By Jim Ley

For the last 10 years of my career as a public administrator, I preached fiscal responsibility for two reasons.

First, I was concerned that we were approaching a cyclical recession and I wanted to build reserves so that service levels could be maintained and property tax increases could be avoided during a challenging financial period.

Second, I was fully aware that, at best, the intertwined fiscal and monetary policies of the federal government were devaluing the purchasing price of the dollar, affecting not only municipalities’ purchasing power, but that of the taxpayer. I was concerned that municipalities’ labor forces, facing this reality, would demand more wages and that the taxpayer would be hurt even worse through increased property taxes.

Little did I know that the inevitable recession would be the worst since the Great Depression and the fiscal policies would devalue the purchasing dollar even further.

 

Debt machinations boil away buying power

I often wonder if we as taxpayers are clueless.

We have been conditioned to look at the ever growing federal debt number as meaningless because nothing bad seems to be happening in any visible fashion that we can translate into our lives. And we believe the politicians who spin the same stories so that they don’t have to do their real job, because it is what we want to hear.

But whether a frog is boiled to death by being immersed in boiling water, or whether it is boiled to death as the temperature is slowly increased to boiling — the frog is still dead. At least in the former case, the frog is at least incentivized to jump out of the boiling water, as opposed to adapting to the increasing but eventually deadly temperature in almost total ignorance of its imminent demise.

We have gone through a period of time where the lower and middle class in this country has seen the value, the purchasing power of their paycheck, decreased by as much as 20 percent. Retirees have seen their retirement funds sit stagnant, while the lack of return on their savings accounts permits inflation to eat into the value of their savings. They can buy less and less.

Anyone with a simple understanding of economics should be able to see what is happening. With a trillion dollar deficit each year, the federal government has to borrow roughly $83 billion a month. How does it do that?

From a little office in Washington, D.C. it auctions off that debt to bankers and governments around the world. As long as things stay relatively depressed economically, and given the good faith and credit of the United States, the interest payment demanded is kept low — thank God. 

 

Irresponsibility will bring it to a crash

The debt doesn’t always sell, or a concern arises that too much of our debt is owned by a foreign power, possibly giving them an economic weapon.

So who buys it then? The U.S. Treasury Department looks to the Federal Reserve, which it funds through the printing of dollars, to buy the remaining debt. So more money is printed to buy the debt. The Fed now owns about $4.5 trillion in U.S. Treasury Bonds on its balance sheet. To control the supply of money in circulation, the Fed promulgates a spider’s web of regulation and control requiring banks to reserve large sums of money to cover the risk associated with future obligations.  

Exploring this system of controls, and the impacts the system has had on our financial well being, would require way more space to explain than I have here.

Everyone knows that China owns a huge chunk of our debt — $5 trillion. And of course, there is the debt the Fed owns. But who do you think, what entity do you think, also owns a huge chunk of the federal debt? It is the Social Security and Medicare trust funds with $2.8 trillion. Rather than investing these funds in instruments that could return more to their trust funds, thus ensuring their long-term solvency, these funds are used by the federal government to lower the overall cost of borrowing.

If nothing else, it is a fiduciary conflict of interest. But Congress does not require itself or the federal government to operate under the same rules with which private and nonprofit fiduciaries must comply.

Too bad for all the rest of us.

Because all of these machinations combine to diminish the purchasing power of the dollar, severely impacting the working middle class.

Jim Ley has more than 35 years in public service, the last 25 of which were in top level administrative positions in two of the more dynamic counties in the U.S. Jim served two terms as President of the National Association of County administrators and was a leading “small government” voice in the profession. His administrative focus has been on financial sustainability and accountability to the taxpayer.

Federal Debt is Killing Middle America

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