Economist: The National Debt is a National Security Issue

March 1, 2013

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 AustrianSchool of Economics. He lives with his wife near Phoenix, Arizona.

It’s a reasonable question. One answer is that special interest groups fight much harder to defend their program than taxpayers do to cut spending. The benefits of spending are concentrated; the benefits of cuts are diffuse.

This is true. There is also a deeper answer. Let’s look at how debt and repayment works using gold. Say that John owes Sue 10 ounces of gold. When he gives her the coins, the debt is extinguished. Not only is John out of debt, the debt itself goes out of existence.

Unfortunately, this is not how the dollar works. Say that John owes Sue $1000. He counts out 10 hundred-dollar bills. He is out of the debt loop, but the debt does not go away. Now the Federal Reserve owes Sue the money. If she deposits it in a bank, then the bank owes her and the Fed owes the bank. It’s endless.

In fact, there is no way for any debt to be paid off. The dollar itself is a debt obligation. You can’t pay off a debt by offering another debt in exchange, only move it around like a lump under the rug.

The clincher is that every dollar is borrowed into existence. As interest accrues, it is added to the debt. While individual debtors can get out of debt by paying down the principal, in aggregate debtors must pay off old debt with new debt. This is called “rolling” the liabilities, but “check kiting” or “Ponzi” scheme would be accurate. It is like taking out a new credit card to pay off an old one.

Wait, it gets worse. What you think of as “money” is just someone else’s debt. If the debtor defaults, then the creditor has to write off the value of the asset. For several reasons such as low yields, creditors are highly leveraged. This causes another problem.

Say you buy a house with $10,000 down and a $90,000 loan. Leverage is fun when prices rise. If the price goes up by $20,000 and then you sell, you have tripled your initial money (and lived in the house in the meantime). But what if the house goes down $11,000? You are wiped out.

The entire financial system is very fragile due to the use of leverage. This is why the Fed is pumping out dollars. They don’t care about exports or employment. They are desperately trying to prevent the collapse of the system. In the process, they are creating yet another problem.

Since debtors (including the government) must keep selling new bonds to pay off old ones, the Fed pushes down the rate of interest (since 1981). The new bonds have a lower monthly payment. Apologists for the system can point to this fact and claim that the interest is more affordable than ever. This is true, but there are two unintended consequences. First, as the rate of interest falls, everyone is encouraged to take on more debt. Second, the burden of debt incurred at (fixed) higher interest rates rises as the rate is cut.

The US and its financial system are slowly going bankrupt. If you think America is pressed by its enemies now then just wait. What will happen when the government cannot borrow more, people are losing their savings and pensions, and there is non-stop crisis? Picture Greece.

One way or the other, the US military could get decimated.

To learn more about Dr. Weiner’s analysis regarding the debt and saving the economy, please read his research and analysis at Monetary Metals.

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