Somewhere in the next three years, the United States is very likely to find itself $20 trillion in debt, and unprecedented amount of money, about double the amount of currency in circulation in the entire country. Credit agencies are starting to sit up and take notice; the nation has been downgraded once, during President Obama's first term in office, and are threatening to do so again if the legislators don't take concrete steps to reduce the government's operating deficit, now running over a trillion dollars a year. Put another way, the government is borrowing 40% of its expenditures, each and every year. How can the country dig itself out of this hole?
Austerity Measures. These involve slashing government spending and finding ways to increase revenue in order to operate frugally and pay down debt. Most notably, in US history, the 29th President, Warren G. Harding slashed the federal budget to stop the bleeding left over from World War I, and to pay off the liabilities accrued from the same. To raise revenues, he cut taxes. And it worked. The resulting lift in the economy ushered in "The Roaring Twenties."
Today, the US would have to cut over 40% of its federal budget just to break even. Few in the White House or Congress are willing to even entertain the idea, so the chances of pursuing this course are nil.
Currency Devaluation. Governments in debt have often resorted to "paying" their bills by making up more money. This "stealth tax" eats away at the purchasing power of other funds in circulation, sometimes to the point of creating hyperinflation.
The Federal Reserve recently announced Quantitative Easing IV, a scheme to print $85 billion dollars a month, more than a trillion a year, which is about a tenth of the dollars in the M2 money supply. Ben Bernanke insists that inflation will not increase by more than 2%. At the same time, the Fed is also keeping interest rates very low. It will be difficult for the frugal to find ways for their savings to stay ahead of inflation.
Seize Private Wealth. Besides the aforementioned currency devaluation, there are several ways to do this.
- Higher taxes. Certainly taxation extracts wealth from private citizens, but when taxes increase, people find ways to avoid them, either through loopholes, illegal means, or just quitting so they no longer generate taxable revenue. Ultimately, economies suffer when taxes get too high, so indebted governments find high taxes unreliable.
- Crack-downs on criminals, real or imagined. The United States' Asset Forfeiture Program allows the government to seize private property where crime is suspected, and does not require conviction in order to keep the goods. Not surprisingly, forfeitures have risen dramatically in recent years, and claims of abuse are rampant.
- Retirement savings. Cash-strapped government leaders are increasingly casting their eyes in the direction of their citizens' long-term savings. Promising to take care of their people themselves, already Argentina and Hungary have justified the seizure of private funds this way. Americans have over $5 trillion in 401K plans, which has not escaped the notice of Congress, who have held hearings about using that money to create a "guaranteed" national retirement savings plan. The US already has a nation retirement savings plan, called Social Security, which is broke because the moneys were reallocated to other priorities.
- Wealth limits. Simply don't allow anyone to have wealth beyond a certain level. This was accomplished in North Korea when the country converted to a new currency at the end of 2009. Citizens were not allowed to convert more than about $740 worth of their old money into new money, so any savings they had beyond that was effectively destroyed. The United States doesn't appear to be contemplating anything similar, though the President caused some alarm when he opined, "I do believe at some point, you've made enough money."
- Wealth taxes. These are paid not based on income, but on net value of assets held. Property taxes and car registration fees are but two examples. Some countries go so far as to tax an individual's total net worth. In this country, some have opined that wealth taxes might be a good idea, but legislatively, wealth taxes have not gained much traction.
- Estate taxes. Currently, upon the death of a wealthy person in the US, the estate owes at least half of the value of everything over $5 million. Heirs often have to liquidate businesses and land holdings in a hurry in order to find the cash.
- Make an enemy. Find a group within to vilify, justifying taking everything of theirs. Jewish asset seizures kept Hitler's regime going. Here in the present-day US, Christian business owners trying to live out their values are getting slapped with steep fines for not paying for abortion-inducing pills.
Default. Already, paying just the interest on the national debt is approaching $300 billion, and that doesn't even make a dent in the principle. If deficit trends continue, or the interest rates rise, at some point even paying the interest rates will be impossible. What then? The majority of America's debt is held by Americans, so American citizens will be the first to feel the pain of nonpayment. Senior citizens won't see their social security checks, welfare recipients will swipe their benefit cards at the local ATM and see "nonsufficient funds" where aid used to be, whole departments will shut down, and more. If we fail to pay our foreign creditors, war could ensue. If we fail to pay ourselves, mass riots could ensue. Either way, it's not pretty.
Notice that almost all of our choices result in a loss of personal liberty.
Elise Cooke, frugal writer extraordinaire, avoids getting into debts that can't be paid, and wishes the government would do the same.