Bitcoin In Peace

Governments ALWAYS Tend Towards Corruption & Tyranny, Part 1.7 – By The Numbers: Peacetime

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The Breakdown

Let’s take a look at how the U.S. federal government has (mis-)managed the country’s finances using inflation and debt as its primary means of being so involved with our lives and see if we can come to any reasonable conclusions.

Financial Note: Many of the numbers below have come from a great website, www.USDebtClock.org[1]. I highly recommend periodically taking a look at it to gain a better understanding and context for our nation’s fiscal peril.

High Level Breakdown Of The Federal Government’s Finances (11/10/2024)

Financial Note: For a more detailed explanation of what the above numbers mean then click the end note.[2]

Financial Note: For an explanation of the “130% Debt-to-GDP” stat, checkout the Hirschman Capital study in the end note.[3]

Financial Note: I deliberately did not make mention of state, county, and municipal figures. Details around state, county, and municipal debts can be found in the end note[4].

Peace & Prosperity?

The above numbers are scary.

And, they are peacetime numbers.

By comparison, take a look at the U.S.’s history in regards to debts during war time (i.e. The American Revolution, The U.S. Civil War, World War 1, World War 2).

Summary View[5]

Detailed View[6]

You’ll see that our debt-to-GDP ratios skyrocket during times of war.  While I don’t excuse the use of debt, I do understand the arguments for why the debts needed to be incurred at the time.  And, in fairness the federal government, after all of these wars (up to and including World War 2), it always brought the debt-to-GDP ratio back down to very reasonable levels by paying back the debts and retiring the bonds.

Historical Note:  Prior to 1913 and the creation of the Federal Reserve, the U.S. did a decent job of trying to bring its debts back down close to zero percent.  After 1913… not so much.

So, when taken within the context of wartime debt numbers, the fact that we have a peacetime debt-to-GDP that is greater than 100% (currently 123%) should be alarming to every single citizen (and the majority of the people of Earth).

This means that we realistically have no means of paying back our federal debt (not to mention our state and local debts)[4] in peace, yet, financially speaking, in a time of peace, we are operating on a war-time footing, typically a period of time that is considered an emergency.

While one could make an entire college course just on analyzing governmental revenues, spending, budgeting, and debts, this is completely outside of the scope of this opening series.  Suffice it to say that our debts are actually systemic; we are legally required to spend money… even if we don’t have the funds.[7]

Think about that for a moment – we are in debt because our laws required it (a la entitlement programs such as Medicaid, Medicare, and Social Security), not because we have some intense armed conflict with another nation.  This has moved our culture so deeply that we are actually addicted to spending and debt.  In other words, a country which is supposed to cover all of its capital expenditures (“CapEx”, think “infrastructure“) and operating expenses (“OpEx”, think “day-to-day activities“) with incoming revenues has completely lost control of its spending and will eventually, by definition, go broke.  When that happens, our credibility with the rest of the world will be completely shattered. Consequently, the entire bond market will be in a state of panic and the global credit markets will freeze over.

Speaking of laws which require spending money (and incurring massive debts), let’s take a look at the above line item “Future Unfunded Liabilities“.[8]   As of the writing of this article (~early 2025), our future unfunded liabilities are $220T.  This is 6X our current debts (~$36T).  And, it’s growing.

In this context, future unfunded liabilities are essentially legal requirements for us to spend money that we don’t have in the future (called “non-discretionary” or “mandatory” spending).[7] In accounting terms, we don’t have the assets to offset the corresponding liabilities.  As mentioned above, this spending is for future entitlement payments to recipients for programs such as Medicaid, Medicare, and Social Security.  Every second of every day, some of the Future Unfunded Liabilities “column” moves over to the “Federal Debt” column.  This means that theoretical liabilities of tomorrow become very real debts today.  And, this doesn’t include debts that are incurred from expenditures for the rest of the federal government’s operations and programs (i.e. law enforcement, infrastructure, defense, diplomacy, etc.).

Taking An Interest In Interest

Recently, we passed the point where it takes over one trillion dollars just to service the federal debt (paying the interest).  That is just to keep the wolf off our backs.  That doesn’t buy us any steel, concrete, infrastructure, electricity, health care, education, retirement funding, or defensive capability.

In fact, if we take a look at the top five federal budget line items, the interest on our federal debt has actually exceeded our defense spending[9], Medicare[10], and Medicaid[11].  That means that Social Security[12] is our #1 line item and the interest on our federal debt is #2.  That is as absurd as saying that, after our mortgage, merely the interest on our credit cards (not the principle) is our second largest household cost.

Financial Note: One could argue that Medicare and Medicaid should be combined into a singular accounting “bucket”. If we go with that grouping, then Medicare / Medicaid is the largest line item in our federal budget. This would be consistent with the USDebtClock display.

Taken a step further, the interest on the debt is growing so rapidly that, in the not-to-distant future, the interest on our debts will become our largest federal budget line item.

For those who feel that it would be decades before anything like that happens, let’s take a look at the interest rates associated with our federal debt.  As it stands right now, our “blended rate” of all of our bonds is ~2.75% ($1.0T interest payments ÷ $36.3T federal debt).  From a historical point of view, 2.75% is a very low interest rate which we have experienced for several years.  It is very uncommon for such low rates to be sustained for extended periods of time.  If our interest rates (via the federal bonds) were to double to 5.5%, this would still be a relatively low rate in the context of mankind’s history.  But, here is the rub – that doubling of interest rates would mean that our interest payments would also double… to $2T.  That would make our interest payments the #1 budget line item.  That would also make our interest payments 40% of our revenues ($2T interest ÷ $5.0T federal revenues).  In other words, before dollar one is spent on anything, the bond holders get their cut first. And, many of our bond holders are international, not domestic.

Going back to the financial breakdown above, the “Debt-to-GDP” metric is a common proxy for the health of an economy (similar to the health of a company looking at fundamental numbers the way Warren Buffet would look at a company for value investing).  While Debt-to-GDP is not a bad metric, a better measure of the health of a country (or company) is the “Federal Revenues-to-Debt” ratio (which I created because I have never seen it used before).  That is because the incoming revenues are the only way that these debts can be repaid.  As it stands now, given that we have over $2T in annual deficits (spending is greater than revenues), it is actually mathematically impossible for us to pay down our federal debt because, by the end of the year, there is no money left over with which to pay off the federal debt.

Looking at this on a global scale, the Hirschman Group found that 98% of countries which have a debt-to-GDP greater than 130% eventually go broke and default on their debt obligations (defaulting on their bonds).[4] Our debt-to-GDP is 123% with no possibility of reversing.  If you believe otherwise, can I interest you on some U.S. bonds?…

“Go For Broke” Is Taken Too Literally

How many times has the U.S. government defaulted on its money?

Historical Note:  In other words, “How many times has our federal government broken its promise to uphold the terms and conditions of the U.S. dollar?”  For example, the original condition of the U.S. dollar to allow any person to convert any amount of dollars into gold directly with the federal government (known as “convertibility“).

One could argue that every time that the federal government changed the terms and conditions of the U.S. dollar (which was supposed to be a contract between the issuer and its counter-party, the holder of the dollars) that it actually defaulted on its responsibilities and liabilities.  For historical specifics of when the feds changed the terms and conditions of the U.S. dollar (USD):

  • Federal Reserve Act of 1913[13]
  • Executive Order 6102 (1933)[14]
  • Gold Reserve Act of 1934[15]
  • August 15, 1971 taking us off of the Gold Standard[16]

This long line of violations of the terms and conditions of the USD has led us down a dark path of debt, spending, and economic calamity.

As alluded to above, one could even argue that, in general, our current federal debts are in default, too, because of the fact that we will never be able to repay our debts.  Our debts (and the interests on our debts) have completely eclipsed our ability to fulfill our financial obligations.  By definition, we have created a “Ponzi scheme“.[17]

Anyone could rationalize our situation by claiming that these debts are “just numbers on paper“.  The problem with this dismissive argument is two-fold:

  • The bonds that represent that debt are the means by which our federal government is funding something very real – our entitlement programs.  If our bonds are seen as worthless then our ability to fund these entitlement programs evaporates.
  • Governments, institutions, and people all around the world have invested in our federal, state, county, and municipal bonds with the serious expectation that these debt instruments will be repaid along with the corresponding interest on the debts.  In fact, our entire global financial system is built upon these promises, promises that cannot, by mathematics, be fulfilled.  It has evolved into the proverbial house of cards that will negatively affect every single balance sheet, portfolio, government agency, institution, and person who uses money.

We are broke.  And, flying on fumes.

Broader Look

So far, we’ve been looking solely at the USD.  Now, let’s take a broader look to see how fiat currencies fair in general.

Monetary Note:  “Fiat currencies” (or “soft money”) are often considered to be a type of money which has no tie to any commodity, such as gold, and, thus, no basis in reality.  In short, fiat currencies are that medium of exchange which can be “wished into existence” without any tie to reality (unlike “good money” or “commodity money” such as gold which requires actual work to produce).

The average lifespan of fiat currencies is 27 years.[18]

Historical Note:  One could argue that the “lifespan” of a currency is only as long as the terms and conditions of that currency are in effect, not necessarily for the lifetime of a country (which can be for centuries).  For example, as discussed above, over our 249 year history, the USD has actually had at least four different monetary systems (the founding of the country, the Federal Reserve Act of 1913, Executive Order 6102 of 1933 and the Gold Reserve Act of 1934, and President Nixon taking us off of the gold standard in 1971).  Thus, for the U.S. dollar, that comes to an average of 62 years per monetary regime.

Eventually, all governments which use “soft money” or fiat currencies go broke and bust their monetary systems because they always engage in deficit spending (spending more than they make within one year), debt, and borrowing (via bond issuance).

100% of the countries which use soft money have the exact same spending and debt problems that the U.S. has.  Going into detail on how this happened for all of these currencies is beyond the scope of this opening series but this is a topic which will be addressed in more detail in future articles.  Suffice it to say that the Hirschman Capital[4] study mentioned above does a good job of providing the historical basis for the claim that fiat currencies are so toxic to the well-being of a nation and its citizenry.

Fortunately, we don’t need to know the details as long as we have the common factor to all of them – human nature.  It is human nature for some people (politicians and bureaucrats) to lie for their own benefit (to retain power and influence) and other people (the citizenry) to accept and rationalize the lie.  If we simply start from those first principles then we can derive what is going to happen from there.  And, 2,100 years of monetary history confirms this.  We will cover that 2,100 years of history in more detail in a future article in this opening series.

Historical Note: This quote comes to mind:  “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance…” — James Madison

As it stands right now (2025), all countries use a “fiat standard” (fiat currency, soft money, devoid of any tie to reality) and, like all addictions, fiat currencies are toxic to the constitution of our nations and their citizenry.

Thus, is it safe to assume that eventually, all countries will eventually go broke by their own hands from conditions of their own making?  I think that we will all arrive at the same answer by the end of this opening series.

Next Steps

In our next article, here, we will examine the reason why fiat currencies (soft money) are so effective at permeating the popular culture and financial systems even though they are so toxic and addictive.

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End Notes, References, & Citations

[1] The numbers I presented are from www.USDebtClock.org .  This site does a great job of providing good faith estimates on all of the metrics that it displays.  That said, getting exact numbers are impossible as many of them represent topics so massive (i.e. GDP, Federal Debt, Future Unfunded Liabilities, demographics, etc.) that merely defining what they are is a monumental task, not to mention measuring them with any sort of high precision (i.e. +/- 1%) is essentially unfeasible.

[2] “High Level Breakdown Of The Federal Government’s Finances”

Explanation of the metrics:

  • Federal Debt: “The National Public Debt Outstanding represents the face amount or principal amount of marketable and non-marketable securities currently outstanding.” (Ref.: USDebtClock.org / U.S. Treasury Dept.)
  • Federal Annual Deficit: “The difference between the total amount spent by Congress and the revenue received by The Internal Revenue Service.” (Ref.: USDebtClock.org / U.S. Treasury Dept.)
  • Federal Interest on the Debt: “The interest on the debt includes U.S. treasury notes and bonds, Government Account Series (GAS),(SLG’s) and other special purpose securities.” (Ref.: USDebtClock.org / U.S. Treasury Dept.)
  • Interest On The Debt ÷ Federal Revenues: Author’s Note: This is the amount of the U.S. federal revenues which are consumed by the interest payments on federal debts. The higher the number, the less net revenues which are available for other expenditures (i.e. Social Security, defense). (Ref.: blog author)
  • Interest On The Debt ÷ Federal Spending: Author’s Note: The is the amount of the U.S. federal expenditures that the interest consumes. The higher the number, the more it contributes to the annual deficit and the more financial strain it creates. (Ref.: blog author)
  • Future Unfunded Liabilities: “Future unfunded liabilities refer to the projected shortfall in funds needed to pay for promised benefits, such as pensions, retiree health care, and other post-employment benefits, in the United States.” (Ref.: Brave search engine summary) Author’s Note: The fact that our future unfunded liabilities are 6X is a death knell for the U.S. Bankruptcy and completely financial insolvency are guaranteed. (Ref.: blog author)
  • Federal Debt-to-GDP: “The US national debt divided by the Gross Domestic Product” (Ref.: USDebtClock.org / U.S. Treasury Dept.) Author’s Note: This metric is a commonly used measure for the financial health of a nation. It is not a bad measure but it blatantly ignores a nations true ability to pay off its debts. Part of what makes this such an incomplete measure is that there is an unstated (and mistaken) assumption that 100% of a nation’s economic activity will go towards repaying its debts. (Ref. blog author)
  • Federal Debt-to-Revenues: Author’s Note: Since federal revenues are the only means of paying down the debt, I devised this metric as a way of expressing just how dire the situation is since it shows how far its debts have outstripped its ability to repay those debts. While the above “Federal Debt-to-GDP” ratio is very commonly used and not a bad measure of the financial health of a country, I prefer to use this metric since the federal revenues are the only way that the debt can ever be paid. Hence, it is a more accurate measure of the financial health of a nation. In this case, the federal debts are 7X greater than federal revenues. In my humble opinion, this is a death knell of the U.S. (Ref.: blog author)
  • Global Debt-to-GDP: Author’s Note: This metric is a globally extended ratio of the above “Federal Debt-to-GDP” ratio. As metrics go, it isn’t a bad measure of the health of the world’s nations’ finances. The 350% number in the chart should be concerning for everyone. (Ref.: Lausanne Movement)
  • Countries which reach 130% Debt-to-GDP go broke: Author’s Note: This is the number of countries which have defaulted on their debts when they reach a debt-to-GDP ratio of 130%. I cover this metric in more detail below. [3X]

[3] A Hirschman Capital study looked at 52 countries over the timeline of 1821 to 2020. It found that any country which surpasses a debt-to-GDP ratio of 130% eventually goes broke and defaults on its debts. As of the publishing of this article, of the 52 countries which reached a debt-to-GDP ratio of 130%, 51 of them ended up defaulting on their debts. Due to our fiat currency and the complete mismanagement of our country and treasury, we are looking at the permanent financial insolvency of our country. As it stands now, Japan is the only outlier. But, if we look at Japan’s results they have had 30 years of stagflation and no real (inflation adjusted) GDP growth.

More details around the Hirschman Capital study can be found below:

[4] States’ Debts: $1.33T; Counties’ & Municipalities’ Debts: $2.5T. (Ref.: USDebtClock.org)

[5] “US Federal Debt since the Founding“

[6] “The Long Story of U.S. Debt, From 1790 to 2011, in 1 Little Chart“

[7] Discretionary vs. Non-Discretionary Spending resources

[8] Future Unfunded Liabilities

Financial Note:  The seemingly banal topic of future unfunded liabilities (FUL) is actually quite fascinating and scary and every single American should be severely concerned.  At first glance, merely having a promise to spend money at some undefined time in the future might not seem like a big deal.  The real issue is that those promises to spend money are not offset by any assets which can be used to pay those moneys.  Hence, the term “future unfunded liabilities“.

My favorite example (if one can have a “favorite” future unfunded liability) is the California state employee’s pension plan, “California State Employee Pension” or “CalPERS”.  Currently, they have a FUL of >$1T (depending on the “discount rate” that one uses).  This means that the CalPERS pension plan does not have enough assets (cash, bonds, stocks, etc.) to cover the payout that they will inevitably have to cover when that state’s employees start to collect on their pension plans.  Of course, there are retirees who are already collecting on their pension.  The problem is that the pension liabilities (the promise to pay retired employees at some time in the future) have grown faster than the assets in the plan.  Add to that that the number of retirees who are collecting payments against the pension are growing faster than the incoming assets.  Those two factors are causing the FUL to accelerate.  Eventually, the whole system will go bankrupt or the federal government will have to cover the liabilities by printing money out of thin air and drive up inflation for everyone in the country (and the world at large). 

If anyone is interested, I recommend also looking into the topic of “expected growth rates” of pension plans.  In short, these pension plans promised lavish average annual growth rates (i.e. 7.5%) as a means of enticing people to work for the government.  But, having one slow year, i.e. 6.5%, means that the next year (or subsequent years) will have to compensate, i.e. 8.5%, which is exceedingly difficult given the fact that pension plans are supposed to be more conservative in their approach yet are (unreasonably) expected to generate these outsized returns.  The completely unreasonable expectations cause the FUL (via pension payouts) to grow faster than the actual market returns.

This isn’t just limited to the federal government and CA.  Nearly every single state, county, and municipality is facing the exact same issue.  Finding a responsible (and ethical) government agency is quite rare. I asked the Brave search engine to provide a summary of “future unfunded liabilities“. Its results are below:

Brave search engine summary “future unfunded liabilities”:

“Future Unfunded Liabilities

Future unfunded liabilities refer to the projected shortfall in funds needed to pay for promised benefits, such as pensions, retiree health care, and other post-employment benefits, in the United States. These liabilities are a significant concern for governments, pension funds, and taxpayers alike.

Key Statistics:

  • Federal Government: The federal government’s unfunded liabilities for Social Security and Medicare have grown to $93.1 trillion, or nearly 400% of annual GDP, as of 2021. (Source: James C. Capretta, “Federal Unfunded Liabilities Are Growing More Rapidly Than Public Debt”)
  • State and Local Governments: Many state and local governments face significant unfunded pension liabilities, with some estimates exceeding $1 trillion. (Source: “Pension Basics: Unfunded Liabilities (aka Pension Debt)” by Equable)
  • Corporate Pensions: Unfunded corporate pension liabilities can also be substantial, with some companies facing billions of dollars in unfunded obligations. (Source: “What Are Unfunded Liabilities?” by various sources)

Causes and Consequences:

  • Demographic Changes: Aging populations and declining birth rates contribute to increased unfunded liabilities, as there are fewer workers to support retirees.
  • Inadequate Funding: Insufficient contributions to pension funds and inadequate investment returns exacerbate the problem.
  • Rising Healthcare Costs: Increasing healthcare expenses for retirees strain pension funds and contribute to unfunded liabilities.
  • Tax Revenue Shortfalls: Decreased tax revenue or reduced economic growth can limit the ability to fund promised benefits.
  • Impact on Taxpayers: Unfunded liabilities may lead to future tax increases, reduced government services, or even default on obligations.

Mitigation Strategies:

  • Increase Funding: Governments and corporations can increase contributions to pension funds or adjust investment strategies to better match liabilities.
  • Reform Benefits: Modifying benefit structures or increasing the retirement age can help reduce unfunded liabilities.
  • Investment Strategies: Pension funds can adopt more conservative investment approaches or diversify portfolios to minimize risk.
  • Private Sector Solutions: Encouraging private sector solutions, such as annuities or defined contribution plans, can help reduce reliance on government-funded pensions.
  • Transparency and Accountability: Improving transparency and accountability in pension fund management can help identify and address unfunded liabilities earlier.

Conclusion:

Future unfunded liabilities pose a significant challenge for governments, pension funds, and taxpayers. Understanding the causes and consequences of these liabilities is crucial for developing effective mitigation strategies. By increasing funding, reforming benefits, adopting prudent investment strategies, and promoting private sector solutions, we can work towards a more sustainable retirement system and reduce the burden on future generations.” <End of Summary>

“Federal Unfunded Liabilities Are Growing More Rapidly Than Public Debt“

“Debt and Unfunded Liabilities“

  • “Unfunded liabilities stress state and local budgets and signal painful future tax increases just as much as bond obligations. Government debt is growing rapidly at all levels.” — Tom Savidge

“States’ Unfunded Pension Liabilities Persist as Major Long-Term Challenge“

  • “States owed a total of $1.25 trillion in unfunded pension benefits in fiscal 2019, the final year before the pandemic. Despite a quick but deep economic downturn triggered by COVID-19, Pew projections in September 2021 indicated that pension debt had decreased below $1 trillion by the end of fiscal 2021, and state pension plans reached the highest-funded level since the Great Recession.“

“Unfunded Liabilities for State Pension Plans in 2023“

[9] Defense Spending (Brave search engine summary: “defense federal expenditures 2024“)

“US Defense Expenditures 2024

The Department of Defense’s fiscal year 2024 budget was signed into law on December 22, 2023, at $841.4 billion, which is slightly less than the initial request of $849.8 billion. This budget reflects a 2.6% increase from the previous year. The budget includes funding for military operations, personnel, research, development, and procurement of new items.” <End of Summary>

“How much does the US spend on the military?“

  • “Since 1980, defense spending has risen by 62%, climbing from $506 billion to $820 billion by 2023, after adjusting for inflation.“

“Military budget of the United States“

  • “Budget for FY2024:  As of 10 March 2023 the fiscal year 2024 (FY2024) presidential budget request was $842 billion.“

[10] Medicare Federal Expenditures

Brave search engine summary: “Medicare federal expenditures“

“Medicare Federal Expenditures

Medicare federal expenditures in fiscal year 2024 are projected to be $858 billion, according to the Congressional Budget Office (CBO). In 2023, Medicare expenditures, net of offsetting receipts, totaled $839 billion, representing 14 percent of total federal spending. Medicare is the second largest program in the federal budget and is expected to grow significantly in the coming years due to the retirement of the baby-boom generation and the rapid growth of per capita healthcare costs. By fiscal year 2053, Medicare spending is projected to rise from 3.1 percent of gross domestic product (GDP) in fiscal year 2023 to 5.4 percent of GDP.” <End of Summary>

Brave search engine summary:  “when will the interest on federal debt exceed medicaid“

“Interest on Federal Debt Exceeds Medicaid

According to the Congressional Budget Office (CBO) projections, interest on the federal debt already exceeded Medicaid spending in 2024, surpassing both defense and Medicare spending. By the end of Fiscal Year 2024, net interest payments are projected to total $870 billion, which is more than the estimated $851 billion for Medicare and likely exceeds Medicaid spending as well.” <End of Summary>

“Budget Basics: Medicare“

  • “Medicare is the second largest program in the federal budget: 2023 Medicare expenditures, net of offsetting receipts, totaled $839 billion — representing 14 percent of total federal spending.“

[11] Medicaid Federal Expenditures

Brave search engine summary:  “Medicaid federal expenditures“

“Medicaid Federal Expenditures

Medicaid federal expenditures have been increasing over the years, reflecting the growing costs associated with the program. Here are some key points about Medicaid federal expenditures:

2022: The total Medicaid expenditure reached $824 billion, with federal expenditures accounting for a significant portion of this amount.” <End of Summary>

[12] Social Security Federal Expenditures

Brave search engine summary: “social security federal expenditures 2024“

“Social Security Federal Expenditures 2024

In 2023, the federal government spent $1.35 trillion on Social Security, which accounted for 22% of the total federal budget. This expenditure is projected to support nearly 68 million people monthly in 2024. Here are the details of Social Security expenditures:

  • Total Expenditure in 2023: The federal government spent $1.35 trillion on Social Security.” <End of Summary>

“How much does the US spend on Social Security? Is it sustainable?“

  • “The largest public program in the US is supporting nearly 68 million people per month in 2024.“
  • “The federal government spent $1.35 trillion on Social Security in fiscal year 2023. This accounted for 22% of the total federal budget.“

“Policy Basics: Where Do Our Federal Tax Dollars Go?“

  • “In 2023, 21 percent of the budget, or $1.4 trillion, was spent on Social Security, which provided monthly retirement benefits in March 2023 averaging $1,833 to 49.1 million retired workers.“

Financial Note:  The Social Security program is expected to become insolvent (bankrupt) by 2033 – 2035

Brave search engine summary:  “when will social security become insolvent“

“When Will Social Security Become Insolvent

According to the latest projections, Social Security’s combined trust funds are expected to be depleted by 2035, leading to insolvency. However, even after this date, Social Security could still pay approximately 83% of scheduled benefits using its tax income if no further actions are taken to shore up the program.” < End of Summary >

“Social Security and Medicare Continue on Path to Insolvency, Trustees Confirm“

“CBO: Social Security is Ten Years from Insolvency“

[13] The Federal Reserve Act Of 1913

[14] Executive Order 6102

  • President Roosevelt’s violation of the 4th Amendment of the Constitution by mandating by fiat (by capricious decree) that personal ownership of gold (in the form and shape of gold coins and bullion) to be illegal and requiring all owners to sell their gold to the government without permission.  This EO even went as far as to mandate that anyone who went to open their safe deposit box in a bank vault had to have a bank official there to observe if there were any gold in the safe deposit box and confiscate it immediately without the customer’s permission.
  • An interesting case:  “Frederick Barber Campbell (who was actually convicted under the Gold Reserve Act’s predecessor, Executive Order 6102), was convicted of hoarding gold when he tried to withdraw 5,000 troy ounces of gold he had at Chase National Bank. Gus Farber, a diamond and jewelry merchant was arrested with his father and 12 others for illegally selling $20 gold coins without a license. The Baraban family was arrested for operating a gold scrap business under a false license. Foreign companies even had their gold confiscated. The Uebersee Finanz-Korporation, a Swiss banking company, had $1,250,000 in gold coins that were being held in the United States.” (https://en.wikipedia.org/wiki/Gold_Reserve_Act)

[15] The Gold Reserve Act Of 1934

  • This congressional legislation was the legislative version of Executive Order 6102.
  • Beyond making Executive Order 6102 law, this legislation made it illegal for companies to use “Gold Clauses“, whereas previously companies could price their contracts in gold, not dollars, so as to preserve the financial value of the goods and services being sold.
  • Roosevelt justified the Gold Reserve Act of 1934 by saying “Since there was not enough gold to pay all holders of gold obligations, … the Government should in the interest of justice allow none to be paid in gold.“

Brave search engine summary “gold reserve act of 1934 contracts“:

“Gold Reserve Act of 1934

The Gold Reserve Act of 1934 had significant implications for contracts containing gold clauses.  Prior to the Act, many contracts, including bonds, loans, and other financial instruments, included provisions that tied payments or values to the gold standard.  With the Act’s passage, the government’s power to regulate contracts with gold clauses was established.

Key Provisions:

Suspension of Gold Standard: The Act suspended the gold standard, effectively ending the convertibility of the US dollar to gold at a fixed rate.

Regulation of Gold Clauses: The government was empowered to regulate contracts containing gold clauses, which had previously been considered sacrosanct.

Devaluation of Gold: The Act allowed the President to devalue the gold dollar by up to 40%, which was exercised shortly after its passage.

Impact on Contracts:

Invalidation of Gold Clauses: The Supreme Court, in cases such as Norman v. Baltimore & Ohio Railroad (1935) and United States v. Bankers Trust Co. (1935), ruled that contracts containing gold clauses were invalid, as they conflicted with the government’s new monetary policy.

Repricing of Debt: The devaluation of gold led to a significant increase in the value of outstanding debt obligations, as the fixed gold-based payments became much more valuable.

Modification of Contract Terms: Many contracts were renegotiated or restructured to reflect the new monetary reality, with parties agreeing to new payment terms or interest rates.

Examples of Contracts Affected:

Bonds: Government and corporate bonds with gold clauses were revalued or repaid in new currency, with interest rates adjusted accordingly.

Loans: Commercial loans with gold-based interest rates or repayment terms were renegotiated or restructured to reflect the changed monetary environment.

International Trade Agreements: Trade agreements and treaties that relied on the gold standard were revised or renegotiated to accommodate the new monetary system.

Legacy:

The Gold Reserve Act of 1934 marked a significant shift in the US monetary system, from a gold-based standard to a fiat currency system. The Act’s impact on contracts containing gold clauses had far-reaching consequences, including the invalidation of such clauses, repricing of debt, and modification of contract terms. The legacy of the Act continues to influence US monetary policy and contract law to this day.” < End of Summary >

[16] President Nixon taking the U.S. off of the Gold Standard on Aug. 15, 1971:

This removed the final tie between the USD and gold as well as completely broke the Bretton Woods Agreement (which all major countries were dependent upon us maintaining a connection to gold). This unilateral decision by one man affected the entire planet, including all debt denominated in dollars, the entire bond market, and the entire global banking system.  That one person has that much power should concern everyone.

Brave search engine summary “August 15 1971”:

“August 15 1971

On this day, President Richard Nixon announced a series of economic measures, collectively known as the “Nixon Shock,” which significantly altered the international monetary system. The key actions were:

  • Closure of the Gold Window: Nixon suspended the convertibility of the US dollar to gold, effectively ending the Bretton Woods system. Foreign governments could no longer exchange their dollars for gold at a fixed rate of $35 per ounce.
  • Wage and Price Freeze: Nixon imposed a 90-day freeze on wages and prices to combat inflation, which was rising at 5.84% in 1971.
  • Import Surcharges: The US imposed surcharges on imports to reduce the trade deficit and protect domestic industries.

These measures had far-reaching consequences:

  • The Bretton Woods system, established in 1944, was effectively dismantled, marking the end of the dollar’s peg to gold.
  • The US dollar began to float freely on foreign exchange markets, leading to significant fluctuations in its value.
  • The Nixon Shock triggered a global economic crisis, with widespread currency devaluations, trade disruptions, and inflationary pressures.
  • The event paved the way for the development of fiat currencies and the rise of floating exchange rates as the new norm in international finance.

In the years that followed, the global economy underwent significant changes, including:

  • The collapse of the Bretton Woods system and the emergence of a new international monetary order.
  • The rise of floating exchange rates and the increasing importance of central banks in managing currency markets.
  • The growth of international trade and investment, as countries adapted to the new economic landscape.
  • The development of new economic theories and policies, such as monetarism and supply-side economics, which sought to address the challenges posed by the Nixon Shock.

Overall, August 15, 1971, marked a pivotal moment in economic history, as the world transitioned from a fixed-exchange-rate system to a more flexible and decentralized international monetary order.” <End of Summary>

[17] Ponzi Scheme

“Ponzi Scheme“: “A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.[1] Named after Italian businessman Charles Ponzi, this type of scheme misleads investors by either falsely suggesting that profits are derived from legitimate business activities (whereas the business activities are non-existent), or by exaggerating the extent and profitability of the legitimate business activities, leveraging new investments to fabricate or supplement these profits. A Ponzi scheme can maintain the illusion of a sustainable business as long as investors continue to contribute new funds, and as long as most of the investors do not demand full repayment or lose faith in the non-existent assets they are purported to own.“

“Ponzi Scheme“: “A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.

With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.“

[18] Average Life Span Of Fiat Currencies

Historical Note: There is a range on the average lifetime of fiat currencies of 27 – 80 years.  In the broader context of global history, this is tiny compared to those countries which had a hard money standard (most of which survived for centuries while they maintained their true monetary standards). In a future post, we will make the distinction between “soft money” (fiat currency) and “hard money” (a.k.a. “good money“).

Brave search engine summary “what is the average life span of fiat currencies“:

“Average Fiat Currency Lifespan

Based on the search results, there is no single definitive answer to this question. However, here are some estimates and ranges mentioned in the search results:

  • 27 years: A study by DollarDaze.org (debunked by others) claimed that the average lifespan of a fiat currency is 27 years.
  • 35 years: The article “Fiat Currency Graveyard: A History of Monetary Folly” suggests that the average lifespan of a fiat currency is about 35 years.
  • 40 years: Another source mentions that the mean average lifetime of a paper currency is 40 years before it fails.
  • 25 years (median): The same source mentions that the median average lifespan of a paper currency is about 25 years.
  • 80 years (at 3% interest rate): One Quora answer suggests that the average lifespan of a fiat currency depends on the interest rate charged from the issuer, and at a 3% interest rate, it would be approximately 80 years.

It’s essential to note that these estimates vary, and the actual average lifespan of fiat currencies might be different. The complexity of monetary systems, economic factors, and political decisions can influence the longevity of a fiat currency. Additionally, the search results highlight the importance of considering the historical context, sample sizes, and methodologies used to calculate these estimates.

In summary, while there is no consensus on a single average lifespan for fiat currencies, the search results provide a range of estimates between 25-80 years, with some sources suggesting a median or mean average lifespan around 25-40 years.” <End of Summary>

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