There Is No Money

Recently by Gary North: The Wall Street Journal’s War On Gold

On May 17, David Laws, the new British government’s Chief Secretary to the Treasury, walked into his office. There on the desk was a note from the previous holder of this high office, Liam Byrne, who had departed along with Gordon Brown’s Labour Party cabinet. The note was brief.

“Dear chief secretary, I’m afraid there is no money. Kind regards — and good luck! Liam.”

Mr. Laws was a bit miffed. He informed the media that it is traditional for an outgoing senior office holder to leave some guidelines for the incoming office holder. This note, Laws said, was not helpful.

On the contrary, it may have been the most helpful note left by an outgoing politician in modern history. It told the truth.

Mr. Byrne later told the media that it was a joke. “I do hope David Laws’s sense of humour wasn’t another casualty of the coalition deal.”

Ha, ha, ha. The joke was on Mr. Laws and the incoming government. There isn’t any money left. The government is running an enormous deficit. The money required to keep the government going will have to be borrowed, either from investors or from the Bank of England.

Mr. Laws was said to be up to the task. This glowing assessment appeared on the site of the Wall Street Journal, a media outlet always ready to believe that deficits don’t really matter, that a government can always dig itself out of a fiscal crisis. All it must do is raise taxes and cut spending. Of course, no government ever does the second. But the folks at the WSJ never are fazed by this invariable law of modern politics. We read of Mr. Laws:

Now he is central to the coalition’s plans and must handle much of the most difficult work. He will have to get used to becoming very unpopular with a significant chunk of the electorate and parts of the commentariat. He will be presented as Mr. Cuts, which the Tory high command clearly thinks is good for its prospects. In theory, Laws will take all the flak for Osborne.

Ah, yes: Mr. Cuts. There will be lots of cuts. There will be a slice-and-dice cost-cutting regime, despite the fact that it is a divided British government in which the Conservative Party could not win a majority.

Laws looks like he realizes all this and is impressively unfazed. He has a job to get on with, as Gordon Brown would say. But it’s a very different task to that undertaken by the former PM. The Lib Dem Laws is on a mission to put the Gladstonian liberal approach — of sound money and low taxation when possible — back into operation.

Said his colleague and friend Malcolm Bruce to Allegra Stratton: “Laws is an unreconstructed 19th-century Liberal…. He believes in free trade and small government. Government should do the job only government can do. There’s no point in having a large public sector if the users of the public services are getting poorer. But he specifically made the point in the house [on Wednesday] that his economic liberalism is tempered by his social liberalism.”

Yes, my friends, there is a New Era coming in Great Britain — a new era of Gladstonian cuts. Yes, it is also true that the Conservatives ran Disraeli against Gladstone, because they could not tolerate his free trade, low-taxes policies. But all this has changed. It’s a New Era.

His agenda has the potential to be quite revolutionary in its effects, if he is not blown over by a hurricane of protest or events unforeseen. But it also might catch on, and make Laws very popular indeed. He has barely been in office for two weeks but the words “potential future prime minister” don’t sound entirely silly.

That was published on the morning of May 28. By the afternoon, Laws had resigned. A hurricane had hit. It seems that he has been a closet homosexual. That was acceptable to the media, but the closet had been in the form of a $1,200/month apartment rented — at government expense — from his partner of nine years. After 2006, this was illegal by government law. Mr. Laws promised to repay $60,000 in subsidies, but it was too late. The 2009 scandal of Members of Parliament who had taken government money to pay for their non-government-related expenses is too fresh in the minds of politicians and voters. Laws resigned.

His immediate replacement was exposed two days later as having avoided paying capital gains taxes on a similarly subsidized residence. It was legal, because of an anomaly in the tax code, but it was one more reminder to the voting public that the politicians have effectively gamed the system to avoid the burdens that the system has imposed on voters. This has been true of political life for several millennia, but the public never seems to catch on.

We see Punch and Judy battling it out again for the right to swindle the public one more time.


Maybe you have seen the video by Clarke and Dawe, the Australian comedians. If not, you really should. They are funnier than Liam Byrne. They cover the same topic. It’s here.

Mr. Byrne warned Mr. Laws that the country was out of money. Mr. Laws had insufficient time to solve this problem. His replacement now inherits the problem. It is the problem facing all of Europe.

It is also facing U.S. banks, mainly the largest ones. They have purchased an estimated trillion dollars in bonds issued by European nations. A series of defaults would call these assets into question. This is why the Northern European politicians are frantically borrowing money from investors to cover the losses that Southern European nations have produced.

There is no possible way that Southern European nations will ever pay off these debts. Modern finance theory assumes that debts of sovereign nations will never be paid off, for these debts have in part been monetized. If they are all paid off, this will force central banks to monetize other assets. Otherwise, the central banks would have to shrink their monetary bases back to whatever gold they still have, assuming they have any, since most of their gold holdings have been leased to bullion banks, which then sold the gold to buy government bonds.

Follow the money, advised Deep Throat in the screenplay of All The President’s Men. No one can actually follow the money. The debts and cross-debts are too large and too complex. Add to this at least $600 trillion worth of derivatives, which are mostly based on the interest and market value of bonds, and the central bankers have a very big problem facing them.

So, the squandering governments in Northern Europe have pledged about a trillion dollars’ worth of bailout money for the even more wasteful governments of Southern Europe. Everyone knows there will be some sort of default, but they do not expect this in the near term. It will be later. How much later? No one knows and no one cares. Until then, investors lend money to governments that will surely default. This is the foundation of international finance. It is also the basis of Social Security, Medicare, Federal pensions, and the municipal bond markets.

Most voters don’t know and don’t care. Politicians do know but don’t care. There are no negative sanctions for continuing to pooh-pooh the inescapable reality of the unfunded liabilities of all Western governments. There are instant negative sanctions for any politician who admits the truth and publicly calls for the immediate reform and partial default of these programs. No one in the electorate wants to face the truth: either granny will get stiffed near-term or the working-age voters will get stiffed long-term. Voters want to delay the cuts now, on the assumption that the can will be kicked down the road indefinitely. They discount the inevitable future for the sake of present bailouts.

This mentality subsidizes the expansion of private lending to governments. This is why the United States government can borrow for ten years at a rate below 4%. This is why capital is pulled out of the private sector in order to fund the delay of the inevitable bankruptcy of Western governments.


The voters believe that there is no connection to the liability side of citizenship. They believe fervently in the asset side of citizenship. They do not believe that the bills will ever come due for them. They believe fervently that they are entitled to every dime already promised, plus whatever more they can get Congress to enact.

They vote for their beliefs. They vote only for politicians who insist that the liability side of citizenship can be deferred or transferred to others. They vote only for politicians who promise that the asset side of citizenship will increase. Every politician knows this.

Liabilities and assets must match on every balance sheet. The government’s balance sheet is the reverse of the citizenry’s. Every asset possessed by a citizen is a liability to the government. Every liability must be matched by an asset. What is this asset? Future government income. Where will this come from? From taxes, from borrowing, and from borrowing from the central bank (inflation).

Citizens believe only in the asset side of their balance sheets. The assets — promised future income — must not be offset by liabilities: future taxes, including the inflation tax. The politicians encourage this belief. They vote ever-increasing assets based on future government income, but they refuse to tell voters about the size of these liabilities. They pretend that an off-budget liability is not really a liability. After all, this is what the government’s own ledgers show.

The liabilities of the voters — the trust funds full of IOU’s from the government on behalf of the citizenry — are counted as assets of the Social Security and Medicare systems. When anyone raises a question regarding the future source of the future funding of these assets — the general fund — he is dismissed as a crackpot, a Tea Party voter.

For voters, the trust funds’ IOU’s are all assets, not liabilities. For politicians, the same is true. The trust funds’ IOUs from the government are assets politically, because the vast majority of voters believe that the trust funds’ assets are not legal claims on their future income. The assets are future claims on someone else’s future income, not theirs. “Don’t tax you. Don’t tax me. Tax the guy behind the tree.”

The accounting charade is promoted by the Congressional Budget Office. The CBO lies in the early part of this paragraph, but tells the truth in the sentence beginning with “If intragovernmental transfers. . . .”

According to CBO’s current baseline projection, trust funds as a group are expected to run a surplus of $119 billion in 2010 and $1.6 trillion from 2011 through 2020 (see Table D-1).That surplus is bolstered by interest and other sums transferred from elsewhere in the budget. Such intragovernmental transfers, which are projected to total $590 billion in 2010, reallocate costs from one category of the budget to another but do not directly change the total deficit or the government’s borrowing needs. If intragovernmental transfers are excluded and only income from sources outside the government is counted, the trust funds as a whole are projected to run annual deficits that will increase from $471 billion in 2010 to $907 billion in 2020.

It plays the same game of deception in the next paragraph, which deals specifically with Social Security. The truth is revealed in the sentence beginning with “Excluding interest. . . .”

Total trust fund surpluses are dominated by those for the Old-Age and Survivors Insurance portion of the Social Security program. Including interest and other intragovernmental payments, CBO estimates a surplus of $110 billion for that fund this year and a cumulative surplus of nearly $1.5 trillion from 2011 through 2020. The DI program is projected to run annual deficits through the entire projection period. For Social Security as a whole, the estimated surpluses peak at $139 billion in 2015 and decline to $107 billion in 2020. Excluding interest (which accounts for the bulk of the intragovernmental transfer), surpluses for Social Security become deficits of $28 billion in 2010 and $202 billion over the period from 2011 to 2020 (see Figure D-1).

The politicians know that most voters will never see this report. So, they emphasize the early portion of each paragraph. They quote other official documents that reinforce this systematic deception.

The voters refuse to hear any other version. They plug their ears to anyone who comes with the message of the second part of these paragraphs.

The politicians tell voters that the government has assets without liabilities. The voters believe that they also possess assets without liabilities. Yet every government promise that voters regard as an asset is in fact a liability. It is deliberately concealed by the government. The voters like it this way. They will vote out of office any politician who dares challenge this deception as an outright fraud. The voters delight in the fraud. Why? Because it shields them from this question:


As surely as departing Chief Secretary to the Treasury warned “There is no money,” so are the trust funds of the United States government. Social Security will run a deficit this year. Medicare has been running one for at least two years.

The dreams of millions of voters will be shattered by this reality: “There is no money.” These dreams will be shattered in one of two ways: open default or mass inflation followed by hyperinflation. In the second case, “There is no money” will not literally be true. What will be true is this: “There is no money with 2010’s purchasing power.”

The voters will be at an age where they cannot easily rebound. But they will be able to vote. This is why, at some point, the electorate will have to decide: outright default to the coming generation of oldsters — an ever-increasing age to receive benefits — or else an outright default to richer oldsters: a means test for receiving payments. Richer people will not be paid. I think the second option is likely before the implementation of the first.

There will be increasing price inflation before the day of reckoning hits, for the Federal Reserve will buy the government’s debt. But, at some point, the default must be open if the dollar is to be saved. Otherwise, hyperinflation at rates above 40% per annum will destroy the capital markets.


You must decide. Which default is most likely? When is it likely? When will I be affected? Then you must take expensive steps to prepare for the scenario you select as most likely. If you continue to act as if there will be no day of reckoning, you will find yourself unprepared for that day.

If you sit there and do nothing, you will at some point face this reality: “There is no money.”

June 5, 2010

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.

Copyright © 2010 Gary North