Over the past four years, the US government has increased the federal deficit by $5.2 trillion–that’s $5,200,000,000,000–lots of zeros! This four-year increase in borrowing amounts to $55,000 per US household. Should those of us at middle age presently retired or contemplating retirement be concerned? Will the value of the dollar shrink by 75%? Will the US go bankrupt?
Thus far, there is scant evidence that this massive new debt load has harmed our economy or our individual pocketbooks. Official inflation remains relatively tame at around 2.5% per year (some may dispute this when they go grocery shopping or fill up at the pump.) In any event, current inflation is far tamer than the near 20% annual rate in the late 1970’s. Unemployment remains high and the economy sluggish but we continue to make slow but steady gains from the depth of the 2009 recession. Despite all of our borrowing, the US dollar remains the world’s primary reserve currency and US Treasury notes a safe haven for investors. How long will this continue?
We needn’t be concerned at all argues Dean Windham, author of the book, All About EQUITY SPENDING…With a Love Story. According to Dean, the US government has been self-generating electronic funds to pay our bills and bail itself out for years. He labels the national debt crisis a “persistent delusion.” Since you and I along with 300 million other Americans are the ones left holding the tab, I guess we have no need to worry.
As I understand it, Dean’s argument goes something like this:
- A major portion of the increase in federal debt over the past four years has been financed by the Federal Reserve’s “Quantitative Easing.” (QE1 of $2 trillion and QE2 of $600 billion.) Now Ben Bernanke and his mates are about to launch QE3.
- Under QE, the US Treasury issues new short and long-term notes. The Federal Reserve “buys” a significant portion of this debt which becomes an asset on the Fed’s balance sheet. During the past fiscal year, 3/4 of the annual deficit was financed by the Fed!
- To “pay for” their additional holdings of Treasury notes, the Fed credits major US banks with “electronic deposits”. i.e., reserve balances at the Federal Reserve. In effect, the Fed is giving money away to the banks! (Don’t you wish your local bank would credit you with new balances without you having to first deposit the money?) These bank reserve balances have grown from $8 billion in September 2008 to $1.5 trillion today.
- The additional bank reserves are intended to encourage bank lending and in turn to stimulate our sluggish economy. Since the Fed creates the money, they effectively circumvent the traditional appropriation process. The Fed also is able to control the interest paid on the bank reserves that they give away, which is why the current Federal Funds rate is close to zero.
- Whenever the federal government needs more money, they simpy create additional electronic deposits in member banks. This leads Dean to conclude we no longer need any form of federal taxation: income, social security or medicare!
- Since the Treasury no longer is beholden to the gold standard, the only real limit to private and government expenditures are the vast actual resources of our country: American ingenuity, human capital, real capital and our natural resources.
- With no federal taxation, to finance government expenditures and to repay our debt the federal government only needs to create additional electronic deposits. Dean refers to this as “equity spending” (hence the title of his book.)
- Even without federal taxes, Dean is confident we as a nation can finance universal heathcare for all citizens plus generous retirement for every American at age 60.
Does all this sound too good to be true? Before rejecting Dean’s argument as “crazy” I urge critics to preview his book and not to jump to conclusions without learning the full story. In interviewing Dean for my Internet radio program, I raised the obvious threat of looming inflation, which if high enough would be far worse for most Americans than current federal taxation. Dean admits that we as citizens will need to be highly dilligent to insure the government does not crowd out private expenditures and does not foolishly squander the nation’s resources.
I’m certain like you, I’m not ready to buy Dean’s argument 100%. To date, I’ve heard no prominent politician or economist step forward to endorse it. As a person of middle age contemplating retirement, I can think of several aspects of Dean’s plan which make me highly nervous:
- As a person who for years has saved and invested for retirement, I foresee Dean’s plan negatively impacting me in two ways. First, for several years the Fed has set interest rates close to zero making it tough to generate adequate retirement income without unacceptable risk? Second, as all those additional dollars chase a finite level of human and real capital and natural resources, surging inflation appears inevitable. If in ten years, I must pay $1,000 for a hamburger, my $500,000 retirement portfolio won’t last long!
- Only 40% of current US Treasury debt is held by the Fed; the remaining 60% is owed to foreiegn governments (including China), state and local governments and private citizens. These parties will demand to remain whole by receiving back dollars similar in value to those they invested plus a fair interest return. Should the value of our currency decline precipitously, these lenders will be wiped out like General Motors bondholders were in 2009.
- High levels of inflation, especially for staples like food and energy, are most harmful to the poorist Americans and to retired people on fixed incomes. How will these two groups survive and prosper? This certainly is not the type of income distribution we as a nation desire!
- If we Americans collectively decide to grant ourselves an extravegant lifesyle far more than we can afford, how will other countries react? The US dollar will quickly disappear as the world’s reserve currency and it will be much harder for us to pay for imports (especially oil.) Other nations will need to be on a similar track. Does Dean propose a universal world currency?
- In this country, only the federal government has license to create money. As the value of the dollar erodes, it will be much harder to reign in federal spending than it is spending by you and me.Theoretically, we can vote failing politicians out but if the value of our assets has shrunk to 10 cents on the dollar , this is small consolation. Can you imagine politicians no longer constrained by tax receipts!
- As inflation kicks up, holders of US debt other than the Fed will demand higher interest returns, compounding the need to create additional currency–a vicious cycle.
- Unlike General Motors, the US government can’t declare bankruptcy, but it can flood the world with so many dollars that their value becomes worthless. Remember Germany after World War I?
During our radio interview, Dean surmised that inflation will be held in check by private sector manufacturers and service providers who will charge less once federal taxation is eliminated. A noble thought but don’t hold your breath!
Obviously the US is far greater and has vastly more resources than a small nation like Greece. Nevertheless, we cannot continue indefinitely collectively consuming more goods and services than we are capable of producing. Despite proven American ingenuity, at least for the intermediate term, our resources are limited. The basic economic law of supply and demand dictates that prices will increase rapidly as more and more dollars chase after a limited supply of goods and services Most Americans will be pinched; few will prosper. High inflation and an unfair redistribution of wealth is all but guaranteed!
My conclusion: we cannot count on lagging US employment or problems elsewhere in the world to make US Treasury securities a safe have forever. Through QE1, QE2 and QE3 and who knows what next, we risk losing the great benefit of low interest rates from the dollar’s role as global reserve currency. Before long, there simply will be too many dollars chasing too few resources and those of us well along in middle age will be the major losers. I hope I’m wrong!
Despite my concerns, Dean Windham’s ideas are highly innovative and worth listening to! Join Dean and me by tuning into to the October 22, 2012 weekly episode of my Internet radio program, “Middle Age Can Be Your Best Age.” Tune in at your convenience, any time of the night or day at www.WebTalkRadio.net.