Can the Government Forgive Itself of Intragovernmental Debt?

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Can the Government Forgive Itself of Intragovernmental Debt?

Excluding the entitlement programs, can the government continually forgive itself of debt? If the Pentagon were to borrow $10m from the department of forestry could the department of forestry just say, "oh never mind, we don't need that $10m anyway. The debt is forgiven?"

I understand that this would be $10m less for the department of forestry to work with,  but what's to stop the government from moving money around like this for eternity? In this example, if the deptartment of forestry were able to tighten its belt and spend $10m less than usual, everything would balance out, right?

I'm sorry if this is a remedial question, but I just don't understand this idea. If I lend my brother $10.00 and then tell him not to worry about it, I lose ten dollars of purchasing power that week, but the debt gets wiped out between us. What stops the government from just wiping out a bunch of its internal debt the same way?

 

 

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Re: Can the Government Forgive Itself of Intragovernmental ...

 

Interesting concept, governments probably do this when it comes to the black budget.  I don't know why the government Borrows it's own money from the fed at interest, when they can create money debt free.  

Money creation should not be loaned into the economy but spent into existence. 

 

When was the last time you voted someone out of office at the Fed?  (rhetorical)

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Re: Can the Government Forgive Itself of Intragovernmental ...

okubow and JK121

I'm very glad you brought up this subject.  I have wondered for a long time what will happen about the box full of IOU's that the congress has "borrowed" from the Social Security Fund.  I've been told, and I don't know if its true, that if all the money that has been "borrowed" from SS were back in there, SS would last much longer.  Does anybody know about this,  as well as the answer to okubow's question?

Thank you.

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Re: Can the Government Forgive Itself of Intragovernmental ...

Anybody . . . ?Cry

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Re: Can the Government Forgive Itself of Intragovernmental ...

okubow -

Here's a shot.  Short answer - yes they could, but no they won't.

The majority of the Intragovernmental debt portion of the national debt has historically been funded by the government raiding/borrowing/stealing from Social Security Administration account.  So there is money on the books, the government just transfers the debt from SSA to thier coffers - but the debt still exists and has to get paid at some point, likely by my great-great-grandchildren.

About 85% (from a 2007 source, http://ivesaidenoughtalready.blogspot.com/2008/06/growth-in-intragovernmental-debt.html) of the intragovernmental debt is distributed among 5 programs as follows:

Federal Old-Age and Survivors Insurance Trust Fund (Social Security) - 50%

Civil Service Retirement and Disability Fund - 17%

Federal Hospital Insurance Trust Fund - 8%

Federal Disability Insurance Trust Fund - 5%

Military Retirment Fund - 5%

These programs are debts that the government 'owes' - forgiving themselves of these debts would be a huge breach of faith (what a surprise) and would be political suicide (perhaps not such a bad idea).  Debt forgiveness without curbing spending idiocy only pushes the intercept point out a couple of decades.

Again, I think the short answer is yes the government could forgive portions of the intragovernmental debt, but only the small programs, so no they wouldn't. 

Now that's not to say that some future administration couldn't come forward with courage and visionary leadership and tells the truth - that we are broken and can't be fixed.  Social Security is broken folks, thanks for paying in, but it's over and done.  No more SS witholdings from your paycheck, but you now have to figure something else out when you 'retire' because there's nothing there.

Now we only have to get the spending part of the equation under control.

Here's another link to a pretty good article about the dynamics of the National debt, the site is kind of right leaning, but the message is on the mark. 

http://www.craigsteiner.us/articles/16

 

Anybody else want to strap this one on?

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Re: Can the Government Forgive Itself of Intragovernmental ...

okubow wrote:

Can the Government Forgive Itself of Intragovernmental Debt?

Great question!  The short answer is "yes" but the mechanics would be different than simply "forgiving debt."

For example, if the U.S. wanted to it could pay the $6 trillion it owes to the people (social security fund, medicare, pensions, etc).  As a soveirgn nation, the U.S. has the power to issue it's own money, the treasury could issue the money free from debt.

This would not be inflationary as the government would be retiring debt.

Larry

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Re: Can the Government Forgive Itself of Intragovernmental ...

Great question!  The short answer is "yes" but the mechanics would be different than simply "forgiving debt."

For example, if the U.S. wanted to it could pay the $6 trillion it owes to the people (social security fund, medicare, pensions, etc).  As a soveirgn nation, the U.S. has the power to issue it's own money, the treasury could issue the money free from debt.

This would not be inflationary as the government would be retiring debt.

Larry

Larry,

Are you really saying the government could issue $6 trillion in paper money and there would be no inflation?  I would follow that up with, "you cannot be serious", but somehow I get the feeling you are. 

Please explain how issuing and introducing $6 trillion into the economy would not be inflationary.  If it wouldn't be, why not make it $12 trillion, or heck, let's just go for the full $60-$80 trillion we have in debt or unfunded liabilities?

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Re: Can the Government Forgive Itself of Intragovernmental ...
DrKrbyLuv wrote:

Great question!  The short answer is "yes" but the mechanics would be different than simply "forgiving debt."

For example, if the U.S. wanted to it could pay the $6 trillion it owes to the people (social security fund, medicare, pensions, etc).  As a soveirgn nation, the U.S. has the power to issue it's own money, the treasury could issue the money free from debt.

This would not be inflationary as the government would be retiring debt.

Larry

But Larry -

Wouldn't the government be following the Constitution?  We can't have that.

You run for Congress and make that your platform and I'll move to PA so I can vote for you.

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Re: Can the Government Forgive Itself of Intragovernmental ...

[quote=DrKrbyLuv]

okubow wrote:

Can the Government Forgive Itself of Intragovernmental Debt?

Great question!  The short answer is "yes" but the mechanics would be different than simply "forgiving debt."

For example, if the U.S. wanted to it could pay the $6 trillion it owes to the people (social security fund, medicare, pensions, etc).  As a soveirgn nation, the U.S. has the power to issue it's own money, the treasury could issue the money free from debt.

This would not be inflationary as the government would be retiring debt.

Larry

[/quote]

I don't agree there Larry...if/when the government prints money to "retire" the SS debt, what it will be doing is paying off SS claims with freshly printed money. 

The "debt" we are talking about is not like a banking debt, it is a bookkeeping entry signifying a liability from the government to itself.

In incurring that specific liability the government already took in and spent money and then recorded the difference as an "intragovernmental holding," a misnomer if ever there was one.  It is not a holding.  It is an IOU representing missing funds.

Because the retirement of this "debt" is precisely synonymous with printing money and handing it out into circulation via SS checks, I am 100% certain that it will be inflationary as it will represent an increase in money without a corresponding increase in goods and services.

No doubt in my mind at all about this.

More generally, the government can do anything it wants with respect to intragovernmental holdings, including declaring that they no longer apply but that won't fix the issue which is that all intragovernmental holdings represent a liability from one portion of the government to another.  If anybody here can figure out how my left pocket can owe my right pocket some money and I can gain value to myself in repeating that process, I need to talk to you immediately .  We'll go into business!

Because it is not possible for a subsidiary to owe money to a parent corporation in a way that make them both worth more, such accounting gimmicks are thoroughly illegal in the world of private business.  It is considered fraud to engage in such accounting (see also: Enron) and can invoke both criminal and civil penalties if discovered.

For a variety of reasons, mainly that it makes the laws, government has granted itself a pass on the necessity of proper accounting that conforms to reality or makes any sense at all to a rational person.

So "intragovernmental holdings" cannot really be made to disappear without some pretty extensive impacts to the world's perception of the viability of doing business with the US.

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Re: Can the Government Forgive Itself of Intragovernmental ...

Okay, it seems like we're talking about two different forms of "intragovernmental debt." I was asking about type B below, which I'm not even sure exists (since I'm a novice at intragovernmental accounting).

Types A and B

A. A government department raids a pension or entitlement program (like SS) to the tune of $25m and spends all the money. The $25m in this example represents money that was put aside for a later payment to tax payers or a social program.

B. A non-pension/entitlement department (Dept. 1) borrows $10m from a different non-pension/entitlement department (Dept. 2). Dept. 2 cuts spending by $10m for the year. No harm no foul. In this case it's not the government dipping into a fund, rather it's 'money being moved from one pocket to the other.' (Maybe this never even gets chalked up as intragovernmental debt?)

I asked this question because I want to know if type B debt even exists on the government books, and if it does, what percentage of intragovernmental debt it accounts for? I understand why writing off type A would be political suicide, but forgiving type B seems entirely possible. Dogs_In_A_Pile's response shed a lot of light on this for me. I still need to do more of my own research, but from a quick skim through the link on his posting it seems like type B is a non issue.

Dogs_In_A_Pile wrote:

About 85% (from a 2007 source, http://ivesaidenoughtalready.blogspot.com/2008/06/growth-in-intragovernmental-debt.html) of the intragovernmental debt is distributed among 5 programs as follows:

Federal Old-Age and Survivors Insurance Trust Fund (Social Security) - 50%

Civil Service Retirement and Disability Fund - 17%

Federal Hospital Insurance Trust Fund - 8%

Federal Disability Insurance Trust Fund - 5%

Military Retirment Fund - 5%

I appreciate all of the responses, particularly Dr. Martenson's. I hope people don't feel like I'm asking a stupid question or wasting time with unfounded theories. Government accounting is still very new to me and I'm trying to understand it. I'm trying to "resist the call to be a believer" and ask for explanation when I don't understand how certain figures were calculated.

Based on DIAP's response it looks like pretty much all intragovernmental debt is made up of Type A. Is this a fair assessment?

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Re: Can the Government Forgive Itself of Intragovernmental ...

Okay, it seems like we're talking about two different forms of "intragovernmental debt." I was asking about type B below, which I'm not even sure exists (since I'm a novice at intragovernmental accounting).

Types A and B

A. A government department raids a pension or entitlement program (like SS) to the tune of $25m and spends all the money. The $25m in this example represents money that was put aside for a later payment to tax payers or a social program.

B. A non-pension/entitlement department (Dept. 1) borrows $10m from a different non-pension/entitlement department (Dept. 2). Dept. 2 cuts spending by $10m for the year. No harm no foul. In this case it's not the government dipping into a fund, rather it's 'money being moved from one pocket to the other.' (Maybe this never even gets chalked up as intragovernmental debt?)

I don't think Type A ever happens.  Government departments that actually spend less than they are allocted will probably get less the next year so they are highly incentivised to always spend their budget.  This same sort of thing often happens in large companies, where departments that are well run and come in under budget, are actually punished by having their budget lowered the next year.  This type of baseline accounting insures waste and inefficiency.

 

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Re: Can the Government Forgive Itself of Intragovernmental ...

Chris wrote:

I don't agree there Larry...if/when the government prints money to "retire" the SS debt, what it will be doing is paying off SS claims with freshly printed money. 

The "debt" we are talking about is not like a banking debt, it is a bookkeeping entry signifying a liability from the government to itself.

In incurring that specific liability the government already took in and spent money and then recorded the difference as an "intragovernmental holding," a misnomer if ever there was one.  It is not a holding.  It is an IOU representing missing funds.

Hello Chris, thanks for taking the time to respond to my post.  I think we both agree that the U.S. government has the prerogative of issuing it's own money.  If you agree here, then the disagreement becomes would it be inflationary to repay the money borrowed from SS with new money?

My understanding is that the social security trust has purchased bonds from the U.S. government, approximately $2.5 trillion, here is a link.  If the SS fund is holding bonds, the government could redeem the bonds with U.S. dollars.

The reason I don't think this would be inflationary is that no extra money would be put into circulation.  The fund would be replacing bonds with dollars and the benefits would be paid as before, no more or less would be entering the economy.  I know that it is more complicated than that as you explained, the government has already spent the money.  It is already in circulation or it has been extinguished as debt.

One thing that puzzles me is how can "we the people" be both debtors and creditors to money we already earned through FICA with holding taxes.  The government has borrowed our money and we will have to repay it.  As things stand, I don't think the government will ever repay the money.  If they don't, won't this be deflationary as we move from a funded benefit to a pay-as-you-go system that ultimately results in rationed benefits or worse.

On a separate note, why didn't the government borrow from the banks as they usually do and left our SS fund alone.  The only reason I can see is that FICA has been a hidden tax misrepresented as a benefit.

okubow wrote:

I hope people don't feel like I'm asking a stupid question or wasting time with unfounded theories.

I think you are asking very important and relevant questions.  If the U.S. economy continues on it's current trajectory, SS, medicare and many government pensions will go broke.  Something needs to be done and you are searching for solutions through your questions.  Great thread!

Larry

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Re: Can the Government Forgive Itself of Intragovernmental ...

Larry,

The most important thing to get right here is the notion that the government cannot owe itself money.  It just can't.  So you are absolutely onto something when you stated:

One thing that puzzles me is how can "we the people" be both debtors and creditors to money we already earned through FICA with holding taxes.  The government has borrowed our money and we will have to repay it.  As things stand, I don't think the government will ever repay the money.

This is the key. 

I've written about this extensively in the past and most recently here.   This is worth a re-read as I cover the basic issues which are that the government cannot owe itself money and currently has no other plans than to borrow more money to make payments on their past promises.

 

 

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Re: Can the Government Forgive Itself of Intragovernmental ...

Chris,

I've read your "Social Security Stunner; Bankruptcy of Nation Moved Up Several Years" (great piece!) but it was good to read it again.  I learned a lot from it but I still think it may be viable to exchange the SS bonds for dollars.  I'm basing my opinion on Crash Course Chapter 8.  Maybe I don't understand what you said in the video:

The first is that all dollars are backed by debt. At the local bank level, all new money is loaned into existence. At the Federal Reserve level, money is simply manufactured out of thin air and then exchanged for interest-paying government debt. In both cases, the money is backed by debt. Debt that pays interest. From this Key Concept, we can formulate a truly profound statement, which is that at a minimum, each year enough new money must be loaned into existence to cover the interest payments on all of the past outstanding debt.

If we flip this slightly, we can say that each year all the outstanding debt must compound by at least the rate of the interest on that debt. Each and every year it must grow by some percentage. Because our debt-based money system is growing by some percentage continually, it is an exponential system by its very design. A corollary of this is that the amount of debt in the system will always exceed the amount of money.

All of which leads us to the fourth Key Concept, which is that perpetual expansion is a requirement of modern banking. In fact we can make a rule: Each year, new credit (loans) must be made that at least equal the amount of all the outstanding interest payments that year. Without a continuous expansion of the money supply, past debts would not be able to be serviced, and defaults would ripple through, and possibly destroy, the entire system. Defaults are the Achilles heel of a debt-based money system, which we saw in our local banking example in the previous chapter. Because of this, all the institutional and political forces in our society are geared towards avoiding this outcome.

My take is that that the system will eventually fail as accumulating interest debt exceeds our ability to pay.  Eventually, there won't be enough willing and worthy borrowers - I think we passed that point.  The government will have to step in as the borrower of last resort, to keep the system from collapsing - I think we are at this point.  We will never be able to repay our debt with debt, we can only go deeper.

If I misunderstood what you were saying, I'd greatly appreciate any comments as I hold these principles highly in my thinking.  I know that you have said in the past (example here) that "The claim boils down to the idea that the way to avoid bankruptcy is by spending money."  To be more consistent with CC Chapter 8, shouldn't the wording be "The claim boils down to the idea that the way to avoid bankruptcy is by borrowing more money."

When I put your concepts together, I come to the conclusion that debt free money must be added to the system.  There may be many ways of doing this, but why not start with paying back SS?  Wouldn't any inflationary effect be more than off-set by the contracting money supply (assuming the amount of new debt is falling below existing debt obligations).  

Any comments would be greatly appreciated.  I'm here to learn.

Larry

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Re: Can the Government Forgive Itself of Intragovernmental ...
DrKrbyLuv wrote:

Chris,

I've read your "Social Security Stunner; Bankruptcy of Nation Moved Up Several Years" (great piece!) but it was good to read it again.  I learned a lot from it but I still think it may be viable to exchange the SS bonds for dollars.  I'm basing my opinion on Crash Course Chapter 8.  Maybe I don't understand what you said in the video:

The first is that all dollars are backed by debt. At the local bank level, all new money is loaned into existence. At the Federal Reserve level, money is simply manufactured out of thin air and then exchanged for interest-paying government debt. In both cases, the money is backed by debt. Debt that pays interest. From this Key Concept, we can formulate a truly profound statement, which is that at a minimum, each year enough new money must be loaned into existence to cover the interest payments on all of the past outstanding debt.

If we flip this slightly, we can say that each year all the outstanding debt must compound by at least the rate of the interest on that debt. Each and every year it must grow by some percentage. Because our debt-based money system is growing by some percentage continually, it is an exponential system by its very design. A corollary of this is that the amount of debt in the system will always exceed the amount of money.

All of which leads us to the fourth Key Concept, which is that perpetual expansion is a requirement of modern banking. In fact we can make a rule: Each year, new credit (loans) must be made that at least equal the amount of all the outstanding interest payments that year. Without a continuous expansion of the money supply, past debts would not be able to be serviced, and defaults would ripple through, and possibly destroy, the entire system. Defaults are the Achilles heel of a debt-based money system, which we saw in our local banking example in the previous chapter. Because of this, all the institutional and political forces in our society are geared towards avoiding this outcome.

My take is that that the system will eventually fail as accumulating interest debt exceeds our ability to pay.  Eventually, there won't be enough willing and worthy borrowers - I think we passed that point.  The government will have to step in as the borrower of last resort, to keep the system from collapsing - I think we are at this point.  We will never be able to repay our debt with debt, we can only go deeper.

If I misunderstood what you were saying, I'd greatly appreciate any comments as I hold these principles highly in my thinking.  I know that you have said in the past (example here) that "The claim boils down to the idea that the way to avoid bankruptcy is by spending money."  To be more consistent with CC Chapter 8, shouldn't the wording be "The claim boils down to the idea that the way to avoid bankruptcy is by borrowing more money."

When I put your concepts together, I come to the conclusion that debt free money must be added to the system.  There may be many ways of doing this, but why not start with paying back SS?  Wouldn't any inflationary effect be more than off-set by the contracting money supply (assuming the amount of new debt is falling below existing debt obligations).  

Any comments would be greatly appreciated.  I'm here to learn.

Larry

When those debt-free issued dollars are deposited into accounts, there would have to be a mechanism to make sure that the Fed cannot redeem those dollars. Otherwise, they will be treated like every other dollar.

Even if a mechanism to differentiate between debt-based dollars and debt-free dollars were in place, the Fed will change the monetary policy in accordance with the overabundance of money, based on the amounts of both debt-based and debt-free money in circulation. They will control the money supply just as before to provide necessary protection against hyperinflation. The Fed will require itself two ways to prevent hyperinflation:

1) Prevent money creation by deliberately slowing down the credit markets. This will force us to rely more on equity financing and insurance.

2) Have an agency of government or private enterprise stimulate the spending of currency on imports so that they do not remain in the domestic consumer-producer economy. That will do nothing to resolve our debts with others, despite not owing money to the Fed.

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Re: Can the Government Forgive Itself of Intragovernmental ...

So I guess the real issue is not intradepartmental lending, but all the "borrowing" that the government has done from SS and other programs which needs to be repaid.

I know the treasury department posts the total "Intragovernmental Holdings" here, but is there a more in depth breakdown of that figure somewhere?

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Re: Can the Government Forgive Itself of Intragovernmental ...

This question is of HUGE personal interest to me (perhaps even more than others).

As a Federal employee, my retirement plan has three parts to it.

The first part is Social Security.  I pay FICA like everybody else.  I'm 40 years old and for as long as I can remember my father was warning me that "THERE WILL BE NO SOCIAL SECURITY MONEY FOR YOU, PLAN ACCORDINGLY!"

He was right; I've known for a long time that he was right.  If I get any SS it will be with hyper-inflated dollars worth far less than I personally contributed into the system.

But my concern doesn't end there.

The second part of the Federal Employee Retirement System (FERS) - is the Thrift Savings Plan (TSP). 

http://tsp.gov/rates/fundsheets.html

This is the gov. version of a 401(k). 

The "safest" fund is the "G Fund".  What is the G Fund?  It is a special gov security that yields a rate based on a weighted average of all US Treasuries greater than 4 years.

As everyone here is probably acutely aware, we should begin to see US T-bill rates skyrocket as the supply of this debt far exceeds demand.  The handwriting is on the wall.  China along with most of the other Indirect Bidders at T-auctions have made it clear that they want, need, and will move away from the dollar.

A bubble in T-bills will be good for the G Fund in the short term but like SS these securities are intergovernmental (a simple account entry).  They are non-negotiable and cannot be sold in the open market.  When I want to transfer money out of the G Fund, TSP goes to the Treasury (just like SS) and tells them how much they need.  Since the Treasury doesn't have this money on hand they need to go to auction and sell new debt to get the cash.  If there isn't enough demand, that will leave the Fed to buy the bonds resulting in an instant increase in the money supply (inflation).

I'm thinking at present I won't be able to retire for another 20 years (if ever...assuming the US gov doesn't implode under the weight of debt). 

The gov has only three options:

1) Default,

2) Monazite the debt (including SS, Medicare, Medicaid, and my G Fund :-(

3) Reverse course NOW and cut Fed spending somewhere in the neighborhood of 50-75% and reduce the Debt to GDP ratio.

#3 is what we should be doing but won't do. 

I'm still torn between #1 and #2.  #2 seems the most likely but the US Treasury will still have to deal with all the central banks that don't want to see their investment dollars hyper inflated away.

I'd take my money out of the G Fund and put in one of the other FERS TSP equity funds but I already took a 40% haircut last fall and I'm expecting to see the same thing happen again very SOON!

So what is the more likely, the government will default on intergovernmental bonds or monazite this debt? 

This question is of HUGE personal interest to me (perhaps even more than others).

As a Federal employee, my retirement plan has three parts to it.

The first part is Social Security.  I pay FICA like everybody else.  I'm 40 years old and for as long as I can remember my father was warning me that "THERE WILL BE NO SOCIAL SECURITY MONEY FOR YOU, PLAN ACCORDINGLY!"

He was right; I've known for a long time that he was right.  If I get any SS it will be with hyper-inflated dollars worth far less than I personally contributed into the system.

But my concern doesn't end there.

The second part of the Federal Employee Retirement System (FERS) - is the Thrift Savings Plan (TSP). 

http://tsp.gov/rates/fundsheets.html

This is the gov. version of a 401(k). 

The "safest" fund is the "G Fund".  What is the G Fund?  It is a special gov security that yields a rate based on a weighted average of all US Treasuries greater than 4 years.

As everyone here is probably acutely aware, we should begin to see US T-bills skyrocket as the supply of this debt far exceeds demand.  The handwriting is on the wall.  China along with most of the other Indirect Bidders at T-auctions have made it clear that they want, need, and will move away from the dollar.

A bubble in T-bills will be good for the G Fund in the short term but like SS these securities are intergovernmental (a simple account entry).  They are non-negotiable and cannot be sold in the open market.  When I want to transfer money out of the G Fund, TSP goes to the Treasury (just like SS) and tells them how much they need.  Since the Treasury doesn't have this money on hand they need to go to auction and sell new debt to get the cash.  If there isn't enough demand, that will leave the Fed to buy the bonds resulting in an instant increase in the money supply (inflation).

I'm thinking at present I won't be able to retire for another 20 years (if ever...assuming the US gov doesn't implode under the weight of debt). 

The gov has only three options:

1) Default,

2) Monazite the debt (including SS, Medicare, Medicaid, and my G Fund :-(

3) Reverse course NOW and cut Fed spending somewhere in the neighborhood of 50-75% and reduce the Debt to GDP ratio.

#3 is what we should be doing but won't do. 

I'm still torn between #1 and #2.  #2 seems the most likely but the US Treasury will still have to deal with all the central banks that don't want to see their investment dollars hyper inflated away.

I'd take my money out of the G Fund and put in one of the other FERS TSP equity funds but I already took a 40% haircut last fall and I'm expecting to see the same thing happen again very SOON!

So what is the more likely, the government will default on intergovernmental bonds or monazite this debt?

 

btw Chris, I saw Glen Beck used your 7 year $5b bond auction slight of hand call (Shell Game) on his show last night (He didn't attribute the source but I recognized the graphics as coming directly from this sight).  It would have been nice if there was something on the graphic that pointed to this sight but I'm happy to see the info getting out regardless of who gets the credit.

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