Tuesday, September 09, 2008

The National Debt

Lawrence Malkin is an economic reporter for Time Magazine wrote an excellent book explaining the complexities of the National Debt. The problem? This book was written in 1986, published in 1987 and since then nothing has changed. The National Debt is such an institution that it even deserves capitalization as a formal noun.

Malkin begins by review the 3 ways the US Government makes money. The US taxes, prints money and borrows money in the form of US Treasury Bonds or T-Bills. Way back during the days of Alexander Hamilton and Thomas Jefferson, there was a debate over whether the US Government should have a national debt and run deficits. US Treasury Secretary Alexander Hamilton argued that during war time, a national deficit would be important because wars are generally a test of economic power as well as military power and resolve. The idea was that during the war the country could tap into its credit reserves, and then pay off the dept during peace time and though continued economic growth. That is, if the GDP or gross domestic product of the nation increases faster than inflation. 10 billion dollars yesterday is not the same as 10 billion dollars today. As the country grows, more people are making money and paying more taxes. However, on the other side, borrowed money accrues compound interest and 10 billion dollars borrowed yesterday becomes many more billions of dollars owed today.

So, how did we get into this mess? Malkin begins by taking us back to WWII. When the US emerged from the war after the long years of The Great Depression, due to huge investment by the US Government in industry and infrastructure, there was a huge post-war boom. Companies like Ford, Chrysler, Boeing had huge production facilities built for them during the war which they were gifted to them after the the war was over. In an example of Keynesian Economics, the investment of the government in industry and the US Highway System stimulated a huge boom in the economy. The 20 years following the war, the US was at the peak of its power and influence during the Eisenhower and Truman administrations.

So, what happened? Vietnam and the Sexual Revolution. During the prolonged Vietnam conflict, the US ran up big deficits. Additionally, the birth control pill was introduced which gave women a false sense of security about pre-marital sex as well as making pre-marital sex socially acceptable. So, during this critical time, while the country was paying for the Vietnam War, hundreds of thousands of unmarried women in the US were getting pregnant, moving from rural America to the city and going on the new welfare system created by Lyndon B. Johnson's "the Great Society."

Due to the prolonged war, Richard Nixon was elected into office and eventually stopped the war. However, he made a critical mistake which signaled the decline of the US. President Nixon took our currency off the gold standard. The US Dollar used to be the world's leading currency. In times past anyone could exchange a US Dollar for the equivalent amount of gold. Well, during the war, the US started printing money instead of just borrowing to pay for LBJ's Food Stamps, Medicare, Medicaid and the war. Simply printing paper money results in inflation, devalues the currency, and weakens the dollar. Consequently, foreign governments and banks who held billions of US Dollars began to exchange them for gold. Nixon wanted to hold onto the gold so, he took the Dollar off the Gold Standard. What this did is let the value of the Dollar float and be entirely determined by how many dollars are owned by foreign companies and governments.

The next critical mistake was that the US Government ignored the oil issue. It used to be that the Western Powers had control over the world supply of oil. It was true then as it is today that a majority of oil came from the Middle East countries of Saudi Arabia, Iran, Iraq, and Lybia. But, these countries did not refine the oil into gasoline. Western companies such as Exxon, Mobile, Chevron, Texaco, Shell, and BP controlled oil because they controlled the distribution, and refining of oil to gasoline. These 7 companies could tell the Middle East what they were willing to pay for oil. This is the same concept of how Walmart controls the producers and dictates to a producer what it will pay for the product. Well, this power over oil and gas distribution only lasted as long as the US had its own oil and gas reserves. But environmentalists forced the US to stop drilling and exploration and the building of oil refineries. At the same time, the oil producing nations in the Middle East unionized and formed OPEC. As the US began exporting more and more oil from the Middle East, OPEC gained control to dictate oil prices. This new control resulted in the Oil Crisis and embargo in 1967 and 1973 and the high gas prices today. Now gasoline distribution and production is controlled by a new 7 sisters which includes nationally held companies from Russia, Saudi Arabia, Brazil, China, Malaysia, Iran and Venezuela.

So, what happened in the 80's and 9o's? More of the Same. The welfare programs such as Social Security, Medicare, Medicaid etc began to grow out of control. At the same time the US continued record spending in defence during the the Cold War as we "out spent" the Soviet Union. Since the fall of the Soviet Union we haven't seen the expected "peace dividend" because of the unrest and threat by smaller nations destabilized by the fall of the Soviet Union and organized terrorism.

Now there are record numbers of single women on welfare and children born into poverty. There are record numbers of "Baby Boomers" who are retiring and expecting to cash in on Medicare and Social Security which returns 5 dollars for every 1 dollar paid into it. We live in a different world today. Housing after the war was exceptionally inexpensive. An average home cost about $10,000 and the mortgage payment was less than a 1/5 of the family income. That left more money available to buy cars, appliances, TVs and microwaves, which our grandparents did. They spent and spent and didn't save and looked forward to Social Security after retirement. Now the Baby Boomers were born and housing became more expensive. That same house that was $10,000 now became $85,000 and the mortgage payment was 1/3 of the family income. To live after the manner in which they were accustomed to living, the Baby Boomers sent mom into the work place and children went to day care.

Today large family homes are $250 to 350,000 and up. Many families who cannot afford the same size house as their parents live in town houses at a cost of $100,000 or small 3 bedrooms homes at $150,000. Men and women are getting married later in life, from 23 to age 25 in 1980 and 27.5 in 2006. Families are having less kids today 1.8 per family which means less workers to pay for Social Security and Medicare. Also, Generation X is not only not saving but also racking up record consumer and credit card debt.

With the increase in housing costs, the average salary of the US worker is not following suit. Industrial and Manufacturing jobs are increasingly going overseas. Even technical computer jobs are going overseas. Manufacturing has become increasingly automated and the robots and computers only need supervision. So, an increasing amount of US jobs have become service oriented. These jobs in the service industry usually are part-time, low pay, temporary, and do not provide benefits. As transportation costs increase, raw materials are mined from the US, shipped to Asia where components are produced and shipped back to the US for final assembly in an automated factory. While Blue Chip companies have been loosing jobs to foreign outsourcing and automation. Small US companies have been the source of a majority of job creation. However, much of the rise in US productivity is reflected in US workers working longer hours for less pay, working two and three jobs, or an increasing amount of women in the work place.

How much is the National Debt? Educated Upper middle class Americans pay 40-50% of their pay check for taxes, of which 9% of the National Budget goes just to pay the interest on the National Debt which is calculated to be over 9.6 trillion dollars. 22% of which is owed to foreign governments and 40% is owned by our own federal reserve which is controlled by the worlds largest investment banking institutions. These same institutions that ask for a government bailout when they make a bad financial deal and loose money speculating in the market.

This book is complimentary of the Federal Reserve Chairman Paul Volcker who prevented the US from printing money, causing inflation, devaluing the US Dollar instead of issuing bonds. The Book gives the equation MV=PT (money)(velocity)=(price)(transactions). If the US prints more money are there is more money in circulation, that could cause the price of everything to inflate and devalue the dollar. That would also devalue T-bills and cause foreign holders to cash in and the large world banks who own the Fed to take the loss. During the administration of Paul Volcker, the Fed Reserve held record high interest rates (20%) which made it difficult for the US to borrow money, made record profits for the reserve, and made borrowing for individual buyers in the US for homes difficult. The result of high interest rates did moderate double digit inflation in the late 70's and early 8o's.

The book is critical of Ronald Reagan and Alan Greenspan and so-called "supply-side" "trickle-down" economics or "Reaganomics." The idea here is that if you reduce taxes for the rich, that will put more money into the hands of people who will go out and spend or save it. Problem is that most of that money goes to China because of the US trade deficit and therefore doesn't grow our GDP at home. Inflation has been outpacing our rise in GDP destroying any home in outgrowing the National Debt. It seems after 20-30 years, supply-side economics hasn't delivered on its promises. You can increase the amount of money in the pockets of the rich and middle class but you can't force them to save it, invest it, or buy American.

What does Malkin suggest? He suggests for the US government to not print money and to control inflation. He suggests for the American people to tightening our belts and for the US government to cut programs and defence spending. But so far it seems the government is nowhere near ready to cut entitlement spending and defence spending now as it was in 1987.

The Book does try to explain what the Federal Reserve is. It says that a couple times a year the US government decides to issue bonds. The Fed determines at what rate they will be sold for. The Large World Banks buy up these Bonds and then hold or resell them. They really don't have real money to buy them as they only are expected to carry a small percentage of actual cash on-hand for the amount of money they loan (8%?). A sizable amount of these bonds are then resold to foreign governments, corporations, and a small amount make up individual accounts, and corporate pension funds.

What this book doesn't address. There are some people who are suspicious of the Federal Reserve and consider it a front for several world investment firms and international banking institutions such as the Rothschild Bank of London, Warburg Bank of Hamburg, Rothschild Bank of Berlin, Lehman Brothers of New York, Lazard Brothers of Paris, Kuhn Loeb Bank of New York, Israel Moses Seif Banks of Italy, Goldman Sachs of New York, Warburg Bank of Amsterdam, and Chase Manhattan Bank of New York. Some conspiracy theorists claim these banks are controlled by the ulta-elite and the national debt allows them to exert political power over US policy. These conspiracy theorists claim that both Abraham Lincoln and John F. Kennedy were assassinated after attempting to dissolve the Federal Reserve or print money without approval of the Fed.