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July 25, 2011 / 74

A Vocabulary Lesson for the US “Debt Crisis”

Debt – Obligating your future resources in return for present use of the possible benefit of them. You borrow a dollar, you have to work tomorrow to earn that dollar and pay it back. The government spends a $Trillion – it must collect a $trillion in tax revenues in the future to pay it back. Debt could also be called “Voluntary Slavery” – or a milder form of that, “voluntary servitude.” In the future you must surrender your time and labor in return for what you used/borrowed today.

Fiat Currency – What most or all of the nations of the world use for money. It’s called “fiat currency” because the government SAYS it’s money, (by fiat). Fiat currency is said to be worthless paper – but only by people who don’t understand “money.” ALL “money” that is not also a commodity could be said to be worthless, but it’s not. It’s not because such “money” is in reality “non-specific debt”. It is issued by an issuing authority with a promise to pay something of value when it is “redeemed” but that something is never defined so all you get is a promise to pay, and the trust of your fellow citizens that YOU will pay if the government doesn’t. So what it really is, is “non-specific debt” – you “borrow” the issuer’s promise to pay and pass the promise around until someone decides to collect, and they must take the “money” back to the issuer to claim their “something 0f value.”

The problem with “money” is the redeeming part. Issuers never stop issuing money when they run out of things of value – because people believe in the existence of that promised non-defined value and so they keep passing the debt around. Default is what happens when too many folks try to redeem their debt/money at the same time and the issuer can’t redeem all that money for something of value. (See below.)

Inflation – is the debasement of the currency/money by flooding the economy with fiat currency. It is a method used by idiots who think that it’s a cheap way to pay off debt. What inflation really is, is a tax. By decreasing the value of the money, the government reduces the value of the wages paid to workers – thus the government STEALS the value of their labor. Hyper-inflation is the destruction of the economy by creating so much currency that it becomes worthless. Prices go up and up, wages never keep up. Eventually the people stop bothering with the currency, and switch to a barter economy with some usage of foreign currency. Inflation is what happens when the issuer of the currency creates more money than he has value to redeem it with – so it takes more of the money to get some of the value in redemption. So in common terms – inflation REDUCES the value of the currency/money. If the US government inflates the debt away, we’ll all be broke because it will essentially tax us for the money.

Deflation – The opposite of inflation. What you get when you don’t print enough fiat currency to provide for the economy’s currency needs. Reduction of currency levels also reduces economic activity because there’s not enough money to be exchanged in transactions. Deflation INCREASES the value of the currency/money because since there is less of it, you can get more value for it, provided you can get your hands on some. Excessive deflation also leads to a barter economy because the people don’t HAVE money.

Default – an even cheaper way to get out of debt. It’s essentially when a nation can’t pay it’s bills because it spent too much for too long and the bills exceed the revenues from taxes. The mega-banks aren’t the only ones who would be stiffed if the government defaulted. Granny’s retirement and your paycheck this coming Friday would become worthless. I hope you have a few weeks or months of food in the cupboard and can live without electricity!

Like “bankruptcy” there are degrees of default. A nation can be “late” with payments on borrowed money, or it can ‘skip” a payment or five, or it can “restructure” its debt, or finally it can say PHOOEY on the creditors and refuse to pay them at all… ever  (aka “stiffing the chumps”.)

Entitlement Spending – When a government becomes all things to all people it ends up spending the nation’s value on things that aren’t the proper job of the government to pay for. For example – people have to eat. But is it a government’s job to feed them? Some believe that it is. And if the government decides that feeding people is part of what it’s supposed to do, it spends the value entrusted to it by the people to feed other people. The process of doing things like this lead people to believe that they are ENTITLED to receive value from the government to pay for their food. When you are entitled to something, that means you are OWED that something – so the taxes/value collected from some citizens to pay for the government’s expenses of governing don’t go to those expenses, but instead go to feed other citizens. You may substitute here the issues of health care, housing, education, and a host of other things that the people may begin to feel entitled to once the government opens the door to offering itself as a replacement for your mommy and daddy. Entitlements are considered “mandatory spending”

Mandatory Spending – another name for entitlement spending. Mandatory spending must be spent by operation of law – ie Congress said so and passed a law saying so and the President agreed.

Discretionary spending – Spending that results from “appropriations acts” or on things that the citizens do not feel entitled to. This currently includes paying for the military and military hardware to provide for the common defense.

  1. Mandatory spending is budget authority and outlays provided in authorizing legislation, rather than appropriations acts; by entitlement authority, even if nominally funded through an appropriations act; and by the Food Stamp program.
  2. Discretionary spending is budget authority and outlays provided for by appropriations acts, other than mandatory spending.

From “The Federal Budget – A Primer”

So essentially what should once have been considered “discretionary spending has become Mandatory spending, and what once was considered ESSENTIAL spending for the operation of the government in performing it’s lawful functions is considered discretionary. What a world!

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Now – a couple of general comments.

First, as I said before, the US government is addicted to spending. You don’t cure an addict by buying them more drugs. Figure it out.

One of the threats that the government is putting out in an effort to scare us is that “interest rates will go up! Ummm… excuse me? Where are interest rates? Can they do anything BUT go up? So interest rates will go up – whether the US government defaults or not.

As to the current level of debt owed by the US government – it’s really not that much. At nearly 100% of GDP, that would be the household equivalent of owing an amount equal to your yearly salary/wages. People do that all the time when they borrow to buy a house. BUT they aren’t borrowing to give the money away to the poor guy down the block. They are borrowing to buy value, and exchanging the money for value. (Cash for the house)  So it’s not so much the fact of the debt – but the fact of where the money goes. And it can be paid off eventually but ONLY if ALL deficit spending ceases immediately!!! ie NO MORE BORROWING!!! As I’ve said before – If a guy tells you that the way to get out of a hole is to dig deeper, you can bet he’s selling shovels. Only a fool borrows from a slave master. Entitlement spending must be corralled, deficits must END! The era of buying votes with the voter’s money needs to end.

If this is too technical for you, or too confusing, please ask questions and be specific and I’ll try to answer your questions.



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