This post is from an email from John T Reed.  He’s one of my favorites and isn’t much on sugarcoating, so I love reading his stuff.  He sent this email to pitch his book, How to Protect Your Savings from Hyperinflation and Depression. It’s ok with me that he pitches, I’m a capitalist at heart.  I’m currently reading this book – just started actually, so I’ll report back later my impressions.  But I was so impressed with the email that I asked his permission to post here, and he agreed.   I have included links to the book.  He doesn’t sell on Amazon, so all proceeds go directly to the author.

Whatever your opinion or impression, education is always a good thing, and this article is chock full, so read on:

There must be huge cuts in federal spending right now. We’re not going to get them.
You have to protect yourself.

The U.S. national debt ceiling was set at $14.29 trillion in February, 2010. It looks like we are going to hit that ceiling in the next few months.

Politicians are starting to agitate about which way to vote. As usual, many are lying about it.

Not passing a law to increase that ceiling is tantamount to enacting a balanced budget amendment. Not raising the national debt ceiling means deficit spending ends immediately. It means the U.S. government would henceforth have to live within its means.

The means of the U.S. government are the $2.2 trillion it collects each year in taxes. Current federal spending is $3.5 trillion.

That means the U.S. government has to borrow the difference—$3.5 trillion – $2.2 trillion = $1.3 trillion. That difference is called the deficit. The U.S. government borrows by selling U.S. Treasury bonds.

If Congress refuses to raise the debt ceiling, the U.S. government is not allowed to sell any new bonds except to refinance old ones.

Some politicians are saying that not raising the ceiling risks the “full faith and credit” of the United States.

Not really. As I just said, we can still sell bonds for the purpose of paying off existing bonds.

The average term of U.S. bonds is 49 months. That means about 1/4 of the bonds come due each year.

1/4 of our current $14 trillion debt is $14 trillion ÷ 4 = $3.5 trillion. So if we do not raise the debt ceiling, we would only be able to sell $3.5 trillion of bonds this year and something similar in future years. The politicians want to sell an additional $1.3 trillion.

We would not have to default on any existing U.S. bonds if we do not raise the debt ceiling. So the “full faith and credit” of the U.S. government would not be in jeopardy if the debt ceiling was not raised.

Would not raising the debt ceiling have any other effect then?

Oh, yeah.

It would mean we would have to gradually cut federal spending by the amount of the deficit over the next twelve months. That’s $1.3 trillion which is $1.3 trillion ÷ $3.5 trillion = 37%.

So we would have to cut federal spending 37% by the end of the twelve months after the ceiling was reached.

If you applied that percentage across the board equally to every category of spending, it would mean that Social Security and federal retired pensions recipients would see their monthly checks go down by 37%. 37% of federal employees would have to be fired or have to accept a 37% pay cut including military, FBI, Border Patrol, and so on. Medicare would be cut 37% presumably meaning patients would have to pay that much because doctors and hospital probably would not accept such a cut and would refuse to treat the patients unless the patient or some other person paid the difference.

Congresspersons and the president would have to take immediate 37% pay cuts—so would their staffs.

Opponents of not raising the ceiling say the world would lose faith in U.S. government promises if the government reneged on Social Security, etc.

They should. Those bogus promises were made by politicians playing Santa Claus with taxpayers’ money. There is literally not enough money in the world to pay Social Security, federal pensions, medical care benefits and so forth that have been promised by federal politicians.

The net worth of the world is minus $34 trillion. The gross domestic product of the entire world is $70 trillion. The unfunded liability (money we should have put in the bank but did not) for Social Security and Medicare alone was $107 trillion in 2008. There is no hope that we can ever pay that.

Would a recovery and unemployment going down to 5% solve the problem? Not even close. That would only increase annual tax revenues by about $150 billion.

Would tax increases solve the problem? Not even close. Numerous experts like Former Fed Chairman Alan Greenspan have said that. If you could increase taxes 25%, which is probably impossible unless you broadened the base (made the 50% of Americans who no longer pay any tax other than Social Security tax start paying income tax), you would still only get about $500 billion more revenue. Not enough.

Selling all the national parks and federal buildings like the Smithsonian? Not even a dent.

If the U.S. continued to make on-time payments to bond owners, the “full faith and credit” of the U.S. would not be adversely affected. Indeed, I suspect the world bond market would feel relieved that the U.S. government was finally getting serious about living within its means and behaving in a way that will likely result in bond holders being paid back as promised.

No doubt, liberal politicians will say that seniors and the sick should take precedence over bond holders.

Okay. Go with that. But understand it takes you to the same place very rapidly. If the U.S. government defaults on the bonds instead of the Social Security and other federal entitlements, the world bond market will instantaneously impose their own debt ceiling. That is, they will refuse to buy any more U.S. bonds. In other words, defaulting on the bond payments would change the U.S. government’s credit from AAA to defaulted. To put it in laymen’s terms, the credit card of the Congress and the President would be cut to pieces and canceled.

The “full faith and credit” of the U.S. government would, in that case, indeed, be destroyed.

If and when the world bond market, which mainly consists of U.S. citizens and institutions, stops buying U.S. bonds, those same cuts I described above will have to take place immediately. Basically, there are two entities that can shut down the U.S. government selling bonds and engaging thereby in deficit spending:

• Congress and the President voluntarily
• the world bond market involuntarily

Same result no matter who initiates it.

Furthermore, remember the refinancing of maturing U.S. bonds I described above will also not happen if the bond market stops buying our bonds. In other words, we would have to pay off the $3.5 trillion of bonds that were due this year and we would only have $2.2 trillion of tax revenues to do it. And we could only use that $2.2 trillion to pay off maturing bonds if we totally shut down the entire U.S. government. Even if we did that, we would still have to default on the deficit spending—$1.3 trillion—portion of the maturing bonds because we would not be able to sell the bonds or collect the taxes needed to pay them.

This is a hell of a mess, isn’t it? Your elected officials have been building this mess since 1930—both parties albeit more the Democrats.

So what is probably going to happen?

On January 25th, Obama, Paul Ryan, and Michelle Bachman all delivered State of the Union addresses. Obama promised more of the same, calling spending on Democrat pet projects like green jobs “investment.” His concessions—three-year freeze on non-defense, discretionary spending except where union contracts exist, cutting back on the requirement to issue tons of 1099s, vetoing earmarks, were all symbolic trivia, no substance.

Ryan said the right things but almost in Federal Reserve code that only an expert on fiscal and monetary policy would truly understand. Bachman gave the best of the three talks with a more militant Tea Party list of plans,. Like Ryan, she was truthful, but failed to tell audiences exactly what it all meant because if she had there would be demonstrations in the streets today.

Surprisingly, the best State of the Union Speech on the 25th was made by John Stossel on Fox Business. He even had a little presidential podium only it said Stossel instead of The President of the United States. He also entered the room shaking everyone’s hand and had lots of flags. But after a pause, he began his speech with, “We’re in DEEP trouble.”

Stossel said almost exactly what I am saying about what has to be done. But it’s not going to happen.

They will probably vote to raise the ceiling. Republicans will probably demand some token spending cuts from the Democrats. They will probably refuse most of them. That will result in the debt ceiling arriving and the government not being able to sell bonds because refusing to vote on the ceiling is the same as voting against it.

During that post-hitting-the-ceiling period, Democrats will probably try to reprise the Clinton-era trick of saying the “Republicans shut down the government.” It worked for them back then. I doubt it would work again. If two sides do not agree, you cannot logically blame the lack of agreement to either side. Each side can explain their position and the public can decide which is more reasonable.

Both parties are guilty of succumbing to forgetting their campaign promises and going along with business as usual when they get to Washington. Republican House Speaker John Boehner called voting for the debt-ceiling increase “being adults” and Republican “strategist” David Winston called voting to increase the debt ceiling “governing.” Call it what it is: kicking the can down the road—again, stealing from our children and grandchildren, and making sure we have to do “nine” when a “stitch in time” would have saved them. Criminal careerism gets more to the heart of it.

Ultimately, they will all get together and raise the ceiling with some meaninglessly small cuts. If it’s not a trillion or more, that means the situation is still deteriorating.

Then the media will start discussing when we will hit our next debt ceiling. Once again, everything I said above will apply only the cuts required to match outlays with tax revenues will be bigger.

In other words, the choice is not 37% cuts now or more borrowing. It is 37% cuts now or bigger cuts next year or even bigger cuts the year after that, etc. etc.

37% is the best offer the American people are ever going to get. And they will almost certainly haughtily reject it.

Congress and the president will not vote to cut federal spending 37%. When they have to choose between personal political suicide or national financial suicide, they will choose national financial suicide. That means we will be hit with bigger cuts in the future. “It could happen tomorrow” is the first sentence in my book How to Protect Your Life Savings from Hyperinflation & Depression.

The back cover of that book says,

There is no grown-up in Washington or on Wall Street looking out for you. You have to be your own grown-up.

But the vast majority of Americans are behaving exactly as if they believed some Washington/Wall Street grown-up were taking care of them.

What can/should you do? Implement the “Action Plan to Protect You” in chapter 27 of How to Protect Your Life Savings from Hyperinflation & Depression.

John T. Reed

John T. Reed Publishing 342 Bryan Drive Alamo CA 94507 | 925-820-7262

www.johntreed.com

Copyright 2011 John T Reed Publishing
Reprinted with Permission