The Great Debate over the National Debt and the Debt Ceiling

Is the Government Participating In a Huge Ponzi Scheme?

In a word, yes! Some time ago, Treasury Secretary Geithner sent a letter to Congressional leaders about the debt ceiling increase, stating that "The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations. Default by the United States is unthinkable."

In other words, if you don’t hurry up and allow the Federal government to borrow more money, presumably from new lenders, then we won’t be able to pay the interest and principal to the previous lenders. You see, the only way we “can meet our commitments and our obligations” (meaning the only way we can pay back the current lenders) is to allow us to borrow even more money from a new set of lenders. Isn’t this the classic definition of a giant Ponzi scheme?

A Ponzi scheme is normally a fraudulent investment operation that pays returns to early investors, not from any actual profit earned by the operation, but from new money invested by constantly acquiring new investors. It’s the classic taking from Peter to pay Paul. The name Ponzi scheme is named after Charles Ponzi, after he used that technique back in the early 1920’s. Ponzi schemes are highly illegal and usually involve stocks, oil wells, offshore investments, etc. They are not normally associated with United States Treasury Bills, Notes or Bonds.

If you look at the facts, the U.S. Government is engaged in a classic Ponzi scheme, as there is no way this government will ever be able to get its financial house in order to pay back all of the interest and principal that it now owes. The two most discussed methods that are available to pay back this money are to have a continuing series of debt limit increases or to pay back the money with worthless inflated dollars. There is a third method, which I will mention later.

In order to continue to survive for a little longer, the U.S. government needs to continue to find more individuals, organizations or other countries dumb enough to keep lending it more and more money.

Just How Much Debt Does the U.S. Government Owe?

The total amount is not all that easy to determine, as much of the actual debt is not even registered on the government’s books.

Here is the actual government debt that the government claims it owes as of 7-21-2011:

You can get this data from a website called Treasury Direct.

Here are the additional government debts that are excluded from the national debt and kept off the government’s balance sheet, but is still debt that the U.S. Government has incurred:

The entire amount owed by the federal government is incredibly large, somewhere in the neighborhood of $75 Trillion dollars. This doesn’t even include the enormous costs associated with Medicaid, which is funded largely by the States and the funding required for our latest federal entitlement program, Obamacare.

Can this Enormous Debt Ever be Paid Off?

The answer to that is plainly, no!

Let’s just look at an average of all of the debt reduction plans that have been discussed by the various party leaders and the media, just so we can get by this next debt ceiling increase. The best deal we will probably get is an overall reduction of about $3 Trillion over a ten year period, and that will include a $1Trillion tax increase over that same period. That amounts to a net reduction of $400 Billion per year while at the same time as we are incurring a $1.6 Trillion deficit each year.

By my calculations, at the end of ten years, we will add another $14 Trillion to the federal debt ($1.6T - $0.4T) x (10 years). My calculations do not include the certainty that the debt rating agencies will downgrade the U.S. debt instruments, that Interest rates will surely rise, and that even more people will be joining the entitlement and welfare ranks. In addition, it doesn’t take into account the very real possibility that the American voters will turn against those politicians that are trying to reduce government spending today, and again turn to those political leaders that promise pie in the sky benefits and even more government spending.

Where do We Go from Here?

It looks like the U.S. Government is in a deep hole from which it cannot recover. I give Speaker John Boehner some credit for attempting to get as much in the way of wasteful spending cuts out of the upcoming budgets and for hanging tough, so far, on the debt ceiling negotiations. Unfortunately, no one has proposed a real plan to put the U.S. Government on to a solid financial footing. All of the plans discussed, so far, including the Ryan Plan, just get us to the point where the national deficit is zero. By that time, our on-the-books national debt will be well over $20 Trillion and our total debts will be almost incalculable.

As I have said before, there are really only two solutions that are open to the U.S. Government. The most likely solution is to inflate the currency to the point where the debts can be paid. Americans will revolt against this approach, as it will drastically reduce their standard of living and cause untold hardship, especially among older Americans living on fixed incomes. The other, perhaps better solution, would be for the government to default on its debts and start over with a new currency, preferably gold backed. This is a solution that is not often talked about, but one that deserves much more study and consideration by those in political power today.

I am disappointed that none of the Republican candidates for president are even discussing this potential cataclysm that is facing the American people. I believe that the candidate who can best explain the fiscal predicament in which the United States find itself will win the Republican nomination. Americans must be made to understand that their current president has, with the help of a compliant Congress, already pushed the United States over the edge of fiscal stability, and that a completely new approach must be taken.


1. The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.

2. Intra-governmental Holdings are Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.

3. These include Freddie Mac, Fannie Mae and the Federal Housing Finance Agency (FHFA).

4. These include Social Security, Medicare, Military Retirement benefits, Federal Employee retiree benefits and State/Local Government Obligations.

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