the Road to Government Default
by Gary North: Cars
2 Isn't a Lemon. It's a Saab.
A great default
is behind us. The public is unaware of this. If you read this report,
you will no longer be unaware of it.
The ease with
which this default took place should serve as a warning: there will
be additional, much larger defaults. Again, the public does not
understand this. The main one will be Social Security. The program
is now in the red: more money going out than comiomng in. But most
people still cannot believe that the program really will go belly-up.
That's why I produced a
video on this.
the government really break its retirement promises? Of course.
It has already been done. Bear with me. You need to know how the
game is played in Washington.
Federal government is a month away from bankruptcy. The government,
under the direction of Treasury Secretary Geithner, is borrowing
money from Federal employees' pension funds to keep the doors open.
It's an accounting
trick. First, the Federal government funds the pension funds with
money. Second, the funds buy Treasury bonds. Third, the government
immediately spends the money. It's like Social Security, whose Trust
Fund is a pile of IOUs from the government.
the government unilaterally defaulted on those Federal pension fund
IOUs. That action wiped the obligations off the books. That in turn
has allowed the government to operate legally. That is because its
total debt is now lower than it was before the default.
is an analysis by the Federal Times. There are two funds
involved: the Civil Service Retirement and Disability Fund and the
Thrift Savings Plan's Government Securities Investment Fund, known
as the G Fund.
are invested in government bonds, which count as borrowing against
the national debt ceiling. Under the Treasury Department's strategy,
the government trims the two funds' holdings in those bonds. For
the 2½-month period from mid-May until Aug. 2, that's supposed to
free up about $214 billion in "headroom" against the debt ceiling,
thus allowing the government to borrow a similar amount of money
from other sources to keep paying its bills.
retirees and employees will be unaffected by these actions," Geithner
wrote in a letter to lawmakers earlier this week. By law, those
accounts must eventually be made whole. The department took similar
"extraordinary measures" in 2002, 2003, 2004 and 2006; each time,
the G Fund and the CSRDF were made whole with back interest once
the ceiling was raised.
No one is using
the D-word: default, but this is what the procedure really is. This
has gone on so often in the past that no one in Washington blinks
an eye. It's business as usual. The government pretends that the
legal IOUs that it has been presenting to the funds in exchange
for real money have been wiped off the books. This is solvency,
does not understand any of this. It also does not understand that
the Social Security Trust Fund is a pile of IOUs from the government.
Even worse, these IOUs are not counted as on-budget. They are off-budget.
the two Federal pension funds different from Social Security is
that they are on-budget; hence, by wiping them off the books, the
government ducked the debt ceiling bullet.
new payments are being postponed. That means that the government
is spending the money owed to the funds without bothering to issue
any IOUs. This saves the government a few million. Every penny counts!
default, when coupled with a reallocation of the monthly "contributions"
to the two funds, is all that stands between government spending
and the debt ceiling. If that crash takes place in August, there
will be a far greater reallocation of government revenues.
DAY ON AUGUST 2
that the government will hit the legal debt limit in early August.
Nobody knows if he is bluffing. He may have a few other rabbits
in his hat, but if so, they are new. The tried-and-true rabbit of
defaulting temporarily on Federal pensions has been pulled out of
He says that,
once the crisis is behind us, meaning after the Republican House
has voted to increase the debt ceiling, that the government will
replace the missing pension fund IOUs. If he really believes this
scenario, then he is admitting that the politicians are involved
in a grand charade. It's all for show. There will be a deal. Geithner
is saying that the temporary accounting games the government is
playing with the Federal pension funds is part of a political charade.
But if the
deal cannot be worked out in August, then the Federal government
will stop paying more of its bills. We have not been told which
ones will not be paid. There will not be an overnight shutdown of
the government, but some people who think they have guaranteed salaries
or who think they have contracts with the government will find that
these promises these IOUs are not worth the paper
they are written on . . . until the Republican House quits stalling
and does what everyone in Washington knows is inevitable. Until
then, the contracts will not count when the government is over its
We are witnessing
kabuki theater in a pre-election year. This is why there has been
no deal among Obama, the Democrat-controlled Senate, and the Republican-controlled
House. They are doing a kind of mating dance about how they are
ready to deal, just so long as the others want to deal. But the
only thing between official bankruptcy and today is the on-going
raid on the pension funds.
this. Government workers spent years contributing to these funds
taking IOUs and Geithner is treating the funds as
convenient cookie jars. He has assured the victims of this contract-breaking,
crisis-delaying theft of $214 billion of IOUs that the government
will replenish the cookie jars just as soon as the crisis is over.
PETER TO PAY PAUL
time that the debt ceiling is legally raised, Washington will continue
to rob Peter to pay Paul. Of course, this is the premise of Washington
politics at all times, but this time, the victimized Peters are
This is the
sweet fiscal irony of the budget impasse. The middlemen in the great
Peter-to-Paul wealth transfer programs are finding that they have
become the targets of the senior administrators of the great heist.
Instead of taxpayers coming up with the money to finance the transfers,
the middlemen are. Civil-Service-protected, salaried employees of
the government are now on the paying side of the wealth-transfer
process. It could not have happened to a more deserving bunch.
Here is what
impresses me most. First, the default on $214 billion of Treasury
debt did not get a headline on the front pages of America's press.
This was not a prime-time story on the evening news shows.
arcane nature of the retirement fund programs remains arcane. The
public does not understand that the great heist is long behind us.
It has been going on since 1937. Political deception is part of
the American way of life. It is right up there with mom and apple
pie. In fact, it's way above mom and apple pie. The tell-all biographies
of the children of famous celebrities have long-since undermined
mom, and the food police are after apple pie. But nobody writes
a best-selling book called Franklin Dearest on the origins
of Social Security.
are no legal repercussions of a default on $214 billion of government
debt. There are no class-action lawsuits. How could there be? The
Federal government is legally sovereign. It cannot be sued in any
Federal court unless it consents to the lawsuit.
send a message to anyone who is alert to what is going on. The U.S.
government can default at any time. It is not bound by law. If,
in order to obey one law, such as the debt ceiling, senior officials
think it should violate another law, such as keeping pension fund
obligations on the books, someone is going to get stiffed. Politics
will decide who gets stiffed.
We are on the
road to default. Who has sounded a warning? Not the nation's economists.
are dumb. I don't mean stupid. I mean mute.
They are smart.
They have Ph.Ds. They can write unreadable articles filled with
equations. They get paid lots of money, at least the ones we read
about in the media. Yet, as a profession, or guild, or special-interest
group, they are remarkably silent.
With the exception
of Austrian School economists, university economists are not going
on the Web, let alone national television, to sound the alarm. No
academic economist is as forthright and as rhetorically inflammatory
as David Walker, the former Comptroller General of the United States.
He has been sounding the alarm for years. In early 2008, he went
on the CBS "60 Minutes" show to give one last shout as a government
employee. The next month, he resigned. He was hired by Peter G.
Peterson to be the spokesman for Peterson's new foundation which
is dedicated to sounding the alarm. That interview is still worth
watching, even though the huge deficits that began in 2008 had not
I have posted it here.
There was a
mild warning in March issued by ten former chairmen of the President's
Council of Economic Advisors. I suppose we should be grateful for
small blessings. Their press release got very little attention.
It was posted on the Politico site, which is not an economics site.
It did get picked up, but not by the mainstream media, as a search
on Google will reveal.
The press release
began with a positive reference to the now-defunct Bowles-Simpson
commission: the bipartisan National Commission on Fiscal Responsibility
and Reform. It issued a report in December 2010. It had a great
title: "The Moment of Truth."
It is a shame that it was filled with convenient deceptions. Here
is an example:
we act, these immense demographic changes will bring the Social
Security program to its knees. Without action, the benefits currently
pledged under Social Security are a promise we cannot keep. Today,
the program is spending more on beneficiaries than it is collecting
in revenue. Although the system's revenues and expenditures are
expected to return to balance temporarily in 2012, it will begin
running deficits again in 2015 if interest from the trust fund is
excluded and in 2025 including interest payments. After that point,
the system's trust fund will be drawn down until it is fully exhausted
By now, you
know what the deception is. The report pretends that the Social
Security Trust Fund is filled with assets rather than non-marketable
IOUs from the Treasury. We were told that "the system's revenues
and expenditures are expected to return to balance temporarily in
2012." That means that revenues and expenditures were not in balance
in late 2010. The report did not mention that the Trust Fund is
broke today, not in 2037.
This is the
same old con game that the politicians, the media, and the economists
have been running since 1937. It is so widely accepted that it is
considered heresy for anyone in authority to tell the truth.
was also part of the government's kabuki theater. It was a lead
balloon from day one. The rules stipulated that Congress would not
have to formally consider its recommendations if there were not
a majority vote of 14 out of 18 members. The Commission's report
got 11 votes.
This was also
deceptive. It was well known among insiders that some of the members
voted for the report because they knew that it would not get 14
fact was reported by Stan Collender, an old-time Washington
observer. He concluded a few days after the December report was
all the reasons noted above, my guess is that the Bowles-Simpson
plan will suffer the same fate as the reports by virtually every
other budget-related commission in U.S. history: the online equivalent
of gathering dust on a shelf. By early next year, it will seldom
He was correct.
Then came the
March 24 press release by the ten ex-chairmen. The members praised
the report. They used fairly strong language. But they, like the
Commission's report, ignored the fundamental fact of Washington:
They said of
the deficit, "It is a severe threat that calls for serious and prompt
attention." But then they did what almost all economists do: they
said the problem is far in the future.
actual deficit is likely to shrink over the next few years as
the economy continues to recover, the aging of the baby-boom generation
and rapidly rising health care costs are likely to create a large
and growing gap between spending and revenues. These deficits
will take a toll on private investment and economic growth. At
some point, bond markets are likely to turn on the United States
leading to a crisis that could dwarf 2008.
This was what
Washington loves to hear. This means that Washington can safely
ignore the problem. It guarantees another round of kick the can.
of Truth" documents that "the problem is real, and the solution
will be painful." It is tempting to act as if the long-run budget
imbalance could be fixed by just cutting wasteful government spending
or raising taxes on the wealthy. But the facts belie such easy answers.
They were correct. There are no easy answers. This guarantees that
kick the can will be Washington's response. Washington is interested
in hard answers only after an emergency is upon them. Then Congress
spends hundreds of billions to solve it.
of the Commission's recommendations. Then they did what most economists
do: they said they members of the ten could do better.
be sure, we don't all support every proposal here. Each one of us
could probably come up with a deficit reduction plan we like better.
Some of us already have.
Oh, yeah? Then
why didn't the Commission (or anyone else) accept these better provisions?
Here is the answer: because it's all kabuki theater. One list of
things that must be done to save the Federal government from default
is as easy for Washington to ignore as any other list.
not about solving the deficit problem. It's about solving the November
election in 2012.
know the measures to deal with the long-run deficit are politically
difficult. The only way to accomplish them is for members of both
parties to accept the political risks together. That is what the
Republicans and Democrats on the commission who voted for the bipartisan
going to be done. Politically, nothing needs to be done before November
2012. The debt ceiling will be raised. There may be some late-night
meetings. There may even be a few days when the government has to
rob some Peters on the payroll to pay Pauls with more political
Then they will
kick the can. They will send a ceiling-raising bill to Obama, who
will sign it.
And we'll have
fun, fun, fun 'till the market takes our T-bills away!
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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