AMonger
Veteran Expediter
* * * Gold's Price
* * * * * http://GaryNorth.com/snip/300.htm
* * * * * * * * * * Goodbye, Social Security
* * * * * http://GaryNorth.com/snip/1029.htm
* * * * * * * * * * * * How to Subscribe
* * * * * http://dailyreckoning.com/get-reality/?r=milo
* Issue 1130 * * * * * * * * * * * * * * * * December 30, 2011
* * * * * * * YOU ARE WASHINGTON'S LOAN COLLATERAL
* * * *Whenever any would-be borrower approaches a lender for
* a loan, he must be prepared to offer collateral, just in
* case he cannot repay the loan. If he defaults, the lender
* wants to be able to gain possession of the collateral, and
* obtain it quickly.
* * * *Every government that uses bond sales to maintain its
* level of expenditures must offer collateral. This
* collateral is its ability to extract sufficient revenue
* from those people under its jurisdiction so that it can
* make interest payments on the bonds.
* * * *In the South of 1850, a planter could buy slaves on
* credit. He pledged the future productivity of his slaves as
* collateral for the loan. He made sure that he extracted
* sufficient wealth from the slaves to pay off his loans. *He
* lived well. They didn't.
* * * *Why did he borrow? In order to buy more slaves. He
* used leverage. He built his plantation with borrowed money
* and the heirs of kidnapped victims. It was good business.
* * * *The typical voter thinks of himself as a free man.
* After all, he has the right to vote. He does not think of
* himself as a slave. While trade union organizers -- a truly
* hopeless career these days -- still use the phrase "wage
* slave," it never made any sense, either legally or
* economically. A worker can legally walk away from his
* employer. A slave cannot.
* * * *Washington has borrowed more heavily than any planter
* ever dared to or could do. Why so much debt? To get more
* leverage today. What is being leveraged? Promises. Voters
* trade votes for government promises. This system requires
* an ever-increasing supply of slaves in order to pay the
* interest on the debt. Problem: the rate of population
* growth is slowing. There will not be enough slaves to pay
* off the debt.
* * * *Voters have not thought through the implications of
* government debt. They do not perceive themselves as
* collateral for loans. But they are. This is the meaning of
* the phrase, "the full faith and credit of the United States
* government."
* "FULL FAITH AND CREDIT"
* * * *Whenever you hear the phrase, "the full faith and
* credit of the United States government," an image should
* pop into your head: a slave overseer in Alabama 1850, whip
* in hand, sitting on a horse at the edge of a cotton field.
* The field is filled with slaves, bent down, fingers
* scarred, dutifully picking cotton. You are not the
* overseer. You would be lucky to be his horse.
* * * *The public buys government promises to pay future
* money in exchange for present votes. The trouble is, the
* promises are backed by the full faith and credit of the
* United States government. That means the overseer will
* handle the payment system.
* * * *The U.S. government is borrowed short and lent long.
* To understand this arrangement, you must understand the
* currency. The Treasury borrows money on average for about
* five years. (http://bit.ly/USdebtMaturity) It spends this
* money to meet its obligations. These are political
* obligations. The politicians bought past votes with
* promises of future payments. Today's expenditures are these
* payments, which come due day by day. The government must
* borrow about $1.3 trillion a year to make good on past
* promises. This is in addition to $2.5 trillion in tax
* revenues.
* * * *Candidates for office continue to make new promises to
* voters. The benefits of votes accrue to the elected
* candidates when they take the oath of office. The costs are
* postponed. The price of votes keeps rising. The politicians
* promise to make even larger future payments.
* * * *The federal government is borrowed medium-term in the
* credit markets: a five-year rollover of the debt. It needs
* cash to pay off past promises. So, it borrows long:
* promises to pay far more money over the next 75 years:
* Medicare and Social Security.
* * * *This is a Ponzi scheme.
* * * *Why do voters consent to this? Because they, like the
* planter in Alabama in 1850, think this system can go on
* forever. But there is this crucial difference. The planter
* never worked in the fields. The voters do.
* * * *Voters think of themselves as buying the right to sit
* on the veranda and sip mint juleps in their old age. Those
* who got into the Ponzi scheme early did just this. Ida
* Fuller is the classic example: $24 paid in, $23,000 pulled
* out. But most voters will spend most of their days in the
* fields. There will be no mint juleps for them.
* "WE OWE IT TO OURSELVES!"
* * * *This one became popular in the New Deal in the mid-
* 1930s. It was still popular in the 1950s. We do not hear it
* as often these days, which is a good thing.
* * * *We need a mental image for this, too. There is a crowd
* in front of a large domed building. There is a much larger
* crowd behind it. Members in the crowd in front have gray
* hair, white hair, and no hair. They are all sitting in
* battery-powered carts. There is a large sign in the middle
* of the crowd: "Ourselves." The people lined up at the back
* door also are marked by a large sign: "We." Everyone has
* his wallet open. The people in front of the building have
* the money slots facing up. The people at the rear have the
* money slots facing down. On the domed building, there is a
* sign: "Promises R Us."
* * * *The implications of the credit/debt relationship are
* not understood well by voters. The system is based on
* differences in time. Voters see themselves as spending
* their golden years in one of those battery-powered carts.
* They believe that if they pay for a ticket to a cart
* through their working years, they will get their carts.
* They lend long (working years) in order to receive the
* fruits of their investment (retirement).
* * * *To facilitate this, the federal government issues tens
* of millions of dated tickets: "Good for a free cart and all
* that goes with it." But the ticket refers the holder to a
* web page. There, in obtuse legal language, we find a
* qualification: "Subject to revision by the issuer." This
* means that the date on the ticket can be changed. A wheeled
* walker can be substituted for a cart. A cane can be
* substituted for a walker. Finally, a card that says "Think
* Vertically!" can be substituted for a cane.
* "I OWE YOU SOMETHING"
* * * *An IOU is a promise to pay. The value of this IOU
* depends on four factors: (1) the solvency of the borrower,
* (2) the expected future value of the asset promised, (3)
* the length of time before the IOU comes due, and (4) the
* current interest rate for a loan of that maturity. Through
* competition, a price is set by the market.
* * * *A government-issued IOU is different from a legal
* contract between private parties. A debtor government is
* the enforcer of the loan. It can therefore change the terms
* of the loan at any time. So, the public must have great
* trust in the government. Voters must assume that the
* government's word is law. They are correct: it is law. This
* is the problem. The law can be changed at any time by a new
* crop of politicians.
* * * *With respect to solvency, the U.S. government is
* assumed to be the most solvent borrower on earth. The U.S.
* dollar is the world's reserve currency for central banks.
* The U.S. Treasury today pays about one one-hundredth of a
* percent for 90-day IOUs. There is nothing else like this
* anywhere. There has been nothing like it ever since the
* Great Depression.
* * * *Yet the level of federal debt is growing rapidly: by
* $1.3 trillion a year in the on-budget world, and even
* faster with respect to unfunded Medicare and Social
* Security debt. The vast majority of economists insist that
* the United States can and will grow its way out of these
* obligations. This means that the government's collateral --
* you and I -- will increase our productivity and also
* consent to have at least 25% of it removed by federal
* taxes.
* * * *Federal solvency will not be maintained for another
* decade. The numbers point to a default. But investors do
* not care. Every large nation's solvency looks equally bad
* or worse. By comparison, the dollar is the one-eyed man in
* the world of the blind.
* * * *The other national governments are running huge
* deficits that are also unsustainable. Because the
* politicians of every large nation sell promises for votes,
* the international exchange rate of the dollar is holding
* up. The liars in other nations indulge in the same
* exchange. Their lies are no more believable than ours, and
* maybe less.
* * * *What about the market value of the asset designated by
* the IOUs? What about the long-term purchasing power of the
* U.S. dollar? Today, price inflation is low. Lenders assume
* that they can sell the government's IOUs if this low rate
* starts up. This assumes that most investors will sell their
* bonds in time. Sell to whom? At what price?
* * * *The dollar will fall in value because the Federal
* Reserve will inflate. But this question confounds
* investors: lower compared to what? Gold, euros, yen? Real
* estate? What? When? How fast? How soon?
* * * *The IOUs of the world are based on digital currencies
* manipulated by central banks. The dollar looks good in the
* future because of how bad the other currencies look. The
* Federal Reserve is trusted by investors.
* * * *The longer term the IOU, the more opportunities for
* default, inflation, and new legislation to destroy
* investors' hopes. This is why 30-year bonds are risky. But
* with the FED twisting -- buying long-term bonds and selling
* short-term bills -- the low long rates on T-bonds can be
* maintained for years. People say that there will soon be a
* popped bubble in 30-year T-bonds. This threat always
* exists. If commercial banks start lending to the public
* again, thereby converting the FED's more than doubled
* monetary base into M1, the money multiplier will increase.
* So will prices. But this has not happened. There are few
* signs that it will happen in 2012. So, twisting keeps T-
* bond rates low. Also low are Fannie/Freddie mortgage rates.
* * * *So, the U.S. government's IOU-something still has a
* strong market. It owes U.S. dollars, which are in high
* demand as the euro moves towards the precipice. The
* Treasury is in the catbird seat. It can sell its IOUs at
* historic low rates.
* MISSING COLLATERAL
* * * *Residents in any nation are collateral for various
* government's loans. The politicians have pledged a
* substantial portion of the taxpayers' future productivity.
* * * *But there is a problem facing lenders: this collateral
* votes. Collateral for all loans except loans to a
* government is inanimate. It can be collected by the lender
* after the debtor's default. This is not true of human
* beings. They cannot be transferred to the lenders after the
* bankruptcy.
* * * *This is why it is not possible for a private lender to
* collect payment from a civil government that decides it
* will not pay. The lender is left with a dead IOU: "You
* should have read the fine print, dummy." The fine print
* says that civil governments are sovereign. They pay their
* debts at their discretion.
* * * *When voters at long last recognize that the promises
* made by the government have become too expensive to
* fulfill, voters will send this message to Washington: "Stop
* payment." It will take several election cycles to elect
* enough politicians who will be in a position to issue a
* "stop payment" notice to the Treasury, but it can be done.
* More than this: it will be done. The escalation of the debt
* is so rapid as to make "Stop payment" inescapable.
* * * *The political battles after the election of 2016 will
* focus on which departments will receive the "insufficient
* funds" memo. If the answer is "none," then the political
* question will be this: "How high a rate of price inflation
* will the voters tolerate?"
* * * *At some point, voters abandon a hyperinflationary
* currency. They refuse to offer goods and services in
* exchange for the currency. The currency falls to zero
* value. This is what Ludwig von Mises called the crack-up
* boom. After it ends, a new currency is declared by the
* government.
* * * *Note: there have been few such crack-up booms in
* modern history. Most came after the loss of a major war.
* Here is a crucial fact: the replacement currencies were
* fiat currencies. No government ever since 1914 has gone
* from a crack-up boom to a precious metal currency. Every
* government has inflated again. The citizens have never
* insisted on a gold standard of any kind, let alone a gold
* coin standard in which the government shuts down both the
* mint and the central bank. Not even Andrew Jackson did
* this.
* * * *This is political reality. We hear of a supposed
* reform by some national government to introduce some
* variety of fractionally reserved, non-redeemable gold
* standard. I pay no attention to these rumors. First,
* central bankers are not Austrian School economists. Second,
* without full redeemability in gold coins, any gold standard
* is a promise-based standard, a pseudo-gold standard. It is
* a counterfeit. It is just one more political promise.
* Political promises have gotten us into the present mess.
* They will not get us out.
* * * *Until there is a free market-based gold coin standard
* and also the abolition of the central bank, voters have not
* escaped from their status as collateral. For as long as
* there is a market for government bonds, taxpayers are still
* collateral. They reserve the right to unilaterally remove
* themselves from full liability. When it comes to debt, a
* government is a limited-liability organization. It can
* default on all or a part of its debt. That is what the U.S.
* government will do: declare a partial default. The longer
* the government runs $1.3 trillion annual deficits, the more
* extensive the default will be.
* * * *There is another possibility, rarely discussed. The
* Federal Reserve can stop buying Federal debt. If the FED
* ever decides, as it did under Paul Volcker's early years,
* late 1979 to mid-1982, to cease buying Treasury debt, that
* would be the equivalent of "Stop payment." Why? Because the
* FED would cease to supply the money necessary to make the
* otherwise unfunded payments. The Treasury would have to
* sell its debt to private citizens or other central banks.
* That would mean rising interest rates and broken promises.
* CONCLUSION
* * * *All debt must have some sort of collateral. If voters
* understood that they are the collateral for the federal
* government's debt, they might rebel. They might demand a
* total default. But I don't think this is likely. The vast
* majority believe that they will be the folks sitting on the
* veranda sipping mint juleps.
* * * *I would like to think that Ron Paul is Moses, calling
* the slaves to resist. But I recall their reaction.
* * * *And the officers of the children of Israel did
* * * *see that they were in evil case, after it was
* * * *said, Ye shall not [di]minish ought from your
* * * *bricks of your daily task. And they met Moses and
* * * *Aaron, who stood in the way, as they came forth
* * * *from Pharaoh: And they said unto them, The LORD
* * * *look upon you, and judge; because ye have made
* * * *our savour to be abhorred in the eyes of Pharaoh,
* * * *and in the eyes of his servants, to put a sword
* * * *in their hand to slay us (Exodus 5:19-21).
You know the problem with bad cops? They make the other 5% look bad.
* * * * * http://GaryNorth.com/snip/300.htm
* * * * * * * * * * Goodbye, Social Security
* * * * * http://GaryNorth.com/snip/1029.htm
* * * * * * * * * * * * How to Subscribe
* * * * * http://dailyreckoning.com/get-reality/?r=milo
* Issue 1130 * * * * * * * * * * * * * * * * December 30, 2011
* * * * * * * YOU ARE WASHINGTON'S LOAN COLLATERAL
* * * *Whenever any would-be borrower approaches a lender for
* a loan, he must be prepared to offer collateral, just in
* case he cannot repay the loan. If he defaults, the lender
* wants to be able to gain possession of the collateral, and
* obtain it quickly.
* * * *Every government that uses bond sales to maintain its
* level of expenditures must offer collateral. This
* collateral is its ability to extract sufficient revenue
* from those people under its jurisdiction so that it can
* make interest payments on the bonds.
* * * *In the South of 1850, a planter could buy slaves on
* credit. He pledged the future productivity of his slaves as
* collateral for the loan. He made sure that he extracted
* sufficient wealth from the slaves to pay off his loans. *He
* lived well. They didn't.
* * * *Why did he borrow? In order to buy more slaves. He
* used leverage. He built his plantation with borrowed money
* and the heirs of kidnapped victims. It was good business.
* * * *The typical voter thinks of himself as a free man.
* After all, he has the right to vote. He does not think of
* himself as a slave. While trade union organizers -- a truly
* hopeless career these days -- still use the phrase "wage
* slave," it never made any sense, either legally or
* economically. A worker can legally walk away from his
* employer. A slave cannot.
* * * *Washington has borrowed more heavily than any planter
* ever dared to or could do. Why so much debt? To get more
* leverage today. What is being leveraged? Promises. Voters
* trade votes for government promises. This system requires
* an ever-increasing supply of slaves in order to pay the
* interest on the debt. Problem: the rate of population
* growth is slowing. There will not be enough slaves to pay
* off the debt.
* * * *Voters have not thought through the implications of
* government debt. They do not perceive themselves as
* collateral for loans. But they are. This is the meaning of
* the phrase, "the full faith and credit of the United States
* government."
* "FULL FAITH AND CREDIT"
* * * *Whenever you hear the phrase, "the full faith and
* credit of the United States government," an image should
* pop into your head: a slave overseer in Alabama 1850, whip
* in hand, sitting on a horse at the edge of a cotton field.
* The field is filled with slaves, bent down, fingers
* scarred, dutifully picking cotton. You are not the
* overseer. You would be lucky to be his horse.
* * * *The public buys government promises to pay future
* money in exchange for present votes. The trouble is, the
* promises are backed by the full faith and credit of the
* United States government. That means the overseer will
* handle the payment system.
* * * *The U.S. government is borrowed short and lent long.
* To understand this arrangement, you must understand the
* currency. The Treasury borrows money on average for about
* five years. (http://bit.ly/USdebtMaturity) It spends this
* money to meet its obligations. These are political
* obligations. The politicians bought past votes with
* promises of future payments. Today's expenditures are these
* payments, which come due day by day. The government must
* borrow about $1.3 trillion a year to make good on past
* promises. This is in addition to $2.5 trillion in tax
* revenues.
* * * *Candidates for office continue to make new promises to
* voters. The benefits of votes accrue to the elected
* candidates when they take the oath of office. The costs are
* postponed. The price of votes keeps rising. The politicians
* promise to make even larger future payments.
* * * *The federal government is borrowed medium-term in the
* credit markets: a five-year rollover of the debt. It needs
* cash to pay off past promises. So, it borrows long:
* promises to pay far more money over the next 75 years:
* Medicare and Social Security.
* * * *This is a Ponzi scheme.
* * * *Why do voters consent to this? Because they, like the
* planter in Alabama in 1850, think this system can go on
* forever. But there is this crucial difference. The planter
* never worked in the fields. The voters do.
* * * *Voters think of themselves as buying the right to sit
* on the veranda and sip mint juleps in their old age. Those
* who got into the Ponzi scheme early did just this. Ida
* Fuller is the classic example: $24 paid in, $23,000 pulled
* out. But most voters will spend most of their days in the
* fields. There will be no mint juleps for them.
* "WE OWE IT TO OURSELVES!"
* * * *This one became popular in the New Deal in the mid-
* 1930s. It was still popular in the 1950s. We do not hear it
* as often these days, which is a good thing.
* * * *We need a mental image for this, too. There is a crowd
* in front of a large domed building. There is a much larger
* crowd behind it. Members in the crowd in front have gray
* hair, white hair, and no hair. They are all sitting in
* battery-powered carts. There is a large sign in the middle
* of the crowd: "Ourselves." The people lined up at the back
* door also are marked by a large sign: "We." Everyone has
* his wallet open. The people in front of the building have
* the money slots facing up. The people at the rear have the
* money slots facing down. On the domed building, there is a
* sign: "Promises R Us."
* * * *The implications of the credit/debt relationship are
* not understood well by voters. The system is based on
* differences in time. Voters see themselves as spending
* their golden years in one of those battery-powered carts.
* They believe that if they pay for a ticket to a cart
* through their working years, they will get their carts.
* They lend long (working years) in order to receive the
* fruits of their investment (retirement).
* * * *To facilitate this, the federal government issues tens
* of millions of dated tickets: "Good for a free cart and all
* that goes with it." But the ticket refers the holder to a
* web page. There, in obtuse legal language, we find a
* qualification: "Subject to revision by the issuer." This
* means that the date on the ticket can be changed. A wheeled
* walker can be substituted for a cart. A cane can be
* substituted for a walker. Finally, a card that says "Think
* Vertically!" can be substituted for a cane.
* "I OWE YOU SOMETHING"
* * * *An IOU is a promise to pay. The value of this IOU
* depends on four factors: (1) the solvency of the borrower,
* (2) the expected future value of the asset promised, (3)
* the length of time before the IOU comes due, and (4) the
* current interest rate for a loan of that maturity. Through
* competition, a price is set by the market.
* * * *A government-issued IOU is different from a legal
* contract between private parties. A debtor government is
* the enforcer of the loan. It can therefore change the terms
* of the loan at any time. So, the public must have great
* trust in the government. Voters must assume that the
* government's word is law. They are correct: it is law. This
* is the problem. The law can be changed at any time by a new
* crop of politicians.
* * * *With respect to solvency, the U.S. government is
* assumed to be the most solvent borrower on earth. The U.S.
* dollar is the world's reserve currency for central banks.
* The U.S. Treasury today pays about one one-hundredth of a
* percent for 90-day IOUs. There is nothing else like this
* anywhere. There has been nothing like it ever since the
* Great Depression.
* * * *Yet the level of federal debt is growing rapidly: by
* $1.3 trillion a year in the on-budget world, and even
* faster with respect to unfunded Medicare and Social
* Security debt. The vast majority of economists insist that
* the United States can and will grow its way out of these
* obligations. This means that the government's collateral --
* you and I -- will increase our productivity and also
* consent to have at least 25% of it removed by federal
* taxes.
* * * *Federal solvency will not be maintained for another
* decade. The numbers point to a default. But investors do
* not care. Every large nation's solvency looks equally bad
* or worse. By comparison, the dollar is the one-eyed man in
* the world of the blind.
* * * *The other national governments are running huge
* deficits that are also unsustainable. Because the
* politicians of every large nation sell promises for votes,
* the international exchange rate of the dollar is holding
* up. The liars in other nations indulge in the same
* exchange. Their lies are no more believable than ours, and
* maybe less.
* * * *What about the market value of the asset designated by
* the IOUs? What about the long-term purchasing power of the
* U.S. dollar? Today, price inflation is low. Lenders assume
* that they can sell the government's IOUs if this low rate
* starts up. This assumes that most investors will sell their
* bonds in time. Sell to whom? At what price?
* * * *The dollar will fall in value because the Federal
* Reserve will inflate. But this question confounds
* investors: lower compared to what? Gold, euros, yen? Real
* estate? What? When? How fast? How soon?
* * * *The IOUs of the world are based on digital currencies
* manipulated by central banks. The dollar looks good in the
* future because of how bad the other currencies look. The
* Federal Reserve is trusted by investors.
* * * *The longer term the IOU, the more opportunities for
* default, inflation, and new legislation to destroy
* investors' hopes. This is why 30-year bonds are risky. But
* with the FED twisting -- buying long-term bonds and selling
* short-term bills -- the low long rates on T-bonds can be
* maintained for years. People say that there will soon be a
* popped bubble in 30-year T-bonds. This threat always
* exists. If commercial banks start lending to the public
* again, thereby converting the FED's more than doubled
* monetary base into M1, the money multiplier will increase.
* So will prices. But this has not happened. There are few
* signs that it will happen in 2012. So, twisting keeps T-
* bond rates low. Also low are Fannie/Freddie mortgage rates.
* * * *So, the U.S. government's IOU-something still has a
* strong market. It owes U.S. dollars, which are in high
* demand as the euro moves towards the precipice. The
* Treasury is in the catbird seat. It can sell its IOUs at
* historic low rates.
* MISSING COLLATERAL
* * * *Residents in any nation are collateral for various
* government's loans. The politicians have pledged a
* substantial portion of the taxpayers' future productivity.
* * * *But there is a problem facing lenders: this collateral
* votes. Collateral for all loans except loans to a
* government is inanimate. It can be collected by the lender
* after the debtor's default. This is not true of human
* beings. They cannot be transferred to the lenders after the
* bankruptcy.
* * * *This is why it is not possible for a private lender to
* collect payment from a civil government that decides it
* will not pay. The lender is left with a dead IOU: "You
* should have read the fine print, dummy." The fine print
* says that civil governments are sovereign. They pay their
* debts at their discretion.
* * * *When voters at long last recognize that the promises
* made by the government have become too expensive to
* fulfill, voters will send this message to Washington: "Stop
* payment." It will take several election cycles to elect
* enough politicians who will be in a position to issue a
* "stop payment" notice to the Treasury, but it can be done.
* More than this: it will be done. The escalation of the debt
* is so rapid as to make "Stop payment" inescapable.
* * * *The political battles after the election of 2016 will
* focus on which departments will receive the "insufficient
* funds" memo. If the answer is "none," then the political
* question will be this: "How high a rate of price inflation
* will the voters tolerate?"
* * * *At some point, voters abandon a hyperinflationary
* currency. They refuse to offer goods and services in
* exchange for the currency. The currency falls to zero
* value. This is what Ludwig von Mises called the crack-up
* boom. After it ends, a new currency is declared by the
* government.
* * * *Note: there have been few such crack-up booms in
* modern history. Most came after the loss of a major war.
* Here is a crucial fact: the replacement currencies were
* fiat currencies. No government ever since 1914 has gone
* from a crack-up boom to a precious metal currency. Every
* government has inflated again. The citizens have never
* insisted on a gold standard of any kind, let alone a gold
* coin standard in which the government shuts down both the
* mint and the central bank. Not even Andrew Jackson did
* this.
* * * *This is political reality. We hear of a supposed
* reform by some national government to introduce some
* variety of fractionally reserved, non-redeemable gold
* standard. I pay no attention to these rumors. First,
* central bankers are not Austrian School economists. Second,
* without full redeemability in gold coins, any gold standard
* is a promise-based standard, a pseudo-gold standard. It is
* a counterfeit. It is just one more political promise.
* Political promises have gotten us into the present mess.
* They will not get us out.
* * * *Until there is a free market-based gold coin standard
* and also the abolition of the central bank, voters have not
* escaped from their status as collateral. For as long as
* there is a market for government bonds, taxpayers are still
* collateral. They reserve the right to unilaterally remove
* themselves from full liability. When it comes to debt, a
* government is a limited-liability organization. It can
* default on all or a part of its debt. That is what the U.S.
* government will do: declare a partial default. The longer
* the government runs $1.3 trillion annual deficits, the more
* extensive the default will be.
* * * *There is another possibility, rarely discussed. The
* Federal Reserve can stop buying Federal debt. If the FED
* ever decides, as it did under Paul Volcker's early years,
* late 1979 to mid-1982, to cease buying Treasury debt, that
* would be the equivalent of "Stop payment." Why? Because the
* FED would cease to supply the money necessary to make the
* otherwise unfunded payments. The Treasury would have to
* sell its debt to private citizens or other central banks.
* That would mean rising interest rates and broken promises.
* CONCLUSION
* * * *All debt must have some sort of collateral. If voters
* understood that they are the collateral for the federal
* government's debt, they might rebel. They might demand a
* total default. But I don't think this is likely. The vast
* majority believe that they will be the folks sitting on the
* veranda sipping mint juleps.
* * * *I would like to think that Ron Paul is Moses, calling
* the slaves to resist. But I recall their reaction.
* * * *And the officers of the children of Israel did
* * * *see that they were in evil case, after it was
* * * *said, Ye shall not [di]minish ought from your
* * * *bricks of your daily task. And they met Moses and
* * * *Aaron, who stood in the way, as they came forth
* * * *from Pharaoh: And they said unto them, The LORD
* * * *look upon you, and judge; because ye have made
* * * *our savour to be abhorred in the eyes of Pharaoh,
* * * *and in the eyes of his servants, to put a sword
* * * *in their hand to slay us (Exodus 5:19-21).
You know the problem with bad cops? They make the other 5% look bad.