George Rebane

The usual plots of federal debt in dollars showing a percipitous climb during recent years is meaningless.  What we care about is the debt as a percentage of the country’s earning power as represented by its GDP.  The Peter G. Peterson Foundation has compiled that information from government data into the above graph which is part of a compelling report ‘The State of the Union’s Finances’.  The graph shows that we now owe about 75% of current GDP, a fraction we exceeded only during the very expensive years of conducting WW2.

But the scary part is yet to come.  RR readers know that the total unfunded liabilities of the nation in the coming years is somewhere north of $60,000,000,000,000 ($60Trillion).  For reference, keep in mind that our current GDP is about $14T, and the total annual federal take (excluding state and local taxes and other fees) is a little north of 20% of GDP which is about to go up under Obamanomics.  Now look at the right end of the plot as we go into future years.

This plot graphically shows why the dollar must be destroyed.  There is no conceivable way that the US government can meet its obligations by paying them off with dollars that have their current buying power.  Soon we will not be able to even pay the interest on the dollars we have borrowed.  As Christopher Wood writes in ‘The Fed Is Out of Ammunition’ (24nov08 WSJ),

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism — and with it the fiat paper-money system in general — as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the “barbarous relic” scorned by most modern central bankers, may well play a part.

This bland conclusion hides the real world that will come about from more and more inflated dollars flooding the markets, dollars which other countries are already making plans to abandon.  We all know that inflation is a government induced assets tax, and all serious discussions about taxes should include what the government takes from your earnings (salary, dividends, Soc Sec, …) and your assets denominated in fiat dollars.

The only possible, though improbable, solution is that going forward we grow our economy by leaps and bounds not seen before in our country’s history.  And we must do this in a new global environment of highly competitive countries rising in the developing world.  Further, we must do all this with a labor force that is less capable and more demanding.  And finally, we must do this under a national perception that our economy is a zero-sum game, a game in which we can tax ourselves into a prosperous future while throwing away productive capacity to fight a bogus climate threat.

So when we look at the social dislocations that will occur as federal debt runs away, we will enter the age of gold, groceries, and guns.  I fear that the Beltway elites also know this scenario, and will seek timely mandates to limit our access to all three.