Get Out Your Checkbook: The Government Is Sticking You With Its Tab

Commentary U.S. debt is blasting toward the debt ceiling it recently raised—just over a month ago—like a SpaceX rocket heading for low earth orbit. Well, that didn’t take long. The fake conservatives in Congress feigned horror as they watched our black hole of an IOU expand over four-fold since the turn of the millennium… more than double since the last decade… and by nearly a third in just the last two years. At 108 percent of the country’s GDP, any actual “Keynesian multiplier” stimulus to be incurred from deficit spending has been reduced to crumbs. And that’s without even considering the unfunded liabilities like Medicare, social security, and the rest. That $29.8 trillion number that everyone talks about represents the face amount of securities outstanding. The real debt is much higher when you include, you know, the interest. At some point, something has to be done. But therein lies their dilemma. The commonly-known ways to reduce a debt are all career suicide where politicians are concerned. And when was the last time a politician fell on the sword willingly? But there is a way for governments to reduce their debt that’s not explained in your average Econ 101 book, and without raising taxes, cutting spending, or borrowing to oblivion. They just steal it all back from you. The Sleazy Way to Attack the Debt Problem This particular method has been described as having a “… pervasive lack of transparency.” In other words it’s a sleazy, underhanded, conniving solution. Very few Americans understand its real impact, making it the perfect Washington solution. It’s called “Financial Repression.” Most know it by it’s real name—thievery. It has been secretly used by countries around the world to pay down massive debts (like war debts), including the United States, which used it from 1945 to about 1980. It can be a bit of a challenge to get your head around it, but here’s how it works: Imagine if a debtor could issue a bond with a negative nominal interest rate. It would be a “miracle cure” for reducing their debt. You invest $1,000 in a bond. But that bond pays a negative interest rate. At maturity your total investment of $1,000 has suddenly dwindled to only $900. It might take a while, but you would basically be the one who ends up paying off their bills. Of course no one in their right mind would make an investment like that. So that’s why it has to be done without you realizing it. Here’s How Financial Repression Works First it requires artificially low nominal interest rates. This keeps borrowing costs from getting out of hand. The Fed has held rates at zero for years. Then it requires a level of inflation higher than the interest rates being paid. The higher the level of inflation, the more quickly the debt in question is liquidated. (The United States used this for nearly 35 years to reduce its post-WWII debt.) Headline inflation is currently running around 7 percent, so they’ve got plenty of room to work. Combined, these two factors create an environment of negative real interest rates. This means that while investors are, in fact, getting paid a positive nominal return (let’s say 1.8 percent on your 10-year Treasury note) your overall wealth is actually shrinking by the excess rate of inflation (in this case 5.2 percent). But Wait, There’s More If tax brackets don’t change to adjust for the loss of purchasing power, you get something called “bracket creep” where your tax liability goes. That means you end up paying the government more as your top line income goes up, but your ability to buy things goes down. Taxfoundation.org explains it nicely (my emphasis): “Where rates rise based on nominal income, increases in incomes due to inflation push taxpayers into higher tax brackets, even without an increase in real income.” Create enough inflation and government revenue rises (while the debt theoretically stays the same) and investors get paid back with dollars that are worth less than the dollars they originally invested. In other words they don’t really “pay back” the debt. What they actually do is destroy the value of those debts—your investments—through inflation! Is This Really the Government’s Plan? If you’ve followed me this far, you might be thinking to yourself, “But how successful could this strategy be in an environment that consistently runs $1 trillion deficits year after year?” The answer is, it really can’t. Historically, this strategy has been successful only when it’s been accompanied by some reduction in spending. And no, cutting Biden’s Build Back Better bill from $3-plus trillion to just under $2 trillion does not count as reduced spending. So we know our government’s attitude toward that! Just remember as long as your real returns on government debt aren’t keeping pace with inflation, you’re the one paying off their tab. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Get Out Your Checkbook: The Government Is Sticking You With Its Tab

Commentary

U.S. debt is blasting toward the debt ceiling it recently raised—just over a month ago—like a SpaceX rocket heading for low earth orbit.

Well, that didn’t take long.

The fake conservatives in Congress feigned horror as they watched our black hole of an IOU expand over four-fold since the turn of the millennium… more than double since the last decade… and by nearly a third in just the last two years.

At 108 percent of the country’s GDP, any actual “Keynesian multiplier” stimulus to be incurred from deficit spending has been reduced to crumbs.

And that’s without even considering the unfunded liabilities like Medicare, social security, and the rest. That $29.8 trillion number that everyone talks about represents the face amount of securities outstanding.

The real debt is much higher when you include, you know, the interest.

At some point, something has to be done. But therein lies their dilemma. The commonly-known ways to reduce a debt are all career suicide where politicians are concerned. And when was the last time a politician fell on the sword willingly?

But there is a way for governments to reduce their debt that’s not explained in your average Econ 101 book, and without raising taxes, cutting spending, or borrowing to oblivion.

They just steal it all back from you.

The Sleazy Way to Attack the Debt Problem

This particular method has been described as having a “… pervasive lack of transparency.” In other words it’s a sleazy, underhanded, conniving solution.

Very few Americans understand its real impact, making it the perfect Washington solution.

It’s called “Financial Repression.” Most know it by it’s real name—thievery.

It has been secretly used by countries around the world to pay down massive debts (like war debts), including the United States, which used it from 1945 to about 1980.

It can be a bit of a challenge to get your head around it, but here’s how it works:

Imagine if a debtor could issue a bond with a negative nominal interest rate. It would be a “miracle cure” for reducing their debt. You invest $1,000 in a bond. But that bond pays a negative interest rate. At maturity your total investment of $1,000 has suddenly dwindled to only $900.

It might take a while, but you would basically be the one who ends up paying off their bills.

Of course no one in their right mind would make an investment like that. So that’s why it has to be done without you realizing it.

Here’s How Financial Repression Works

First it requires artificially low nominal interest rates. This keeps borrowing costs from getting out of hand. The Fed has held rates at zero for years.

Then it requires a level of inflation higher than the interest rates being paid. The higher the level of inflation, the more quickly the debt in question is liquidated. (The United States used this for nearly 35 years to reduce its post-WWII debt.)

Headline inflation is currently running around 7 percent, so they’ve got plenty of room to work.

Combined, these two factors create an environment of negative real interest rates.

This means that while investors are, in fact, getting paid a positive nominal return (let’s say 1.8 percent on your 10-year Treasury note) your overall wealth is actually shrinking by the excess rate of inflation (in this case 5.2 percent).

But Wait, There’s More

If tax brackets don’t change to adjust for the loss of purchasing power, you get something called “bracket creep” where your tax liability goes. That means you end up paying the government more as your top line income goes up, but your ability to buy things goes down.

Taxfoundation.org explains it nicely (my emphasis):

“Where rates rise based on nominal income, increases in incomes due to inflation push taxpayers into higher tax brackets, even without an increase in real income.”

Create enough inflation and government revenue rises (while the debt theoretically stays the same) and investors get paid back with dollars that are worth less than the dollars they originally invested.

In other words they don’t really “pay back” the debt. What they actually do is destroy the value of those debts—your investments—through inflation!

Is This Really the Government’s Plan?

If you’ve followed me this far, you might be thinking to yourself, “But how successful could this strategy be in an environment that consistently runs $1 trillion deficits year after year?”

The answer is, it really can’t.

Historically, this strategy has been successful only when it’s been accompanied by some reduction in spending. And no, cutting Biden’s Build Back Better bill from $3-plus trillion to just under $2 trillion does not count as reduced spending. So we know our government’s attitude toward that!

Just remember as long as your real returns on government debt aren’t keeping pace with inflation, you’re the one paying off their tab.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


Follow

Tim Collins worked for years as a financial advisor before establishing his own hedge fund, one that would acquire shares in companies like Facebook, Twitter, and AirBnB in the private markets before they went public. He now co-authors Streetlight Confidential investment newsletter with Bob Byrne, and his writing and commentary has been featured on RealMoney and RealMoneyPro on TheStreet.com for over a decade.