Thursday, July 23, 2009

Gary North, "The Great Default Is Coming"

"The Great Default Is Coming"
by Gary North

"TRUST US:" The government promises to pay off holders of Treasury debt. The government's debt has a AAA rating. Note: So did lots of subprime mortgages. The government sells its debt as a way to keep from having to raise taxes to pay for government programs.
Who pays for these programs? Taxpayers and buyers of Treasury debt.
When are these costs imposed? Today.
What has been transferred to Treasury debt investors? A promise to pay dollars in the future. Not dollars of constant purchasing power. Just dollars.
Question: "What is the difference between a cashed Social Security check and a crashed warplane?" Answer: "The plane does not vote."
Do present costs get transferred to future taxpayers? No; they are paid for by present taxpayers and investors.
Then what do present investors receive? IOU's. Lots and lots of IOU's. Issued by whom? Congress.
As the Mogambo Guru would say, "hahahahaha."

Let's get this straight. We are not transferring present costs to future generations. We are pressuring Congress to write present IOU's for future repayment. We are transferring present costs to present investors in IOU's issued by Congress. As to whether any future generation decides to pay off these IOU's is up to them. But if you look at a chart of the IOU's in relation to present tax revenues, it seems a bit far-fetched to imagine the future taxpayers will pay off these debts. After all, we aren't. Congress runs an official $1.8 trillion on-budget annual deficit, this sends a message: "We prefer that investors pay today's costs." Why should this change?

It will not change. What will change is the willingness of investors to pay for today's costs in exchange for low-interest IOU's.

IOU'S OF OUR FATHERS: In Clint Eastwood's movie, "Flags of Our Fathers," there is a scene that stands out as one of the most illuminating scenes in the history of America's movies on World War II. The three surviving military personnel who were in the second Iwo Jima flag-rasing photo – the rigged one – are stateside. They are skeptical about their role as heroes. They don't see that they did anything special. The Marines' press secretary informs them that they are there to sell war bonds. This seventh war bond drive was expected to fail before the flag photo captured Americans' hearts. He did not say, "If we can't sell bonds to the public, the Federal Reserve System will be the only buyer, and it will have to create the money out of nothing, which will produce shortages, because of higher prices in the black market," but that was the implication. The patriotism aspect of buying bonds is long gone. Today, the sales pitch is safety.

"Investors will get their money back. The market is liquid. Investors can get their money back at any time. Yes, rates are low. Yes, the Federal Reserve System doubled the monetary base in 2008 to keep alive the bond market. But this market is trustworthy. Price inflation is not a threat." Implied message: it will never be a threat. But if it ever becomes a threat, you can sell your bonds and get your money back.

This means that the IOU's of our fathers, which were never paid off, but were merely rolled over by selling more IOU's, have set the pattern. The patriotism is gone; the market for rolled-over Treasury debt is with us still. When it comes to government debt, the World War II song that most closely matches the market is "Roll Me Over."

CONCLUSION: All costs are present costs. It is only a question of who pays them and why. Anyone who says that we are passing on present costs to future generations does not understand economic cause and effect. We are told that we are using politics to leave a massive debt to our children. Really? Which children? The typical taxpayer? He or she can vote. As soon as this tax burden grows too heavy, the voters will demand that it be reduced. Congress will then sell more debt, just as it always does.

At some point, that debt will not find a market. The great default will then take place. At that point, Congress's IOU's will become IOU Nothings. The Great Default is coming. Count on it."

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