The magic of establishment economics
by Brandon Smith
This is the third installment of a series. Read the first installment, “One last look at the real economy before it implodes,” and the second installment, “The steady derailment of the U.S. financial system.”
In the previous installments of this series, we discussed the hidden and often unspoken crisis brewing within the employment market, as well as in personal debt. The primary consequence is a collapse in overall consumer demand, something which we are at this very moment witnessing in the macro-picture of the fiscal situation around the world. Lack of real production and lack of sustainable employment options result in a lack of savings, an over-dependency on debt and welfare, the destruction of grass-roots entrepreneurship, a conflated and disingenuous representation of gross domestic product, and ultimately an economic system devoid of structural integrity — a hollow shell of a system, vulnerable to even the slightest shocks.
This lack of structural integrity and stability is hidden from the general public quite deliberately by way of central bank fiat that enables government debt spending, which is counted toward GDP despite the fact that it is not true production (debt creation is a negation of true production and historically results in a degradation of the overall economy and monetary buying power rather than progress). Government debt spending also disguises the real state of poverty within a system through welfare and entitlements. The U.S. poverty level is at record highs, beating previous records set 50 years ago during Lyndon Johnson’s administration. The record-breaking rise in poverty has also occurred despite 50 years of the so called “war on poverty,” a shift toward American socialism that was a continuation of the policies launched by Franklin D. Roosevelt’s New Deal.
The shift toward a welfare state is the exact reason why, despite record poverty and a 23 percent true unemployment rate (as discussed here), we do not see the kind of soup lines and rampant indigence witnessed during the Great Depression. Today, EBT cards and other welfare programs hide modern soup lines in plain sight. It should be noted that the record 20 percent of U.S. households now on food stamps are still contributing to GDP. That’s because government statistics make no distinction between normal grocery consumption and consumption created artificially through debt-generated welfare.
In this third installment of our economic series, we will examine the issue of government debt, including how true debt is disguised from the public and how this debt is a warning of a coming implosion in our overall structure.
First, it is important to debunk the mainstream lies surrounding what constitutes national debt.
“Official” national debt as of 2015 is currently reported at more than $18 trillion. That means that under Barack Obama and with the aid of the Federal Reserve, U.S. debt has nearly doubled since 2008 — quite an accomplishment in only seven years’ time. But this is not the whole picture.
Official GDP numbers published for mainstream consumption do not include annual liabilities generated by programs such as Social Security and Medicare. These liabilities are veiled through the efforts of the Congressional Budget Office (CBO), which reports on what it calls “debts” but not on the true fiscal gap. Through the efforts of economists like Laurence Kotlikoff of Boston University, Alan J. Auerbach and Jagadeesh Gokhale, understanding of the fiscal gap (the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts) is slowly growing within more mainstream circles.
The debt created through the fiscal gap increases, for example, through the Social Security program, since government taxes the population for Social Security but uses that tax money to fund other programs or pay off other outstanding debts. In other words, the government collects taxes with the promise of paying them back in the future through Social Security, but it spends that money instead of saving it for the use it was supposedly intended.
The costs of such unfunded liabilities within programs like Social Security and Medicare accumulate as the government continues to kick the can down the road instead of changing policy to cover costs. This accumulation is reflected in the Alternative Financial Scenario analysis, which the CBO used to publish every year but for some reason stopped publishing in 2013. Here is a presentation on the AFS by the St. Louis branch of the Federal Reserve. Take note that the crowd laughs at the prospect of the government continuing to “can kick” economic policy changes in order to avoid handling current debt obligations, yet that is exactly what has happened over the past several years.
Using the AFS report, Kotlikoff and other more honest economists estimate real U.S. national debt to stand at about $205 trillion.
When the exposure of these numbers began to take hold in the mainstream, media pundits and establishment propagandists set in motion a campaign to spin public perception, claiming that the vast majority of this debt was actually “projected debt” to be paid over the course of 70 years or more and, thus, not important in terms of today’s debt concerns. While some estimates of national debt include future projections of unfunded liabilities in certain sectors this far ahead, the fundamental argument is in fact a disingenuous redirection of the facts.
According to the calculations of economists like Chris Cox and Bill Archer, unfunded liabilities are adding about $8 trillion in total debt annually. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion of this amount. That is $8 trillion dollars per year not accounted for in official national debt stats.
Kotlikoff’s analysis shows that this annual hidden debt accumulation has resulted in a current total of $205 trillion. This amount is not the unfunded liabilities added up in all future years. This is the present value of the unfunded liabilities, discounted to today.
How is the U.S. currently covering such massive obligations on top of the already counted existing budget costs? It’s not.
Taxes collected yearly in the range of $3.7 trillion are nowhere near enough to cover the amount, and no amount of future taxes would make a dent either. This is why the Grace Commission, established during the Ronald Reagan presidency, found that not a single penny of your taxes collected by the Internal Revenue Service is going toward the funding of actual government programs. In fact, all new taxes are being used to pay off the ever increasing interest on annual debts.
More than 102 million people are unemployed within the U.S. today. According to the Bureau of Labor Statistics and the Current Population Survey (CPS), 148 million are employed. And about 20 percent of them are considered part-time workers (about 30 million people). Only 43 percent of all U.S. households are considered “middle class,” the section of the public where most taxes are derived. In the best-case scenario, we have about 120 million people paying a majority of taxes toward U.S. debt obligations, while nearly as many are adding to those debt obligations through welfare programs or have the potential to add to those obligations in the near future if they do not find work due to the high and underreported unemployment rate.
Another dishonest argument given to discount concerns of national debt is the lie that Domestic Net Worth in the U.S. far outweighs our debts owed, and this somehow negates the issue. Domestic Net Worth is calculated using Gross Domestic Assets, public and private. Of course, just as with GDP, debt is counted as an asset. Debt Capital is the “capital” businesses and governments raise by taking out loans. This capital (debt) is then counted as an asset toward Domestic Net Worth.
Yes, that’s right, private and national debts are “assets.” And mainstream economists argue that these debts (errr… assets) offset our existing debts. This is the unicorn, Neverland, Care Bears magic of establishment economics, folks. It’s truly a magnificent thing to behold.
Ironically, debt capital, like the official national debt, does not include unfunded liabilities. If it did, mainstream talking heads could claim an even vaster array of “assets” (debts) that offset our liabilities.
This situation is clearly unsustainable. The only people who seem to argue that it is sustainable are disinformation agents with something to gain (government favors and pay) and government cronies with something to lose (public trust and their positions of petty authority).
With overall Treasury investments static for some foreign central banks and dwindling in others, the only other options are to print or default. For decades, the Federal Reserve has been printing in order to keep the game afloat, and the American public has little to no idea how much fiat and debt the private institution has conjured in the process. Certainly, the amount of debt we see just in annual unfunded liabilities helps to explain why the dollar has lost 97 percent of its purchasing power since the Fed was established. Covering that much debt in the short term requires a constant flow of fiat, digital and paper.
The small glimpse into Fed operations we received during the limited TARP audit was enough to warrant serious concern, as a full audit would likely result in the exposure of total debt fraud, the immediate abandonment of U.S. Treasury investment and the destruction of the dollar. Of course, all of that will eventually happen anyway.
I will discuss why this will take place sooner rather than later through the issues of Treasuries and the dollar in the fourth installment of this series. In the fifth installment, I will examine the many reasons why a deliberate program of destructive debt bubbles and currency devaluations actually benefits certain international financiers and elites with aspirations of complete globalization. And in the sixth and last installment, I will delve into practical solutions — and practical solutions only. In the meantime, I would like everyone to consider this: No society or culture has ever successfully survived by disengaging itself from its own financial responsibilities and dumping them on future generations without falling from historical grace. Not one. Does anyone with any sense really believe that the U.S. is somehow immune to this reality?