the hand-maiden of Wall Street, as Alexander Hamilton intended it to be.
 
 
George N Romey Added Jul 9, 2017 - 12:27pm
Donald and Katharine the Fed was set up this way.  The bankers wanted to operate outside of the control of the federal government. Wilson was duped into the hogwash that he was given.  Why is unlike the Post Office or Amtrak the Fed is not required to open its books to the Congress or the American people?
Dave Volek Added Jul 10, 2017 - 1:06pm
I went to John G's link and found some interesting perspectives on this topic. I can't say I agree, but this part of macroeconomics is a mystery to me. Many governments should have gone broke two or three decades ago---if we are thinking in classical terms.
 
Governments have certain tools that allow them to have vast amounts of debt--and yet not go broke. Even the biggest corporations could not operate for very long with this debt load and inability to pay it back.
 
I always wondered if there will be a time when a country defaults on its loans simply because it is cheaper to walk away from those obligations--including whatever  economic dislocations occur--than to continue to pay interest.
 
And who in the hell is holding those government loans?
 
George N Romey Added Jul 11, 2017 - 8:04am
Governments do not have the profit pressure to perform like public corporations.  Governments are not bound by the same accounting standards.  Governments that issue their own debt will never need to go begging for another loan from the bank.  The big issue is that if those foreigners decided to dump their securities or stop buying treasuries the entire global economic system would collapse.  The US being the largest economy in the world scares the hell out of everyone.
Dave Volek Added Jul 11, 2017 - 10:17am
Donald: If $7t is being held by Americans, which economic classes are holding that debt. I can see the poor, working poor, or even middle class owning government bonds to earn some interest.
 
George: I think you are raising an interesting point. "Money" is an artificial concept. It only works if people believe it will hold its value in the future. When that belief is gone, it won't matter if money is in the form of currency, zeros and ones in a computer software, or government debt.
George N Romey Added Jul 11, 2017 - 10:26am
Most held by Americans are mostly large corporations (particularly those that have bought back billions in shares and turned it into treasury stock), institutional investors, plutocrats.  The average American buying at what time were savings bonds is well over.
 
The truth it that global debt is at a level well beyond what man has ever known.  Few things can go into infinity.  My belief is that eventually there will need to be a global jubilee but it won't be a pretty time for mankind.  I think people are nuts if they think the US can just continue to print a $1 trillion plus each year even if have our own currency.  Nowadays a trillion gets batted around like its a buck.  Think of this if you haven't heard it yet, if you gave some $1 million in the time of Jesus and continued to give that person and their subsequent heirs a $1 million a year since then their heirs still would not have a trillion. 
Saint George Added Jul 16, 2017 - 5:04pm
Your 'history' is a bunch of made up bullshit.
 
Your 'history' is a pile of real bullshit.