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Debt-Ceiling Crises: Imagined and Real – Article by D. W. MacKenzie

Debt-Ceiling Crises: Imagined and Real – Article by D. W. MacKenzie

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The New Renaissance Hat
D. W. MacKenzie
October 14, 2013
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The federal government shutdown and impending debt ceiling “deadline” have led to near panic over possible default on the national debt. This imagined “default crisis” is a canard used for demagogic fearmongering. That said, the long-term federal financial issues are all too serious.

If federal officials simply continue on with their current financial plans, the U.S. government could run into trouble in early November. Without a debt ceiling increase, the Treasury would be unable to meet some of its financial obligations. Treasury bills would take a hit in international markets. With T-bills losing value in markets, interest rates—especially short-term interest rates—would start to rise. Rising interest rates would impair recovery from the 2008 financial crisis.

The assertion that a debt crisis would impair an already weak economic recovery is correct. However, any claim that the federal government is up against a hard deadline to meet its legal financial obligations is utterly untrue. The federal government holds vast amounts of property, all of which is available to be sold off. How much is needed to cover federal interest payments?

Interest rates are, for the moment, very low. Accordingly, interest payments on the debt are a small percentage of the total federal budget, despite the large size of the national debt.

With annual interest payments at a couple of hundred billion dollars, there is no impending debt-ceiling default crisis.

How exactly could the federal government pay interest on the national debt? To start with, the Federal Reserve now holds large numbers of mortgage-backed securities. There is some uncertainty over the market value of these securities, but their face value is immense, well over one trillion dollars. Sales of some of the better quality mortgage-backed securities could fund interest payments in the short term.

U.S. gold reserves are also substantial. The U.S. holds thousands of tons of gold at Fort Knox and at the New York Federal Reserve.

Sales of a small part of U.S. gold reserves could be used to make immediate interest payments.

The U.S. government also holds large amounts of idle real estate. The federal government spends $8 billion on vacant buildings annually. That’s for an estimated total of 55,000 to 77,000 buildings. The fact that our federal officials aren’t sure how many buildings they manage is itself disturbing, and a sign of incompetence. However, it seems that there are at least over 50,000 such buildings. How many hours would it take for federal employees who “manage” these buildings to post some of them on eBay? Surely sales of these properties would raise enough money to cover federal interest for about a month or two of the next year, even if each of these buildings sold for only a half a million dollars on average.

Efficient, competent public officials could simply announce auctions and begin to sell some of these buildings. Of course, red tape could delay property auctions. However, the Fed could make immediate interest payments by using its discretionary powers to sell mortgage-backed securities and gold reserves. President Obama could, in the meantime, expedite sales of vacant federal buildings—not to mention federal lands—by cutting red tape. (See map of federally managed land.)

The President has already acted in arbitrary—and some would say illegal—ways: by granting special exemptions from the Affordable Care Act to favored corporations, by using drones to kill U.S. citizens, and by targeting unfriendly political groups for audits. If Obama really wants save his beloved federal government from default, why shouldn’t he just use the extraordinary powers that he has already claimed to order the immediate sale of vacant buildings? The point here is not to encourage further illegality on the part of this President (he needs no assistance in such matters). The point here is that Obama does not have his back against a wall; there is no “gun to his head.” Obama has already claimed more than enough discretionary powers to prevent a debt-ceiling default in November. If default does happen it is entirely his choice, given that he has legal options and has already assumed various unconstitutional powers.

Obama has occasionally mentioned that some programs might be trimmed or cut. As Obama put it in 2010, “We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group.” He added, “We simply cannot afford it.”

The federal government holds over 700 million barrels of oil in the Strategic Petroleum Reserve. Obama could raise billions of dollars for interest payments without selling the whole reserve. Some people might see sales of the SPR as irresponsible. However, the oil in this reserve is a small fraction of monthly oil consumption, U.S. oil production is rising, and owners of foreign oil have overwhelming financial interests in continued oil sales to the United States.

The federal government also holds a Strategic Helium Reserve. It was created for “national security,” for blimps used by the military leading up to and during World War II. This program is archaic and the government already sells some helium. It could sell all of it and shut this program down.

Default on the debt is always possible. Obama and his people at the Treasury Department could have refused to pay interest on the national debt last month even though they had this money at hand. They could choose to default next month even though they can get the money—either through legal means or according to Obama’s demonstrated willingness to act illegally. The sale of federal assets and closing of federal programs would do more than just meet short-term interest payments on the national debt. Movement of securities, gold, buildings, oil, and helium would put these resources in the hands of people who would not merely put these resources to better use, but to actual use. The leeway that exists in federal finances points to longer-term financial and economic problems. Why would Obama engage in fearmongering on the national debt when obvious solutions to this problem exist? For that matter, why would federal officials hold so many idle resources for so long?

The reason why the federal government runs deficits nearly every year, despite collecting trillions in annual taxes, is because it wastes vast amounts of money on dysfunctional programs and special-interest payoffs. An efficient government would not need to tax and borrow nearly as much as does the federal government. The gross inefficiency of government has put federal finances in long-term jeopardy.

The real debt ceiling is determined by the ability of all working Americans to pay more taxes. How much more can we pay? Continued structural deficits and rising entitlement spending will result in default on the national debt, but not for a number of years. The existing path of long-term federal spending does surpass the capacity of taxpayers to fund the federal government, as it is currently designed. Future default on the national debt will have severe consequences. However, Obama’s willingness to engage in demagoguery on the immediate debt-ceiling issue is one of many signs that politicians are unwilling to take necessary steps to fix long-term fiscal finances.

The legal debt-ceiling crisis of 2013 is manufactured and phony. Even if Congress refuses to raise the legal debt ceiling this year, there are many ways of avoiding immediate default. The real problem we face is wasteful and irresponsible spending that will make default unavoidable eventually. Long-run default is, of course, avoidable. What we need are real cuts in federal spending, actual sales of federal assets and properties, and rationality in federal finances. Cutting spending and selling assets are easier said than done. Achieving smaller government will require a dramatic shift in public opinion. Americans need to realize that politicians who try to scare us are the ones that we really should fear.

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana. 

This article was originally published by The Foundation for Economic Education.
Legalize Competing Currencies – Article by Ron Paul

Legalize Competing Currencies – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
August 16, 2012
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I recently held a hearing in my congressional subcommittee on the subject of competing currencies.  This is an issue of enormous importance, but unfortunately few Americans understand how the Federal Reserve and Treasury Department impose a strict monopoly on money in America.

This monopoly is maintained using federal counterfeiting laws, which is a bit rich.  If any organization is guilty of counterfeiting dollars, it is our own Treasury.  But those who dare to challenge federal legal tender laws by circulating competing currencies – at least physical currencies – risk going to prison.

Like all federally created monopolies, the federal monopoly on money results in substandard product in the form of our ever-depreciating dollars.

Yet governments have always sought to monopolize the issuance of money, either directly or through the creation of central banks. The expanding role of the Federal Reserve in the 20th century enabled our federal government to grow wildly larger than would have been possible otherwise.  Our Fed, like all central banks, encourages deficits by effectively monetizing Treasury debt.  But the price we pay is the terrible and ongoing debasement of our money.

Allowing individuals and business to use alternate currencies, especially currencies backed by gold and silver, would expose the whole rotten system because the marketplace would prefer such alternate currencies unless and until the Fed suddenly imposed radical discipline on its dollar inflation.

Sadly, Americans are far less free than many others around the world when it comes to protecting themselves against the rapidly depreciating US dollar.  Mexican workers can set up accounts denominated in ounces of silver and take tax-free delivery of that silver whenever they want.  In Singapore and other Asian countries, individuals can set up bank accounts denominated in gold and silver.  Debit cards can be linked to gold and silver accounts so that customers can use gold and silver to make point of sale transactions, a service which is only available to non-Americans.

The obvious solution is to legalize monetary freedom and allow the circulation of parallel and competing currencies.  There is no reason why Americans should not be able to transact, save, and invest using the currency of their choosing.  They should be free to use gold, silver, or other currencies with no legal restrictions or punitive taxation standing in the way.  Restoring the monetary system envisioned by the Constitution is the only way to ensure the economic security of the American people.

After all, if our monetary system is fundamentally sound– and the Federal Reserve indeed stabilizes the dollar as its apologists claim–then why fear competition?  Why do we accept that centralized, monopoly control over our money is compatible with a supposedly free-market economy?  In a free market, the government’s fiat dollar should compete with alternate currencies for the benefit of American consumers, savers, and investors.

As Austrian economist Ludwig von Mises explained, sound money is an instrument that protects our civil liberties against despotic government. Our current monetary system is indeed despotic, and the surest way to correct things simply is to legalize competing currencies.

Representative Ron Paul (R – TX), MD, is a Republican candidate for U. S. President. See his Congressional webpage and his official campaign website. 

This article has been released by Dr. Paul into the public domain and may be republished by anyone in any manner.

The Fed: Mend It or End It? – Article by Ron Paul

The Fed: Mend It or End It? – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
June 3, 2012
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In early May 2012, I held a hearing to examine the various proposals that have been put forth both to mend and to end the Fed.  The purpose was to spur a vigorous and long-lasting discussion about the Fed’s problems, hopefully leading to concrete actions to rein in the Fed.

First, it is important to understand the Federal Reserve System.  Some people claim it is a secret cabal of elite bankers, while others claim it is part of the federal government.  In reality it is a bit of both.  The Federal Reserve System is the collusion of big government and big business to profit at the expense of taxpayers.  The Fed’s bailout of large banks during the financial crisis propped up poorly-run corporations that should have gone under, giving them a market-distorting advantage that no business in the United States should receive.  The recent news about JP Morgan is a case in point.  JP Morgan, a recipient of $25 billion in bailout money, recently announced it lost another $2 billion.  If a corporation shows itself to be a bottomless money pit of “errors, sloppiness and bad judgment,” the Fed shouldn’t have expected $25 billion in free money to change that or teach anyone a lesson in fiscal discipline.  But it determined that this form of deliberate capital destruction was preferable to one business suffering bankruptcy.  Clearly, some changes need to be made.

Several reforms for the Fed were discussed at the hearing.  One was a call for the full-employment mandate to be repealed, in order to allow the Fed to focus solely on stable prices.

Another reform calls for changes to the composition of the Federal Open Market Committee.  Still another proposal was for outright nationalization of the Fed or of its functions.  But if what the Fed does now is bad and inflationary, allowing the Treasury to print and issue money at-will would be even worse, and could possibly lead to a Weimar-like hyperinflation.

The problems and advantages of the gold standard were discussed at the hearing.  The era of the classical gold standard was undoubtedly one of the greatest eras in human history.  For a period of several decades in the late 19th century, the West made enormous advances.  However, the gold standard was still run by government.  The temptation to suspend gold redemption reared its head again with the outbreak of World War I.  Once the tie to gold was severed and fiscal restraint thrown to the wind, undoing the damage would have required great fiscal austerity.  Instead, the Western world proceeded to set up a gold-exchange standard which lasted not even a decade before easy money led to the Great Depression.

While returning to the gold standard would certainly be far better than maintaining the current fiat paper system, as long as the government retains the power to go off gold we may end up repeating the same mistakes.

The only viable solution is to get government out of the money business permanently.  The way to bring this about is through currency competition: allow parallel currencies to circulate without receiving any special recognition or favor from the government.  Fiat paper monetary standards throughout history have always collapsed due to their inflationary nature, and our current fiat paper standard will be no different.

It is imperative that the American people be educated on the dangers of the Fed and the importance of restoring sound money.  The laying of the groundwork must begin today, so that the American people will be prepared for the day when the mirage the Fed has created evaporates completely.  The full hearing footage is available on my website, and I would encourage every American to take a look.

Representative Ron Paul (R – TX), MD, is a Republican candidate for U. S. President. See his Congressional webpage and his official campaign website. 

This article has been released by Dr. Paul into the public domain and may be republished by anyone in any manner.