The Government is Already Broke!

16 Sep

The Government is Already Broke!

The US government isn’t going broke.  

The US government is already broke.

This is a little hard for most people to swallow.  After all, America is thought to be a rich country.  The government is huge.  We pay a lot of taxes.  How can the government be broke?

But it is broke nonetheless.

The US has defaulted on its obligations before.  After World War II, the US persuaded the nations of the world to go on a dollar standard, to hold dollars in their own reserves, to issue their local currencies against their central bank dollar holdings, to settle international accounts and global commerce is dollars.

Part of the deal was that they could always exchange the dollars they held in this arrangement for gold at the rate of $35 an ounce.  

But the US printed ever more dollars, issuing dollars far beyond the amount of gold it had to back them up.  It was like writing checks without enough money in the account to cash them.

It didn’t take the rest of the world too long to figure out they were being flimflammed.  They lined up to get their gold, but in the summer of 1971, President Nixon defaulted and stopped redemptions entirely.  

The US government could not meet its obligations.  It defaulted, plain and simple.

It is happening again now, but in a different way.

The Congressional Budget Office says that US trust funds – including the Highway, Medicare, and Social Security Trust Funds – will run out of money sooner than anticipated.  

Way sooner.  The last time we wrote about it, in April 2019, the Social Security Old-Age and Survivors program’s insolvency date had just been advanced to 2035.  Now it has been moved all the way forward to 2031.

The Committee for a Responsible Federal Budget says, “These earlier depletion dates are driven by declining gas tax revenue as a result of reduced driving, declining payroll tax revenue as a result of higher unemployment and lower wages, lower interest rate payments on trust fund reserves, and more disability applications — all stemming from the current public health and economic crisis.”

All that evades the larger point:  There is no trust fund.  The money to fund those future Medicare and Social Security payments was never secured.  It was spent.  So those funds and their insolvency dates are an accounting fiction.  

By one account, the US has made $200 trillion in unfunded promises, including these unfunded “trust funds.”  That’s more than the State can ever hope to pay. It will default on those payment, just as it did in 1971.  

Printing money is a form of default.  It means not honoring the real value of debts, by faking the currency, devaluing it in a pretense of meeting its obligations.  It is dilution, just like someone watering down the whiskey, the wine, or the gasoline.  That is the most likely means of default the State will choose.  It will destroy the dollar. 

The price of gold is a referendum on the future value of a currency.  The dollar price of gold is a referendum on the future value of the dollar.  As US debt continues to mount, this referendum on the market value of the dollar is not good.  For the dollar.

It is very good for the price of gold.

People around the world – dollar holders who believed the dollar was as good as gold – suffered staggering losses when the US defaulted in 1971.  

Before the next US default becomes evident, we recommend you revisit your investment and retirement plans, with the objective of protecting yourself with gold and silver now.  Republic Monetary Exchange professional are standing by to show you how our best practices are designed to serve you and your objectives.

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