Special Report: Bankruptcy, USA?
Vol: 58 Issue: 19 Wednesday, July 19, 2006
In the view of Prof. Laurence Kotlikoff of Boston University, the U.S. is already bankrupt at least the government is.
“The U.S. government is, indeed, bankrupt,” he writes, “insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.”
While the U.S. budget deficit, currently forecast to be 2.3 percent of the gross domestic product this year, is smaller than that of most European states, Kotlikoff argues the much debated number is not a particularly useful measure of U.S. economic health.
“The proper way to consider a country’s solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy.”
What Professor Kotlikoff never mentions is that the United States is already bankrupt — and has been since 1933. America’s bankruptcy is a dirty little secret shared by politicians and bankers, but seldom discussed in public.
Our economy and how it works is a mystery to most people, and that is what makes it so easy to get confused. So confused, in fact, that people are actually mounting campaigns to repeal tax cuts and raise taxes to ‘pay off the deficit’ – without ever understanding what that would mean.
The United States operates on a ‘deficit’ economy, and it has ever since the passage of the Federal Reserve Act in 1913 and the confiscation of US gold in 1933. Prior to that, the US had operated as a ‘barter’ economy.
It is the ‘barter’ economy that most Americans believe is in operation today, and that is the fundamental flaw that gives spin doctors the green light.
In a ‘barter’ economy, something of value is exchanged for something of value. To have value, it must have substance, it must be acceptable in exchange for goods and services to the general public, and its supply must be finite — that is to say, it has to be sufficiently rare as to maintain its value.
In the US economy, the Currency Act of 1793 set the value of American currency as a weight of gold based on the Dutch unit of measure called the ‘Thaler’ — what we now call a Troy ounce. The ‘thaler’ became Americanized as the ‘dollar’ and it was a unit of measure for a substance of value.
With the confiscation of gold in 1933, the Gold Standard was repealed and replaced by the less-valuable Silver Standard. Suddenly a ‘thaler’ was not gold, but a weight of silver.
The Federal Reserve began issuing dollar bills called ‘Silver certificates’ and declared them redeemable in silver. These certificates of weight were replaced in 1963 by the Federal Reserve Note which promised redemption in ‘Lawful US Money’.
Of course, the Currency Act of 1793 declared one ‘thaler’ of gold to be ‘Lawful US Money’ — and has never been repealed by Congress. So when people demanded redemption of their Federal Reserve Notes in ‘Lawful US Money the face of the note was changed to read, “This bill is legal tender” — in effect, declaring a weight of a substance to actually BE the substance it is supposed to weigh.
Of course, it was theft, remains an unpunished theft, was perpetrated by the money trust that controls the Federal Reserve (which is neither ‘federal’ nor is it a ‘reserve’) and made possible the very thing the Fed was ostensibly created to prevent — inflation, deflation, recession and depression.
But it is a fait accompli, and our economy now depends on it. Turning our economy back from a debit-based economy to a barter economy is as possible as turning a pickle back into a cucumber.
A debit-based economy REQUIRES high deficits to make it work. Investment, production and job growth DEPEND on high national debt. Reducing the debt weakens the overall economy. I’ve used the following analogy before, but it is worth repeating.
Let’s take a family that is earning, from all sources, about fifty thousand a year. Take all of that family’s credit away from them. No credit cards, no loans, cash only.
What kind of car can they afford? They would have to save up to buy a new car. What about their housing? How long would it take YOU to save up enough to buy your own home for cash? What about that new fridge?
No credit cards, no revolving credit, just cash.
A family making a thousand dollars a week would be just getting by. Suppose we are talking about a family making $100,000 per year, about two thousand dollars per week, and a member of the American ‘rich’?
What kind of car would THEY drive? (Still unlikely to be new). They could probably save up and buy themselves a house in about 10 years. But it would be a starter home. They could buy a new fridge or stove or TV set, but that might put a dent in their home savings account.
Give them back their credit cards, revolving charges, mortgage and car loans, and they are living the American Dream. The family making a hundred thousand a year live in a nice home in the suburbs, commuting to work in an expensive SUV, and has both new appliances AND a retirement savings account.
The family making half that drives a nearly-new mini-van, has a smaller home in less expensive neighborhoods and sometimes still have to choose between retirement contributions and big-ticket items. But, thanks to a debit-based economy, they still live a much more affluent lifestyle than they would making twice as much but paying cash for everything.
It is in the interest of the banking and lending institutions to continue to lend them money against their accumulated equity because, a) it increases their profits; and b) the collateral is ‘real’ property, whereas the ‘money’ is an illusion — in reality, nothing but a bookkeeping entry.
America’s economy MUST be in debt in order to prosper. If you doubt me, look back to when we finally balanced the budget and paid off the national debt in the late 1990’s. The economy began to flag and sputter into recession two full quarters before the end of the Clinton administration.
The attacks on 9/11 and the wars in Iraq and against Afghanistan forced the government to pull its credit cards out of retirement and — Voila! — jobs get created, personal income increases, flagging industries like manufacturing post their best gains in twenty years, and the government starts offering tax cuts (that further reduce any chance of a surplus) — and the numbers speak for themselves.
That’s how things work. Learn to live with it. The value of US currency today is based on America’s future earnings potential and its collateral assets, just like your credit card limits.
The higher your credit card balances get, the more credit increases you are offered. You then buy more, which creates demand for increased production, which creates demand for new jobs, etc.
It works the same way looked at from the national level. It is, at its core, an insidious, evil system that will one day result in a global economic catastrophe. But not yet.
The global economic system was constructed based on the same economic model of debit and credit to a particular purpose. Its construction has taken nearly a century, but it is now in place.
For the first time in human history, thanks to centralized banking, technology and the speed of the internet, it would be possible for a single authority to control it all. The Bible says that authority will be given to the antichrist in his time, for the purpose of fulfilling Bible prophecy for the last days.
According to Scripture, by the mid-point in the Tribulation, the antichrist’s government will have taken the existing, centralized system and turned it into his most powerful weapon. He will combine his control of the economy with his control of the global religious system and will use both to demand worship from those living during that time.
“And he had power to give life unto the image of the beast, that the image of the beast should both speak, and cause that as many as would not worship the image of the beast should be killed. And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: And that NO MAN MIGHT BUY OR SELL, save he that had the mark, or the name of the beast, or the number of his name.” (Revelation 13:15-17)
The system stinks. But it is the only one we have, and I, for one, and not eager to endure the chaos and catastrophe that would result in trying to change it now. Especially since it is a necessary part of the overall last-day’s scenario.
But while we might not be OF the world, we are IN it, and while we are in it, we have little choice but to function according to the system’s rules.
Our mission at the Omega Letter is to keep you informed of what is really happening in the world, and how it all comes together in light of Bible prophecy.
The system is what it is, which is also why it is so easy to spin. It is also part of a greater Design outlined in Scripture by its Designer, according to His purpose, for one generation, somewhere in time.
We are that generation. We are charged with ‘occupying until He comes’ — to be the salt and light of the earth, despite the evils of the system controlled by the ‘prince and power of the air’.
In fact, as long as we are here to influence the system for good, it cannot proceed further toward its appointment with destiny. That’s why politics matter, and why they make up so much of the focus of your Omega Letter.
Money and politics are two sides of the same coin. When analysts handicap a political race, it is based on how much money they’ve raised, more than any other single factor.
Bankruptcy, USA? Old news.