Recently a friend of mine took me to task for criticizing the system that enables our government to
This post is the fulfillment of that promise to my friend.
I am about to criticize deficit spending and the gross national debt of the United States government on moral grounds. My criticism is never aimed at persons, but rather, toward the system that allows the United States government to continue deficit spending to the tune of one trillion dollars a year and a national debt of seventeen trillion dollars.
Many reading this post will be tempted to stop reading at this point and ask, "Why should I care about the Federal Reserve System?" As long as American people have access to their money, few care how that money comes to them. Likewise, as long as American citizens have a government that takes care of them, few citizens care how that government gets the money needed to do what it does! We're living in a pragmatic age when people care about results and how they feel and very little about principles of morality.
Americans have forgotten that "We the People" form the government of the United States. Increased government deficit spending leading to an inability to repay national obligations (i.e. default) is morally wrong. To borrow from lenders and promise to repay them, and then later find oneself unable to repay, is financial and moral bankruptcy. The United States government is on the verge of bankruptcy because the American people have not come to grips with the immorality of a system that allows deficit spending to continue unchecked. Again, our national debt is a moral problem, not a political one.
Currently, the United States government is spending one trillion more dollars a year than it receives in revenue. Our national debt is nearing seventeen trillion dollars. The U.S. government must borrow money in order to pay its bills. There is a fight between Congress and the President on whether or not we should increase the government's debt limit. This is an important question, but Americans should ponder even more carefully "Who are the lenders to the United States government?"
There are three answers to that question:
(1). Foreign nations
(2). The Federal Reserve
(3). The American people
Let me explain each.
(1). Foreign nations buy U.S. Treasury securities. When the United States government needs money it doesn't have, it issues financial "securities" which are "we promise to pay you later" instruments (i.e. bills, bonds, and notes). The purchaser of a security expects repayment by the United States government of the principle they loaned plus interest within a designated period of time. To understand how foreign nations buy United States Treasury securities watch this excellent Khan Academy Video.
There is a principle in the Bible regarding debt: "The borrower is slave to the lender" (Proverbs 22:7). This means the one who borrows money is owned by the one who lends money. The average American citizen would be stunned to know how many buildings, banks, corporations, land, and other valuable assets on American soil are being gobbled up by foreign investors with American dollars transferred to those foreign nations through our national debt. Go try to buy an apartment near Central Park in New York City and notice how many Chinese, Russian and foreign nationals own buildings in the Upper West Side. Also, pay attention to the number of corporations in America that are now "foreign owned." The debtor has become the servant to the lender. We owe trillions to foreign governments. Our dollars flow to them through the repaying of government debt. It used to be their dollars flowed to us when they purchased our industrial products (economic production), but no more! Our dollars flow to them because we are repaying them the money they are loaning us.
(2). The Federal Reserve also buys United States Treasury securities. When the Federal Reserve buys government debt, it is called "quantitative easing." That's a fancy name for "creating new money." Currently, the Federal Reserve is buying $85 billion dollars a month in Treasuries to "keep interest rates low, increase the money supply, and restore the economy." Very few Americans understand the process of quantitative easing (or the dangers of it), so let me explain.
The Federal Reserve is not "owned" by the United States government. The Federal Reserve is not Federal. The Federal Reserve is actually twelve regional banks spread out across the nation, with the primary bank being The Federal Reserve Bank of New York. The Federal Reserve issues "stock" to any bank participating in the Federal Reserve System and it serves as the "lender of last resort" for the United States government. It's important to understand that the Federal Reserve is a system of banking owned by banks. Congress provides oversight and the President appoints the Federal Reserve Chairman, but the United States government does not "own" the Federal Reserve -- banks do.
When the United States government needs to borrow money, the Federal Reserve will buy U.S. Treasury bonds and notes through its Federal Open Market Committee (FOMC), whose office is located at the Federal Reserve Bank of New York. Here is where it gets scary. The Federal Reserve can purchase United States Treasury notes through private dealers authorized to purchase U.S. Treasury bonds and then pay for those government securities by simply crediting the bank accounts of the dealers with a computer keystroke. No cash is involved in the purchase.
For example, this month (October 2013) the Federal Reserve will "purchase" $85 billion of United States Treasury securities from authorized dealers. Currently there are 21 authorized "dealers" of United States Treasury securities, all of them banks, and when the Federal Reserve "buys" the $85 billion in United States government securities from these banks, the Federal Reserve will credit the banks' accounts with new money via a computer keystroke! Again, the Federal Reserve does not pay cash to the banks for these government Treasuries. The Federal Reserve creates new money electronically, money called fiat currency (the word fiat is Latin and means "by decree").
Until 1971 the United States dollar was tied to what was called "the gold standard." If the government wanted to increase the supply of money in circulation, the government had to increase their supply of gold. Not anymore. Through the Federal Reserve, "new money" is created monthly, regardless of the nation's supply of gold. The power to create fiat money out of thin air distinguishes the Federal Reserve from all other financial institutions and gives to it incredible clout.
There is a direct correlation between "quantitative easing" (increasing government debt through dthe Federal Reserve creating fiat currency) and American consumer deficit spending (consumer borrowing). When the Federal Reserve creates new money in order that the American government can borrow more money, then the American consumer can also borrow more money because commercial banks are now "flush with new cash" to lend to the consumer. Increased government debt leads to increase consumer debt because the Federal Reserve increases the nation's money supply through decree (or fiat) in time of deficit spending. Inflation will always be the result.
Read what Alan Greenspan once wrote about deficit spending, the lack of a gold standard, and the insidious nature of inflation:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.The system that allows government deficit spending through the creation of fiat currency is as morally bankrupt as the government that eventually defaults on its debts.
(3). The American people can purchase T-bills, T-notes, and government bonds. It is generally considered a "safe" investment. However, if those bills, notes and bonds are backed "by the full faith and credit of the American people," what happens when the government defaults on its debts?
Obviously, the American people would lose faith in U.S. currency. Even worse, when the United States government defaults on its debt, the banking system as we know it would collapse. The Federal Reserve System has enabled the government of the United States to continue borrowing beyond its means. We not only have a spending problem in America, we have a systemic lending problem.
J. P. Morgan was once brought to Washington while in ill health to testify before a U.S. Senate subcommittee after the Panic of 1907. Morgan, the infamous financier and banker, was asked by attorney Samuel Untermyer about the psychological nature of banking, specifically about banking being an industry built on trust:
Untermyer: Is not commercial credit based primarily upon money or property?Morgan: No, sir. The first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it … a man I do not trust could not get
money from me on all the bonds in Christendom.
When the United States loses the trust of foreign nations, banks, and the American people in its ability to pay back her loans, the fiat currency system created to allow continued deficit spending of the United States government (and her people) will collapse. That's not necessarily a bad thing; yes, it will be painful, but not necessarily bad. In fact, I propose moving from fiat currency to a currency based on a standard (be it gold, silver or platinum) is ultimately good.
It has been frequently stated that the only way for the United States to grow economically is for their to be increased “consumption” by the American people. We are told that American people buying goods and services (i.e. "consumption") accounts for between 65 and 75 percent of economic “growth" in our nation. We have been told that the need for increased public CONSUMPTION is THE REASON we need consumers to have easy access credit. It is the only way the United States can "grow" economically, we are told. The theory goes like this: The more consumer credit available, the more economic growth attainable.
It should seem odd to all of us that nobody is able to explain how a nation that "spends" more than it "produces" can ever grow. There's a good reason nobody can explain it; it's impossible to grow anything by spending more than you produce. In fact, it is an eternal principle, an axiom of human existence if you will, that the fastest way to poverty, bankruptcy and decay is for consumption to be in excess of production. This is true in families, churches, business, nations, and economies, not matter the size. It cannot be otherwise. No attempt to create new money by fiat and elasticize (stretch) the economy will ever overcome the axiom that the only way to prosperity is through production. As the Bible puts it: "If a person will not work, he will not eat" (II Thessalonians 3:10).
For those peoples and countries who have lost their moral way and have neglected to spur one another on to increased work and productivity, there is only one creative way left to give the impression the national economy is improving -- through fiat financing. When the rest of the economy whittles to nothing, the financial sector - specifically the banking sector and the financial assets markets - can create an illusion that all is well. They can create money from nothing. No product is sold. No service is rendered. They will simply create new money by fiat. When governments resort to the financial sector to "improve the economy" then you can be sure the government is unintentionally affirming that the economy is dead. Money elasticity is never a substitute for worker productivity, regardless of what you've been told.
For a season, (like 1971 to 2013) Americans may perceive that things are better. The U.S. government (through the Federal Reserve) has flushed the marketplace with fiat currency. Poor people can borrow to buy houses they cannot afford. Consumers may borrow to buy what they otherwise would never be able to afford. Governments give in welfare and handouts what no person has earned. The moral principle of an honest day's work for an honest day's wage is substituted for the immoral principle of something for nothing through easy money.
For a season this works. But then comes the crash.
When there is no standard by which a nation's currency is held, that nation will always be tempted to create new money to enable greater spending by both government and the people. Money becomes the one economic good which must be created out of thin air. Money must be created (by fiat) if the United States economy is to survive. Inflation becomes the by-product.
A nation with a market economy survives by means of voluntary trade between buyers and sellers, and for this trade, an unchanging medium of exchange is vital (i.e. a currency tied to a standard). But in a command or fiat economy welfare economy (as the United States now has), the fiat creation of money is justified on the premise that those being ruled over (the American people) are getting something for nothing. To give Americans all they want requires money to be "elastic" or "stretched," and the American government is hard at work creating new dollars while giving things to citizens they've never worked for or earned.
The system that enables the United States government to continue unchecked deficit spending must be changed. It is a moral problem. If we don't change the system, America as world power will disappear. I urge you not to be offended with what I've written, but challenged. Not all borrowing is immoral. What is immoral is the expectation of receiving something for nothing. We have a culture and a people, a government and a banking system, that allows--yeah, even encourages-- easy credit and deficit spending of both citizens and government. We can't continue down this path without a collapse.
I agree with Barack Obama when he gave a speech announcing his opposition to increasing the nationals debt limit while serving as a Senator from Illinois. Senator Obama's speech was given when the deficit was ten trillion dollars less than it is today. Senator Obama said:
“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.”
True leaders will never silenced until a solution is found.
Ultimately, only when one finds satisfaction in the eternal, and begins to live his life for things other than material possessions, power and pleasure, will there be a solution to the moral problem of spending more than one is producing. Only God brings true contentment to the soul. That's why the system that promotes deficit spending is a moral problem, not a political one. Apart from genuine revival, the political solution seems impossible, and the collapse of the American economy inevitable.