The Weiner Component #38 – The National Debt

To most people the National Debt is an unimaginable amount, over sixteen trillion dollars

United States Capitol

that the United States Government or the taxpayers owe to foreign entities like China and Japan, whose interest payments alone will eventually bankrupt the nation.  This also seems to be the image projected by the Republicans in Congress.  It is total misinformation and nonsense, more mythical than real.

The initial debt was incurred during the Revolutionary War and under the Articles of Confederation.  With the exception of the year 1835, the United States has continually held a public debt since the Constitution went into effect on March 4, 1789. 

The National or Public Debt of the United States consists of two components.  The first is debt held by the public and the second is debt held by government accounts or intergovernmental debt.  Debt held by the public consists of Treasury securities held by investors outside the Federal Government.  These include individuals, corporations, foreign states like China and Japan, and local governments, both in and out of the United States.

Debt held by government accounts includes non-marketable Treasury securities held in accounts administered by the Federal Government that are owed to program beneficiaries such as the Social Security Trust Fund.  This account currently exceeds 2.7 trillion dollars.  Other large intergovernmental holders include the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund, and the Federal Hospital Insurance Trust Fund (Medicare).  Debts held by governmental accounts represent the cumulative surpluses, including interest earning of these accounts that have been invested in Treasury securities.  In 2012 there were at least two direct transfers of 89 billion dollars from the FED to the Treasury that were mostly interest paid on the National Debt.

By my estimate the Federal Government owns well over fifty percent of its own debt.  Dr. Ben Bernanke, the Chairman of the Federal Reserve, recently stated (May 2013) that the FED, which had monthly been investing 85 billion dollars in the National Debt for well over the last twelve months, 40 billion in re-buying government securities and 45 billion in purchasing mortgage paper, would increase or decrease the monthly amount according to the nation’s needs.  He indicated that this would depend upon whether or not Congress would utilize fiscal policy, which it has not done since 2011.

It is interesting to note that the deficit under President Obama, which increased when he took office in 2009 because of the economic disaster facing the nation, has been dropping significantly and could by 2015 reverse itself and generate a surplus as it did in President Clinton’s last year in office.

Up to the end of 2008 there seemed to be endless amounts of money available.  Banks were refinancing real estate at 125 percent of their appraised value and in the process creating endless amounts of money.  People were spending like there was no tomorrow.  All of this ended when the Real Estate Bubble burst.  Every dollar in circulation suddenly became a nickel.  Virtually overnight there wasn’t enough money available to meet the needs of the economy.  If Presidents Bush and Obama had not bailed out the banks the nation would have been in a far worse depression than that of 1929.  The government, under the guidance of President Obama saved the economy from total ruin.  This was done by bailing out the financial institutions that had brought about the crash and then by bailing out some core industries like the automobile companies.  Where did the money come from?  The government created it and gave the needing companies the financial backing to recover.

Foreign trade has been unequal; we buy far more than we sell to others.  The two foreign nations that hold large amounts of the National Debt are Japan and China; each holding about 1.1 trillion dollars worth. 

Keep in mind that each nation has its own currency that has value only within the boundaries of that nation.  While money can be exchanged internationally if the trading is totally out of balance/unequal, then an international exchange of currency following the laws of supply and demand, could drop the value of the money fifty or more percent causing the nation that has acquired it to take a substantial loss in its profits.  Actually the money becomes a prisoner in the country of the sale and has to be invested there.  The value of this to the country making the massive purchases is that it gets the goods it wants and in a slightly convoluted fashion retains the funds it has spent for these items.

Several decades ago Japanese businessmen purchased large amounts of real estate in the United States, particularly in Hawaii.  They actually bought high and ended up eventually having to sell much of it far below what they had originally paid.  While China is very adept at selling goods and services to the rest of the world she has problems with certain aspects of her economy.  On 2012 many thousands of pigs died, presumably from drinking polluted water.  China has the largest population in the world and has to be able to successfully feed them.  It seems that she is in the process of buying food-producing companies in other nations (June 2013).  She is currently in the process of buying Smithfield Foods, the largest producer of pork in the U.S., for 4.7 plus billion dollars.  She is probably doing this also with countries other than the United States.  She will be importing what she needs from companies all over the world that she will own.

The Federal Government utilizes Macroeconomics.  Here money is the tool that it uses to allow the economy to function properly.  Ultimately the government prints/creates the money it needs to allow the economy to work.  It can do this knowingly or blindly.  The manner in which the state performs and controls the process determines the success of its economy.

On April 2, 2013, the National Debt was 16,805 trillion dollars.  What is the significance of this massive amount of money that the government has created?  Does this in any way hamper the productivity of the nation?  The answer to the first question is that there isn’t any real significance other than functionality.  The answer to the second question is NO.  It has become, as far as many of our conservative legislatures are concerned, the tail that is wagging the dog!  

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The Weiner Component #30 – Irony: The GDP & the National Debt


National-Debt-GDP (Photo credit: Wikipedia)

The Gross Domestic Product (GDP) is the dollar and cents value of all the goods and services produced and consumed or purchased in one fiscal year.  It is a measure of the productivity of the nation expressed as a number, which is reported quarterly and allows us to see growth or shrinkage in the overall economy.  It can also be measured by a comparison of all yearly incomes and is, then, a statistic that tells us the immediate economic condition of the nation.

Toward the end of 2008, with the Real Estate Debacle, the National Economy crashed.  The country was saved from falling into a deep depression by the actions of Presidents Bush, Obama, and Congress.  Even though the economy was saved from disaster unemployment fell to over ten percent, with many other people being either partly employed or under employed.  The value of most homes fell with many either being underwater or, with constant refinancing, being at the bottom of the ocean.  From 2010 on, with the election of a Republican majority in the House of Representatives, nothing was done to alleviate the poor economic situation.  In fact there was more job shrinkage with the Republicans in the House and the filibustering Senate minority undergoing a policy of economizing.  There has been no fiscal policy from Congress since 2011.  In the Federal Reserve, imaginative ways have been utilized to increase the amount of money in circulation and help solve the housing disaster.

What has happened since 2009 is that there has been economic recovery but today unemployment is hovering just below eight percent.

The hue and cry around Congressional Washington D.C. is that we have to economize, gain control over our National Debt.  The U.S. currently owes over sixteen trillion dollars and is spending more than it is taking in taxes.  The current argument is that we cannot bankrupt our children by leaving them owing this inordinate amount of money.

If we go back to the amount of money this country spent fighting World War I and the amount we lent to our allies then which, after 1929, was never paid back; to the amount spent by the Roosevelt Administration from 1933 on, when he assumed office; fighting the Great Depression; to World War II when we were the Arsenal of Democracy and paid for ourselves and our allies fighting the war; to the European Recovery Act of 1948 (The Marshall Plan), and to Korea and Viet Nam.  All of these required negative financing, presumably spending money we did not have.  Yet none of these massive expenditures brought poverty or hardship to future generations of Americans.  In fact what these outputs of money did was to greatly grow the economy so that debt as a percentage of the GDP actually diminished because of the economic growth. 

After World War II the United States emerged as a middle class nation with full employment and there was a much higher standard of living for everybody.  The Marshall Plan was a checkbook to European countries to enable them to recover from the war by spending the money we gave them in the U.S.  In both the Korean and Viet Nam Wars the United States was able to produce both guns and butter, fight the wars and provide for the population of the country.

In none of these cases was any real debt transferred to future generations.  What occurred was a growing standard of living for everyone.  Why would the situation be different now if the government used fiscal policy to create jobs by rebuilding the infrastructure of the United States?  The result would be a lessening of unemployment and a lessening of the National Debt as a percentage of the GDP.  A little bit of money spent would create a lot of money collected by all levels of government in taxes.

As a footnote: the National Debt consists of two parts, private and public debt.  Public debt is the money the government has borrowed from many of its own agencies that have surplus funds, like social security which holds over two and a half trillion dollars of the debt.  The Federal Reserve is and has been spending forty billion dollars a month purchasing its own debt.  In fact the government admits to holding over forty percent of the National Debt.  By my estimate it owns well over sixty percent of its own debt.  Twice, that I’m aware of, in 2012 the Federal Reserve quietly transferred 89 billion dollars to the Treasury.

Where are the real economic problems?  The Republicans are creating them by their actions in Congress.  They and a number of Democrats agree that the major problem is the Debt and not creating jobs for the unemployed.  What these people have created is a sense of irony, creating problems that exacerbate the negative aspects of our current situation.  Isn’t it time to take a realistic look at the economic problems of the United States and focus on job creation rather than shrinking the economy to attempt to pay off the National Debt?

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The Weiner Component #18 – Myth & Reality

Washington DC - Capitol Hill: United States Ca...

Today, December 31, 2012, the Republicans and the Democrats in the U.S. Senate are currently attempting to negotiate a compromise to prevent the nation from going over the fiscal cliff; that is, to prevent automatic tax increases from throwing the nation into a recession and possible depression.  Will they succeed?  At this point, 12 noon, Washington time, it’s anybodies guess.

The so-called compromise isn’t really a compromise; it’s a process of each side giving in to some of the other side’s demands.  A compromise is where both sides  can accept and live with an agreement that is somewhere between their initial positions.  What is happening here are that the Republicans are being forced, in their opinions, to give in to some of the Democratic positions.  As a result of the 2012 Presidential Election they have to give in to the other side to some extent.  Given another election, probably in 2014, they believe a victory would allow them to totally get their way.  One Republican candidate for the Senate, who lost the race, stated that compromise, to him, was the other side coming to his position.

The arguments, mostly Republican, are based upon faulty reasoning and a total misunderstanding of economics.  I was surprised last night listening to some eminent newscasters discussing the state of the economy.  They sounded like they had never taken a course in economics or read a book about the subject.  They were talking about the National Debt and they were doing so from the prospective of Microeconomics, equating the National Economy with their household budgets.  This was on MSNBC not on Fox news, which is a fountain of misinformation.  The were respected reporters on “Meet The Press.”  It struck me that everyone, with the exception of the Administration, has taken a Microeconomic view of the National Economy.

Some senator stated that he was not going to burden his grandchildren with current deficit spending.  What he missed was the deficit spending in World War I, the Great Depression, World War II, the Marshall Plan, the Korean War, the Viet Nam Police Action, Reagan’s “Star War” military spending, and the three Bush wars.  Have these sunk us into enormous debt?  Are we still economically suffering and paying for all of these events?

In dealing with this issue there are numerous factors to consider.  One is population growth.  According to the Census Bureau official population clock the population of the U.S. increases at the rate of one person every eleven seconds; this includes births, deaths, and immigrations.  That causes the population to grow at approximately 5 ½ people per minute, 330 people per hour, 7,920 a day, 55,440 for a week, 221,760 for a month, and 2,661,120 people per year.  The Bush Economic growth and Tax Relief Reconciliation Bill of 2001 was passed twelve years ago and extended for two more years in 2010 under President Oboma.  The population increase in the last twelve years is about 34,573,440 people.  The prices of most items have doubled during this period.  Going back to the 2001 level, even if it’s for a short period of time, would bring large-scale unnecessary hardship upon the majority of the population of this country.

This increase in the population requires a significant increase in the Gross Domestic Product in order for the economy to just stay even.  For anyone, be he a Senator, member of the House of Representatives, TV Reporter, or anyone else to talk about the future in terms of conditions today is not only nonsense, it is blatant naivety or ignorance.  And to project to when one’s grandchildren will reach adulthood is utter nonsense.  The entire nation, its population, and the value of money will be different at that time.

Another, and perhaps more important factor is the concept of Macroeconomics.  We think of money in terms of our household budgets.  Anything we buy we have to pay for; but is this true for the Federal Government?  What is the purpose of money to it?  In fact, what is or are the purposes of the Federal Government?

According to the Preamble to the Constitution of the United States:  “We the People, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

Nowhere in the Preamble or the Constitution is Microeconomics or anything about it mentioned.  The Constitution gives Congress the power to “Coin money,” and “regulate the Value thereof.“  If we consider the power given to Congress and the purposes stated in the Preamble, then we can understand the function of the Federal Government in dealing with money. It is to control the money supply to allow for, or insure the greatest prosperity for the people of the United States.  That is the function of Macroeconomics.  Money is the tool that the government uses to achieve the greatest functionality of the economy of the country.

The argument of the National Debt getting so large it will drive this country to bankruptcy is also nonsense.  If we ask the question: Who owns the bulk of the National Debt, 70 to 80 percent of it?  The answer to that is the Federal Government and its agencies.  For example Social Security owns over 2 ½ trillion dollars worth of the debt.  Can an entity owe itself money that it borrowed from itself?  The question points out the irrationality of the concept.  After all, who prints and issues the money?  It is the National Government.  There is nothing behind the dollar but the word of the National Government.

Money is, after all, a tool that the National Government uses to enhance the level of productivity in the nation.  It is supposed to allow for full employment and a certain level of prosperity for all the people in the country.  The National Government’s goal is not to pay off its debts but to allow the nation to function to it highest possible level.

Currently the Federal Reserve, under Chairman Ben Bernanke and his Board of Directors in Washington, D.C., are spending four hundred billion dollars a month on real estate paper and four hundred and fifty billion dollars a month on government bonds.  This is a very creative use of Monetary Policy.  With the multiplier effect, money is spent numerous times before it becomes part of the National Flow through the economy; this adds trillions of additional dollars monthly to the available currency.  Is it working?  The economy is improving new housing is being built throughout the country, employment is increasing and unemployment is gradually shrinking.  As long as there is no inflation, too much cash chasing too few goods, the economy needs the currency to grow.  We are having a healthy development.

It would be nice if we don’t go over the cliff.  It would be even nicer if all the Congressmen understood Macroeconomics and the proper functioning of the Federal Government.  With full employment much more wealth would be produced and much more would be collected in taxes on all levels of government.  We might even be able to pay off some of the “so-called” debt.  In order for this to happen the government has to spend more money than it takes in.

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The Weiner Component #17 – Medicare, Social Security, & the National Debt

Benefit Security Card .. HALF of the U.S live ...

Initially, when Medicare first came into existence in 1965, during the Administration of President Lyndon Baines Johnson, it was part of Social Security.  During the early part of his first Administration President Ronald Reagan fixed Social Security by raising the rates paid by both the employees and employers.  Social Security did not have a problem funding the people it covered at the time but it was felt that this change would allow the system to operate well into the future.  The new funding completely covered both Social Security and Medicare.

In 1988, the last year of the Second Reagan Administration, Medicare was separated from Social Security; and thereafter funded separately.  Social Security continued to be funded at its current rate: 4.2% of incomes up to $110,100 paid by the workers with 6.2% contributed by the employer.  The self-employed pay 10.4% of their incomes.  No adjustment was made to lower the funding now that Medicare was a separately funded entity.  Medicare was funded independently by a 2.9% payroll tax, both workers and employers each paying 1.45%.  Taken together each employee pays, directly or indirectly, 13.3% of their incomes.

Question: When the Republican Congressmen talk about fixing Social Security are they talking about reducing its rates to bring it in line with the amount it pays out or are they talking about taking the excess funds such as the 2 ½ plus trillion dollars that the government has borrowed from social Security and put into the National Debt; or are they considering reducing the payments to the recipients of Social Security and keeping the excess still being paid into it?

In point of fact, Social Security has nothing to do with the National Debt except that part which is owed to it.  One reasonable way to fix Medicare today would be to reduce Social Security by one or more percent and increase the payment to Medicare by that same amount.  Any other argument at this time is based in ignorance of the actual situation.  Are the members of Congress who are proposing these changes being devious and dishonest or are they just ignorant of the actual situation?  If the answer is ignorance then they and their staffs, which cost the taxpayer well over a million dollars a year, are ill equipped to serve as Representatives of the American people, if they are being devious and dishonest then they do not belong in Congress but rather should be incarcerated.

The National Debt is another interesting subject.  Is it real?  If not what is it?  The Federal Government admits to holding 40% of the National debt.  By my reckoning the figure is more like 70%. The Chairman of the Federal Reserve recently announced that the Fed is buying 400 billion dollars worth of real estate paper a month and 450 billion dollars worth of bonds each similar period..

Can an entity owe itself money?  The answer legally is No.  It can be argued that agencies within the government and the Federal Reserve hold most of the debt and that it will someday have to be paid back.  But isn’t all that that sophistry?

Obviously there is a National Debt, but it is far less than what it is officially stated as being.  If we deduct the percentage of the National Debt that the Federal Government holds through it agencies and otherwise the actual Debt is less than 5 trillion dollars.  That is far more manageable than $16 trillion.  Of course that is by my calculation and includes all the Monetary Policy applied during the Obama Administration.  If we just take the 40% the Federal Government acknowledges it owns then the figure is slightly under $10 billion.

In either case what we have to keep in mind is that the Federal Government controls the flow of currency in the economy and that there is nothing behind the dollar except the National Debt.  Money as used by the Federal Government in Macroeconomics is a tool that is supposed to engender growth and health within the economy.

Up to this point the Federal Reserve has been utilizing Monetary Policy in both regular and imaginative ways to try to bring about recovery from the 2008 Real Estate Debacle.  It has been successful in helping to turn the economy around and bring about partial recovery.  In order to bring about total economic recovery all that has to be done is to apply Fiscal Policy by both Houses of Congress and the President.  This would increase the so-called National Debt but it would generate a large volume of new productivity and new wealth, and, in all probability, lower the Debt in a short period of time.

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