Saturday, February 13, 2010

The Impossible Math of Debt Backed Money… and why we WILL take an Evolutionary Step Forward!

“The hollow words “deficits don’t matter” echo through my mind. They are spoken in the arrogant tone of supposedly educated people who continue to spread their debt backed manure. Of course they spread this manure knowing that it fertilizes their returns.”


All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.

The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,

…the real amount of money spent on interest last year alone nearly equals the total amount of money our government takes in!

Please let that sink in.

That’s right, this is no joke! Yes, that chart from the Treasury is completely misleading – as in deceptive. In fact, when all the money spent buying down interest rates is considered, we are actually spending ALL of our nation’s income, or more, just for the privilege of using our own money system!

Consider that by the end of 2010 we will have $14.3 Trillion just in current debt, just at the Federal level. “Deficits don’t matter,” right? Yet we are seeing debt driven events ripple around the globe. And since the end of 2008 through September of 2009, the U.S. Federal Reserve had committed $6.4 Trillion just aimed specifically at programs designed to keep interest rates low! And that is conservative, in fact it can be said that the purpose of nearly all the backstops and bailouts was to keep the cost of debt low! This would include backstops like the one given to the FDIC to prevent bank panic from spreading… is that not in effect buying down interest rates? Of course it is. Total commitments? More than $11 Trillion as of September 2009.

If that’s too much of a stretch for you, let’s be really conservative and only look at the amount of money actually invested by the Federal Reserve during that timeframe to buy down rates, about $1.5 Trillion! The largest section of this money went directly into buying up mortgage paper through the GSEs.

So, we spent $1.5 Trillion, at least, buying down interest rates, the sole purpose of which is to mask the debt load. This is because debt saturation has occurred and at normal interest rates, the debt load cannot be supported by incomes. That is true on all levels.

If you combine the amount the Treasury spent directly on interest in 2009, $383 billion, and add it to the $1.5 Trillion used to keep rates low, then it can and should be said that the Treasury actually spent at least $1.88 Trillion on interest!

How much money did the Federal Government take in? $2.2 Trillion is all. Remember, comparing debt or interest to GDP is a FALSE argument, a Red Herring. Income is the only thing that matters when it comes to carrying debt.

$2.2 Trillion in income, $1.88 Trillion in real interest expense. How are we looking?

This conservative estimate means that we actually only have about $320 billion to spend on everything else that’s not interest related. States going bankrupt? Roads in disrepair? The value of your retirement falling? Jobs hard to find? People going hungry?

According to, this is how Congress currently spends our money. Note that their Treasury Department expenditures exceed $700 Billion in 2010, and that just the top three budget items exceed the total amount of revenue collected by our government. That’s without any mention of the amount spent to keep rates low.

Have you ever been trapped by logic? When this happens to your brain, it will know it. Oh sure, you may try to weasel your way out, but deep inside you will know you’ve been had.

To those who think this can reverse or that it was a one-off expenditure, you simply do not understand the exponential growth that is occurring, nor will you see the parabolic collapse that is coming.

The collapse of debt has already begun in the private sector, but the government is simply picking up that collapse and creating a parabolic growth phase of government spending and government debt. Here it is presented in the Fed’s own charts… What exponential growth? This exponential growth:

That chart spans more than the past century and is experiencing a classic parabolic blow off move that has gone quite vertical. Parabolic moves ALWAYS collapse, it is just a matter of when. When this curve collapses, it is going to be very painful for many people indeed.

Looking at that chart, is there anyway possible to believe the budget forecasts stating that the deficit is going to start coming down soon? What would that mean to the economy if it really happens at this point? Would the economy still be growing or would it be shrinking? Are those light bulbs I see coming on? Pretty illuminating isn’t it?

Okay, now we’ve seen that our outlays (spending) are skyrocketing, let’s take a look at the collapse of current receipts, again our nation’s income, but this time let’s view it in terms of year over year change. Here you will see a historic collapse of tax revenue on the Federal level:

The chart of outlays has moved into a parabolic blow off phase upwards, while at the same time the chart of current receipts has already peaked and is now collapsing downwards. This, of course, is causing deficits to enter a parabolic move of their own – the Fed refers to this deficit as our “national savings.”

The hollow words “deficits don’t matter” echo through my mind. They are spoken in the arrogant tone of supposedly educated people who continue to spread their debt backed manure. Of course they spread this manure knowing that it fertilizes their returns.

The stench of that manure ripens further as many argue that we can simply print money without debt and that will inflate existing debt away. That is a comical notion if you understand that it requires income to service debt and that the rate of debt expansion is far outstripping the rate of income growth.

If that math doesn’t convince you that change is about to come to our monetary system, then nothing will! Remember the housing bubble? “Real estate never goes down,” remember? I was one of the few who was warning about it early on, but now everyone seems to think they saw it coming. Do you see this coming as well? Or, do you believe that it’s possible to “inflate away debt…” even though your money is backed by debt?

YES, absolutely the rules are going to change, that’s exactly what I’m saying. But I’m also saying that the rule changes will not be simply printing money within the same old framework.

The day after the TARP program was announced in November 2008, I wrote a paper called Death by Numbers. In it, I simply added up all the debts on the personal, corporate, and Federal Government levels and demonstrated how the same people are ultimately responsible for all the debt on each level to the tune of $303,053 per man, woman, and child in the United States – more than $1.2 million just for my family of four, and this did not include the debt on the state and local government levels. People were stunned, you cannot argue the numbers, yet nothing has changed. Besides getting worse that is.

Recently I updated the math in an article called Zombie Nation – The Rise of the Mathematical Plague. In it I added the cost of additional debt, not counting the trillions spent bailing out mortgages in the GSEs, and showed that each worker in the United States is now responsible for $704,530 each! This is an impossible math situation as the average wage simply cannot support that much debt, especially when interest is considered.

Now, through demonstrating how much of our income actually goes to interest on our debt, we are demonstrating the same bad math just expressed in another manner. But let’s have some fun and challenge the sanity of those who believe that adding debt will cure a debt problem by asking a couple of pretty easy questions…

“Is it possible to add money to inflate away debt in a system in which money is backed by debt?”

This is what many people are saying will happen, right? Of course the fact is that almost all of our money is backed by debt. Creating more money means creating more debt. The real question becomes how do incomes keep up with the debt creation? Are they? Of course not…

Next question:
“In a system in which money is backed by debt, what happens to the supply of money if you decrease the quantity of debt?”

Of course the supply of money would fall! Do you see the dilemma that is created when you back your money with debt? We can’t pay back our debts without decreasing the supply of debt backed money, and if we do that, then the economy will suffer. But if we continue to pile on debt, then more and more of our money will go to pay interest and our economy will suffer. Those are the choices we are presented with in our current Federal Reserve Debt based system.

Thus we are damned if we do, and damned if we don’t. And it’s not just us who are damned. The entire world is built around the same clearly unsustainable system.

This begs the question, “Why is our system built like that, and to whose benefit was it made that way?”

I think you know the answer to that question – this current system was built around the Federal Reserve Act that was passed in the year 1913, and it took the money power from Congress and moved it to the private banks and bankers.

The very same interests that created this monetary conundrum are telling us “consumers” that we need to spend more to get their credit (debt) flowing again! LAUGH OUT LOUD, that is hilarious! Then they use the money created and the tax dollars that flow to them from us CITIZENS to buy the political and judicial systems! Talk about irony of ironies, the money system doesn’t even belong to them, it belongs to us! We don’t have to pay anyone for the right to use our own monetary exchange system, that notion is simply ludicrous, yet we have all been living under that system our entire lives!

Simply put, our money system was stolen from us. We can either take it back or we can continue to swim in the manure, the choice is ours, not theirs.

The globe is saturated with debt. Adding one dollar of debt now subtracts 15 cents from GDP.

The velocity of debt is zero, the debt saturation point. Adding additional debt will only cause future defaults and falling employment.

This debt saturation is causing default waves that ripple around the globe. Subprime in the U.S., Banks in the U.S., Commercial Real estate, etc. Now the debt bombs are detonating in Dubai, then Greece, in Portugal, Spain, Ireland, and even Japan. The bombs are just waiting to explode in England, Germany, the rest of Europe, and even China. Even if the bombs don’t explode immediately, the debt smolders causing global economies to suffocate. Germany is the latest to report that despite all the efforts to prevent it, their GDP is simply not growing (neither is ours in reality).

Our statistics are not comparable with bygone eras. Debt saturation has caused a phase transition and attempts to cover-up this transition have resulted in huge distortions of the truth. Below is a chart published by SG Cross Asset Research showing their computations of net liabilities to GDP. This includes liabilities that are off balance sheet, and they far exceed the liabilities carried on balance sheet:

Yes, our governments are insolvent. Insolvent being a condition in which you can no longer service current debts. That has already occurred in the United States. That is why we resorted to “Quantitative Easing” and why we use several methods to artificially buy down our interest rates. If we could have continued to borrow more money at normal rates we would have but we didn’t and we can’t as the stress in our debt auctions is now showing time and again.

We can show that insolvency in the math in several different ways. Thus you are a witness to the biggest lie and accounting scandal in the history of mankind. No, that is not an exaggeration, it is a fact, a very sad fact that we are all going to have to face one way or the other and soon.

To all those who point to this (Democrat/ Republicans!) and that (bad assed unions who are ruining our country) and claim the other thing (banks need to lend more, lol) regarding our economy, all I can really say is that your eye is way off the ball. The game of debt backed money with the ever escalating interest going to private individuals is nearing an end… the mathematical outcome of the game was decided before it ever started.

If you view the current situation objectively, you will come to the inescapable conclusion that the rules of the game must change. Who is it that is going to bring those new rules to you? The same people who created the current debt backed system? Have you heard of any solutions that address this root of the problem? Are you waiting to be rescued, or are you hiding in your bunker?


Yes, printing money without debt is an alternative, but that doesn’t make the current debt go away and it doesn’t bring spending back to match income. The quantities of money required to be printed would be so vast that you would soon find yourself printing trillion dollar bills.

Another solution would be to buckle up, spend FAR less, tax FAR more, and default on current debts. The economy will suffer hugely and for decades as a result, and in the end, with debt backing our money the result would be that eventually the same old cycle would repeat as the next debt bubble builds anew.

The inescapable conclusion is that if you live inside of a debt backed box, our nation and human kind will continue to be held back.

There is only one right answer for the long haul, for the good of our nation and of the world. That answer is to replace the Federal Reserve Act with the provisions of Freedom’s Vision. This will return the money system to Congress and to the People where it belongs. It will cleanse the debts and derivatives to lessen leverage in the economy while restoring balance sheets, not just for our Federal Government, but for States, Banks, Businesses, and Individuals.

Implementing Freedom’s Vision will:
1. Avoid the disaster about to unfold – regardless of how we get there, by inflation or deflation, the math of debt that underlies our currency does not work. This would break that math and preempt the negative events that are going to follow should we fail to take action.

2. End the practice of debt backed money for our Federal Government. Lower taxes and more productivity result.

3. Provide direct and immediate relief for people in debt, accomplished in a way that’s fair to everyone including those who are not in debt and without creating excessive price inflation, deflation or a giant “moral hazard.”

4. Provide direct and immediate compensation for those who are savers and have been damaged by past practice.

5. Provide relief for States, almost all of whom are in deep debt trouble.

6. Cleanse the banks and financial businesses of unserviceable debts and derivatives and would ensure that they stay that way. All banks would survive the transition, immediately benefiting from improvements in our citizen’s balance sheets. The same process would be used to cleanse other financial like businesses.

7. Businesses, both large and small, would immediately benefit from our citizens and the banks improved balance sheets.

8. Unfunded liabilities would immediately get better with zero percent price inflation.

9. Limits on special interests would separate their money from politics lessening the pressure to continually increase the quantity of money. This allows long term decision making. Special interests associated with the banking, oil, defense, food, insurance, and other industries would no longer have their huge pull. Thus politicians would not have to focus on spending our resources on special interests, but instead on the interests of the people. Budget pressures would decrease as a result.

10. States would exercise more control over their own destiny. Lower taxes on the state level, more productivity. Low cost money would become available to repair and upgrade current infrastructure and to build the infrastructure of tomorrow’s commerce.

11. The powers possessed by the central banks would be greatly diminished freeing our country and others from their methods of control via debt, now even issued worldwide by the IMF. Countries would no longer be working to pay central banks interest. Instead they would work to develop their own rule of law. Their productive labors could be used to improve their own infrastructure, to feed and cloth themselves, and to build a future for themselves. In other words, they need to be taught how to fish, not simply given a fish and asked to pay it back forever and ever.

12. No price inflation eroding away future savings. People who take on reasonable debt could once again make progress towards paying it off.

13. Massively supports education, underpinning progress so that we may continue to lead the world in innovation and the production of meaningful technologies.

14. Provides a national mission - focused on creating the energy and infrastructure of the future. REAL and meaningful economic growth would ensue and massive new employment would result.

Many argue that such a plan is not possible or is too difficult to implement. Some feel that collapse must happen first while others do not see the threats at all.

As I look back through history, here is what I see: I see that mankind has been making a steady march towards progress. I see the evolution to the Magna Carta, then to our own Constitution. I see the evolution of economic theory, although painfully slow, it has progressed from rudimentary trade, theories of self-interest, to Adam Smith’s Invisible Hand, to an understanding of supply and demand. I see monetary systems and their progression from sea shells, to wooden sticks, to metal coins, to gold, to paper, to digital.

Now THE major hurdle to overcome is how debt backs our money. We CAN and we WILL overcome this obstacle. It is the next step in the progression, a step that will be taken. To think that we will not progress goes against thousands and thousands of years of history. It will happen because the math of debt is forcing it to happen, it is the only logical conclusion. Nature has a way of pointing in the right direction. When that direction is clear, you know it, it is just, the math supports it and therefore it will last and become the next step forward for humankind.

Yes, “it’s the DEBT, Stupid!” It time to get on with Freedom’s Vision!

Neil Young – Rockin’ in the Free World:

The Impossible Math of Debt Backed Money