Killing You Softly With Their Lies

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The U.S.
government’s budget deficit this fiscal year will be in the range
of $450 billion. If we assume an $11 trillion economy (GDP), the
deficit is in the range of 4.2%.

The figure
for Gross Domestic Product is deliberately misleading. It counts
government expenditures as part of the productive output of the
nation. If we are comparing the burden of the national deficit
on the productivity of taxpayers who actually produce something
of value, the deficit’s burden is much higher. Governments at
all levels extract about 40% of the output of the nation. If we
reduce the GDP estimate by, say, 80% of 40% (32%), we get a GDP
of a little under $7.5 trillion ($11t x .68). The deficit this
year will be in the range of 6.2% of total productive output.

The official
federal debt is over $7.3 trillion. You can monitor this on the
U.S. national debt
clock
.

Your personal
share of this is a little under $25,000. If you are married, add
another $25,000. This is the per capita burden, which includes
children.

Like the
GDP, this figure is misleading. It does not count off-budget programs,
most notably Social Security/Medicare. Add another $50 trillion
for Social Security/Medicare.

KERRY,
THE BUDGET CUTTER

In Kerry’s
nomination acceptance speech, he promised to reduce the deficit
by half. He meant the official deficit.

And we’re
going to return to fiscal responsibility because it is the foundation
of our economic strength. Our plan will cut the deficit in half
in four years by ending tax giveaways that are nothing more
than corporate welfare — and will make government live by the
rule that every family has to follow: pay as you go.

"Pay
as you go" is the policy of the Social Security and Medicare
system. It produces a long-term disaster. It means that the government
is not setting aside income for investments that will pay off
these obligations. Set-aside investment (amortization) is required
for publicly traded private companies, but not the government.

"Pay
as you go" means that the government this year will not set
aside the $3 trillion per year that it needs to finance Social
Security/Medicare over the next 75 years at a 6% interest rate.
I used this amortization
calculator
(use 5000000; then add seven zeroes at the end
of the procedure).

With a $2.4
trillion budget (2004), a $3 trillion set-aside is a bit high.
But if the government refuses to set this money aside, then $3
trillion is added to the total debt owed this year. Then next
year, $3 trillion plus a little extra to cover the added interest
payment is added. And so it goes, year after year. In real estate,
this is called a backward-walking mortgage. It grows and grows.
Eventually, you get evicted.

By "set
aside," I mean "invest in companies that will produce
profits that will pay off the obligation." That will not
happen, Kerry says.

We believe
in the family value expressed in one of the oldest Commandments:
"Honor thy father and thy mother." As President, I
will not privatize Social Security. I will not cut benefits.
And together, we will make sure that senior citizens never have
to cut their pills in half because they can’t afford life-saving
medicine.

By the way,
"honor thy father and mother" is the biblical law that
both Social Security and Medicare are designed to violate. Parents
are saying, "Stick it to the taxpayers, not my kids."
Their children are saying, "I am not willing to pay for my
parents’ old age. Let the government do it."

In any case,
it will take the Democrats four years to get the official (fake)
deficit cut to 50% of what it is today. This means four years
to go from $450 billion a year to $225 billion. This is campaign-speech
finance, not real-world finance. How will he do all this?

And let
me tell you what we won’t do: we won’t raise taxes on the middle
class. You’ve heard a lot of false charges about this in recent
months. So let me say straight out what I will do as President:
I will cut middle class taxes. I will reduce the tax burden
on small business. And I will roll back the tax cuts for the
wealthiest individuals who make over $200,000 a year, so we
can invest in job creation, health care and education.

About four
decades ago, liberal cartoonist Jules Feiffer drew a multi-panel
cartoon of a crowd that was looking upward. Above the crowd was
a pair of boots on legs hanging in the air. You could not see
the President who was wearing them. Each panel had a balloon containing
another promise. There would be lower taxes and more government
benefits and economic prosperity. In the next-to-last panel, the
people listening to the speech ask:

"How
will you do all this?" The final panel had the answer: "I
shall wheel and deal."

Lyndon Johnson
wheeled. He also dealt. Then he refused to run again. He transferred
the quagmire of Vietnam to Richard Nixon, who also could not find
a way to get out, and under whom the deficit climbed to a staggering,
unthinkable, back-to-back $25 billion a year (1970, 1971).

Kerry continued:

I know
what we have to do in Iraq. We need a President who has the
credibility to bring our allies to our side and share the burden,
reduce the cost to American taxpayers, and reduce the risk to
American soldiers. That’s the right way to get the job done
and bring our troops home.

Here is
the reality: that won’t happen until we have a president who
restores America’s respect and leadership — so we don’t have
to go it alone in the world.

This means
that Kerry expects France and Germany to send billions of dollars
and troops to Iraq because he has replaced Bush. Why? I guess
because Skull & Bonesman B has replaced Skull & Bonesman
A. This will make all the difference. He actually expects voters
to believe this.

The conventioneers
cheered — anti-war, anti-draft Democrats who obviously understand
the truth: we are not going to get out of Iraq, so why not cheer
for our candidate, since there is no exit? Make the best of it.
We will not leave Iraq until there is peace in our time.

I defended
this country as a young man and I will defend it as President.
Let there be no mistake: I will never hesitate to use force
when it is required. Any attack will be met with a swift and
certain response. I will never give any nation or international
institution a veto over our national security. And I will build
a stronger American military.

In short,
we’ll get the international community to help bail us out in Iraq,
but we will refuse to give them control. We won’t give them a
veto. We have seen this program before: the June 28 transfer of
"sovereignty" to Iraq’s government — a government that
we control and defend and pay for. But the crowd in Boston cheered!

We will
add 40,000 active duty troops — not in Iraq, but to strengthen
American forces that are now overstretched, overextended, and
under pressure. We will double our special forces to conduct
anti-terrorist operations. We will provide our troops with the
newest weapons and technology to save their lives — and win the
battle. And we will end the backdoor draft of National Guard
and reservists.

More troops!
But where will we get these troops? Re-enlistments are falling.
How will we keep from having to increase the military budget by
increasing pay for the troops?

He did not
mention the dreaded word. Bush does not mention it, either. But
Congress knows what is coming: the reinstitution of the draft.

UNCLE
SAM WANTS YOU, SWEETIE

On May 1,
the Seattle Post-Intelligencer
ran this report
.

WASHINGTON
— The chief of the Selective Service System has proposed
registering women for the military draft and requiring that
young Americans regularly inform the government about whether
they have training in niche specialties needed in the armed
services.

The proposal,
which the agency’s acting Director Lewis Brodsky presented to
senior Pentagon officials just before the U.S.-led invasion
of Iraq, also seeks to extend the age of draft registration
to 34 years old, up from 25.

The Selective
Service System plan, obtained under the Freedom of Information
Act, highlights the extent to which agency officials have planned
for an expanded military draft in case the administration and
Congress would authorize one in the future.

"In
line with today’s needs, the Selective Service System’s structure,
programs and activities should be re-engineered toward maintaining
a national inventory of American men and, for the first time,
women, ages 18 through 34, with an added focus on identifying
individuals with critical skills," the agency said in a
Feb. 11, 2003, proposal presented to senior Pentagon officials.
. . .

The agency
officials acknowledged that they would have "to market
the concept" of a female draft to Congress, which ultimately
would have to authorize such a step.

There is
an old rule regarding government policy: "Don’t believe a
rumor until it is officially denied." Selective
Service has posted this on its website
.

Notwithstanding
recent stories in the news media and on the Internet, Selective
Service is not getting ready to conduct a draft for the U.S.
Armed Forces — either with a special skills or regular
draft. Rather, the Agency remains prepared to manage a draft
if and when the President and the Congress so direct. This responsibility
has been ongoing since 1980 and is nothing new. Further, both
the President and the Secretary of Defense have stated on more
than one occasion that there is no need for a draft for the
War on Terrorism or any likely contingency, such as Iraq. Additionally,
the Congress has not acted on any proposed legislation to reinstate
a draft. Therefore, Selective Service continues to refine its
plans to be prepared as is required by law, and to register
young men who are ages 18 through 25.

We are losing
the war in Iraq. Over 1,000 American troops have died. This
week, the Shi’ite insurgency persuaded the company that controls
the oil pipeline in Basra to shut it off for the time being.

This means that world oil output fell in one day by 1.8 million
barrels.

The fighting
with Muqtada al-Sadr’s Mahdi Army militia began to have economic
fallout. Iraq’s southern oil company stopped pumping oil to
the southern city of Basra — where militiamen were controlling
main streets — because of threats to infrastructure, an
official with the company said.

About 1.8
million barrels per day, or 90 per cent of Iraq’s exports, move
through Basra. Iraq’s other outlet from the north to Turkey
has been out of operation since early June, so a stoppage from
Basra threatens to completely shut down the flow of Iraq’s main
money earner.

Iraq’s oil
was supposed to pay the reconstruction bills. The military bills
must also be paid. American taxpayers are unwilling to pay them.
So, the deficit will continue to be in the 6% range of the real
economy for the foreseeable future.

Kerry has
no answer. He speaks in grand, empty phrases. They all boil down
to this: "I shall wheel and deal." Bush has no answer.
If Bush had an answer, it would be implemented. American troops
are trapped in a disaster zone that keeps getting worse.

The candidates
dare not refer to a draft, but that is where we are headed. After
three decades, the draft will have to be restored during the next
Congress unless we have pulled out our troops, which no candidate
says he is willing to do.

So, add to
the paralysis over the deficit a major political fight over the
draft. Middle-class parents are not interested having their children
sent to Iraq. But that is where the kids are headed if a new draft
law is passed by Congress.

If it isn’t
passed, then the President, whoever he may be, will have to increase
the pay scale of the military or else pull the troops out.

Neither candidate
is willing to discuss any of this. No one asks. It’s "don’t
ask, don’t say" on a national level. A conspiracy of silence
prevails.

UPWARD,
EVER UPWARD

The deficit
keeps escalating. The so-called surplus in Clinton’s second term
was fake. It was achieved by raiding the Social Security trust
fund, issuing non-marketable IOU’s, and not calling these IOU’s
an official obligation of the U.S. government, and hence not part
of the deficit. For details on how this scam works, click
here
.

Who is going
to pay off this debt? "Not you, not me . . . the man behind
the tree."

It is going
to be paid off with freshly created fiat money issued by the Federal
Reserve System. No one is going to admit that the system is bankrupt.
It’s politically acceptable to let the dollar go bankrupt and
then blame its decline on speculators.

The government
will keep upping the retirement age. This will help stem the ocean
of Fed Ink, but not much. Social Security is not the big problem.
Medicare is the big problem. Medicare, not Social Security, is
now the third rail of American politics. Touch it, and you die.
The bulk of the projected Social Security/Medicare deficit —
over 80% — is expected to come on the Medicare side of the
ledger. Check
this out in economist Kent Smetters’ testimony to Congress. See
Table 1 at the end of his testimony.

The deficit
will increase. We are now addicted to the deficit. Congress will
not cut spending. The increase is becoming exponential. A $450
billion deficit in a $7.3 trillion on-budget deficit is 6%. Using
the doubling period "law of 73," we divide 73 by 6.
We get 12 years. Every 12 years the on-budget national debt will
double. But the U.S. economy is not going to grow at 6% to pay
for this. We are falling behind — not counting the off-budget
debt monster.

CONCLUSION

The stock
market is stuck. If you have your money in an index mutual fund,
you have seen no growth in four years. The old dream of 10% or
15% per year growth is dead. Yet the public still holds on, hoping
against hope, that their meager pension fund will grow fast enough
to keep them secure and comfortable in retirement. It won’t. The
no-load, index fund, buy-and-hold strategy is being eaten alive
by the deficits — national, personal, and corporate.

When interest
rates rise — as they surely will — the economic burden imposed by
these growing deficits will increase. The stock market will be
in even worse shape than it is today.

Corporate
debts must be repaid.

Rising rates
will be bad news for holders of bonds, because existing bonds
fall in price when long-term interest rates rise.

No one in
Washington is willing to tell us how they can cut taxes, increase
benefits, and get out of Iraq. Kerry gave assurances, but his
assurances are not backed up by numbers.

Bush will
either follow suit at the Republican convention or just avoid
giving assurances.

Voters don’t
want to hear the economic truth. The economic truth, even more
than Medicare, is the third rail of American politics. Here is
the economic truth: "If you ain’t got any, you can’t re-distribute
it." The government has only one thing left: the illusion
that it can and will pay its bills with money that is still worth
what it is worth today. It can’t. It won’t.

Don’t be
on the receiving end. Neither a borrower from the government nor
a debtor be.

August
13, 2004

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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