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July 19, 2005

The Great Debt
by Joshua Fritsch

debt (dt)

Something owed, such as money, goods, or services.
1. An obligation or liability to pay or render something to someone else.
2. The condition of owing: a young family always in debt.
An offense requiring forgiveness or reparation; a trespass.

Definition as provided by Dictionary.com http://dictionary.reference.com/search?q=debt

The next financial horror to hit the world probably won't go down in history as The Great Depression Part II, but it very well could be called The Great Debt. Oh we may have a depression, and we may experience both inflation and deflation, but the memorable thing about the crisis will be the debt. Government and private debt piled so high it defies comprehension. How high will it go? That's impossible to say. We are living on borrowed time - - time generously donated by foreigners who for some unfathomable reason are willing to continue purchasing our worthless IOU's.

Just how bad is it? As of July 7, 2005 the public debt as reported by the government is $7,838,410,800,630.51.¹ This does not include private debts such as mortgages, home equity loans, car loans, "personal" loans, credit card accounts, layaway plans or any other type of personal debt. Nor does this number include corporate debt, or even your state or local government debts - - it is purely a measure of how much debt the federal government alone has taken on. Considering that this total has increased by more than $242 billion in just the first 7 months of this calendar year, I think it is safe to assume we will crack $8 trillion by the end of the year. With a population of 300 million here in the United States, this means that every man, woman and child in the country owes approximately $26,600. You owe twenty-six thousand dollars. So does your spouse. If you are married with three children, your combined household debt, courtesy of runaway government officials, is about $133,000. But let's stick with $26,600 for now - - it's easier to wrap your head around. Let's say you owe $26,600 and there is no such thing as interest - - the amount owed remains static. If you decide to make payments of $100/month, it will take you roughly 22 years to pay it off. Even if you pour money on this debt at the rate of $1000/month, it will still take you more than two years to pay it off. Can you afford a $100/month increase on your taxes? How about $1000?

Perhaps you are thinking that this does not apply to you - - after all, you didn't spend the money, so why should you have to pay it back, right? Wrong. The government has spent this money in your name, and in the name of your children. The only source of income the government has is taxes - - therefore, if the government needs to pay a debt, it will raise your taxes. But hey, they'll only raise taxes for the rich, right? It still won't be enough - - the combined net worth of the 25 richest Americans as of September 24, 2004 was roughly $358 billion.² This means that if the 25 richest people in the richest country in the world cashed in everything they own and donated it towards the federal debt, it would pay off 4.57% of what we owe.

Let us not forget about all the other debts we face. We have more than $2.13 trillion in outstanding consumer credit, such as car loans and credit card accounts.³ We have another $2.29 trillion in mortgage debt.⁴ If we take a wild guess that the combined state debt comes to a mere third of the federal debt, we have an additional $2.65 trillion to account for. This brings the grand total of all debt to a staggering 15 trillion dollars. That's $50 thousand owed by each and every American. At $100/month it would take you more than 40 years to pay off.

Some may argue that the burden of debt does not lie solely on individual taxpayers. After all, businesses pay taxes as well. However, those taxes come from the sale of goods and services. Who do you think purchases those goods and services? The money comes out of the individual citizens' pocket one way or another. Corporations aren't going to provide debt relief; in fact, they're a huge contributor to the problem. General Motors alone has almost $300 billion in debt and less than $16 billion in cash.⁵ Sure, they'll tell you that they have a "market value" of almost $300 billion, but this essentially means they have a net value of zero. This precarious situation can be found in many "blue-chip" companies as well as on a personal level. If you, as an individual, save $10,000, yet you accumulate $10,000 in debt of any type, then you have nothing saved - - your debt will consume your savings. Because debt incurs interest (probably at a higher rate than your savings) you will constantly be chasing the balance. While you're pulling in a slim 2-3% in a savings account, your credit cards likely are hitting you up for double-digit interest. In this type of race you cannot win.

The situation is actually much, much worse than a $10K-to-$10K ratio. Unless you pal around with the mega-wealthy who give their 8-year-olds credit cards with a $10,000 limit⁶ to "teach them about money", chances are you owe money on your house, or your car, or a student loan, or perhaps on a revolving account at Sears. It doesn't matter - - if you have more debt than savings, then you don't truly have any savings. If you have $100,000 in your 401k, and you owe $250,000 on your house, what will you do if the real estate market takes a tumble? If your house is worth less on the market than what you owe on it, you have two options - - stay where you are and hope you can keep up with the payments, or declare bankruptcy. With the latest round of bankruptcy laws, you may still be on the hook for that mortgage. After they've seized your 401k you would be left houseless, penniless, and carrying $150,000 in debt for a home you no longer live in. "Isn't that illegal?" It won't matter if it's legal now or not. The government is quite adept at making new laws when it suits them, and believe me, if $8 trillion in debt is called due, it will suit them just fine.

I expect that you may be skeptical of this "doomsday scenario", but I assure you, the risks are quite real. In a world of interest-only mortgages, adjustable-rate loans and Wal-Mart Mania, it will not matter if you, personally, do not default on your debts. It will not matter if you, personally, have been fiscally responsible. Just like it only takes one bad driver to cause a 50-car pileup on the highway, the domino effect applies to our economy as well. The government and the vast majority of the United States population have been on a spending binge the likes of which the world has never seen. When the bill comes due, we all will pay. We will pay through higher taxes. We will pay because our neighbors walk away from their mortgages, causing a glut of unwanted real estate on the market leaving us unable to sell our own homes for even close to what we paid for them. We will pay for new social programs to assist the very people who caused this catastrophe when they wind up mired in bankruptcy. We will pay with the blood of our sons and daughters in the wars that always accompany the decline of an empire. We will pay.

Regardless of what you read in the papers or hear from your elected officials, the economy is not in good shape. It is very simple to make this determination - - we don't need any fancy formulas, just common sense. For example, common sense tells us that if an individual is accumulating debt faster than they are accumulating assets, this person is not financially healthy. They can claim their finances are in good order, but simple math tells us that the path they are on leads to Very Bad Things such as taking on even more debt to pay the debt they already have. This simple analysis can be applied to the federal government. The public debt is increasing at an alarming rate - - between May 31, 2005 and July 1, 2005 we piled on almost $50 billion in new debt. That's $1.6 billion a day which breaks down to $66.67 million per hour. Divided amongst our 300 million citizens, this requires that each and every person, working or not, puts a quarter "in the jar" every hour - - 24 hours a day. This is in addition to the taxes you've already paid. Let's say your income is $50,000/year. We'll assume for the purpose of this argument that the Federal government takes 20% of your earnings via income taxes, Medicare taxes and Social Security taxes. 20% of $50,000 is $10,000. If you work a 40-hour week 52 weeks out of the year, this amounts to roughly $4.80 each hour that goes to the federal government. According to the 2003 census⁷, we have approximately 144 million people in the labor force. To pay for the $584 billion of new debt this year ($1.6 billion X 365 days) we would need each worker to pay an additional $1.95 per hour in federal taxes; that's a 40% increase. This massive tax hike would not eliminate a single penny of our current federal debt, nor would it cover the interest on the existing total. The only thing accomplished by raising your taxes 40% would be to stay even; we would still owe 8 trillion dollars, plus interest. This is the true face of our economy. This is the legacy we will leave for our children if we do not take action immediately.

Will you 'pass the buck' and wait for someone else to clean up the mess? Or will you step up and demand a stop to all of this madness by getting out of debt? That's all it takes, you know - - to bring an end to the fiat fiscal policies we live under...stop carrying debt. You don't need to convince the rest of the world to condemn the system, just stop participating in it yourself. Eliminate your debts to the credit card companies and the car financing corporations. Eliminate your debts to the mortgagor. Don't buy a new TV just because you can get it on credit with "no payments or interest for one full year!" - - save up the money and buy it. You do not need to "keep up with the Joneses", Mr. and Mrs. Jones are going to eventually suffocate under a mountain of debt - - do you really want to be one step ahead of them? Richard Russell once said there will soon be a new four letter word - - this word will be D-E-B-T.

Of course, given the highly leveraged position of most Americans, total elimination of debt is not a realistic option. People need their cars and their homes, and chances are they do not have the cash lying around to "just pay them off". However, this problem took generations to develop, and it will take generations to remedy. The initial required action is to stop taking on more debt. When you're stuck in a hole, the first thing you need to do is stop digging! The next time you buy a car, don't buy the most expensive one you can afford - - buy the less flashy one with terrific gas mileage. When you are considering a purchase, do not look at the price in terms of monthly payments; consider the total price you will pay, and then compare that with your annual income. Can you afford to spend an entire year's salary on a car? Most importantly, teach your children what debt is, and why it should be avoided whenever possible. If your children see you indulge your every whim even when you can't afford it, they will do the same. Give them the gift of honest savings, not reckless spending. The best way to convince others to avoid debt is to set the example. Let them see that it can be done, and what the benefits are.

Unfortunately, the elimination of debt from private life will do nothing to stop the government from overspending in your name. As far as our elected officials are concerned, the federal debt will never be paid off and that is "A-OK". Perpetual inflation allows debts to be paid back with "cheaper dollars", but this is dishonest. Do we really want to be written into history as the sleazy, cheating Americans? We need honesty in our monetary system, and this requires that those in charge of our currency report to an established set of checks and balances. When an economy is run on a purely fiat currency, there are no checks and balances. Fiat, by definition, is simply "by decree" - - the US Dollar is money because the government says, "this is money"; there is no inherent value. How can you purchase an item of value using something that is utterly worthless? This is where gold comes in. As Alan Greenspan once said, gold "...stands as a protector of property rights." Whether or not Mr. Greenspan still believes this is certainly open for debate - - but those words are true. The only thing that can stop politicians from spending money they do not have is a system which prohibits the creation of money from thin air. Honestly, it doesn't even have to be gold - - you could have a monetary system based on peanuts if you really wanted to. As long as there is a commodity that backs the currency, the inflation spigot cannot be turned on at a rate greater than the commodity can be produced. Since production is the heart of any economy (real production, not some trumped up formula that claims computing power makes up for lost jobs), the monetary base will expand and contract naturally as the economy expands and contracts. There will be ups and downs, but they will be a healthy phenomenon for our economy instead of a series of crises.

Gold represents honesty in the economy. A truly honest monetary system would not need the phrase, "the price of gold". The reason for this is simple: gold itself would be the currency. Have you ever heard someone talk about "the price of the dollar"? Of course not; the dollar is exchanged for other currencies, but it has no price assigned to it. The problem with a fiat system such as we have now is that the value of the dollar fluctuates. More specifically, by its very nature the dollar is stuck in perpetual debasement (inflation), but that is a story for another day. With a monetary system based on gold, there would be no fluctuation. There would be no need to guess how much money you would need for retirement, you would know down to the penny. There would be no need to worry about how much it would cost to send your child to college, it would be virtually static. Returns on the stock market would be just that - returns; not a desperate search for funds or stocks that would provide you the 10% annual price increase you need just to keep up with the devaluation of the dollar. If you put aside enough gold (or a currency backed by gold) to purchase a new suit, you could leave it in a vault for 3 generations and it would still be enough to buy a new suit.

Gold is honest money. Gold represents the average person who just wants to provide for his or her family. Gold provides the economic stability required to predict your expenses years in advance, which in turn reduces the stress that shortens your life. Fiat is for cheats, liars and scoundrels. Fiat provides cover for politicians who want to spend money on the war machine. Fiat keeps the public on its toes by causing financial worry for everyone who is not independently wealthy. If you are busy putting together a plan to keep your family solvent, you have no time to examine the policies of your elected officials. Fiat is theft; theft of your assets, theft of your time and theft of your life. Fiat takes all the power away from you and places it into the hands of those who print the currency. Fiat is debt, and debt is slavery.

Many people have taken a stand against fiat and in support of gold over the years, but most of them have walked away defeat. Some people last decades, some last a few weeks - - but in the end, virtually all gold advocates have given up hope. Perhaps you, right now, are considering a return to support of the fiat system. Maybe you're tired of "fighting the Fed" - - tired of waiting for the price of gold to explode upwards once the rest of the world catches on to the economic truths you have discovered. So...what have you done to make this happen? There is no company working for you - - with gold, YOU are the company. You share both the ownership and workload with advocates of gold around the world. The government certainly isn't going to argue on gold's behalf! Nothing will happen if you just sit around waiting for it. You need a change in sentiment....so do your part to move that process along! Keep a good hunk of your savings in the form of bullion - - store it in a safe or a vault. Show a coin or two to your friends - - let them hold it (do you remember holding your first gold coin?). Support an alternative currency like the Liberty Dollar or "e-gold". In short, stop wishing for a change and start working for one. This is our Great Debt. We are mired in the first two definitions of the word- - don't let the generations to come curse us with the third.

debt (dt)

Something owed, such as money, goods, or services.
1. An obligation or liability to pay or render something to someone else.
2. The condition of owing: a young family always in debt.
An offense requiring forgiveness or reparation; a trespass.

¹ http://www.publicdebt.treas.gov/opd/opdpenny.htm
² http://www.forbes.com/lists/forbes400/2004/09/22/rl04land.html
³ http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2005-07-08T190045Z_01_WBT003422_RTRIDST_0_ECONOMY-CONSUMERCREDIT-URGENT.XML
⁴ http://www.mortgagebankers.org/news/2005/pr0331b.html
⁵ http://finance.yahoo.com/q/ks?s=GM
⁶ http://www.azcentral.com/ent/celeb/articles/0627madonna.html
⁷ http://factfinder.census.gov/

Joshua Fritsch
TheMarketTraders.com

Disclaimer: The information contained in this article is believed to be factual, however, the author cannot be held responsible for mistakes or intentional deceptions on the part of the sources. Trading and investing of any type entails risk, and that risk is assumed solely by the trader/investor.