STR Column by Jim Davies, published on August 02, 2010
Those who lend money to the government participate in a fraud, for all of them know that it has only one way ultimately to pay either interest or principal: by stealing it. So if they ever lose it (and they will, as below) there will be no sympathy from this quarter.
They do the lending by purchasing municipal bonds and Treasury Bills, Notes and Bonds, and lenders come in two flavors: (a) real investors and foreign governments, and (b) the Federal Reserve Bank, or the Fed. As far as I've been able to find out, the current $13 trillion total US government debt (often but wrongly called the "national" debt) splits about half and half between the two, meaning that the Fed holds around $6.5 trillion in government paper. But for some reason they are very shy about publishing accounts, so we can't be sure.
All buyers of such instruments know quite well that it's a big pretense. The Feds are not going to return the promised money from their own resources, because they have no resources whatever and everybody knows it. If government (at any level) were an incorporated company with limited liability, its share capital (funds voluntarily placed with the enterprise in expectation of gain) would be zero--not even a nominal $100. That being so, nobody in his right mind would deal with it except on a strictly cash basis--and for sure, nobody would lend it a billion bucks for ten years. Why, then, does this happen? Because of its monopoly on force. Government does have that single "asset": the ability (though not the right, by any measure or definition) to extract money and other property by the threat of force from real people in its domain. So there's a paradox: at one and the same time, government is always bankrupt (there are no true financial assets in its ownership), yet it can never go bankrupt, for as long as it exists, it can always steal what it needs by taxation. Those who lend it money are therefore betting that it will continue to be able to steal enough to repay the loan with interest, and are electing to join the heist. They are staking their fortunes on the power of government guns and the thugs who wield them.
That is why all who hold some of their assets in "government securities" so readily support continuing taxation. If that tax machine ever broke down, they would lose the lot.
When a Treasury instrument becomes payable, the Feds normally just float a new one--they roll over the debt. Perhaps in some year they can pay the interest on, and even some of the principal of, some of their debt from tax revenues (a surplus, over current spending), but more usually the opposite happens--they overspend, and so increase the debt. That's how it grew to $13 trillion.
Suppose, though--just suppose--that there comes a day when government loses its power to tax. On that day, all holders of its paper will howl "government security!" as they chew, but all they will be able to do is to eat the paper. If one of them is a foreign government, it might contemplate waging war so as to capture the productive capacity of formerly taxed Americans, but such a venture would be costly and hazardous. Ordinary investors will have no such option. How about the Fed?
Such a day will actually come, I believe, and quite soon. The process of terminating government is already under way; the process is to learn what freedom means, then resign any government job held, then bring one friend a year to the same learning facility--so producing exponential growth. It will be completed during the 2020s, and when government expires, so will its financial obligations. The Fed, accordingly, will vanish with it, amid a great gnashing of teeth.
As that day approaches, panic will develop along the corridors of power, for staff shortages will occur at the very time that enforcement staff are most needed. I visualize some of the possible detail in my Transition to Liberty and despite best efforts, they will fail to arrest the avalanche. As staff shortages make it impracticable to enforce local taxes, property owners will delay, "forget" and eventually flat refuse to pay those confiscations, and the collectors will squeal for help to the state and federal governments. I think those will probably provide it, since they will rightly see the whole future of the government industry is at stake. So the Feds will ask the Fed to find them some more paper, to scatter among the nation's array of local mobsters. Real investors and foreign governments will almost certainly decline to help--but will the Fed oblige?
Probably. Whether their member banks will then engage in fractional-reserve lending so as to amplify the counterfeiting as usual, I can't guess--but the primary engine of inflation, the Feds' "purchase" of Treasury bills, will red-line and pump more and more into the economy, at the very time that a growing minority will be trading among its members using real money (probably, silver and gold)--meaning that government paper will circulate only among the residue.
Hyperinflation will therefore grab hold, and there will be no fix for it, for fewer and fewer every month will attach any credence to government's fatuous assurances about how its currency is guaranteed; it will never admit the truth (that it's secured only by the power to steal) so it will quite fast run short of myths to offer instead.
Their crisis will rapidly deepen. The Fed will be on its own, as a lender/printer of last resort, and the more it prints, the less each "dollar" will be worth. Such a development can only give a powerful boost to the above virtuous circle of learn-resign-replicate. It will be a delicious dissolution, and the sooner observers like us acquire gold, the tastier it will be.
As well as gold, silver and vital commodities, there's another asset the prudent might buy: real estate, and with the largest possible mortgage - denominated, of course, in dollars. House prices will follow an interesting pattern, I believe, in the next couple of decades. Let's first track where they've been, in terms of something more permanent than government paper, such as gold. Consider this table: [Sorry about the display. It seems Drupal is incapable of properly presenting tabular data. You can see it more clearly by clicking here.]
So in gold terms, the average US house is now priced less than half of what it was 20 years ago; yet as I see it, houses have been far too expensive for a very long time, because of several factors that distort the market--all of them originating in government: cheap money, mortgage-interest tax deductions, zoning that associates better schooling with costlier homes, etc. So in real terms, I expect prices to fall further yet as the malignant effect of government is reduced--perhaps to around 100 gold ounces. That's another way of saying that when our society is liberated, housing will be more affordable. It should not surprise us. What their price will be in dollar terms depends mainly on how fast the dollar loses purchasing power; eventually, in or around 2027, the price will be infinitely high, since the dollar will have become worthless; and that will be an excellent moment to repay the whole of the large, dollar-denominated mortgage the prudent homeowner will have carried. He will be left with a fine property free and clear for the price of a trunkload of Legal Tender Notes.
When several million bank mortgages are paid off exactly according to terms but with worthless dollars, banks in their present form will also disappear, under a literal mountain of paper money--another tasty thought. The long and ruinous reign of the Fed and its members will be over. "Banks" of a different caliber will arise out of the ruins, to serve the new, free society as safe places to store real money for modest fees. Just imagine one of their names: "First Honest American Bank."
Meanwhile those who loaned money to government by trusting its promises (supported only by the power to steal) and who failed to cash out before redemptions got "suspended" will also be left high and dry--each with nothing but some elegantly printed "government securities" with which, should they fail to please the palate, to decorate the bathroom wall.