The Real Plan to Pay Off the Debt

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The Real Plan to Pay Off the Debt

From the April 2006 Trumpet Print Edition

Are you worried about paying off the massive and ever-increasing national debt, which is now over $27,000 per person? The federal government certainly doesn’t seem worried. Vice President Dick Cheney, in fact, said that debts and “deficits don’t matter” (Weekly Standard, Feb. 15, 2005; emphasis mine throughout).

Why would politicians feel this way? Because the government knows just how it can pay off the debt—and it is the craftiest, yet oldest, trick in the book.

Make no mistake: The national debt is soaring. The last time the federal government actually paid off some of its debt was 1960. Even then, it paid less than $1 billion of the over $291 billion it owed at the time. The debt has soared so much that the $1 trillion in federal debt that President Ronald Reagan declared “incomprehensible” in 1981 when elected to office has grown 800 percent, to more than $8 trillion today. The federal government has borrowed more money from foreign governments and banks during the past two presidential terms alone than during all other American administrations put together. More debt will have been added during these last two presidential terms than in the previous 200 years (Daily Reckoning, January 20).

And these numbers are just the federal debt. If you include state and municipal debts, total governmental debt mushrooms an additional $1.7 trillion.

As of January 24 this year, according to the U.S. Treasury Department website, the federal debt stood at $8.1853 trillion. But here’s the kicker: The national debt “ceiling” mandated by congress is only $8.184 trillion—a whole billion dollars less! Since January 24, the government of the United States has actually been operating in technical default.

Back in November 2004, the last time the debt ceiling was about to be breached, the Treasury Department did everything it could (and then some) to avoid breaking through it. Congress quickly passed the necessary legislation allowing for an additional $800 billion debt so the debt ceiling was not breached. A short year and two months later, the new borrowing limit was surpassed. This time around, the debt ceiling was openly exceeded, with hardly a peep heard from politicians or the media. This is surprising, especially since the amount and rate of debt increase is unprecedented.

Government debt no longer seems to carry any stigma for politicians. According to Texas Congressman Ron Paul, “The original idea behind the debt limit law was to shine a light on government spending, by forcing lawmakers to vote publicly for debt increases” (www.house .gov/paul, Oct. 25, 2004). However, over time, increases have become so commonplace (over the past 40 years, the debt ceiling has been raised 50 times) that the media scarcely report them, and those who vote for more debt face no political consequences. Moreover, seeking a mandate for more debt has become an after-the-fact matter.

Meanwhile, even as it blatantly exceeds its debt limit, the government tries to reassure the public that it is seeking to reduce the deficit. For example, House Budget Committee Chairman Jim Nussle responded to President George W. Bush’s Fiscal Year 2007 speech by saying, “As we continue our efforts to control spending and reduce the deficit, the president’s proposal provides a solid starting point for this year’s budget by focusing on our most pressing needs: sustaining our strong economy and job creation, and ensuring the strength of our national defense and homeland security” (washingtonpost .com, February 6).

However, when examined, the 2007 budget proposal actually doesn’t do anything to cut the debt! That’s right: It doesn’t cut the debt at all. It actually creates more debt.

Under the plan, the $423 billion deficit (the amount the U.S. is expected to go further into debt this year) would eventually be whittled down to $183 billion by 2010 (ibid.). Superficially this sounds positive, but still having a deficit each year means that we are still sinking further into debt. America’s overall indebtedness will still grow.

But not only does the budget create more debt, it also underreports the official deficit numbers. The cost of the wars in Iraq and Afghanistan, for example, are not even accounted for in the budget. In fact, over $100 billion in war money is included in “off budget” funds (Texas Straight Talk, February 13). If the government’s report on the actual yearly deficit included war costs, it would be approximately 25 percent higher.

But the federal debt is yet higher than that, because government officials conveniently do not include future “entitlement costs”—costs associated with promised government-funded benefits like pensions, Medicare, Medicaid and Social Security—in their deficit and debt calculations. If these were properly factored into the calculation, America’s reported deficit and debt levels would skyrocket. The debt per person would, in fact, be closer to $176,000, not the reported $27,000.

According to USA Today, U.S. governments are, as of 2004, in truth short $53 trillion in “entitlement costs,” with more than $1 trillion being added to that figure every year. This is the amount that “federal, state and local governments need immediately—stashed away, earning interest, beyond the $3 trillion in taxes collected last year—to repay debts and honor future benefits promised under Medicare, Social Security and government pensions” (Oct. 4, 2004).

Given these facts, it is a gross understatement to say that repaying the debt and paying promised benefits is a challenge. Actually, it is like trying to climb Mount Everest with your spouse and three children (Social Security, Medicare and Medicaid) strapped to your back!

This is why David Walker, the comptroller general of the United States (the nation’s top auditor), is publicly warning that, as USA Today paraphrased him, the “nation’s finances are going to h-—“ and that the “United States can be likened to Rome before the fall of the empire” (Nov. 14, 2005).

Mr. Walker highlights that America’s 80 million baby boomers, born between 1946 and 1964, are getting set to start retiring—the first ones in 2008. Because the baby boomers had fewer children than their parents did, as more boomers retire there will be fewer people entering the workforce—which makes for a comparatively smaller tax base to pay ever-increasing Social Security and other retirement benefits. Right now about 4.1 workers fund every retired person. By 2020, that number is projected to be only 2.9, and by 2030 only 2.2 (Congressional Quarterly, Oct. 21, 2005).

Consequently, a progressively greater proportion of the governmental budget will need to be set aside to pay for benefits in the future.

Right now, Medicare, Medicaid and Social Security costs already take up $1.1 trillion, or about 40 percent, of the total federal budget.

Social Security, especially, is a catastrophe just waiting to happen—one that could easily have been avoided. As people have paid money into the fund, the government has actually been spending that money and giving ious in return.

How does this work? Joe Taxpayer pays money into Social Security. While Joe works and waits to turn 65, the government uses the money he sends in for his future benefits to pay for Joe’s dad, Jack Retiree. The government has already spent the money Jack paid into the plan in order to pay for retirees before him.

Any extra money left over after paying current retirees is called a “surplus.” The government takes the surplus and in exchange puts an iou in the Social Security fund. The government then spends the surplus money on whatever it wants to. All the money that has been paid into Social Security is gone and has been spent. What is left in return is just a bunch of government ious.

What the government has done with Social Security is no different than a corporation funding its pension plan with its own debt (i.e., its own bonds or ious)—an act strictly forbidden by regulatory authorities that oversee corporations (Investment News, Sept. 19, 2005).

Frighteningly, this Social Security situation sounds eerily similar to the Enron scandal, in which Enron was investing its employees’ retirement money back into its own stock, thereby inflating its own value and making the company look healthier than it really was, encouraging shareholders to buy more shares. When the stock crashed, the employee retirement funds crashed too.

Right now, the huge Social Security debts are manageable because people are still paying in more than is being paid out. But the surplus will shrink as baby boomers begin retiring and increasingly less will be available to cover budget shortfalls in other areas that the Social Security funds have been funding. Beyond that, a major crisis is coming.

Once the surplus disappears, what is going to pay for Social Security—the ious? Just how will the government pay for all its debt, including the escalating Social Security, Medicare and Medicaid costs? It is already up to its eyeballs in debt, and is spending far more than it is taking in, so more borrowing has its limits.

The government will also not likely be able to cut other programs to pay for retirement benefits. Congress is struggling to trim a mere $50 billion from the budget over a period of five years! And that is out of the projected $1.6 trillion deficit over that period.

If extra borrowing and/or budget cutting are not probable options for the longer term, then that leaves the government only three other conventional alternatives: significantly hiking taxes, slashing benefits and raising the retirement age. But these are political “hot potatoes,” so they won’t be the solutions of choice for politicians.

So, just what is this “crafty trick” the government has for paying off the debt, and paying for the entitlement costs?

It is the same trick that many other debt-bloated empires, such as Rome, Weimer Germany, John Law’s France and the Soviets, employed just before they crashed.

Based on the Federal Reserve’s past proclivity to expand the money supply every time there is a crisis, politicians will likely take the seemingly easy way out: simply print the additional money needed to repay debts and promised entitlements under Medicare, Social Security, Medicaid and government pensions—the $53 trillion-plus worth. This way, the government can prolong the façade of a healthy fiscal business model a little longer—paying debt and promised benefits with devalued dollars.

As long as the dollar doesn’t devalue too sharply or quickly (loss of value is the result of expanding the money supply relative to demand), paying debt with devalued dollars could sound like a pretty good deal for the U.S. In fact, the U.S. has been doing this for a while. The government is able to borrow money from taxpayers and foreigners, spend it, then pay back the money later at a discount. Crafty. At the very least, it decreases any incentive for politicians to get out of debt.

However, this scheme is very risky because of the sheer levels and pace of our accelerating debt, especially in light of future entitlements promised. While inflation temporarily alleviates the symptoms, it does not fix the cause of America’s overspending habits. And runaway inflation may result from the massive amounts of money that would need to be printed. To this point, foreign lenders have been willing to accept dollars, but at some point, when they decide that they no longer enjoy having their dollar holdings constantly losing value, especially at a precipitous pace, they could decide to dump them.

If that occurs, America’s “crafty trick” of devaluing the dollar certainly won’t seem so crafty. The trillions of dumped dollars would come flooding back into the U.S., causing the dollar to drop like a rock and creating inflation on an unprecedented scale.

Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, is half right when she says that Americans are in for a “future of unfunded promises” and a “lower standard of living” (USA Today, Nov. 14, 2005). Although Americans certainly will be in for a much lower standard of living, the government will likely continue to pay its “promises” for a time. But instead of being able to purchase ten loaves of bread with your devalued benefit dollars, you will only be able to purchase five loaves, or even fewer.

America is in serious financial trouble, and its economy is much more precarious than almost anyone realizes. The debt collectors are no longer just on the horizon, they are at the door. All lenders eventually demand repayment. The good times America has enjoyed while living beyond its means are just about over.

The Trumpet can state with certainty that the American economy will collapse, bringing on a global crisis of unrivaled proportions!

If you want to know why this economic collapse is coming, request our free book The United States and Britain in Prophecy. It will prove to you where America’s economic collapse is leading and how that will subsequently affect the world. It will also reveal the urgency of the times we are in and show your responsibility to get your spiritual house in order.

Are you willing to face reality?