Is Uncle Same broke?

The United States is broke. We've bankrupted our children. Our financial situation's grave. And it's not true; yet.

First let me ask these question. Monetarily, what did World War II cost the United States, most of it borrowed? Do you ever worry about paying this off?

It cost us $ 341 billion, an amount considered astronomical in 1945. People who knew nothing of government finance had no idea how we'd pay this off. And the government didn't.

This is because we have a debt currency which creates inflation, the savior of the borrower. It's built into the system and is necessary because it guarantees enough available credit, which raises living standards above the inflation when done right. So the government creates money by borrowing but never repaying it.

This system was invented because the gold standard was terribly flawed. True, gold coins kept their value, but the system caused depressions. Gold flowed abroad in good times to buy products depleting domestic gold supplies until there was a credit crash. Then rumors might cause bank runs and bankrupt the neighbor who got there last.

Now you're saying that the system's idiotic because the government pays interest on the debt. Tell me something, do you think the government's stupid enough to create a system on which it paid interest? The government does pay interest, it's true, but it's refunded all but the operations cost of the Federal Reserve yearly (and a small profit to member banks, the rest of the profit paid to the government ) with basically the Fed paying the foreign interest in exchange for U.S. government paper on which it also refunds the interest. The government can then spend the refund or give it back to the taxpayers.

The idea was that since most people think that government accounting's like private accounting, it was to be a check against rapacious spending. The government could thus only borrow until it reached a limit where it scared the living hell out of the people.

And that's the problem today. It's not the national debt, which becomes institutionalized as our money ( it is a debt currency); it's the yearly borrowing. The problem's that the government now has crossed a line where it's deaf to the shrieks of citizens at the huge amounts borrowed, probably thinking, “It's free money."

But it isn't. The system's good for a sound money supply, money in case of war or other emergencies with a little inflation based on a balance of what we need as opposed to what we want. Many sewage and electric power plants were built on inflation in the form of federal government grants. Dirt roads became highways. The system; however, wasn't intended for issuing ocean upon ocean of new currency yearly.

We aren't broke today. The government owns 1/3 of the country's land and has vast sums of gold, oil deposits, etc. but we could go broke if government spending isn't reigned in. This is because as our paper money's backed only by faith and credit, it's only as good as people have faith and credit in a government. When too much currency hits an economy, it causes catastrophic economic distortions and if those distortions become long term because of long term fiscal irresponsibility of a government; faith and credit's lost.

The same faith and credit that lets our government issue currency is the same faith and credit that eventually will be given to someone else more responsible if trends hold. The government isn't broke today, it just isn't trusted. Which means creditors may one day demand our land, gold, oil etc. instead of government paper.

By

Jeffrey Ruzicka

Jeffrey Ruzicka is a retired executive of a small company that specializes in industrial water treatment. He lives happily with his wife in Western Pennsylvania and is a contributing writer to FinancialJobBank, FinancialJobBankBlog and Nexxt.