“The rich rules over the poor, and the borrower becomes the
lender’s slave.” – Solomon
This is the story about Debtor, a newborn American baby. Debtor has just
been born into the greatest economy in the world, a land full of promises and
opportunities. This is what his parents tell him. But unbeknown to Debtor, he
has been given a very bad start in life. Because the parents haven’t told
Debtor, and how could they since they are not aware themselves, that he
starts life with a massive debt burden that will grow manifold during his
lifetime.
THE AMERICAN DEBT SLAVE
King Solomon’s words will ring true for almost every American born today.
The average American is a debt slave already at birth. And by the time he
dies, his debt will have increased exponentially, thus passing on an even
bigger debt and greater enslavement to the next generation.
This is a vicious circle that has gone on for just over 100 years. A very
small elite has become incredibly wealthy and the masses have become enslaved
by private and government debt.
For the majority of people it will be impossible to extricate themselves
from this massive debt stone around their neck. Instead they will add to the
debt by taking on more debt.
US DEBT GOING FROM $21 TRILLION TO $43 QUADRILLION
But the government will also do their part. They will at least double the
national debt every 8 years as they have been doing for several decades ( see
last week’s article). Starting from $21 trillion debt today and
assuming that Debtor will live until 88 years old, a doubling of the debt
every 8 years would lead to a $43 quadrillion federal debt in 2106.
Most of us will of course not be around to check that forecast but since it
is just an extrapolation of long term trends, it is difficult to argue with
although a lot can of course happen in 88 years.
Even the $43 quadrillion US debt in 2106 could be conservative. Higher
deficits and higher interest rates, both being likely, could multiply the $43
trillion many, many times.
I am sure that no one expected, in 1981 when Reagan started with a $900
billion debt, that the US debt would have gone up 23x to $21 trillion, 37
years later. No one likes forecasting the truth, because the truth looks
horrific when it comes to all the mismanaged economies in the world.
But the federal debt is of course only a smaller portion of the total debt
and liabilities that Debtor and his fellow Americans are responsible for.
US UNFUNDED LIABILITIES $220 TRILLION
The biggest burden will be the unfunded liabilities of Medicare and Social
Security. Professor Laurence Kotlikoff has calculated that these amount to
$220 trillion. That is 10x current federal debt and a liability that is
unlikely to ever be funded. The best solution would of course be a miraculous
increase in prosperity and tax revenues – Very unlikely.
Another alternative would be that Debtor and his young friends spend all
their working life just to pay the pension and medical costs of the older
generation – Unlikely, plus it would lead to a revolution.
More likely is that the government will just create more debt to pay for
these commitments. We know of course that a debt problem will not be
solved by incurring more debt and whatever additional money the government
will create out of thin air will have zero value and therefore also zero
effect.
So that leaves the option that there will be virtually no medical care or
pension for Debtor and his fellow Americans – This will lead to civil
unrest as well as poverty, famine and disease. Not a very desirable
outcome but sadly very likely.
EVERY AMERICAN HAS A $715,000 LIABILITY
If we take the US population of 325 million, Debtor will be responsible
for his share of all outstanding government debt and unfunded liabilities.
That means 1/325 millionth of $21 trillion or $65,000 of debt is what Debtor
starts off with as a baby. He clearly didn’t deserve that and nor can or will
he ever repay it.
Debtor also needs to take responsibility for his share of unfunded
liabilities which is 1/325 millionth of $220 trillion, or $650,000. His
parents never told him this because they were brought up in an era when the
government just printed or borrowed money whenever a need arose. So in total
Debtor owes $715,000. The parents never understood that their government
constantly spent money that didn’t exist. They clearly hadn’t read Charles
Dickens’ David Copperfield and nor had their government:
“Annual income twenty pounds, annual expenditure nineteen [pounds]
nineteen [shillings] and six [pence], result happiness. Annual income twenty
pounds, annual expenditure twenty pounds ought and six, result MISERY.”
Charles Dickens, David Copperfield
THE PRIMARY AIM OF A GOVERNMENT IS TO BE REELECTED
The government never told Debtor’s parents that it always spent more money
than it had and that this eventually would lead to misery for the US and for
virtually every American. The government could of course not tell Debtor’s
parents and the US people that it totally mismanaged the economy. The
principal aim of the US government (as well as most governments) is to be reelected.
And the best way to achieve that is to buy votes by bribing the people. But
this has been a costly affair since the US government has not been able to
make ends meet since 1960. Thus for almost 60 years, the US government has
spent more money than it has collected from tax payers in order to buy votes.
Once the newborn Debtor comes of age he will of course argue that he
didn’t incur the debts and liabilities and therefore he will refuse to pay
them. It obviously doesn’t matter if he refuses or not as he is not in a
position to even pay the interest on the liabilities.
CONSUMER LOANS
In
addition to his inherited debts, Debtor will during his lifetime continue to
incur all the debts that every US citizen does. These will include credit
card debt as well as student, car and mortgage loans. As the chart below
shows, these debts have gone from just over $7 trillion in 2003 to almost $14
trillion today. During Debtor’s lifetime total consumer loans will grow from
$14 trillion today to $100s of trillions. Debtor will of course have no
ability to repay his loans and nor will any of his fellow US citizens.
A FORGIVEN DEBT MUST BE PAID BY SOMEONE
Many debts are likely to be forgiven by the government. What most people
don’t understand is that their government can’t just wave their magic wand
and forgive or write off debts without consequences. Someone will always have
to take the pain of making debts disappear whether it is savers, pension
funds or other investors. On the other side of a debt is an asset which will
decline in value proportionately to the debt. So when debts disappear,
whether it is by defaults or write offs, there will simultaneously be an
implosion of asset values.
THE US IS DEAD BROKE
The US government, as well as many other governments, have for over half a
century bribed the people with social security, welfare and medical care at
the expense of future generations. Debtor’s parents or their fellow Americans
never understood that the country couldn’t actually afford the standard of
living that it was providing. The common belief in all Western economies
today is that the government will always take care of you. No citizen ever
asks: “WHERE IS THE MONEY COMING FROM?”
According to Kotlikoff it isn’t coming from anywhere. When he recently
commented on Trump’s tax bill, he stated: The US is dead broke. This
leaves a fiscal Sword of Damocles hanging over our children’s economic
futures.
So what is the solution? Well there isn’t any. The US, together
with many countries in the world, is leading its people to perdition.
This will include massive debt defaults and a deflationary implosion of most
asset values.
But before that, governments will separately try to save their economies
by printing unlimited amounts of worthless money. This will of course not
save the economy but instead lead to hyperinflation and collapsing
currencies.
What will happen to Debtor who was unlucky to be born at the top of the
biggest economic bubble in global history? The good thing for Debtor is that
all his debts together with the country’s debts will disappear in a black
hole. So will also his savings and investments but he is unlikely to have
any.
So Debtor will have a tough start in life. Hopefully during his 88 years,
he will have a chance to rebuild his finances. Just imagine if his parents
had just a little bit of foresight and gave him some gold. Even a small
amount would make a very significant difference to his life.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 442 136 245
Matterhorn Asset Management’s global client base strategically stores an
important part of their wealth in Switzerland in physical gold and silver
outside the banking system. Matterhorn Asset Management is pleased to deliver
a unique and exceptional service to our highly esteemed wealth preservation
clientele in over 55 countries.
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