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The Coming Great Government Debt Default

Economics / US Debt Jul 22, 2009 - 03:26 AM GMT

By: LewRockwell


Diamond Rated - Best Financial Markets Analysis ArticleGary North writes: Have you ever heard this argument? "The national debt is too high. We are laying an enormous burden onto our children."

It is misleading. In what way? Because our children, like Atlas in Ayn Rand's novel, will shrug. They will send Congress a message: "No more."

Congress always responds to immediate threats regarding future sanctions. Whenever Congress thinks the voters will remember a vote at the next election, and will probably impose negative sanctions on incumbents, Congress always sees the light. "When we feel the heat, we see the light" said Senator Everett Dirksen a generation ago. His observation still holds true.

Our children are not going to pay off the suckers – us – who naïvely thought they could pass on the Old Maid of government debt to them.

Here is economic reality. Taxpayers and Treasury debt buyers are paying for all of the benefits that voters enjoy as recipients of government-funded programs. Voters are not transferring these costs to future generations. Costs are inescapably the same as benefits. If we receive present benefits, someone pays for these benefits in the present. The only questions are these: Who Wins? Who loses? How soon?

Economists despair about their inability to get across this simple idea: we consume only present goods.

Economics students nod their heads in agreement with the professor. "Yes, yes; we know that." But they don't know it. As soon as they start to vote, they forget.


When you catch your child with his hand in the cookie jar, you can be certain of one thing: he is after a present cookie. You can also be sure of something else: he does not intend to replace that cookie. He is driven by the desire for present gratification.

When you think of "child with its hand in the cookie jar" think "Congress." The difference is, a child will not respond to being caught with these words:

  1. "This is in the best interests of the nation."
  2. "We are acting as an agent of the People."
  3. "Everyone deserves a fair share."
  4. "We owe it to ourselves."
  5. "We promise to replace this cookie with two cookies of equal or greater value in ten years."

Think of national economic production as a cookie factory.

People are employed to produce cookies. They eat cookies, but they also make cookies.

If they made no cookies, could they eat cookies? Only those cookies already in the cookie jar.

If, because of a war, the government tells the public that from now on, "we must support the troops," this means that those at work in the cookie factory must send cookies to the troops. The troops will be consuming cookies. They will not be producing cookies.


In his radio address to the nation on December 9, 1941, President Roosevelt did his best to substitute the inspirational word "privilege" for the economically correct word, "sacrifice." This was a way to describe costs as benefits.

On the road ahead there lies hard work – grueling work – day and night, every hour and every minute.

I was about to add that ahead there lies sacrifice for all of us.

But it is not correct to use that word. The United States does not consider it a sacrifice to do all one can, to give one's best to our nation, when the nation is fighting for its existence and its future life.

It is not a sacrifice for any man, old or young, to be in the Army or the Navy of the United States. Rather it is a privilege.

It is not a sacrifice for the industrialist or the wage earner, the farmer or the shopkeeper, the trainmen or the doctor, to pay more taxes, to buy more bonds, to forego extra profits, to work longer or harder at the task for which he is best fitted. Rather it is a privilege.

It is not a sacrifice to do without many things to which we are accustomed if the national defense calls for doing without it.

A review this morning leads me to the conclusion that at present we shall not have to curtail the normal use of articles of food. There is enough food today for all of us and enough left over to send to those who are fighting on the same side with us.

But there will be a clear and definite shortage of metals for many kinds of civilian use, for the very good reason that in our increased program we shall need for war purposes more than half of that portion of the principal metals which during the past year have gone into articles for civilian use. Yes, we shall have to give up many things entirely.

And I am sure that the people in every part of the nation are prepared in their individual living to win this war. I am sure that they will cheerfully help to pay a large part of its financial cost while it goes on. I am sure they will cheerfully give up those material things that they are asked to give up.

In other words, the cookie jar would soon suffer a substantial increase in demand from people who were no longer engaged in the production and distribution of cookies.

He predicted that those Americans who were still involved in the production of cookies would cheerfully eat fewer cookies, for the sake of the troops. But, just in case this cheerfulness waned, the President oversaw the creation of the War Production Board, which came into existence on January 16, 1942. It set up a rationing system.


When a member of the military dies in action, he pays the ultimate price. There is no deferral of payment. He is gone. He has to be replaced. Someone else must now put his life on the line.

There is no bond market for human lives. During World War II, there is no illusion among Gold Star Mothers that this cost of the war could be passed on to a future generation. A grave marked the end of that particular generation wherever the occupant had not fathered a child.

In Europe, tens of millions of civilian graves marked the reduction of the size of future generations. There was no bond market for these productive assets, either.

What voters understand clearly with respect to the most productive assets – human beings – they do not understand with respect to all other productive assets.

A crashed airplane, a burned-out tank, a demolished jeep: they are all junk. They are all finished as assets. They were paid for, but they are worthless now except as scrap metal on a battlefield. They must be replaced.

What is the difference between the productivity of a burned-out tank and the men who died in that tank? Scrap metal value. The burned-out tank may be worth more than the remains of those who died inside it. We do not like to think this way, but from the point of view of economics, it is true.


In a popular war, there is a war bond market. The mark of an unpopular war is the absence of any war bond market. The last American war bond market was in World War II.

The U.S. government sold war bonds in World War II. The total by the end of the program in 1946 was $186 billion – in early 1940's dollars – a gigantic amount. The War Finance Committee and the War Advertising Council spent more money on this ad campaign than any other in the history of American advertising.

But why did the government sell them? If the cost of the war in men and material was paid for by those on the battlefield who suffered and died, as well as by the folks back home who had to reduce their consumption, what did the war bond produce of economic value? A war bond could not reduce the loss of human life. It could not reduce the number of burned-out tanks. In short, a war bond could not reduce the cost of the war.

Then why sell them?

The reason was motivation. The cookie jar was being depleted, day by day. This meant that replacements were necessary. Folks back home who were engaged in war production would have to reduce their consumption. This output had to replace whatever had been lost.

Let us return to the three crucial questions. Which folks would have to cut back? Which folks wouldn't? For how long?

The war bond drives persuaded half of the folks back home to forego present income for the sake of future income. Income in what form? Pieces of paper with dead politicians' pictures on them? No. The promised future income would be America's survival as an independent nation. The appeal made by the government to buy war bonds was not the promise of personal economic gain in the future. It was to win the war by supporting the troops.

Then who were the winners? Those Americans who refused to buy war bonds and who saved their extra money to make down payments on unimproved land, especially in the Los Angeles area or in Westchester County, north of New York City.

The bond sellers never explained how buying a war bond supported the war effort. They did not say the following:

"Buy a war bond so that you will not be tempted to use your money to compete in the consumer goods market. That would drive up consumer goods prices. The government has imposed price controls on these goods. But if you will not buy war bonds, you will be tempted to spend the money in the black market. We're onto you. We know that privilege has long since turned into sacrifice, and you are tired of so much sacrificing. We are selling war bonds to re-kindle the sacrifice motivation. This will keep you out of the black market. This will in turn lower the costs of whatever the government buys."

Today, no one in government is so naïve as to try to sell war bonds. There are costs, but these costs are funded by Congress through taxes and the sale of conventional Treasury debt. Instead of war bond drives, the Treasury sells bonds to Asian central banks and American investors.

Buyers of long-term bonds are concentrated in the life insurance industry. Life insurance companies buy long-term bonds to cover long-term legal liabilities. What are these liabilities? To pay dollars. This is not a legal liability to pay dollars of constant purchasing power. Just dollars.


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 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.


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."


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.

    Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    © 2009 Copyright Gary North / - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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