June 2, 2010

You may think, when I write about government, that I am cynical or paranoid, but when dealing with government, a bit of critical thinking is absolutely necessary. Every official pronouncement is politically motivated and carefully composed to avoid an outright lie or at least an obvious lie, but to leave a positive impression of good, wise, control of any situation.

Today there are noises from Washington DC about “reducing the deficit” to zero by some future date. Doesn’t that sound like a very good thing? It just might leave you with the impression that someone up there in the Federal Government intends to reduce the National debt to zero. Let’s vote for him!
Not so fast. Nobody is proposing to reduce the debt to zero. The deficit and the debt are two very different things. The deficit is the rate at which we are increasing the debt. So even if we reduce the deficit to zero, the debt, instead of constantly rising, will simply settle down, neither rising nor falling.

I estimate that the current deficit is about $1.4 trillion dollars per year. If you can’t imagine such a number, just divide that by the population of the USA and you have a personal deficit of about $4,600. If you have a wife and 2 children, your family has a collective deficit of $18,400. Actually, this is the amount the government will extract from the value of your income, by the stealth tax, in the next year.

Now get this straight; that’s not your personal portion of the national debt. That’s just the amount that will be added to your portion of the national debt this year, if the government stays within its budget.

So how much is the national debt, and what is your share of it? Don’t ask. You’re best not to think about it. And I don’t know the answer, except to assume that it’s many times more than the deficit.

However there’s a silver lining in this dark cloud. Quite a bit of this debt is real debt, but most of it is fake debt, one of the games governments play to fool us.

First, the real debt; There are many trillions of dollars in US government bonds sitting in the vaults of foreign central banks. Our government will have to pay them off if ever the world loses faith in the dollar and demands cash to redeem the bonds.

Then our government will simply convert the real debt into fake debt by selling the bonds to the Federal Reserve Bank. The Fed will obligingly print legal counterfeit money with which the government can buy back its bonds.

Why do I call this fake debt? This is a debt that is simply written off to fill the deficit by creating new counterfeit money to pay it. The Fed obligingly creates the new money. The bonds sit in the Fed vaults, and when the Government pays interest on the bonds, the Fed refunds them to the Treasury Department. It’s a magic trick done with smoke and mirrors. The government deficit is cleared as fast as it is spent, with counterfeit money.

So the government pays for the real value of bills and salaries with counterfeit money. The money supply increases, and the value of each dollar in circulation is reduced. The real value bought by the government with counterfeit money is taken out of your savings and mine by the stealth tax.

When you hear somebody fuming about the massive debt we are passing on to later generations, he’s actually only partly right. The national debt consisting of government bonds in the hands of individuals and foreign banks is real. It will be paid off sometime in the future with counterfeit money- the stealth tax. But most of the national debt is simply a bookkeeping fiction maintained by the Federal Reserve System.

And as for the current deficit, you and I are paying for it now through the stealth tax. $8400 per person per year.



  1. Denis Afonin Says:

    $8400 per person per year – it’s just an estimation. taxing corporations or banks is easier to maintain. and it would not necessarily effect the wages, so it is not so obvious.

    • glennodell Says:

      Right, Denis, $8400 is just a rough approximation. And taxing banks and corporations has the same hidden effect. It increases the costs, and therefore the prices of the services and products the banks & Corporations produce. However, adding to taxes on banks & corporations does require changing the tax code.

      On the other hand, the stealth tax doesn’t even require a change in the tax code. Nobody connects the deficit with the increasing prices of everything caused by the new counterfeit money which the Fed provides automatically to cover the deficit. The cause and effect chain are completely hidden from view. Thus I call it the stealth tax.

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