Tuesday, June 28, 2011

“Dream A Little Dream”: How Long Would It Take To Pay Off The U.S. Federal Government Debt?

Let’s dream: Let’s imagine that the American political leadership decides to get serious about U.S. Federal government debt reduction—crazy as it may sound.

“Porcus Washingtonianus”:
Recently discovered new species,
native to the District of Columbia.
Actually, that’s too crazy. The American political leadership will never “do the right thing” with regards the deficit. After all, last spring, the American political leadership couldn’t agree on a measly $50 billion worth of cuts—a mere 1.4% of the total Federal government budget.

Okay, so in order to give our daydream a veneer of verisimilitude, let’s pretend instead that the members of Congress and the president are the victims of a cunning biological terrorist attack—they are infected with truly massive doses of both the Responsibility Bug and the Austerity Virus.

And then—under the unnatural effects of these sneaky terrorist pathogens—the American political leadership decides to cut the deficit outright, and start retiring the national debt.

Yeah: That’s much more realistic.

How much would they have to cut, in order to pay off the national debt? And how long would it take, to retire that national debt in its entirety?

Well, in order to figure this out, first they’d have to get honest about exactly how much is the U.S. Federal government’s debt. (Honesty is a perverse side-effect of the Responsibility Bug and the Austerity Virus. Scientists are working feverishly to try to stop this honesty stuff.)

Total outstanding Treasury debt is $9.7 trillion—but that’s not the entire Federal government debt. To those $9.7 trillion, you have to add another $4.6 trillion, which corresponds to “intragovernmental holdings”—basically IOU’s or markers the Federal government has put in the famed “Social Security lockbox”.

Thus the total Federal government debt: $14.35 trillion.

That’s the number the Congress and President of our dreams has to close: $14.35 trillion. Or to be more precise: $14,344,491,791,132.71.

The current deficit is $1.65 trillion per year—but that bald number doesn’t help up much.

A better factoid would be knowing, How much revenue does the U.S. Federal government bring in per year, via taxes, fees and so on?

That would be $2.173 trillion, according to the OMB.

So let’s imagine that the Capitol Hill and the White House of our dreams agree to immediately cut all deficit-expenditures—that is, cut $1.65 trillion right off the top—and then they also agree to pay down the national debt on an “accelerated” schedule: Let’s say they set aside a third of all Federal revenue to pay down the Federal government debt. In other words, for every $3 of revenue the Federal government brings in, $2 will be for government services and operations, and another $1 will be for paying down the debt.

A third of $2.173 trillion is $724 billion.

So they start paying off the Federal government debt at this pace: $724 billion a year—a TARP per year. The Federal government “makes do” with just the two-thirds of its revenue, $1.45 trillion.

Question: How long would it take for the Federal government to pay off the total Federal government debt?

Answer: If the Federal government took on no new debt, and instead paid off all its outstanding debt at a pace of $724 billion per year, it would take just shy of 20 years to pay off the National debt.

That’s right: At a minimum, it’ll take 20 years to pay off the Federal government deficit—assuming there are balanced budgets from here to fiscal year 2032, and the Federal government devotes one-third of its total revenue just to retiring the National debt.

Like I told you at the outset: This is just a dream.

Let’s keep on dreaming—hell, it’s one of the few things in this life that’s free.

So now that they’re cutting the deficit and the debt, what will our Dream-Congress and Dream-President have to cut in the budget, in order to make this target?

Let’s assume that Social Security is the sacred cow—after all, people have actually contributed to this fund, so in a sense it’s “theirs”. So no cuts in Social Security.

And no cuts in the interest payments, which in 2010 was $197 billion. Can’t unilaterally cut what you owe, so that’s also Untouchable.

Social Security was $701 billion in 2010. To make the math simple, let’s ignore the demographic time-bomb that is the Baby Boomer generation. So say it’s the same $700 billion moving forward. Ditto with the interest payments, which were $197 billion in 2010 but which of course would begin to decrease as we retired debt. These two fudges more-or-less cancel one another out.

So if Social Security and interest payments are Untouchable, that means $900 billion gets lopped off our $1.45 trillion budget.

That leaves us with $550 billion a year for “everything else”: The military, Medicare, Medicaid, mandatory and discretionary expenditures, infrastructure, NASA, the FBI, Homeland Security—everything else has to be covered by that $550 billion. A year.

Thus every other Federal government department would have to be cut by about 80%.

Sounds extreme, huh? But 80% cuts across the board is the number, once you start to think about it:

If the total outlays of the Federal government in 2010 were $3.45 trillion, and we’ve said that $900 billion of that is Untouchable in our new $1.45 trillion budget, then that leaves us with $550 billion to cover what used to be $2.55 trillion in expenditures.

That is, 80% cuts.

Thus the military would go down from about $700 billion (not including wars) to $140 billion. Medicare and Medicaid? From about $800 billion down to $160 billion. And so on, across every budget item.

An easier way to think of it is from the point of view of employment: If we cut 80% of the budget, how many Federal employees would we have to lay off?

Well, according to the U.S. Office of Personnel Management, there were 4.43 million people employed by the Federal government in 2009, of which 1.6 million were military personnel.

If we lay off 80% of that work force, we’d reduce the Federal government to a mere 880,000 employees for all branches and departments.

Or in other words, we’d have to lay off 3.54 million people. They’d be some very unhappy voters, those 3.54 million unemployed—but they’d be doing their bit, to reduce the deficit!

So they’d be happy, right?

. . . right?


This, of course, is a dream: Let’s get back to the nightmare.

Like I said, last Spring, the Congress and the White House could barely manage to cut a measly $50 billion from the Federal government budget—a mere 1.4% of the total Federal government outlays.

So there is no way—ever—that the political leadership will get serious about reducing the deficit, much less the overall debt. Hell, they’re about to raise the debt limit, and probably kick it up by a couple of trillion dollars—at least!

So there’ll never be any cuts—ever.

Therefore, the U.S. Federal government has to look at other alternatives to get out of paying its debt—and generate more nominal revenue.

After all, that huge Baby Boom generation is beginning to retire and—wouldn’t you know it—they didn’t provide for themselves in their retirement: They will be completely dependent on Social Security, which is as everyone knows a pay-as-you-go scheme. Or in other words, a Ponzi scheme.

Therefore, the Federal government can’t cut spending—and has to increase nominal spending. In other words, it has to go into even more debt.

In the end, there are only two ways to get out of a sovereign debt you can’t pay, or don’t want to pay: Either default, or inflate.

The U.S. Federal government will never default—because if it did, the entire U.S. financial superstructure would blow up on the spot. Even if it were a “half-hour default”, as some Neanderthal Republican politicians are saying ought to happen, it would still be a credit event—all sorts of contractual hedges would trigger. Even if this “default” really were merely a half-hour long, it would be akin to throwing sand into the gears of a nuclear reactor—unpredictably damaging to the U.S. financial system, potentially from merely “very bad” all the way to “mortal”.

So no default.

Therefore, inflate.

QE-2 is ending—but QE-lite is still going strong: The Federal Reserve reinvestment of excedents from its MBS and other toxic asset positions, brought onto the Fed’s balance sheet back during QE-1 in 2008 and 2009.

QE-lite is about $25 billion a month.

Furthermore, QE-3 is likely in the offing, as the Treasury department simply does not have the buyers for the debt it has on deck—and the Federal Reserve has become the buyer of last resort. The Fed can—and probably will—launch QE-3 under the cover that the “recovery” has been “sluggish”, and that therefore more monetary stimulus is necessary.

Therefore, more money printing by the Fed, to keep the Treasury department funded.

Therefore, more inflation, as we have been seeing lately, even in the official numbers.

Therefore—inevitably—an eventual Moment of Clarity in the markets, when they realize at a zeitgeist level that Fed-induced inflation is the only solution to the U.S. Federal government debt issue.

When that Moment of Clarity in the markets happens, then that’s the day the dollar dies: Weimar here we come.

Don’t believe me? OK—then go convince Capitol Hill and the White House to get serious about cutting the deficit: Go tell them to eliminate the national debt in 20 years. See if they take any serious steps in that direction.

At The Strategic Planning Group, we discuss in detail what to do in the face of dollar hyperinflation in our Scenario. Do check it out here, if you’re interested.


  1. So wouldn't all those federal employee layoffs trigger massive deflation? Wouldn't that effectively make the timeline to pay off in the dream scenario something like 1,000 years?

    I think the Capitol Hill and White House stance will be "If it can't be fixed, it must not be broke".

    So if there is a moment of clarity that will trigger hyperinflation in America, what should people be doing right now to prepare for it? Is it even wise to stay in the US with such a looming disaster?

    Where can people find answers?

  2. The progressive budget increases federal revenue and cuts spending drastically. I feel that this is the best compromise. Have you written an analysis on it and if not could you in the future.

    Further with money printed as debt, isn’t it impossible to pay off the national deficit?

  3. Since we're going to be DREAMING, we might as well push the limits of imagination a teeny bit further and pretend instead that the members of Congress and the president are the victims of a cunning biological terrorist attack AND THEY ALL DROP DEAD! (except for Ron Paul, who is absent, busily auditing Fort Knox)

    *INSTANT* balanced budget!

  4. Some suggestions. These may be insufficient, but if all were followed, perhaps the remaining steps would be possible.

    1. Fire the Fed. No more central bank. Let interest rates be set in a free market.
    2. Pay off the debt in United States Notes, including retiring Federal Reserve Notes.
    3. Tax all virtual labor and imported products at a rate equal to the cost of domestic production + 10%. Corporations that offshore US jobs are assessed an immediate tax, that is non deductible against other taxes @ 200% of the wages of the jobs offshored.
    4. Bring home troops, close foreign bases and defend US borders.
    5. Build a true missle defense system and a real civil defense program.
    6. With proper notice and diplomacy, withdraw from all treaties that require the deployment of US forces abroad.
    7. Repeal laws recognizing corporations as persons.
    8. Repeal laws allowing corporations to lobby or hire lobbyists
    9. Repeal laws allowing corporations to support candidates for election in any way.
    10. No national emergency may be extended beyond ten years, and if any such emergency expires upon reaching ten years no new emergency may be declared until the passage of at least five years.
    11. No deficit budget may be passed unless a declaration of war is in effect, and/or a national emergency is in effect, or either of these hase expired within the previous two years; in addition a deficit budget must have a majority of 75% in both the House and Senate.
    12. No law may have more than one subject, excepting that any law requiring funds not previously budgeted for that year must provide a source of funds for the current year and also the subsequent year (if funds will be required in that year too).

  5. America is screwed...big time. And so is the most of the western world that lived on borrowed money over last 30 years and accumulated huge debt. It is only a matter of time hell breaks loose..they won't be able to redeem the situation

  6. I very much appreciate your blog. I think you could try making an extra effort translating this material in favor of the spanish speaking audience and specially your chilean fellows that would benefit from your insightfull view of the global economy.

    Luis from saludfinancierachile.blogspot.com

  7. If the Republicans are Neanderthal the Democrats are surely on the level of Lucy

  8. My reasoning is a bit more simplistic than GL's but we come to the same conclusion.
    $3.7 Trillion being spent with $2.1 coming in.
    So to stop deficit spending you'd have to cut spending by about half.
    To pay the debt in 20 years at $727 Billion per year you'd have to cut spending by another 20%.
    There is no way that the politicians will cut spending by 70% unless there is an economic disaster.
    Therefore more counterfeiting, excuse me QEx, by the Federal Reserve which will lead to hyperinflation.
    Good luck.

  9. 1 - How do the variables in this equation work in concert with each other, i.e. wouldn't you expect the gov't to try a mix of "serious, but not too painful" inflation and spending cuts?

    2 - How does all this compare to the late 70's early 80s cycle of inflation and spending cuts?

  10. There will be no hyperinflation because new money are printed against new debt.

  11. GL,
    Your question is a non sequitur. Asking how long it would take to pay down the debt of a nation whose money is based on debt is the same as asking how long would it take for all the money to disappear. This is what would happen if all our debt were paid off.

    This is the conundrum of debt based money. You must have debt for our money to exist. And in order to pay the interest due you must create more and more and more debt.

    That is why under all administrations, Democrat and Republican, huge new spending programs or huge new wars are created. Republicans scream about social programs, but the healthcare bill written by Republicans under the Nixon administration was more oppressive and intrusive than what we have now. Bush II ushered in the biggest new entitlement program in 40 years. Democrats scream about Republican wars and corporate welfare, but Obama has started a third undeclared war. His administration made a loan to an Italian car company, who bought stock from GM, who in turn used the money to "pay back" money borrowed from the taxpayers.

    That's why our money is called dishonest. Keeping the system afloat requires the creation of more and more debt that must be paid back by our children and grandchildren. It is immoral. It is generational theft.

    Asking how long will it take to pay off the debt is the equivalent of the question that occupied the great minds of the middle ages for years - "How many angels can dance on the head of a pin?"

    The real question is - "How do we transition away from our debt based money system to an honest money system, and what form should the new system take?".


  12. money?used to create and sustain the owning class.workers/creators produced this world,paid with only a small part of all money in circulation.capitalism is moribund.dont prop it up,kick it over.time ripens for historical violence,carpa deium

  13. One of the best essays I have read.

    There were possible ways to have never got into this dire global situation.

    Ellen Brown advocates state-owned banks and North Dakota proves that she is right ... but it is far too late (and politically/ideologically impossible) for this solution to ever happen.

    The much maligned J M Keynes had it right too.

    He never endorsed "deficit spending". His core idea was fiscal (not monetary) responsibility.

    Governments (a necessity with any civilization) have to tax, so as to provide various regulations, goods and services.

    His core argument was really very simple and runs like this: "During good times you tax and save the surplus to counter inevitable bad times."

    The precise opposite has happened since the adoption of "The Chicago School" and Ayn Rand fanatics like Greenspan (presumably Bernanke) and such as Thatcher and that idiot Raygun.

    Even von Mises could have been right (though I am not sure about that) but the fact is that we are going to hell, whoever might, or might not have diverted the course of history.

    Banksters and their political slaves win the day, but not in the long run (which is becoming very short).

    No one escapes such as Fu(c)kushima and a possible WW3.

    It is all over (including in China) bar the shouting.

    If you want to know (partly) how I got my perspective on things, then read J K Galbraith's "The Affluent Society".

    That man was a giant, both physically and intellectually.

    He was called "the economists economist" even by those who opposed him ... and he supported Keynes.

    All too late now. No use dwelling on what might have been.

    We might have had safe(?) nuclear reactors using thorium, but TPTB wanted uranium reactors, because they produce plutonium ... which is used in atomic bombs.

    I give up; though I will say tha my name is Gerry Hiles and my email is ghilesc@hotmail.com

    Thus I am not "Anonymous(e)". I put my name to what I write.

  14. Sorry GL, but I no longer have any dealings with PayPal, since they shafted Wikileaks and, apparently, let someone access an account of mine which has stripped me of at least hundreds of dollars.

    I know who did this, but I am not an IT expert, so I cannot prove anything.

    I know who previously hacked my emails and I have managed to fix that, but I do not know how to fix PayPal running me into an overdraft on one of my bank accounts.

    I would like to donate, but NOT via PayPal.

    My name is Gerry Hiles and my email is ghilesc@hotmail.com

    I feel and think exactly the same way you do.

    Somehow your site does not let me publish my name, etc., automatically.

    Maybe you have a wrong server, but I do not know enough to actually really know that.

    I am 68 and only came across PCs about ten years ago.

  15. What a collection of ignoranuses! There IS ABSOLUTELY NO DEBT! NADA! ZILCH! Pursuant to the U.S Constitution, Article I, Section 8, Clause 2, Congress was only granted the power: “To borrow Money on the credit of the United States” The U.S. Congress has absolutely No legitimate power whatsoever to borrow either “credit”, OR commercial debt instruments (ie fiat phederal reserve asswipe) whatsoever! Anyone so deluded so as to refer to, or otherwise imagine, FRNs as either “Dollars” or “Money” had better actually look up the Law in the United States Code at: 12 USC 411 Anyone who has not yet already acquired their own weight in Lawful Money, U.S. Gold Coin/s perhaps may wish to consider taking a long slow drink from a tall cup of STHU and visit http://groups.yahoo.com/group/the_great_debate/ and Learn HOW it is done. "Knowledge will forever govern ignorance; and people who mean to be their own governors, must arm themselves with the power which knowledge gives." James Madison "Ignorance of fact excuses; Ignorance of the law excuses not. Every man must be
    taken to be cognizant of the law; otherwise there is no saying to what extent
    the excuse of ignorance may not be carried."
    Black's Law Dictionary Sixth Edition Centennial Edition (1891-1991)page 747 Leviticus 19:36; Deuteronomy 25:15-16
    Proverbs 20:10;23
    I John 4:6 We are all born ignorant, but one must work hard to remain stupid.
    Benjamin Franklin Wisdom is the principal thing; Therefore get wisdom. And in all your
    getting, Get understanding. Proverbs 4:7 "vivus spartacus"
    All Rights Reserved It is the common fate of the indolent to see their rights become a
    prey to the active. The condition upon which God hath given liberty
    to man is eternal vigilance; which condition if he break, servitude
    is at once the consequence of his crime and the punishment of his
    guilt. John Philpot Curran (1750-1817) Find out just what any people will quietly submit to and you have
    found out the exact measure of injustice and wrong which will be
    imposed upon them, and these will continue till they are resisted
    with either words or blows, or with both. The limits of tyrants are
    prescribed by the endurance of those whom they oppress.
    Frederick Douglass, "If There Is No Struggle, There Is No Progress"

  16. Very informative post GL and as I live in Canada during the summer months, I sense we are not far behind the US. Our country has not even been able to deliver the mail for 2 weeks !

    Kelly Florence
    Ontario Canada

  17. Well stated 8:48 !!!

  18. Stuart StevensonJune 28, 2011 at 2:14 PM

    default/hyperinflation = same thing
    let's bring it on
    1920's Germany recovered completely shortly after the 1923 debacle
    2010 Iceland is recovering nicely
    let's get it over with so we can start again

  19. A good view of what will happen to Greece taking Argentina experience into account: http://alerta-financiera.blogspot.com/2011/06/ante-una-corrida-bancaria-solo-el.html

    Sorry but its in Spanish

  20. Stuart Stevenson said:

    "1920's Germany recovered completely shortly after the 1923 debacle"

    My worst fear is that we have a similar "recovery."

  21. Well G man I like your style of writing I really do. Dream? Hell ya! However as long as the world reserve currency status is in the hands of the USA and it won't likely change any time soon. I mean what alternative is there? The Pound? The Euro? The Yuan? Uhhhh....no! I know it is dissappointing to all you gold bugs out there but that isn't going to happen either. Lets put it this way....how many people in the western world, let alone a country with the GDP the the US has ever balanced their books? That answer is obvious as that is why we have this problem of contracting credit right now. Default is usually the way.

  22. Robert Bader, MDJune 28, 2011 at 5:40 PM

    In a recently published book called, "Your Money Is Everything", the author whom had previously predicted the financial and housing crisis, shares his views on where we are heading and how to position your assets for this massive wealth transfer that is happening now. I think he has "pre release" versions of the book for sale at the site www.yourmoneyiseverything.com

  23. Seize the Fed, arrest the Fed chairman, forgive the United States of all debt and intrest owed to the Fed and then shut down the Fed. Problem solved.

  24. GL - seems it can all be said very simply, particularly now that the Debt and GDP are roughly equivelant.

    GDP must grow faster than the debt growth. However, whatever, any other outcome ultimately leads to default (write off or inflation).

    The debt growing (annualy) at 12% and GDP at 3% is a bit of a problem. Ultimately we don't have to balance the budget or pay off the debt...what we have to do is grow GDP faster than the growth of the debt (and it's servicing).

    Only issue (as you know well) is if we cut gov spending by $1T or $2T we simultaneously cut GDP and debt by $1T or $2T. No significant progress made. Austerity this late in the game seems unlikely to resolve the issues.

    Bottom line is we need a bankruptcy, a restructuring of all debt and liabilities coupled w/ a balanced'ish budget amendment (or hard backing) so as GDP growth may again outpace debt growth (and servicing).

    I know you, I, and most on this board are not believers in this sort of grand bargain, this later day patriotism where all citizens, corporations, entities agree to forgo, make do, and start over. Still, I think it's important people know it is possible (and really not outlandish) we could solve our problems. We simply choose not to.

  25. The post Anonymous June 27, 2011 9:49 PM is on correct. Add to the list eliminate the tax loop holes and subsidies The Republicans are protecting and we can be on our way. The "repressive" taxes of the Clinton administration created 23 million jobs. The Bush administrations tax relief created 3 million jobs. Trickle Down has never worked. To get out of debt you need to do two things. Decrease spending and INCREASE INCOME.

  26. Pink Lemonade and Pink Slips:

    I would like to see several Federal Institutions gone bye-bye, or at the very least, taken back to their pre-9-11 levels.

    If ObamaCare continues, then everyone should be on it, even the President! Frankly, it would be nice to see that business scrapped completely.

    I vote for firing Congress and Senate when they are part of the overspending. Look at the votes and bills. If their work causes more debt then off they go with the pink slips.

    For Christmas, send home a package of pink lemonade for many Govt. Agencies. Tell them to suck it up!. And leave the US Armed Services alone. Let them do their job. When their job is done, bring them home and treat them right! - In fact here is an idea - Put General Stanley McKristol (wrong spelling)in Washington. Replace the current White House staff Pop with real heros.

    Kansas is back briefly. Feeling pretty disgusted with the idea of "raising budget ceiling, going over budget indefinately, etc."

    Another currency/monetary system is on its way in, only to make a repeat performance. Some folks think a Gold/Silver back currency will arrive next. I am not that optimistic.

    Kansas out!, Tess


  28. If you really want to wake up: there is no debt. The debt system is a collective dream, created by central bankers who know how to fool & hypnotise the world population.

  29. e-bag said "There is no way that the politicians will cut spending by 70% unless there is an economic disaster." If that happens then tax revenues fall even more and we have to make bigger % cuts to get to the same reduction....of course that too would be imposible....

  30. Could federal lands be sold to pay off the national debt?

  31. In response to Anonymous (June 27, 2011, 9:49 PM)

    I agree with a number of your suggestions, but I question number 4: "Bring home troops, close foreign bases and defend US borders."

    As a general principle, is sounds OK, but let's think about it for a moment.

    The U.S. currently has over 20 thousand military men and women deployed in various countries of the Middle East. One of these troops' main functions is to watch over the oil fields. Withdraw these forces and it is possible that another nation would take advantage of the vacuum to attempt a takeover of Saudi Arabia's oil fields, or that a terrorist group would attempt to put the oil fields out of commission.

    The U.S. could withdraw its forces from Central and South America. Would Nicaragua, Cuba, and Venezuela ever consider mounting a joint invadsion of Panama, taking control of the Canal, and refusing passage to U.S. ships? The Cuban and Venezuelan leaders have both stated their yearning to see the U.S. on its knees.

    The U.S. has many troop deployed in Asia. Australia, South Korea, and Japan are the Asian countries hosting the largest numbers of American troops. Australia has many mineral resources of interest to China, and China could use the extra elbow room.

    It's not difficult to imagine an expansive China sending troops to Laos, Cambodia, and Thailand, perhaps in conjunction with Myanmarish forces, to secure their economic interests.

    Were the U.S. to leave the Korean Peninsula, North Korea would certainly be emboldened to invade South Korea.

    These are all imaginary scenarios, but they're not very imaginative. Anyone with a little strategic education will admit that these examples are theoretically possible. Most of the same individuals, however, will prefer to believe that these scenarios are unlikely because, well, aggression is not fashionable in the international community today, and is only practiced by the U.S. and its proxies.

    Be careful what you wish for -- you might get it.

  32. Mostly true. But people today have NO IDEA how massively this extraction of government from the lives of people would SPUR new endeavors and begin a boom like China experienced the past 20 years... except in the USA.

    So guess what? Overall, after a SHORT adjustment period (a few months), a non-stimulus, non-deficit generated boom would strike the USA. Imagine that.

  33. GL,

    I am sorry but the markets have known of the dire situation for years!!

    They are in bed with each other to prolong the inflation fix! For as long as the 0.1% get richer then all is fine.

    The US will continue to be the reserve and feeder of liquidity for years to come.

    Your scenario is extreme but a real world scenario, we are no longer living in the real world. Its manipulated with one purpose, inflate the debt away! When the calls for money printing begins expect QE3 to begin. It will happen with no fanfare, will be accepted and the markets will continue their secular bear bull run! It will stop and then QE4 will begin, and no one will notice, this was planned and operating per schedule!

    The elephant are the BRICS, however they are dependent on the US and Europe possibly more than the other way around.

    I see Japan revisited and then ???

  34. And a headline today says that European monetary authorities think the US Dollar will lose its reserve currency status in 25 years?
    The ONLY thing that will keep the system propped up for even 2.5 years is that the Euro, yen, etc are in even worse shape!
    We will be buying gas with thousand dollar bills before this ends. And a pre-1965 quarter will buy a week's groceries.

  35. Death will be way most folks get out the mess that's coming. When the money becomes useless around the world, chaos will envelope the world. Starvation will be massive. Mobs of hungry people will roam the countryside looking for food. I don't think there will be any place to hide.






  37. If it were just about the math, we'd be having very different discussions already (and perhaps by carrier pidgeon, scribbled on dried leaves using our own blood as ink). But it's not just math. Your own argument requires various parties acting in ways that contradict their public statements and sentiments.

    How long can the phony math we actually -do- use go on? I don't know, something about the market having more time than you have money. The argument that relies just on numbers ignores the most powerful part of economics; the people who do the actual business. People don't want to go hungry, or use wheelbarrows to buy a loaf of bread. They don't want to have a warehouse full of unsold doohickies. They don't want to be short in a bull market. They don't want to be standing when the music stops and all the chairs are taken.

    In other words, while your math might be spot on (I haven't had one of those scientific notation sort of calculators in years, so it's too much effort for me to check it), you'll be daily surprised just how long all the interested parties can continue the 'extend and pretend'. With the exception of the Crazy Town folks who believe life will be sooooo much better once we throw off the yokes of our oppressors, the rest of us have every incentive to do everything we can, or are willing to do, to keep the music playing.

    Call it animal spirits, human spirit, or Ghost Hunters spirit if you like. Bottom line is the end has been nigh since forever, and I'm still able to read this stuff on the modern miracle called the internet. Nor harm in having some extra supplies laid in, but I sure don't suggest holding your breath and waiting for your credit card bills to stop being delivered.


  38. An early comment said it would be a mistake to pay off all US debt because all money (Federal Reserve Notes)would then disappear. I have heard others make this claim, and I am still trying to get my head around the fact that our US currency is debt-based. I suspect there is a lot of truth in this concept and its repercussions. Perhaps a future column could address this concept of a debt-based currency.

    On the other hand, it seems that our problem is not that we have some debt, but it is 1.)How much debt we have, and 2.) Who we owe the money to. I think if we had debt of up to 40% of GDP and we owed most of it to ourselves (USA based pension funds etc.) then it would not be a big problem.

  39. Oh, so QE2 is ending now? I thought that you had predicted that it wouldn't end?

    Gonzalo, by now your prediction record rivals Bernanke's!

  40. S.I. Fishgal wrote in "KOSHER HOOKS" (http://stores.lulu.com/fishgal):
    “...Amerikakers believe to and cram all, but understand zilch. The unabated consumerisms, incompetence, currency debasing and keeping up appearances indebt their offspring, enrich their enemies and turn capitalism to kaput-alism. Amerikakers (In case that Russian, Yiddish or German languages are not your forte, kaka and kaker mean feces and its appropriate derivative.) are above Marx’s and Lenin’s teaching that such deeds ruined even Rome and will the US Empire of debt and “useful idiots” (Lenin’s term). They do not own their useless stuff. It owns them and is not loaded on a hearse anymore. It was quite liberating not to keep up appearances during the American Revolution. Then the troops lined worthless bills called shinplasters in the knee-length boots.
    Amerikakers convert the capitalist society to the capital-less and vote for the like corrupted nobodies, bigots, cranks, hustlers and pulpit artists franchising race or faith into a fat living and political career. For the world revolution, Lenin, Trotsky, and, for the corrupted democracy, some US presidents ruined countries regardless of the people acceptance.
    Since US universities develop one’s entire abilities, especially the idiocy, the educated idiots are most dangerous. An economist (let leave him nameless for his own sake) became a Nobel laureate for his mathematical exercises on options, applied that in his hedge fund and did not ruin the entire financial system just by accident. Of course, Sir Isaac Newton failed to gauge “the madness of the crowd” (his term) too, but he ruined fiscally only self and became famous not just for that.
    God bless and help America, the country of best brightest politicians (i.e. masterly liars), incompetents, useful idiots, and great opportunities, especially for fraud! Welcome to Amerikaka, Comrades!

  41. It is a myth that the progressives want to balance the budget with increased revenues. The government always spends more then they take in. If they increase taxes they will spend more. DUH!! How stupid would you have to be to believe otherwise??

  42. The U.S. is facing OTHER issues just as seriously destructive as rampant inflation. This comment is slightly Off-Topic, but I wanted to share with Gonzalo & fellow readers a prime example of the complete DETERIORATION of news media reporting standards here in the USA.

    Here's a June 28, 2011 headline from Bloomberg regarding the most recent Case-Shiller housing report: "Home Prices in 20 U.S. Cities Fall by Most in 17 Months, Case-Shiller Says".

    Here's how the Washington Post, the Associated Press & several others chose to report this exact SAME news item: "Summary Box: Spring buying BOOSTS (capitals mine) home prices in 13 of 20 US metro areas".


    This situation of blatant LYING is just getting WORSE & WORSE in this country. I find myself increasingly second-guessing and/or outright DOUBTING almost EVERYTHING I SEE, HEAR or READ...ESPECIALLY if it's coming from the U.S. media. This crap is eerily reminiscent of the many years I spent living in Argentina. In fact, at this rate the U.S. will soon SURPASS the INCOMPETENCE & FRAUD of Argentina. So much so that I'm starting to consider emigrating AGAIN down to either Argentina or to Uruguay.

    The USA is T-O-A-S-T!

  43. Wow, Gonzalo, you seem to have made some enemies amongst the communists ! :) It seems that their incoherent blabbering is on every 5th post!

    Anyway, like you have shown, there is a snow chance in hell that the debt will get paid off in the usual way.

    I agree that the only way is to default, not outright, but by inflating. I think this will be a combination of prolonged low real rates of interest, continuous QE, and most importantly, unofficial direct printing that is not reflected in any debt statements or any such thing. It seems that only an injection of counterfeit (by the issuers themselves) trillion or two can tip the balance. Therefore, this is exactly what they will do.

    10 years down the road, the economy will be 3.5 time it's size today, everything will be 2-3 times more expensive, but the saved capital and debt would be devalued to about 0.3 of what it is today (purchasing power). The debt would be about 1.8 of what it is today.

    I also agree that this must collapse, but in my experience, things this big take way longer to play out than it may seem at the time of forecast.

  44. A compliment for this crazy side. Actually I knocked through chance on that and thought myself to leave behind a nice entry and many greetings.
    _____ \\\!!!///____
    .._____( ô ô )____..

    Perhaps they view once on my homepages past! .
    trazado de recorte

  45. It's not that hard to pay off the debt if we could muster the consensus needed to do so.
    When you or I go to a Las Vegas casino and place a bet, a portion of our bet goes toward taxes. When a giant hedge fund or bank goes to the Wall Street casino and places multi-billion dollar bets, the bets are tax free. These are the people who crashed our economy with their reckless gambling so maybe it would be fair to have them pay a little. Here's an idea; place a one half of one percent tax on the 500 trillion dollar Wall Street casino handle. The result would bring in $2.5 trillion to the treasury and allow us to immediately balance the budget and pay of the debt within a decade. Now to be fair, a one-half percent tax would slow down some of the computer trading programs resulting in a reduction of that handle, but it would still represent an enormous source of revenue with which to pay down the debt.
    Another idea: The lion's share of discretionary spending is found in our military budget. Do we really need a gigantic world girdling military? Do we need 1000 plus military bases stationed all over the world? Are the vast Canadian hordes poised to sweep down on us the minute we let our guard down? Over the course of the decade we can phase out about 90% of our foreign military bases which will still leave us with about 100 military bases outside our country. For comparison, do you know how many military bases China has outside its country? Zero.
    Here's another idea: Raise taxes on income over $500,000 to levels comparable to what we had in the 1950s, 60s and 70s. After World War 2, we had a bigger debt than we have now as a percent of the economy and we didn't go broke. We raised taxes on the wealthy to over 90% and guess what? The rich prospered along with the middle class. As it turns out the rich heavily invested in tax breaks for business creation in order to avoid the high taxes, and in the process created millions of new jobs resulting in increased tax revenue. A win-win-win scenario that resulted in decades of robust growth and low deficits.
    These Wall Street money interests and the military industrial complex along with the wealthy make practically all the donations to elect our representatives and they hire all the lobbyists that populate Washington. They flood our media with messages meant to shape our views to convince us that any tax increase is absolutely horrible and in fact if we cut taxes on them (the wealthy) somehow that will magically increase government revenue. Sadly, a lot of people are taken in by this effort to shape public opinion as evidenced by just looking around at sites like this. The sad fact is that it is extremely effective and has prevented us from reaching any kind of consensus to deal with our very solvable fiscal problems.

  46. I don't see how it is possible for the US to hyperinflate its way out of debt. To increase the money supply someone has to borrow that money into existence. The government can't play that role and reduce its debt at the same time, they need someone else to borrow it, then they can tax it. So who is going to borrow all of the money needed for hyperinflation with so few productive (non ponzi) business opportunities?? We are not in a Weimar /Zimbabwe situation where the government can print up as much debt free money as it would like. It's no gold standard but the amount of money created in our system is limited to the aggregate demand for debt. So it seems to me that for hyperinflation to occur you would have to have an enormous surge in debt demand, and I just don't see where that would come from, especially if you take the US government out of the picture!

  47. Someone may argue that the type of hyperinflation that gonzalo is arguing for has more to do with a change in the velocity of money. i.e. people start dumping dollars for hard assets. But the only real reason to get out of dollars would be fear of hyperinflation, which if my argument above holds, can't really happen. Massive defaults, and the corresponding deflation is the only end game I see. To fight this our system may move to a non-debt based form of money, in which case we would find ourselves in the same situation as Weimar and Zimbabwe with no limits to how much money we could create. My suggestion would be to protect yourself from deflation until the federal reserve system/debt based money system is scrapped, that will be your cue to shift to protecting yourself from hyperinflation. Cheers!

  48. I don't know the future, but this scenario makes as much sense as any other.
    Bottom line: Calamity is certainty! Plan and prepare accordingly!

  49. Gonzo,

    I like the dream you posit here. I will take the high road here and state unequivocally that 80% of the Federal work-force is useless and deserves immediate dismissal. After all, if Washington and its environs were the only place not to suffer the real estate collapse of the previous four years, they should be willing to sacrifice now. That whole place needs a reality check, and this would go a long way toward advancing it.

  50. There's a simple solution to avoid USA default:
    1. Sell back Alaska to Russia-China (a new state under SCO rule);
    2. Enforce each state to start printing a new money backed by commodities.

  51. triplefire,

    I think you're mistaken. Follow this thought: There is a dollar being printed. No one borrows it. It's just "is". It gets used by the government to pay your social security or mine. There. Now you have a dollar that was not "borrowed" by anyone, yet, in circulation.

    Your observations are based on the rules of the game as they exist today. But, our government is dishonest, and this means they change the rules of the game exactly after the bets have been made.

    Was QE a law? How about numerous "lending Facilities"? Nope. The law of banana republic is written as needed, which is why it is called a banana republic. Today, you may argue that the government can not simply "print" a dollar.

    But the truth is, they are already doing it. The evidence will only be available after the hyper inflationary collapse (as is the case most of the time).

    Don't count on that few letters on a paper that they call "law" would stop these criminals from printing money as needed to stave off the day of the judgment. This would not be the first criminal gang that had done so.

    July 2, 2011 3:09 PM

    Word verification
    Visual verification
    Listen and type the numbers you hear

    triplefire,, I think you're mistaken. Follow this thought: There is a dollar being printed. No one borrows it. It's just "is". It gets used by the government to pay your social security or mine. There. Now you have a dollar that was not "borrowed" by anyone, yet, in circulation. Your observations are based on the rules of the game as they exist today. But, our government is dishonest, and this means they change the rules of the game exactly after the bets have been made. Was QE a law? How about numerous "lending Facilities"? Nope. The law of banana republic is written as needed, which is why it is called a banana republic. Today, you may argue that the government can not simply "print" a dollar. But the truth is, they are already doing it. The evidence will only be available after the hyper inflationary collapse (as is the case most of the time). Don't count on that few letters on a paper that they call "law" would stop these criminals from printing money as needed to stave off the day of the judgment. This would not be the first criminal gang that had done so.

  52. triplefire,

    Hyperinflation is a very extreme excess of money supply versus money demand; this can be expressed as a low demand for both new money AND pre-existing money. The Treasury can print up bonds or currency as it deems fit; the Fed monetizing these bonds is merely changing the allocation between bonds and currency held by the public. There is no limit to how much monetizing the Fed can do; which is why it is a politically independent monetary policy authority.

    Worst case, the Fed could lose its independence and become a stooge that monetizes bonds and/or prints currency infinitely (Zimbabwe). The Fed could also just simply screw up experimenting with bogus monetary theories as happened repeatedly in the past. The Treasury could just simply pay its recipients directly in bonds instead of currency (Weimar). The public at large could also just simply dump their money instruments on the marketplace. The Fed could also engage in unconstitutional activities (Maiden Lane, etc.) of taking bad money onto its balance sheet and devaluing the currency.

  53. Worst case ... the Fed could lose its job.
    Period. Come to think of it - that's really a pretty good outcome.

    It also means that all of "Da Boyz" at Goldman would have to apply for traditional jobs in the banking sector. Like sitting at a bank window all day filling out deposit slips. That might be a good experience for them ... it would put them in touch with The Street. That would be good for their inner soul :-)


  54. Here's the thing - once we hyperinflate or default it will never be the same. That's the real problem. The new normal will be way worse than the gini coefficient we now know. And I suspect a lot of Amerikans won't be able to adjust. It's just not the way we've been trained. Social unrest, rioting, criminality will be off the charts.

  55. "Sanyo.D. said...

    the saved capital and debt would be devalued to about 0.3 of what it is today (purchasing power)."

    You know what? Fuck'em! We just have to pledge to support each other while the billionaires lose all their money.

    I, Eric, do solemnly swear to those, and their friends, and their families, who also saw it coming and who pledge to never again support the tyranny of money over the love of each other, to do my utmost to cooperate during the transition, and beyond.

    So Help Me God.

  56. If the Republicans are 'neanderthals'(and only the neocons qualify in this regard, then the Democrats are pond scum.

  57. You always bring these issues down to earth, but hey, there are maxims for stuff like this. My favorite is “divide and conquer”, but what keeps coming to mind is the solution which emerged during the Bush administration.
    More than a few Americans were deeply disappointed with the federal government’s attitude to the Kyoto Treaty (which had been our idea in the first place.) I can’t tell you how proud I was to be an American when I learned that the mayors of most major American cities faced this by organizing to implement the protocol in their city, regardless of the federal government’s renege http://www.usmayors.org/climateprotection/revised/.
    This can work for other things as well. In this emerging global economy, nothing says that “sister” cities world wide couldn’t implement commerce and solutions to address mutually beneficial solutions. Many other areas of the world have solved problems we now face. This could take recycling to a new level.

  58. F*** Recycling, ok? You just keep showing everyone your lack of understanding of economic matters when you keep arguing for better recycling supported by the violence (Just like I am showing my lack of class when I am reacting to you, Kyoto assholes). You need to start somewhere like "Bullshit of Recycling" by Penn and Teller, that is a slimy easy one, but surprisingly right on the point, which is not characteristic of P&T.


    To Anon who wanted to pledge love:

    I respectfully decline. Why? Because this will bring even bigger disaster. If you base your life on LOVE, and you practice that on wider circle than just your family and friends, then you going to end up killing people. Communism is a state based on forced love (RAPE).

    This happens to be true because there is no love other than to your family and friends. So, while you can pretend there is love, or you can contractually agree that there should be love, you will end up violently ensuring there is rape.

    Love based relationships are great, but only for where they belong, i.e. where there is love.
    We can not make other people to love us, and we can not even make ourselves to love the people who really deserve being loved.

  59. Ever borrowed on a credit card to pay another credit card? That’s the U.S. Government's 4 year plan!


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