Reaganomics has never worked and it can not be defended. When you see TV pundits like Larry Kudlow and Bill Seidman defending Reaganomics, you must understand that they are not pure economists. They are political economists, and they owe their careers to the Republican Party. Both Kudlow and Seidman make their money as senior economists for the Heritage Foundation, the Cato Institute, other Republican so-called think tanks, economic research institutes and socio-economic forums. Bill Seidman, of course, was the former chairman of the Resolution Trust Corporation (RTC), where there were many allegations of fraud. When the RTC was charged with cleaning up the S&L mess, it promptly proceeded to sell off a lot of property at very favorable prices to well-known Republicans and Republican interests.
You cannot get around
the fact that the Reagan-Bush Regime came into office with a $1 trillion accumulated
National Debt and the Social Security Fund (both the General Fund and Disability Fund) was
fully funded. They came into office with all the other 43 Public Trust Funds, such as the
Indian Affairs Fund and the National Reclamation Fund, fully intact and funded. Most
importantly, they came into office with the United States being the largest creditor
nation on earth.
Twelve years later, when the Reagan-Bush Regime left office, they had expanded the National Debt from $1 trillion to $5.65 trillion. They had created a total long-term deficit in the Social Security General and Disability Trust Funds of some $3.2 trillion. Then in 1983, they started to say that we are henceforth going to count social security contributions as surpluses to the Fund, and we will count them now as General Revenue. To offset the drain, we will place non-marketable, long-term, US Treasury Bonds with a 3% coupon rate into the Social Security Trust Funds. In other words, we will stuff the Social Security Fund with worthless paper.
The Reagan Bush Regime tried to say that these were US Treasury Securities but they were restricted and non-marketable. That which is restricted and non-marketable, according to the Securities and Exchange Commission, is a worthless instrument -- whether that instrument is government, corporate or whatever.
By the end of Reaganomics (when George Bush left office in January 1993), the public treasury was spilling red ink at the rate of $2 billion per day, approximately twice what the Bush Administration said the deficit was.
The fact remains that the deficits, during the Reagan-Bush Regime, were consistently twice as high as what was publicly revealed. Due to the "voodoo economics" of the Reagan-Bush Regime, they were able to hide the deficits in a variety of ways, principally by this egregious and nonsensical Reaganomics technique called "off budget deficit financing."
When they were deciding budgetary matters in Congress, they would say, "We'll put this $8 billion 'off budget' or this $12 billion 'off budget.'" What this meant was that "off budget financing" was simply money, being spent currently, which was not being recorded as having been spent currently. It was simply an accounting trick. It was also like maintaining two sets of books, wherein you can spend money, say $8 billion, but instead of putting it in the deficit column, it shows up as a zero figure and the $8 billion deficit is transferred to your second set of books called "off budget financing."
The problem with "off budget financing" (and the reason why the Treasury Department to this day can not balance its books) is that this is money, which still has to be raised through the regular sales of US Treasury bills bonds and notes. What happened was that the sale of these bills, bonds and notes for off budget financing was put in a separate category, not as actual liability or actual debt of the US Government, but future contingent debt.
Future contingent debt is debt that is not immediately due, payable, or honorable by the US Government. It was only due and payable, when said notes were presented for redemption -- whenever their term or maturities ran out. In other words, "contingent" means upon redemption at a future date.
There is a parallel between this tactic of Reaganomics and the latest accounting tricks of so-called Enronomics, and the failure of the energy giant Enron. Enronomics used the same trick to hide losses -- even though one is a government entity and the other is a corporate entity and the bookkeeping is different. But Enron did use the same tactic in hiding its losses through offshore accounts. This is much more complex, in fact, extraordinarily complex. There are numerous ways they did it. One way was to enter into a transaction, which is known as a "cross," an "options" or "futures collateral cross."
A "cross" means you cross out a current cash contract for a future contract and all obligations, debts, and liabilities, profits included, are then rolled over into the next series of contracts.
Remember all futures contracts and options contracts are issued fixed strike price, fixed series. But a cash contract (and this is where Enron got in trouble towards the end) is unrestricted. This means there are no price limits imposed on daily movements. Future or so-called non-cash contracts are susceptible to daily limits, either up or down, hence the expression "limit bid" or the expression "limit offered."
This is where you can get into a squeeze (and this is not the first time) as in the late 1970s, when Revco and Continental experienced the same squeeze in the grain markets. In the mid 1970s, Holly Sugar and Clewiston Sugar experienced the same squeeze in the sugar market. How you get into trouble is when a market takes off in one direction and keeps moving in that one direction. In Enronıs case, they came into September 11, being short oil because there was a widespread expectation in the oil market that the price of oil was going to drop by as much as two dollars a barrel in the fourth quarter. That was the widespread expectation. Demand was falling and OPEC was not cutting production to offset the falling demand and that was the expectation.
After the September 11 Incident, when the price of oil began to skyrocket every day, limit bid, limit bid, limit bid, day after day, eleven days in a row, when you were short in the forward contracts, there was no limit. The liability was endless, and in the forward contracts, the price of oil began to spread between the cash current contract and the next available futures contract increased from about 60 cents a barrel to over $4 a barrel -- very quickly. So if youıre short in the cash contracts and all of the futures contracts are "limit bid," it is almost impossible to hedge your risk because, in order to offset the current short in a cash contract, you have to get long in the futures contract. If those futures contracts are opening up limit bid every day and stay "limit bid" all day long -- and not only "limit bid," but "limit bid with pools."
"With pools" means that there are so many hundreds, thousands, hundreds of thousands of contracts to buy, which cannot be fulfilled because there are no sellers. Thus, what happened is that Enron found itself having to cross out contracts in the cash market, which effectively meant that they had to buy back a current short into a sharply rising market. It was Enron, and not only Enron, but Southern California Edison (SCE) which was also caught very short. All of the oil companies (Mobil, Exxon, etc.) were all caught on the wrong side of the market.
In essence, what you had was a lot of buyers chasing a rapidly increasing market. Because of these buyers, the spike in the price of oil that happened after September 11, reached unnaturally high levels because you had so many buyers in the cash contracts.
They had very few offsetting long positions. Why? Because A) they were under the impression that the price of oil was going to fall. B) They were also under the impression that the demand for oil would continue to fall because there was plenty of physical deliverable oil in the United States at the time.
What happened is that the physical supplies of oil got used up pretty quickly because all the secondary marketers wanted to buy that oil, that physically currently deliverable oil before the price went even higher. They were locked into contracts with utility companies and even some county and state governments to sell that oil and/or natural gas at a fixed price at a certain time in the future. And that is how the California Energy Debacle happened. Companies that had made obligations to sell oil and/or natural gas at a fixed price at a fixed time in the future found themselves having to buy that energy that they had to deliver in a rising market.
So, despite my personal differences with Bill Clinton (I was no fan of Bill Clinton), Iıd like to offer a few words in defense of Clintonomics. I believe you have to give credit where credit was due, and Clintonomics, the idea of restraining government spending, the idea of not reducing taxes, but offering tax incentives for true increases in productivity and efficiency, worked.
Clintonomics (what Clinton announced as his long-term economic policy) was that he would restrain federal government spending and that he did. And even Democrats couldn't believe it. Republicans couldnıt believe it either. Who ever heard of a Democrat restraining federal spending? Such a thing had never occurred before. Clinton knew that the United States economy was very shaky when he took office because of the enormous debts accumulated by the Reagan-Bush Regime, which they had hidden. They did a tremendous job of building confidence, of lying, of hiding figures. Clinton knew that that could not be sustained, and that we had to generate fiscal surpluses as quickly as possible.
Remember Clinton came
into an economy with a 7% unemployment rate and a 7% inflation rate. Clinton knew
that those numbers had to be brought down, and one way that could be done was to restrain
federal spending and offer a tax incentive package to business and industry that actually
encourages them to increase productivity and efficiency. You would have thought he would
have pumped up spending on social programs as Democrats have traditionally done in the
past, but instead he actually restrained spending across the board and put in strict caps
for all categories of federal spending. He said that that spending could not increase more
than 2% a year in all categories. Washington pundits were amazed. Nobody believed this guy
in the beginning, that he would stick to this plan and that he would be able to carry it
out.
Clinton was able to stick to it, despite opposition from both Republicans and Democrats. The Republicans pounded him to increase defense spending. But he stuck to it and it bore enough fruit, so he could go to the American people directly and say that we are diminishing the federal budgetary deficit of our predecessors; inflation is coming down; unemployment is coming down; and it works. What was novel was that he was able to go over the heads of both parties directly to the American people and that was his strategy. The American people saw that it was working and that engendered support for his policies. The Republican and Democrat parties hated him because of it.
The Republicans did everything they could to beat him up on defense spending. They said our defense capabilities are falling apart; the equipment is falling apart; we need more money; Clinton is allowing us to become defenseless. Clinton's response to that was absolutely correct. He said that no matter how much money you spend on defense, the Republicans always said the same thing. They never change their tune. Thereıs never enough money spent on defense to make them happy.
The essence of Clintonomics, then, is genuine fiscal prudence, sustained over a period of years, something we have not had since the first term of Eisenhower. There was, of course, pork barrel spending, but Clinton used the line-item veto extensively, even with his own party. Why do you think Senator Byrd didn’t like him? He kept vetoing Senator Byrd’s $10 billion West Virginia Highways to Nowhere.
Clinton curbed pork barrel spending. He reined in federal spending in general. It was Clinton who reversed the social security policy and began to put social security money that people were paying, the FICA taxes, back into social security, instead of counting them as general revenue -- what the Republicans did into the second term. They'd say that Nixon was able to produce a surplus too. But it's so disingenuous when the Republicans say that because there was a tiny surplus of $3 billion in 1969, but the only reason that fiscal surplus was created was because of Johnsonıs reduction in defense spending in his final year in office. Nixon didn’t have enough time to increase defense spending, since he came in January 2, while the federal budget closes September 30. Right after that, we went back into deficits.
Clintonomics had this nation back on the right track, economically speaking. Fiscal surpluses were growing. Clinton had a scheme to begin to repurchase and retire government debt through open market transactions, something the Bush II administration just discontinued because there is no more surplus engendered to be able to do that. We had four successive years of federal surpluses created. Debt was being repurchased and retired. The Republicans said that these surpluses could not possibly be real because the National Debt continued to increase. The reason why it increased was that the bills, bonds, and notes that were originally sold, the Treasury instruments, to finance this off budget debt were coming due for redemption in greater numbers than the surplus that was being created. It's just that the surpluses were being consumed and then some by maturing debt which had not been calculated as debt to begin with.
Now there's more Republican disingenuousness. Remember how Bush II campaigned originally on the platform that he would continue Clintonomics. That’s what he said. He didn't have to say that, but that was the truth. In all the campaign speeches he made, he did not try to defend Reaganomics, or the economics of his father. He didn't try because he knew it was a can of worms.
When George Bush II got into office, he immediately reverted to a Bush. He can’t help himself. He's a Bush, so immediately he ratcheted up federal spending especially on defense into a slowing economy. The slowing economy was not Clinton’s fault, and it wasn’t Bush's fault. It was just a natural reaction of a speculative bubble that had been created in the internet industry.
When that bubble burst, the effects rippled throughout the economy, and the economy slowed down. Therefore Bush was put in a difficult political position. He knew the economy was slowing, yet being a Republican and being a Bush, he couldn't help himself, but to spend more money on defense. Then he proceeded to institute the largest tax cut in the history of the country. People think that since they got their $300 check in the mail, that's it. People must remember that this is not a one-time tax cut, but it’s a ten-year program, a $1.6 trillion tax reduction. It is the largest tax reduction package ever put through. It should also be remembered that 93% of the tax benefits of this package go to those earning $200,000 a year or more. Because of this tax cut and the dramatic increase in defense spending into an economy which is already slowing, Bush has taken what was a projected 10 year accumulated surplus of $2.2 trillion and turned that into a negative number. As of fiscal year September 30, 2001, when all previous surpluses had been exhausted, Bush is going to take a zero surplus economy (a break-even economy) and, by September 30, 2002, we're looking at a $250 billion deficit. By September of 2003, weıre looking at a $400 billion deficit.
When Clinton left office, he left with a Clinonomics ten-year plan and a twenty-five year plan, which was called Target 2025. In the ten-year projection of Clintonomics, which would have happened if Bush kept his pledge, the Office of Management and Budget (OMB) had projected that at the end of ten years we would have accumulated an aggregate fiscal surplus of $2.2 trillion. Now under the Bush II Regime, this has turned into a negative number. In ten years, there will be accumulated fiscal surpluses, but in fact, there will be a further accumulated fiscal deficit carry-forward.
If you take Clinton's plan and extrapolate it over 25 years, we had to raise approximately $15 trillion of fresh federal surpluses. That would have been enough to pay down the National Debt and to refund Social Security all that was owed with interest in arrears, to pay down all remaining off-budget debt, and to pay down any other government "non-streamed" or "non-collateralized" government obligations. It would also have been enough to fill all the holes in the 44 public trust finds, created by the Reagan-Bush looting of said public trust funds.
For example, the Indian Affairs Trust Fund now has a deficit of $10 billion that was simply stolen to mask Reagan Bush deficits. Every one of the 44 public trust funds now have multi-billion dollar deficits, yet the revenue streams continue. Now because of Bush’s own economic policies, he cannot fulfill any of his pledges.
Already we see a remarkable increase in the federal budget going to debt service. Clinton had reduced that figure substantially. The peak of that number occurred in 1986, during the Reagan-Bush Regime when 26% of the federal budget went to servicing debt. Clinton had reduced that number to 18% in his final year in office and had the Clintonomics plan stayed in effect, that number would have gone to zero by 2025.
The percentage of debt service has already risen to 20%, and if one extrapolates Bush spending plans and tax cuts over the next ten and twenty -five years, we are talking about an accumulated national debt, by 2025, which will exceed $30 trillion.
People are trying to blame the recent downturn in the stock market on various short-term fundamentals, like accounting scares, for example. The real reason the dollar has been falling and the price of gold has been gradually rising, is that there is a growing loss of long term confidence in the US economy by both American and foreign investors. Our equity and debt markets are going to continue to suffer, as long as Bush is in office and his policies remain in effect.
Former Rep. Bill Alexander (D- Ark.) told me that Clinton used to say privately that he realized that the rest of the world outside the United States was gradually falling apart. The projections were done through the Target 2055 study, the largest inter-agency study commissioned during the Bush I Administration, which included participation by OMB, GAO, Bureau of Labor Statistics, the Federal Reserve etc. It was the greatest financial and economics-demographics study ever done by government at a cost of $3 billion. It was this study whose conclusions were so dire that the Bush Administration had it suppressed until they left office.
Clinton knew that by the year 2025 other First World countries would begin to collapse, and the United States, in order to keep the whole world afloat, had to be in a position to bail these other nations out but to do so at the least cost to the American taxpayers, a plan that did not commit taxpayers to a open-ended long-term liability.
The Clinton plan was to let most of the other nations collapse, and they figured the collapse would take up to about 2040 to occur. Then the foreign debt of these former First World nations would be trading at ten cents on the dollar. The United States could have used its enormous fiscal surpluses, which would have been created by 2040, actual surplus money, something the US government has never had.
We could have used those accumulated surpluses to purchase the debt of foreign countries, to bail them out, to effectively impose real fiscal discipline on them, and to change their economic systems from the political, social and economic doctrines of social welfarism to lasting and unfettered capitalism and unrestrained free enterprise. This was the long-term thinking of the Clinton Administration.
Now with Bush policies, we come back to the short-term again let the Bush administration do whatever is in its best political interest in the short term and let the next administration worry about the consequences. But now the consequences are much more dire because we will not have the money available to stabilize the rest of the world, when it will be incumbent upon us to do so because we should have been, in twenty years time, the only remaining country in terms of a viable economy.
We were supposed to be, in fact, we were destined to be the Global Savior. Yet Bush has taken that away. We will now be in the same position, relative to other nations, in twenty years time, in terms of our accumulated national debt and in terms of the percentage of the federal budget that is being used every year to service that debt -- the same position as nations which are failing.
And what did Clinton tell Alexander? Clinton realized that we would eventually become, in thirty or forty year’s time, a one-world government. As Clinton understood, it wouldn't be a one-world government by design. It would be a one-world government by default. It wouldn't be any complex or sneaky or shadowy plan to put the UN in as a puppet for the US. As the rest of the world fell apart, the United States would emerge as the leader; the only viable economy left standing and the only country with the financial capability to stabilize the rest of the world. We would have a de facto one-world government by default -- because the rest of the nations wouldn't be able to do anything about it.
Now in thirty or forty years, you're going to have a one-world government by design not by default. The conspiracy theorists have much more to worry about under a Bush Regime long term, than they did under the Clinton Regime long term. Those who believe in some sort of sinister machination behind the one-world government have much more to worry about under a Bush Administration. It's not going to be a one-world government by default anymore since we're going to be among the defaulters.
We have lost a golden opportunity when Clinton left office. We were looking at a $250 billion a year fiscal surplus that could have been both sustained and increased indefinitely simply through the continuation of Clinton's economic course. Inflation and unemployment were coming down. The dollar was at all time high, and even our balance of trade deficits were starting to reverse. The economy was in the best shape ever. The Dow Jones average was trading above 11,000. Real interest rates were at all-time lows, and economic productivity and efficiency were at all time highs. Now Bush has taken our nation from the road of fiscal responsibility and put us on the Bushonian path of never-ending federal budgetary deficits and never- ending increases in the gross National Debt.
Everyone should understand the dire consequences in the longer term. We are now going to join the rest of the world in a gradual decline. Our internal security policies are going to be such that we are going to be a dictatorship, but that dictatorship is going to be necessary to control a United States in a gradual state of economic collapse.
Why do you think these security measures are being put in place? Why do you think Bush is doing this? We are gradually turning this country into a dictatorship. Very few people would actually disagree with that idea. All the new restrictions on personal liberties and freedoms will increase over time.
More power will be consolidated in the office of the presidency. The militarization of law enforcement will become a fait accompli -- after the Posse Comitatus Act is rescinded and military forces within the United States are increased. This will be necessary to control civil unrest and political strife, which will undoubtedly be created in the throes of the inevitable Bushonian-inspired economic collapse.
Bush II has now committed America to the path of Grand Malfeasance, or as his father used to say "to the continuous consolidation of money and power into higher, tighter, and righter hands." The Bushes' success in this strategy is illustrated by the fact that the top 1% of the population controls 53% of the nation's wealth. It should also be noted that 88% of that top 1% are Republicans.
Now the Clinton Administration's fiscal responsibility is being perceived in a new light. It's actually referred to as the "Salad Days" of recent economic history.
Meanwhile, to counteract the coming depression, the Bush Family, the First Family of Prozac, will encourage Eli Lilly to make their products more available.
George Bush Sr. has said that as long as we have Jack (Jack Daniels Whiskey) and Prozac, everything will be all right -- and the suicide rate will be held in check.
It might not even be necessary to legalize cocaine. All it takes is to direct the pharmaceutical companies to increase the production of Prozac, Zoloft (and don't forget Xanax) and all the anxiety and depression will simply vanish. At least, that's the plan.
Numbers Don't Lie, Bushes Do
Deconstructing the National Debt means
understanding the difference between GAAP (Generally Accepted Accounting Principles) and
BFAP (Bush Fantasyland Accounting Principles).
According to BFAP, the figure for the publicly stated National Debt is $5.65 trillion. When the National Debt is deconstructed in terms of GAAP, however, you'll find that the accumulated National Debt is closer to $14 trillion.
This figure can be calculated by plugging in debt (either current or future debt, which will have to paid) that is not included in the BFAP numbers. The $5.65 trillion number comes principally from the accumulated Social Security deficit of $3.2 trillion, combined with some provisions for the 3% non-marketable US Treasury notes that have been inserted into the other 43 Public Trust Funds. They have made unrealistic projections regarding the so-called "mandated spending gaps," which are actually much higher than the figures they use.
There is a reason why the deficit did not come down during the Clinton Regime, despite the surplus engendered by the relatively prudent economic management of the Clinton Regime. The National Debt should have diminished, but instead it rose slightly from $5.42 trillion to $5.65 trillion. Of course, the Republicans would say disingenuously that Clintonomics wasn't working and the surpluses are a farce.
The Debt was not falling though because Treasury instruments, previously issued during the Reagan-Bush Regime to finance the "smoke and mirrors" accounting trick of "off-budget financing," were coming due for redemption at a greater rate. In other words, the bonds, which were essentially off-the-books were coming due for redemption. The Treasury Department did not even have an accurate accounting because of the massive shredding of more than seven million documents late in the Bush Administration. They still don't even know how many are outstanding.
When you look at all the appropriations (I actually did this and it took me about three days), you have to look at all the individual appropriations and see how much of it was "off-budget financed." By going back to the Congressional budgetary records, you can find out how much was financed off budget. In the 1980s, for example, you'd see a Congressional Committee and if the appropriation passed, they'd actually say, "We'll put $8 billion on the books and $2 billion off-record or off-budget." This was an effort to obfuscate the actual size of the annual fiscal budget deficits during the Reagan Bush Regime. Everyone then would agree -- because at the time nobody even questioned this off budget financing. Nobody even understood what it was all about. The markets never questioned it. The American people never questioned it, and they never even tried to hide it.
When there is a fiscal budget deficit, it means that everything is deficit financed, so the only way the money is coming in to make up the gap is through the sale of Treasury instruments. You don't necessarily know which series of Treasury instruments because it isn't figured that way. There are regular weekly, monthly, and quarterly sales of US Treasury bills, notes and bonds, which are used to finance spending appropriations.
Even though there is no way to actually translate that into budget figures, I would estimate that there were about $400 billion of bond redemptions, which were directly caused by off-budget financing during the Clinton Regime. This number can be ascertained by looking at the total budgetary surpluses generated by the Clinton Administration. Then you can find how much of that money was actually used to repurchase and retire Treasury instruments. The Treasury Department has these figures because the Treasury Department had to execute the orders. So you could find out how many Treasury instruments were repurchased and, of course, retired.
When a corporation repurchases its stock (to support the shares in the marketplace or if they need the shares for their ESOPs and so on), those shares are not retired. They are simply repurchased by the company, which reduces the outstanding "float," the amount of shares floating on the market at any given time. It doesn't change the debt to equity ratio or the book value of those shares because the shares aren't being retired. There is a difference.
When you repurchase and retire debt, you change the debt to equity ratio and you actually increase the equity vs. the debt part of the ratio.
In other words, according to the way it's calculated by GAAP accounting standards, the National Debt rose about $230 billion during the eight years Clinton was in office. Yet there were $373 billion worth of US Treasury instruments, which were repurchased and retired. So obviously there's something wrong.
If we subtract the total number of Treasury instruments purchased and retired and then subtract that number from the amount the National Debt grew according to GAAP, we come up with a surplus of $143 billion. Accumulated debt should have diminished by $143 billion instead of increasing.
In other words, there were more bonds coming in for redemption than the Treasury Department had calculated. There is, therefore, an unknown amount of Treasury instruments outstanding that the Treasury is unaware of due to "smoke and mirror" accounting practices and the massive shredding of documents during the Reagan-Bush Regime. The Department of the Treasury is uncertain how many debt instruments had been issued and sold pursuant to so-called "off- budget financing."
There is probably still $1.5 trillion outstanding in a variety of Treasury instruments, obligation notes, collateral guarantees etc., that the Treasury Department is not counting as debt because it is unsure how many securities are outstanding.
What else is not being counted as debt, which actually is debt, is the compounded interest in arrears, which is inured every year by the 3% coupon non-marketable US Treasury Securities, used to make up for the $3.2 trillion that the Reagan-Bush Regime defrauded from the Social Security General and Disability Trust Funds.
Since these securities are not marketable, the interest simply compounds in arrears. In other words, of that $3.2 trillion in Social Security debt (even before George Bush said they would be raiding Social Security again), the debt actually increases by $100 billion a year because of the compounded interest in arrears that should be calculated on non-marketable securities. That will either have to be paid when a future government should engender sufficient fiscal surpluses in order to redeem these non-marketable instruments or at such time that a future government, like the successor to the Bush Administration, should be forced to convert these securities into marketable securities.
The Clinton policy was to generate surpluses, but he didn't even get that far. Using prioritized debt reduction, he planned to repurchase and retire US Treasury instruments, then divert the surpluses and begin to repurchase these non-marketable Treasuries out of the Social Security portfolio in order to retire them. They would have had to repurchase them at such a price as to pay the compounded interest in arrears. The 3% coupon rate borne by these securities was not a number chosen at random, but rather it is the interest rate that Social Security pays on your "contributions."
Reaganomics dictates, as George Bush has admitted, that there will be no budgetary surpluses. There will be nothing but deficits. So how do you refund the money? How do you put back the money you previously stole from Social Security? In other words, how does Bush Jr. put back the money his father Bush Sr. stole in a fiscal budgetary deficit situation?
You can do this by converting these securities from non-marketable to marketable, simply by removing the restrictive covenant. In the securities business, it's called "removing the letter."
The president would have to authorize it. Then these securities would become, in market parlance "free to trade." They would simply be sold into the marketplace, incorporated as part of ongoing sales of Treasury instruments.
That takes a lot of assumptions. You can't convert an unrestricted security that has an implied debt in it because of interest in arrears. You have to recalculate the number. In other words, there are $3.2 trillion of these non-marketable bonds stuck in the Social Security portfolio, but that number is increasing by a $100 billion per year because of the interest.
In eight years time, you'd have to re-issue more of the bonds. You wouldn't be selling $3.2 trillion of them. You'd be selling $4 trillion and that is making the assumption that in the future the Treasury market will be sufficiently liquid to absorb such a massive amount of debt instruments. An additional supply of $4 trillion would increase the entire outstanding issuance of all Treasury securities by 50%.
Liquidity depends on the economic strength, the gross domestic product, the liquidity of funds at any given time, investor interest in these Treasury notes, foreign central banks' demand or need for these notes, and the interest spread differentials between the long and short end of the maturity. There are actually a lot of factors involved.
To try to market $4 trillion worth of securities into a market, in which the Treasury might be selling $300 billion or more per annum in order to finance a budget deficit -- this would effectively double the sales for a period of fifteen years.
The question then becomes - could the entire global economy even generate sufficient surplus liquidity to absorb those bonds?
We are in a world that is gradually falling apart and in an era of global debt deflation that could potentially last for decades, until everything was finally unwound and collapsed. The portrayal of a rosy scenario, which the Bush Administration likes to depend on for its economic forecast, thus becomes even more highly suspect.
Here's another smoke and mirrors accounting trick. Treasury lists these 3% non-marketable Treasury notes as current assets in the Social Security portfolio. In fact, they're not. They're not liabilities, either, but they're not current assets because they're not marketable. The SEC has clearly stated that they aren't worth anything. A security that isn't marketable because it has some restricted covenant attached isn't worth anything.
If they didn't have restrictions, that would have defeated the entire purpose. If your intent was to raid Social Security (as the Reagan Bush Regime wanted to do) to deplete all of its cash, you can't deplete cash and then replace it with a near cash instrument. US Treasury instruments are considered near cash instruments for accounting purposes. A non-marketable security isn't a debit. That way you can issue them almost ad infinitum.
Also not included in the National Debt figure is the unknown billions of dollars that the Reagan-Bush Administration raided from the 43 Public Trust Funds, in which it used the same non-marketable Treasury instruments to replace the cash it had stolen.
The "mandated spending gaps" that were created during the Reagan Bush Regime are also not being counted as debt. A "mandated spending gap" is money that was previously authorized for something that was supposed to have been spent, but which was not spent -- because the money was stolen. This occurred throughout the Reagan Bush Regime, particularly after 1984, when the deficits really began to balloon. The Administration, in its annual budget, would skim some of that money off the top and move it over to Defense to make it appear that we were spending less money on defense than the enormous sums we were already spending.
This was hidden through what was called "mandated to spend authorized delayed projects" because there was no money left to fund the projects. In other words, a federal agency like the Department of Education, which was supposed to spend so much on certain projects, didn't have the money to complete various building projects and have sufficient money for school restoration it was required to spend because a certain percentage of that money had been skimmed off the top.
Therefore they would have what were called "delayed funding projects," so that at the end of the year when they had to account for the money, there would be a caveat that would explain that some of the money was in "delayed construction pending." To hide the loss, they would reduce the maintenance contracts, or stretch them out, without making a notation for it in the budget.
Here's the problem. According to General Accounting Office, this has created a $350 billion spending gap in the Federal education budget. This has to be spent and the result of this "spending gap" is we have public schools, which are falling apart because they haven't been properly maintained and a shortage of classrooms because the Department of Education has not built as many schools as it had planned to build.
At some point in the future, that hole of $350 billion will have to be plugged with cash, so that what was supposed to have been done will be done. Otherwise the problem of schools falling apart because they haven't been maintained properly will grow even more severe.
What happens is the "hole" keeps getting carried forward. The Department of Education is used as an example here. But there are budgetary gaps in every federal agency, which now total in the aggregate about $1.5 trillion.
This has happened because of the Reagan-Bush Regime's misappropriation of monies throughout the federal agencies to mask the money, which was being spent on defense. We currently have accumulated spending gaps, which total about $1.5 trillion.
The largest of those gaps is what's called "Net Infrastructure Spending," which includes Department of Transportation, Department of Interior, Department of Commerce, Bureau of Land Management, etc., about 18 different agencies responsible for infrastructure spending.
It's estimated to be $550 billion. And what are the results? The nation's bridges and roads are in a dire state of disrepair. A GAO report has stated that 25% of the nation's federal highway system is now "dangerous," and 28% of the nation's bridges are also considered "dangerous." Then there are the airport computer systems, the butt of jokes since half of the equipment still use vacuum tubes.
When maintenance technicians go to the General Services Administration to replace parts, they can't even find them because they stopped making these parts forty years ago. A maintenance tech at Logan Intl Airport actually had to go to somebody who deals in antique electronics instrument to find the vacuum tube he needed. That is the net result of this nonsense - road and bridges are falling apart and antiquated air traffic control systems are still in use. Internal waterways are also falling apart -- 18% of all internal waterways, canals etc., that the federal government is responsible for had to be shut down because they don't work anymore.
These are some of the larger items in the National Debt that aren't being counted as National Debt. If you applied Generally Accepted Accounting Principles to the National Debt, these things would be included, as well as contingent liabilities -- either future real liability or future contingent liability, including billions of dollars the United States is obligated to pay because of a variety of treaties. For instance, the US Federal Reserve maintains a $50 billion emergency stand-by credit fund to support the Canadian dollar in the event it collapses. We still have multi-billion dollar commitments around the world that constitute debt -- money that has to be spent and for which there are no provisions. There are also debts to the United Nations in arrears and debts to the IMF in arrears.
We also have an enormous amount of liability in the ill-conceived so-called "Brady Bonds." Brady Bonds are essentially US Treasury securities, which get stripped of their coupon payment and become what's called a "strip" or "stand alone asset." They are used to back loans, mostly coming from banks or bond funds for marginal Third (and Second World) countries like Mexico, Brazil, Peru and Argentina.
If you look at these more speculative high interest rate government bond funds, you'll find they're loaded with Mexican bonds or Brazilian bonds. What happens is that these Brady bonds get issued as the ultimate guarantor of principal, yet they do not guarantee interest payment. When you ask the Treasury Department, nobody seems to know how many of these Brady Bonds have been issued. It is known that hundreds of billions of dollars of them are out there. They were used to bail out Mexico and Russia, but nobody seems to know how many there are. Not only that, but nobody cares.
These are some of the highlights why the National Debt is not what it appears to be, according to BFAP accounting. When you apply GAAP accounting to the National Debt, you find that the National Debt is actually about $14 trillion. That's called RWA, or Real World Accounting.
The Clinton administration was operating under the assumption that the actual National Debt was about $14 trillion. Clinton said we have to raise $15 trillion by 2025 to pay off everything, all the National Debt, all the unsecured instruments outstanding, and to plug all the holes in unfunded spending measures and so on. That's $14 trillion, plus another trillion for compounded interest over a 25-year period. The number of $15 trillion would have done the job. He was even going to retire about $200 billion of Savings Bonds outstanding because they are debt as well.
One reason why the stock markets worldwide came under pressure recently was because of the unwinding of the Clinton confidence factor. It is very likely the final unwinding. When there was a sudden massive liquidation of US dollars, receipt of which were moved into gold, it was an indication that the remaining hope that Bush would follow Clintonomics had finally disappeared. People simply threw in the towel, and the markets reacted worldwide to that realization.
The confidence in the US economy was also shaken worldwide. If George Bush remains in office for one term, we will probably be looking at an aggregate deficit of $30 trillion by the year 2025 -- not including the interest. And there will be a gradual loss of confidence, as it is more widely understood that Bush has firmly returned us to the road of Reaganomics.
Part of the loss of confidence was also due to the Bush Administration reneging on most of its economic campaign promises. When they announced that they had abandoned any effort to pay down the National Debt and they would not only attempt to redeem the previously mentioned worthless Treasury securities from the Social Security fund, but would again begin to raid the Social Security Trust Fund as a preemptory measure to hide the enormous fiscal budget deficits which lay just over the horizon - that was it.
It is important that Bush not stay in office more than one term -- to at least try to limit the damage he's going to do to the economy in the long run. The perception that there is no difference in economic strategy between the Clinton and Bush Regimes is not valid. On the day George Bush Senior left office, the nation had a 6.7% unemployment rate. On the day Clinton left office, the nation had a 3.8% unemployment rate.
On the day George Bush Senior left office, the US Treasury was bleeding red ink at a rate of $2 billion per day. When Clinton left office, the nation's Treasury was inuring black ink at the rate of nearly $700 million a day. There is a difference.
It reminds me of the time when Bush Senior came up with the concept of the "Evil Empire." Now Bush Junior is talking about the "Axis of Evil."
What does it mean? Any time that a Bush attaches the word "Evil" to American foreign or military policy, watch out. Hundreds of billions of dollars of fiscal deficit spending are just around the corner.
