The National Debt Cannot Be Paid Off

Government spending is out of control and, while most say they want spending cuts, people oppose cuts that impact them. Among those who get government money, there’s practically an unspoken, unbreakable pact to keep the money coming. But when I say that the national debt cannot be paid off, it’s not a political forecast; it’s a statement on the flawed nature of the dollar.

Astute observers call the dollar a fiat currency. Fiat means force. It’s true that we’re forced to use the dollar (e.g. by taxes on gold) but the dollar is also irredeemable. There’s no way to cash it in. The dollar is credit that is never repaid. Today’s dollar is a dishonored promise.

This was not always true. Before 1933, the dollar represented an obligation to pay 1/20 ounce of gold. People could deposit gold and get paper notes in receipt. Those notes circulated, and any bearer could redeem them for gold. Back then, $20 was not the gold price. It was the legal rate at which gold was deposited and redeemed.

 

In 1971, President Nixon changed the monetary system with the stroke of his pen, making the Fed no longer obligated to redeem dollars for gold. The consequences of using debt as if it were money were soon clear. Rising debt became a more serious problem than rising prices.

To understand debt, credit and the importance of redemption, consider Joe borrowing sugar from neighbor Sue. To pay Sue back, Joe goes to the store, buys sugar and hands it to Sue. Not only is Sue repaid; the debt goes out of existence—it is extinguished. Borrowing money used to be like borrowing sugar. The repayment of debt in gold-backed dollars settled the loan and wiped the debt clean.

Not anymore, since Nixon detached the dollar from gold. By making people pay with paper-only dollars, each debt is transferred, not cleared.

Suppose Sue owed Joe $1,000, then hands Joe ten $100 bills. Sue gets out of the debt loop. But now the Fed owes Joe the $1,000. What does Joe do? He deposits his cash in a bank. Now the bank owes Joe money, while the Fed owes the bank. What does the bank do? It buys a Treasury bond. Now the Treasury owes the bank. And so on.

By Nixon’s design, the system omits a crucial feature. The extinguisher of debt, gold, is not allowed to do its job. Debt can only be transferred from one party to another. It’s like a lump being pushed around under a rug. With no means of final payment, that lump is never put in the trash. Debt is never extinguished.

In fact, the debt must increase, because the interest is constantly accruing. Interest is added to the debt, as it can’t be paid off either. Total debt must grow by at least the interest. Debt actually increases faster than that, because the government craves what now passes for growth.

The rate of debt increase is proportional to the debt itself. It is not a fixed dollar amount, such as $100 billion a year. It is instead a percent of total debt. Mathematics has a term for this type of growth: an exponential function.

Exponential growth is not sustainable, according to credible scientists. Mainstream economists ignore this fact in the hope that that somehow growth can outpace debt, one year a time.

But exponentially rising debt is not sustainable because the capacity to service the debt is finite. Without a means of extinguishing debt, servicing is merely borrowing new money to pay off old debts. This is the equivalent of taking out a home equity loan to get money to pay the mortgage.

The U.S. debt is putting us in danger of economic catastrophe. Like Greece, which found no more buyers for their bonds, the U.S. relies on selling new bonds to pay interest and principal when due. The difference is that the whole world bids on U.S. Treasury bonds, for now. But eventually, market participants will realize that the American debt cannot be paid off.

 


 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals.  Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads.  Keith is a sought after speaker and regularly writes on economics.  He is an Objectivist, and has his PhD from the New Austrian School of Economics.  He lives with his wife near Phoenix, Arizona.

 


 

 

 

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4 Responses to “The National Debt Cannot Be Paid Off”

  • RedQueenRace:

    “Question: Where did the $2.5 come from? The simple answer is from Joe’s customers. But such an answer is short-sighted, for where did *they* get it from? Remember, we are talking about a closed economy here and the Central Bank is the only entity able to create new legitimate currency.

    So, when all is said and done, those $2.5 ought to have been created (out of nothing) by the Central Bank. But, let’s not forget, the Central Bank lends (at interest!) all the money that it creates. So, by the end of the year, we have $2.5 more money in the economy – which equates more debt, because these new money are lent out just like all the old money and they keep gathering interest, the paying of which requires even more new money.”

    The creation of new money is not required to satisfy interest payments as debts are paid out of cash flow, not money stock. It only requires that the borrower get his/her hands on enough money each month to make the monthly payment. In other words, the debt can be paid down by some or all of the same money circulating through the borrower’s hands each month that was used to make previous payments. Debt payments are just another expense from which a borrower must apportion monthly income. Once the debt is paid, that expense, including the interest, vanishes. While our system more or less continuously expends debt it does not have to do so to enable payments of loans. Expansion of the money supply is necessary to keep interest rates down without limiting loans but it is not a requirement for loan repayment.

    If a bank could operate with zero expenses and simply stuff every penny it gets back into a vault and never spend it, then yes, new money would have to be created to enable the payment of interest. But no bank operates like that.

    • Vess:

      I am sorry, but this is a disingenuous argument. “Cash flow”? In other words, Joe got the $2.5 from Alice. Where did Alice got it from? From Bob? Where did Bob get it from? Charlie? Where did Charlie get it from?

      You can expand the chain of “cash flow” for as long as you want but in the end the additional money HAS to come from somewhere. Shifting the debt around via the “cash flow” won’t make it disappear – the money for paying it down will still have to come from somewhere, eventually. The Central Bank is the ONLY entity that can create it in our example. ALL money created by it expands the total debt, because it is lent out at interest.

      You can introduce artificial complications by adding money created via lending by private banks (fractional reserve banking), leveraging of debt and monetary instruments via derivatives, shifting the debt around the world via international transactions – but the end result is the same. The fact that the central banks create money and lend it at interest results in the global debt increasing exponentially. There is no way around this. Your choice is only how fast to reach unsustainable levels.

      • RedQueenRace:

        An individual’s income from their job and other sources, together with their expenses, constitutes their cash flow. Money is always on the move and cycles through the system over and over. If it didn’t you might as well ask how companies keep paying their employees without expanding the money supply.

        Repayment of a loan, including interest, is a monthly expense just like food, utilities, internet, etc, except that it can/will eventually be liquidated.

        Each month the borrower gets a paycheck (incoming cash flow). Each month a portion of it is dedicated to servicing the debt, including the interest along with other monthly expenses (outgoing cash flow). There is no chain needed here. During that time the money dedicated to servicing the debt cannot be used to make other purchases or amass savings. Interest is simply a part of this expense and the payment of it changes relative wealth.

  • Vess:

    Here is a simpler explanation. For simplicity, consider a closed economy (e.g., an island) with no international transactions, derivatives, private bank lending, barter or anything else that unnecessarily complicates things. All we need to know are two things:

    1) The Central Bank is the only provider of legitimate currency. It can create it out of nothing, just like the Fed.

    2) The Central Bank lends at interest all the money it has created, just like the Fed.

    This is all we need to conclude that the debt in such a system will keep expanding exponentially.

    Consider the venture capitalist, Joe, who has a great idea for a new widget that ought to be tremendously successful on the market. But Joe doesn’t have the savings (capital) to implement his idea. Nevertheless, he is convinced that the profits will be great. So, he borrows, let’s say $1000 to implement his idea. Since the Central Bank is the sole provider of new money, he borrows from it at the low interest rate of 0.25%.

    Joe’s idea turns out to be successful. He makes gobs of money and pays back the $1002.5 owed by the end of the year.

    Question: Where did the $2.5 come from? The simple answer is from Joe’s customers. But such an answer is short-sighted, for where did *they* get it from? Remember, we are talking about a closed economy here and the Central Bank is the only entity able to create new legitimate currency.

    So, when all is said and done, those $2.5 ought to have been created (out of nothing) by the Central Bank. But, let’s not forget, the Central Bank lends (at interest!) all the money that it creates. So, by the end of the year, we have $2.5 more money in the economy – which equates more debt, because these new money are lent out just like all the old money and they keep gathering interest, the paying of which requires even more new money.

    Presto, we have an exponential debt increase – because you need new money to pay old debts and all new money equates new debts. By varying the interest rate you can make the exponent more or less steep – but it will always be an exponent and will inevitably reach unsustainable levels.

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