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Is the debt problem as bad as they say?

June 8, 2011
New York City

On the rare occasion that I’m bored, I like to watch 24-hour news television for entertainment. It’s hilarious watching the talking heads spin out of control in apoplectic fits when they’re essentially arguing the same point; they might be from different parties, but they’re merely battling over small details of the same government-sponsored solution.

Recently I caught one of these talking head financial experts on TV arguing about debt levels in the United States.  He was saying that the US debt doesn’t matter all that much because the US government has so many assets to offset its debt.

For example, he suggested that things like the highway system, national parks, and strategic petroleum reserve would more than offset America’s liabilities, so the looming national debt isn’t such a big deal after all.

He couldn’t have been more wrong.

The Government Accounting Office (GAO) puts out an annual financial report that looks and feels like corporate financial statements… of course, the US government doesn’t have to abide by the same accounting principles as the private sector, so they get to cheat quite a bit in overstating their position.

The most recent report is signed off by Tim Geithner and includes oodles of newspeak from the Ministry of Plenty about how dazzling their economic recovery measures have been. Needless to say, the numbers paint a different picture.

Even when you add up -all- of the assets, right down to every desk, chair, and lifeguard stand, and even if you throw in a healthy boost to the asset column to account for premiums in the market value for land and “gold” in Fort Knox, the government is still in the hole to the tune of over $10 trillion.  It would take more than 300,000 years to count that high.

And yet, the fake recovery is vanishing, the dollar keeps falling against anything of real value, and the average guy on the street is realizing limited benefit for his share of the debt and inflation burdens. How is this possible?

I’ve often said that bureaucrats and politicians have an extremely limited playbook consisting of taxation, regulation, and inflation. These three ugly sisters of bureaucracy effectively serve to steal from people, make things more difficult for them, and rob them of their purchasing power… and yet they’re dressed up as solutions instead of problems.

Consider the case of Illinois– the state is completely insolvent and running out of cash quickly. It doesn’t have the luxury of printing its own currency, and is thus being forced to deal with its fiscal reality… much like Greece.

Rather than trying to make their state more competitive in order to attract talent and capital, they’ve opted for the old playbook… starting with taxes. Specifically, Illinois lawmakers have targeted companies like Amazon, arguing that online transactions through the company’s Illinois-based affiliates are within the state’s sales tax jurisdiction.

For Amazon, the calculus involved is totally objective– once the Illinois legislature passed this legislation, the cost of doing business in the state exceeded the benefit, and Amazon cut all ties to its Illinois affiliates.

Thousands of people across the state who used to earn a portion of their living as an Amazon affiliate were stripped of their income thanks to do good lawmakers trying to squeeze a little more dough out of a productive company.

Peoria, Illinois based Caterpillar Inc. is in a similar position, now threatening to leave Illinois because the politicians keep raising income taxes. Now the financial powerhouse CME Group is echoing this sentiment. The impact this would have to the state economy is devastating.

These steps that Illinois lawmakers are taking, along with their destructive consequences, are reflective of what will happen when the federal government is finally forced to deal with its own fiscal reality.

$10 trillion in the hole and facing a steep downward trend, the US government is either looking at substantially higher borrowing costs, substantially higher inflation, or both. Investors are getting jittery about loaning money to the United States, so they will either demand a higher return, or the Federal Reserve will hyperinflate the currency to mop it all up.

Regardless of the scenario, Congress will reach deep into this playbook until they chase away every productive citizen and company they can… In fact, it’s already happening.

The number of people renouncing US citizenship has been more than doubling year-over-year for the last several years. Meanwhile, many businesses are moving overseas, or at least focusing on international operations and shifting profits offshore.

It’s easy for companies to move… much more difficult for people who have emotional ties, fear, anxiety, etc. that maintains their geographical inertia. As such, it will ultimately be the individual citizens remaining behind who will be exploited like malnourished milk cows to pay for the destruction.

In the coming days, I’d like to tell you a lot more about how I see this playing out. Stay tuned.



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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • disqus_TLcMqwnySr

    History is replete with resultant examples of that style of debt burden. Now we have the rumblings of a modern equivalent:


  • http://twitter.com/PeterZink Peter Zink

    Simon, even after reading this blog and SM:C for a few months, the the potential for hyperinflation still unsettles me a lot. I’m diversifying my currency holdings but at the end of the day every single currency out there is fiat now, and the US dollar is the main reserve. So does that mean all currencies will suffer serious devaluation if we hyperinflate? Foreign real estate is promising but can be relatively illiquid, and its a large concentration of money in one area for. Global equities at that point would be a large question mark for me as well. I’m just trying to figure out how to lessen the blow as much as I can with my savings, because I definitely don’t feel like buying canned food and water with all of it.

    • Diogenes_

      My own opinion rather than SB’s is that it’s hard to predict what will happen with any fiat currency, other than jagged upward inflation, and for that reason fiat currencies should be gotten rid of as fast as possible in any financial transaction. That’s essentially the advice of the great book ‘the hyperinflation survival guide.’

      Check out the recent article on this site on the Hong Kong dollar. Schiff recommends Asian stocks (he also offers a mutual fund), Gold, a smaller amount of silver, and commodities-like oil,wheat,rice,cotton.

       Get a multi currency HK or Singapore bank account, only use that to receive and quickly transfer money to bullion vault and an international brokerage account, and buy all of the proceeding, each from different countries, + very well investigated overseas land. That’s 4 different asset classes spread among multiple countries handled through reliable financial institutions. Do that and the whole world will go broke before you do.

      • Diogenes_

        btw-in the few months between the end of qe2 and the start of qe3, everything will probably tank in fiat dollar price. That will probably be the last big buying opportunity before the US and other countries get on the permanent inflation and financial police state treadmill. The tanking might be somewhat alleviated by money fleeing the EU. This shows how the situation will be one of continuing chaos and wildly fluctuating inflation,economic controls, and products disappearing. But the longer term trend will be one of harsh stagflation, culminating in the effective destruction of fiat currencies.

        Everyone checkout this tremendously important article, it’s data shows why first world fiat currencies and their economies in all but the bric states are guaranteed to be destroyed by a combo of inflation and police state tactics:


        -those western states will end up trying to combat the inflation with price,wage and capital controls, but that will only convert it to plummeting product quality and availability, think empty shelves and long gas lines. This is somewhat like a variation of Greshems law, in which products will become more of a currency than the dollar. The various economic controls and the disappearance of products will cause many to think that currency deflation is to blame rather than currency inflation, but that won’t be the case.

  • LocalHero

    Here’s what most people (including Simon) don’t understand about so-called debt and deficits.

    When the US declared bankruptcy (again) in 1933 all real money was called in – which is why the people were ordered to turn in their gold; the bankers were calling in their debts and the US went in receivership. Since that day, there has no longer been “money” to pay off debt. I know this is a bit difficult to wrap your head around but, since then, the “coin of the realm” has been debt. Debt is now the engine of the economy, it is the “people’s money” and the “debt” will country to grow – as it MUST – for the economy to operate. There is simply no way around it. Since there is no “money” to pay off “debt,” it can only be set-aside by other debt. Bankers call it double-entry accounting or bookkeeping which is, basically, moving numbers from one column to another column in a ledger; real “money” never actually changes hands since no real “money” exists in their system. It CAN’T exist in their system since real money is private (and no longer exists) and their system is public. The two can NEVER meet.

    The gist of this, of course, is that (if such a thing were possible in their system) it would be an economic catastrophe of Biblical proportions to eliminate debt and deficits. To stop creating debt would be economic suicide and the economy would grind to a halt. “Debt” MUST grow for the economy to function. Simple as that.

    • inquiring minds want to know

      Wasn’t the era between the Civil War, and the creation of the Federal Reserve, the most prosperous time in American history?

      How much debt, and how much deficits was our government accumulating during this time? 

      I’m not stating facts, just inquiring.  Waiting for a reply. Thanks.

    • Guest

      Localhero: while you are correct about the need to grow debt for the economy to continue in its current form the amount of debt creation required to sustain the economy in the same form as the past 30 years is 100% of our current debt. We would need to reach 25 trillion in total debt outstanding in the next decade to maintain the growth level of the past half century. 

      This is unrealistic in that the credit markets that would purchase this debt are so overloaded with the debt created in the past that there is no room to absorb more. The only answer for congress and the Fed is to inflate the money supply and destroy the dollar, some time in the next 10 years we will have a dollar denomination change just like has happened in many countries before.

      We have seen in the past what happens when the political will is non-existent to change this course, hyper-inflation and economic collapse.

    • Grimreaper

      Who will give US more money? china?saudi arabia?i dont think, that  anyone is willing to part even more money for failing US  economy. I Do agree with you, that it would be catastrophic for all of us, not just US.WE’re in same shoes as you are; you know whats happening in europe.Our “bailout” of greece, ireland, portugal, now prolly spain and italy…WE CANT get that much money.what will happen? wil they default on their own currency and create ripple effect throughout the rest of the Eu countries? US+EU= receipe for catastrophic disaster in unimaginable scale.
       Are you sure about that debt? you know that when noone else will be able to give US money, the feds will start to print it on large scale.And thus create hyperinflation.What that means im sure you’re fully aware.i cant see any “simple” solution to get out of this mess.Its either Us default and suffer another civil war(very probable), or the world gets another WW.And then we can start again from the begining.And make same mistakes.Again.
       (sry for my spelling mistakes, english is not my primary language).With best regards from Slovenia.

  • Taxfree Ifyoucan


    Isn’t it milch cow?

    And you are absolutely right.


  • LocalHero

    Oops, I meant to type “continue” to grow… not “country” :)

  • Aro

    After reading about these new taxes effectively shutting down all of Amazons associate business in Illinois I was pretty pissed.

    This morning I woke up to an email from Amazon saying that my affiliate contract with them is being canceled (along with thousands of others here) because, of course, my state (Arkansas) has passed the same new tax law that Illinois did.

    I didn’t – and I doubt many people did – make a full time income from this.  But for thousands of people it was something, whether an extra few hundred or few thousand dollars a month.

    Most importantly though, it was that we had the opportunity to do so – and now we don’t.

  • http://www.facebook.com/michael.gugino2 Michael Gugino

    It’s all monopoly money.  We could be a gigillion-trillion-bazillion dollars in debt.  It’s all pretend time.  When the music stops, it will become toilet paper.

  • Roberto Z.

    Hey Simon, you’re right on with your assessment of the U.S. situation, my question is how is life in Ecuador? how easy is it to set up and open a small business? how high are food costs and real estate there? I would be very interested in moving my family there if we could live more freely and could have our own business there without being taxed and regulated up to our eyeballs,please let me know what you think of Cuenca, Ecuador as a place to expatriate..

  • Bjp

    Just FYI regarding Amazon: Arkansas passed a similar law and now Amazon is cutting off Arkansas affiliates.

  • ChasInNJ

    Mistake in the 5th paragraph: GAO stands for Government Accountability Office.

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