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competitive posture and the quality of life for Americans would
be seriously threatened.1
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Chapter 38 - The Federal Debt




U.S. Debt 1950-2004
Excel Growth Trend Projection 2005-2015
18000
16000
14000
12000
billions




10000
8000
6000
4000
2000
0
1950 1960 1970 1980 1990 2000 2010

www.babylon.com


In the 1930s, economist Alvin Hansen told President Roosevelt that
plunging the country into debt did not matter, because the public debt
was owed to the people themselves and never had to be paid back.
But even if that were true in the 1930s (which is highly debatable), it is
clearly not true today. Nearly half the public portion of the federal
debt is now owed to foreign investors, who are not likely to be so
sanguine about continually refinancing it, particularly when the dollar
is rapidly shrinking in value. Al Martin cites a study authorized by
the U.S. Treasury in 2001, finding that for the government to keep
servicing its debt as it has been doing, by 2013 it will have to have
raised the personal income tax rate to 65 percent. And that™s just to
pay the interest on the national debt. When the government can™t pay
the interest, it will be forced to declare bankruptcy, and the economy
will collapse. Martin writes:
The economy of the rest of the planet would collapse five days
later. . . . The only way the government can maintain control in
a post-economically collapsed environment is through currency
and through military might, or internal military power. . . . And
that™s what U.S. citizens are left with . . . supersized bubbles
and really scary economic numbers.2


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Web of Debt




Compounding the problem, Iran and other oil producers are now
moving from dollars to other currencies for their oil trades. If oil no
longer has to be traded in dollars, a major incentive for foreign central
banks to hold U.S. government bonds will disappear. British journalist
John Pilger, writing in The New Statesman in February 2006, suggested
that the real reason for the aggressive saber-rattling with Iran is not
Iran™s nuclear ambitions but is the effect of the world™s fourth-biggest
oil producer and trader breaking the dollar monopoly. He noted that
Iraqi President Saddam Hussein had done the same thing before he
was attacked. 3 In an April 2005 article in Counter Punch, Mike
Whitney warned of the dire consequences that are liable to follow
when the “petrodollar” standard is abandoned:
This is much more serious than a simple decline in the value of
the dollar. If the major oil producers convert from the dollar to
the euro, the American economy will sink almost overnight. If
oil is traded in euros then central banks around the world would
be compelled to follow and America will be required to pay off its
enormous $8 trillion debt. That, of course, would be doomsday
for the American economy. . . . If there™s a quick fix, I have no
idea what it might be.4

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Chapter 38 - The Federal Debt

The quick fix! It was the Wizard™s stock in trade. He might have
suggested fixing the problem by changing the rules by which the game
is played. In 1933, Franklin Roosevelt pronounced the country officially
bankrupt, exercised his special emergency powers, waved the royal
Presidential fiat, and ordered the promise to pay in gold removed from
the dollar bill. The dollar was instantly transformed from a promise
to pay in legal tender into legal tender itself. Seventy years later,
Congress could again acknowledge that the country is officially
bankrupt, propose a plan of reorganization, and turn its debts into
“legal tender.” Alexander Hamilton showed two centuries ago that
Congress could dispose of the federal debt by “monetizing” it, but
Congress made the mistake of delegating that function to a private
banking system. Congress just needs to rectify its error and monetize
the debt itself, by buying back its own bonds with newly-issued U.S.
Notes.
If that sounds like a radical solution, consider that it is actually
what is being done right now -- not by the government but by the private
Federal Reserve. The difference is that when the Fed buys back the
government™s bonds with newly-issued Federal Reserve Notes, it
doesn™t take the bonds out of circulation. Two sets of securities (the
bonds and the cash) are produced where before there was only one.
This highly inflationary result could be avoided by allowing the
government to buy back its own bonds and simply voiding them out.
(More on this in Chapter 39.)

The Mysterious Pirates of the Caribbean

“Monetizing” the government™s debt by buying federal securities
with newly-issued cash is nothing new. The practice has been quietly
engaged in by the Fed and its affiliated banks for the last century. In
2005, however, this scheme evidently went into high gear, when China
and Japan, the two largest purchasers of U.S. federal debt, cut back
on their purchases of U.S. securities. Market “bears” had long warned
that when foreign creditors quit rolling over their U.S. bonds, the U.S.
economy would collapse. They were therefore predicting the worst;
but somehow, no disaster resulted. The bonds were still getting sold.
The question was, to whom? The Fed identified the buyers as a
mysterious new U.S. creditor group called “Caribbean banks.” The

i
An allusion to John Snow, then U.S. Treasury Secretary.
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Web of Debt

financial press said they were offshore hedge funds. But Canadian
analyst Rob Kirby, writing in March 2005, said that if they were hedge
funds, they must have performed extremely poorly for their investors,
raking in losses of 40 percent in January 2005 alone; and no such losses
were reported by the hedge fund community. He wrote:
The foregoing suggests that hedge funds categorically did not buy
these securities. The explanations being offered up as plausible
by officialdom and fed to us by the main stream financial press
are not consistent with empirical facts or market observations.
There are no wide spread or significant losses being reported by
the hedge fund community from ill gotten losses in the Treasury
market. . . . [W]ho else in the world has pockets that deep, to
buy 23 billion bucks worth of securities in a single month? One
might surmise that a printing press would be required to come
up with that kind of cash on such short notice . . . . [M]y
suggestion . . . is that history is indeed repeating itself and maybe
Pirates still inhabit the Caribbean. Perhaps they are aided and
abetted in their modern day financial piracy by Wizards and
Snowmeni with printing presses, who reside in Washington.5
In September 2005, this bit of wizardry happened again, after
Venezuela liquidated roughly $20 billion in U.S. Treasury securities
following U.S. threats to Venezuela. Again the anticipated response
was a plunge in the dollar, and again no disaster ensued. Other buyers
had stepped in to take up the slack, and chief among them were the
mysterious “Caribbean banking centers.” Rob Kirby wrote:
I wonder who really bought Venezuela™s 20 or so billion they
“pitched.” Whoever it was, perhaps their last name ends with
Snow or Greenspan. . . . [T]here are more ways than one might
suspect to create the myth (or reality) of a strong currency “ at
least temporarily!6
Those incidents may just have been dress rehearsals for bigger
things to come. When the Fed announced that it would no longer be
publishing figures for M3 beginning in March 2006, analysts wondered
what it was we weren™t supposed to know. March 2006 was the
month Iran announced that it would begin selling oil in Euros. Some
observers suspected that the Fed was gearing up to use newly-printed
dollars to buy back a flood of U.S. securities dumped by foreign central
banks. Another possibility was that the Fed had already been engaging
in massive dollar printing to conceal a major derivatives default and

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Chapter 38 - The Federal Debt

was hiding the evidence.7
Whatever the answer, the question raised here is this: if the Fed
can buy back the government™s bonds with a flood of newly-printed
dollars, leaving the government in debt to the Fed and the banks, why
can™t the government buy back the bonds with its own newly-printed
dollars, debt-free? The inflation argument long used to block that
solution simply won™t hold up anymore. But before we get to that
issue, we™ll look at just how easily this reverse sleight of hand might be
pulled off, without burying the government in paperwork or violating
the Constitution . . . .

Extinguishing the National Debt
with the Click of a Mouse

In the 1980s, a chairman of the Coinage Subcommittee of the U.S.
House of Representatives pointed out that the national debt could be
paid with a single coin. The Constitution gives Congress the power to
coin money and regulate its value, and no limitation is put on the
value of the coins it creates.8 The entire national debt could be extinguished
with a single coin minted by the U.S. Mint, stamped with the appropriate
face value. Today this official might have suggested nine coins, each
with a face value of one trillion dollars.
One problem with that clever solution is, how do you make change
for a trillion dollar coin? The value of this mega-coin would obviously
derive, not from its metal content, but simply from the numerical value
stamped on it. If the government can stamp a piece of metal and call
it a trillion dollars, it should be able to create paper money or digital
money and call it the same thing. As Andrew Jackson observed, when
the Founding Fathers gave Congress the power to “coin” money, they
did not mean to limit Congress to metal money and let the banks create
the rest. They meant to give the power to create the entire national
money supply to Congress. Jefferson said that Constitutions needed
to be amended to suit the times; and today the “coin” of the times is
paper money, checkbook money, and electronic money. The
Constitutional provision that gives Congress “the power to coin money”
needs to be updated to read “the power to create the national money
supply in all its forms.”
If that modification were made, most of the government™s debt could
be paid online. The simplicity of the procedure was demonstrated by
the U.S. Treasury itself in January 2004, when it “called” (or redeemed)

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Web of Debt

a 30-year bond issue before the bond was due. The Treasury
announced on January 15, 2004:
TREASURY CALLS 9-1/8 PERCENT BONDS OF 2004-09
The Treasury today announced the call for redemption at
par on May 15, 2004, of the 9-1/8% Treasury Bonds of 2004-09,
originally issued May 15, 1979, due May 15, 2009 (CUSIP No.
9112810CG1). There are $4,606 million of these bonds
outstanding, of which $3,109 million are held by private
investors. Securities not redeemed on May 15, 2004 will stop
earning interest.
These bonds are being called to reduce the cost of debt
financing. The 9-1/8% interest rate is significantly above the
current cost of securing financing for the five years remaining to
their maturity. In current market conditions, Treasury estimates
that interest savings from the call and refinancing will be about
$544 million.
Payment will be made automatically by the Treasury for bonds in
book-entry form, whether held on the books of the Federal Reserve
Banks or in TreasuryDirect accounts.9
The provision for payment “in book entry form” meant that no
dollar bills, checks or other paper currencies would be exchanged.
Numbers would just be entered into the Treasury™s direct online money
market fund (“TreasuryDirect”). The securities would merely change
character “ from interest-bearing to non-interest-bearing, from a debt
owed to a debt paid. Bondholders failing to redeem their securities by
May 15, 2004 could still collect the face amount of the bonds in cash.
They would just not receive interest on the bonds.
The Treasury™s announcement generated some controversy, since
government bonds are usually considered good until maturity; but
early redemption was actually allowed in the fine print on the bonds.10
Provisions for early redemption are routinely written into corporate
and municipal bonds, so that when interest rates drop, the issuer can
refinance the debt at a lower rate.
How did the Treasury plan to refinance this $4 billion bond issue
at a lower rate? Any bonds not bought by the public would no doubt
be bought by the banks. Recall the testimony of Federal Reserve Board
Chairman Marriner Eccles:
When the banks buy a billion dollars of Government bonds as
they are offered . . . they actually create, by a bookkeeping entry, a
billion dollars.11
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Chapter 38 - The Federal Debt

If the Treasury can cancel its promise to pay interest on a bond
issue simply by announcing its intention to do so, and if it can refinance
the principal with bookkeeping entries, it can pay off the entire federal
debt in that way. It just has to announce that it is calling its bonds and
other securities, and that they will be paid “in book-entry form.” No
cash needs to change hands. The funds can remain in the accounts
where the bonds were held, to be reinvested somewhere else.
Indeed, at this point the only way to fend off national bankruptcy
may be for the government to simply issue fiat money, buy back its
own bonds, and void them out. That is the conclusion of Goldbug
leader Ed Griffin in The Creature from Jekyll Island, as well as of
Greenbacker leader Stephen Zarlenga in model legislation called the
American Monetary Act.12 Zarlenga notes that the federal debt needn™t
be paid off all at once. The government™s debts extend several decades

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