One of my readers claims that the only way out of our current economic problems is to simply repudiate the existing National Debt. He argued that repudiating the debt was justified by the fact that the entire National Debt is based on fraud. More, he compared repudiating the National Debt to the “Jubilee” in the Old Testament wherein every 50 years, all debts were cancelled.
I replied as follows:
Simply repudiating the debt would work fine if our monetary system were still based on precious metals or some other tangible substance. We could eliminate the debt but our economy would still retain the assets—gold & silver coins—although some of the gold and silver might be redistributed into other people’s hands.
The reason the Old Testament people could have a Jubilee every 50 years and wipe out all the debt is that those Old Testament people used an asset-based (gold, silver, even cattle) monetary system. When the Jubilee occurred, it didn’t destroy any assets. Whatever tangible assets (gold, silver, cattle) existed within the local economy, tribe or nation before the Jubilee began, would remain in the economy during and even after the Jubilee had ended. Only the debt would be destroyed.
The Jubilee would only shift ownership of whichever of those tangible assets were currently loaned from the lenders to the borrowers. Thanks to the Jubilee, borrowers were entitled to keep whatever they’d previously borrowed without having to make any more payments on their loans.
In general, the Jubilee transferred ownership of whatever wealth had been borrowed from the relatively rich lenders to the relatively poor borrowers. The Jubilee was essentially an attack on the oligarchy, on the rich “bankers” who understood the nature of money and would become fabulously wealthy and assume unrivaled power if their wealth was allowed to grow indefinitely. When the Jubilee wiped out all current debts every 50 years, it essentially wiped out the debt-obligations due to the rich bankers and prevented the nation from becoming an oligarchy. So long as there was a Jubilee, the bankers could prosper, but they couldn’t quite rule.
Even though a Jubilee eliminated all current debts, all of the tangible assets (gold, silver, cattle) remained in the local economy. So long as the assets remained, the economy could easily survive and even prosper. The Jubilee only changed the ownership of assets purchased on credit from the relatively wealthy lenders to the relatively poor borrowers. The Jubilee only destroyed debt—not monetary assets.
Of course, once the debts were cancelled, the ordinary people would behave like a bunch of fools, declare a holiday, get drunk, squander their newly-acquired wealth, and soon be back in debt to the bankers who understood the nature of money. But, at the end of another 50 years, there’d be another Jubilee, and once again the smart bankers would lose much of their assets to the people.
The key to the success of the Jubilee was that assets and debts were two different concepts. Because they were separate, you could lose one but still keep the other.
• Today, however, we have a debt-based (rather than asset-based) monetary system. We treat debt instruments as assets rather than liabilities. The whole concept is insane and certain to fail badly—but that’s what we have.
With a debt-based monetary system, for every debt, there’s a correlative paper debt-instrument that’s signed by the borrower and which memorializes the borrower’s promise to repay that debt. Those paper debt-instruments (promises to pay) are treated as assets.
For example, if I borrow $100,000, the lender keeps a piece of paper with my signature on it that promises to repay $100,000 plus interest. The lender treats that signed, paper debt-instrument as an asset. If you ask him about his net worth, he’ll say “I’m worth $100,000 because I have a piece of paper signed by Alfred Adask that promises to repay $100,000 to me.”
But, if I default on my $100,000 debt, my creditor’s $100,000 paper asset will also disappear. Because “one man’s debt is another man’s asset,” if I go broke, my debt disappears but so does my creditor’s paper wealth. What’s the value of a piece of paper bearing my signature if I can’t afford to make good on my debts? Zeee-row.
Every debt is purported to have created a correlative paper “asset“. The paper debt and the paper asset aren’t separate. They’re united like two sides of the same coin. You can’t have one without the other. You can’t lose one without also losing the other.
• With a debt-based monetary system, the deeper we dive into debt, the richer our nation seemingly becomes.
If you think about that principle for a moment, you’ll begin to sense why the whole monetary and financial system seems almost incomprehensible: it’s irrational. But that principle explains why government tries to stimulate the economy and seemingly get out of debt by creating more debt.
We aren’t the most deeply indebted nation on earth because our government is simply incompetent. We’re the world’s greatest debtor-nation because our government understands that under a debt-based monetary system, debt equals wealth, and therefore going deeper into debt should makes us all more prosperous. That’s why they lowered interest rates—to make borrowing and going deeper into debt more attractive to potential borrowers. That’s why they offered “liars’ loans” to sub-prime borrowers in the early 2000s—to create more debt (apparent wealth) by accepting promises to pay (that couldn’t possibly be paid) as “assets”.
Later, when those purported “assets” turned out to be “toxic assets” (debts that could not and would not ever be repaid) the whole US and even global economies nearly imploded from the loss of those paper “assets”.
Again, this entire debt-based monetary concept is irrational (or at least fraudulent). Nevertheless, that concept also almost irresistible when people first realize that they can purchase tangible goods and services with nothing but their personal promise to someday repay the resulting debts. Thanks to a debt-based monetary system, we could become rich without being productive and prosperous without actually working. That monetary system will work brilliantly so long as the people are willing to go ever-deeper into debt. Figuratively speaking, under the debt-based monetary system, I could repay a $100,000 loan by borrowing another $100,000—or, better yet, $200,000.
So long as we didn’t lose our nerve or our greed and therefore stop borrowing, our debt-based monetary system could prosper forever! We could all be consumers in a consumer-based economy. We could have all we wanted without ever having actually produce anything! It would be a paradise on earth. We could shop ‘til we dropped. The more we shopped, the more we could shop.
The idea of a debt-based monetary system is crazy, self-indulgent, irrational and certain to fail. But before it failed, it would inspire one helluva party. Being “party animals,” who could resist the temptation? And who knows? So long as we kept drinking, smoking and borrowing, the party might last for decades—even generations!
Therefore, people who should’ve known better allowed our government to violate Article 1.10.1 of the Constitution (which declares that “No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts; . . . .”) and to subject us to a pure fiat currency. When we accepted that pure fiat currency, We the People implicitly authorized the national monetary madness in which we’re currently ensnared.
Result? Today, insofar as we repudiate any of the existing debt, the correlative debt instruments (which we treat as our paper assets) will also become worthless.
Implication? We can’t default on the debt. There’ll be no “Jubilee” for America. We can’t deny and destroy our debt without also denying and destroying our apparent (paper) wealth.
• In the Old Testament world, the debts (promises to pay) and the assets (tangible wealth in the form of cattle, gold or silver) were two different kinds of financial “instruments”. They were largely separate. Each could exist (or disappear) without regard to the other. You could cancel the debt without destroying the tangible assets.
For example, if I borrowed ten cattle from Jacob, and the Jubilee took place, Jacob would lose his claim on those ten cows and I would be “enriched” by owing 10 cows that I no longer had to pay for. That wouldn’t be fair to Jacob, but our tribal economy would not be impaired. The ten cows that were tangible assets would remain in the tribal economy. They might no longer be Jacob’s property and instead be mine—but the ten cows would not disappear. The local economy/community would not be impaired by a loss of those cows. Some wealth would be redistributed, but that wealth would still be available to all in the sense that if you wanted to buy one of those ten cows, you could do so. The only difference was that you’d pay me for the cow, rather than Jacob.
But, in today’s brave new world of fiat currency, one man’s debt is another man’s asset. In the same sense that the Nazi’s once posted the slogan “Work is Freedom” in their concentration camps, today’s economists, bankers and politicians have adopted the slogan that “Debt is Wealth”.
Today, it’s not like the Jubilee where, if we repudiate our debts, the assets will still remain in our economy. If we repudiate our debts, we also destroy the corresponding paper assets.
Once those paper assets have disappeared, where will our local economy find the capital needed to build a new factory, grow crops or buy a new flat-screen TV on credit? Without valid and performing paper debt instruments, there are no paper assets. Without paper assets, there’s virtually no “liquid” basis (other than gold or silver) for credit, no basis for buying products, producing products, growing food.
Result? If we follow my reader’s suggestion and repudiate the National Debt, our whole society could degenerate into an impoverished, mindless, starving, unemployed and violent chaos.
We’re like a nation of crack addicts faced with two choices: either we keep taking ever-larger doses of crack (which will eventually kill us) or we kick the habit cold turkey and immediately suffer the agony of withdrawal pains.
So, what’s it gonna be? Immediate agony? Or eventual death?
I guarantee that virtually no politician will advocate “immediate agony” to the American people.
• In a debt-based monetary system, we can’t repudiate the debt without also repudiating the correlative paper assets (US bonds, stocks, pension funds, savings accounts, paper dollars, etc.) that we treat as “assets”. That’s why we support banks that are “too big to fail”. They’re not really “too big”—they’re too indebted. If they were allowed to go bankrupt, they’d destroy so much debt and so much correlative paper assets that the entire US economy might collapse.
If we repudiated the “official” National Debt of $17.2 trillion, we’d thereby also repudiate $17.2 trillion in paper assets currently held by US and foreign investors. That loss of paper assets might be survivable, but it would still badly destabilize the US and world economies.
If we repudiated the “actual” National Debt (which John Williams of Shadowstats.com currently estimates to be nearly $90 trillion), the US and global economies would probably disintegrate.
Therefore, the U.S. government, American people and even the world are caught in a terrible dilemma. We can’t possibly repay the existing debt in full. I’d guesstimate that we can’t repay more than 10% to 20% of the existing debt. But, we also can’t repudiate the existing debt without also destroying our illusion of paper assets.
Can’t pay; can’t repudiate. Immediate agony, now—or premature death later? What do you do? Government has little choice but to try to continue to issue ever more debt to try to create the paper “assets” needed to keep the debt-based monetary system afloat.
• But there’s a problem that’s become increasingly apparent over the past five years. Very few people or institutions want to lend to the US government. Americans are broke and can’t lend much to Uncle Sam. Foreign investors have lost confidence in Uncle Sam’s capacity to repay its debts and no longer lend to the US government. Result? At least 70% of government’s current bonds are “purchased” by the Federal Reserve. The appearance of borrowing continues, but the illusory nature of these loans is becoming increasingly obvious.
Sooner or later, the government will be unable to borrow more currency to go deeper into debt and create an ever-greater illusion of paper assets. Once the government can’t borrow, create more debt, and thereby create more paper “assets”, the whole damned system will implode, people will starve, riots will ensue, martial law may be tried (I doubt that it will succeed for long) and our nation may disintegrate into chaos and violence.
We’re screwed and we can’t escape that fate. Our choices are stark: immediate agony, or eventual death.
We’ve been screwed ever since our government and Federal Reserve addicted us to a pure fiat currency and we were dumb enough to accept that paper “illusion” without question. An overt national bankruptcy is inevitable. We may be able to “kick the can down the road” a few more months or years and thereby postpone that fate. But it’s increasingly apparent that the “can” can’t be “kicked” much longer.
• If we still had our gold in Ft. Knox, etc., we might be able to mitigate the coming economic debacle. We could issue a new currency backed by gold at the rate of, say, $25,000 or $50,000 per ounce of gold. That wouldn’t provide a painless solution, but we’d still have real, tangible, liquid assets that we could lend and use to rebuild our economy and nation.
But there’s good reason to suspect that our government and the Federal Reserve have already sold off most of our former 8,200 tons of gold.
If our gold’s gone, and if the government can’t borrow any more currency so as to go deeper into debt (and thereby create more paper assets), there’s no earthly way to escape the coming collapse.
We’re heading for a national, and perhaps global, catastrophe. We can’t avoid that catastrophe by repudiating our National Debts. Instead, repudiating our debts will only cause that catastrophe to happen much sooner.
Even so, the fact remains that our debts are already so enormous, that they can’t ever be paid in full. That means that, sooner or later, we’ll be forced to openly repudiate most of the National Debt (and the correlative paper assets) and watch our economy decline or collapse.
• The heart of our economic problem is the adoption of a debt-based monetary system and the correlative loss of tangible assets like gold and silver coin. If you agree with this analysis, your most rational course of action should be to sell as much of your current paper “assets” as possible and use the proceeds to acquire as much gold and silver (real money; tangible assets) as you can before the collapse occurs—and then hang on tight.
After the collapse (repudiation of debt/cancellation of paper assets) begins, whatever few liquid assets remain will be in high, even desperate, demand. The price of such real assets should skyrocket. One ounce of gold might pay for the equivalent of a new Cadillac. Three or four ounces of gold might buy a new house. One ounce of gold might be enough to feed you and your family for a year. Ten ounces of gold might be enough to buy controlling interest in a local business. Fifty ounces of gold might buy enough stocks that you or your heirs might become fabulously wealthy after the economic collapse ends and the nation begins to slowly rebuild.
And, rebuild, we will (unless, of course, we’re in “End Times”—in which case you should be probably be reading the Bible rather than this article).
Still, before we see a legitimate recovery, we’re going to go through at least 5 to 10 years of national austerity and economic depression that might make your ears bleed.
More than likely, if the Greater Depression hasn’t already begun, it’ll start soon and become undeniable. Those who hang onto paper assets will probably be ruined. Those who acquire and hang onto tangible assets like gold and silver should survive with the least stress and the most opportunities.