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The Larger the Deficit, the Greater the Default

Written by Gary North on September 25, 2013

Americans are told the following from their youth.

“What goes up must come down.”

“You can’t get something for nothing.”

“There are no free lunches.”

“What goes around comes around.”

“The bigger they are, the harder they fall.”

This is Austrian School economic theory.

When they are old enough to vote, they are told this.

“What goes up can keep going up, if you stick it to the rich.”

“You can get something for nothing, if you stick it to the rich.”

“There are free lunches, if you stick it to the rich.”

“What goes around need not come around, if you stick it to the rich.”

“The bigger they are, the harder they fall. The rich are big.”

This is Keynesian economic theory.

The federal government collects about $2.8 trillion a year in taxes. The problem is that it spends about $3.6 trillion. Politicians prefer to make up the difference by borrowing on behalf of the government. That is to say, they prefer to obligate taxpayers for future expenses: paying off lenders.

The Federal Reserve System creates money out of nothing, and then lends $540 billion a year to the Treasury. It does so at low interest rates. If it limited its purchases to 90-day T-bills, it could do this at just above zero interest. But it buys longer-term debt to hold down long-term rates, a policy that has led to an increase in bond rates by about 65% since May.


In short, it’s not working. Neither is its policy of buying $480 billion of Fannie/Freddie debt to hold down mortgage rates.

The public doesn’t care. It wants goodies for free. It thinks it can get this. The voters feel no pain. So, why not get more government goodies? Someone else will pay. That’s what Keynesians teach.

Our children will pay off the debt, we think. No, they won’t. They will elect politicians who will simply cut off the flow of funds when they at last feel the pain. The voters have a permanent deal with Congress. They let Congress run up as large a tab at the debt window as the suckers who lend money to the government are willing to extend. Then, when the suckers try to collect, and the pain on taxpayers begins, the voters will elect Congressmen who tell lenders that they will not be paid off.

This is a terrific government program to wipe out lenders who believe in the full faith and credit of the U.S. government. The present Congress says to voters: “Elect us. We’ll run up the tab. You’ll get your free goodies.” The voters love it. They don’t care about the deficit, because they know that they will never have to pay it off. Keynesianism teaches this. It teaches that government deficits are productive, and will never have to be paid off.

The voters accept this line of reasoning. They don’t understand Keynesianism. No one does. No one is supposed to. It is a system that promises something for nothing. Keynesians have arcane mathematical equations, which are magical incantations uttered by people with Ph.D. degrees in economics.  The voters love it. They want more of it.

So, the federal government deficit grows. This is a program of free money, free goodies, and no day of reckoning.

There will be a day of reckoning, of course. There always is. But a majority of voters at that time will be sure to see to it that previous lenders will suffer the losses. There will be a Great Default.

The lenders will cry: “But you promised.” And the borrowers will cry: “That’s life in the land of Keynes. In the long run, we’re all dead. You go first.”

The big losers will be the suckers who lent Uncle Sam the money. The biggest lenders are those who trust the federal government to pay their retirement bills, including medical bills. They will be among the biggest losers.

In short, those who believe in the welfare state will be the biggest losers. That is appropriate. They have justified the theft. They have justified the deficits. They have justified the promises. They have believed in something for nothing. They will get left with a pile of IOUs and a note: “Sorry, Charlie.”

The tab must always be paid. The main question is this: By whom? The secondary question is this: When?

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4 thoughts on “The Larger the Deficit, the Greater the Default

  1. One other point. If you support and act on Keynesian theory the liberal government owns your soul. They will keep it. You relinquish your humanity and the power of discriminatory thought. Best to be free and independent. See my blog at http://cranky-conservative.blogspot.com

  2. The ones who gain from deficits:

    The saddest thing of all is that the larger the deficit the greater the graft coming from the money borrowed. So in this way, those who wrongfully run up the debts know that they can vastly increase this debt with much larger rake-offs that can line their pockets and those of their cronies and funders while knowing the end is near and that their trails will be covered through the confusion of the collapse.

    Worse, it is the citizens such as you and I who end up picking up the tab; not only for the crooked politicians and their cronies, but also for those behind the Federal Reserve who manipulate the markets and the various so-called "bubbles" that keep conveniently popping up, growing through wrong and illegal behaviors and then bust, just in time to wipe out lots of people financially.

  3. The ones who gain from deficits: (continued)

    Meanwhile, slick tricks like Qualitative Easing, expectations of movements of the FED and other ploys are used to bump markets and investments first one way and then another; while the politicians manipulate and leak info on "coming laws" to manipulate markets using insider information for them, their families and their friends to get in early; profit; and then get out, all before the losses hit and the stink starts.

    Why have we taken this for so long? Why do we continue to do so? At any other time in history such scoundrels would have been gathered up and hung by those whom are their victims.

  4. FreeMarketAnarchist says:

    Quit spamming your blog here, I'm getting tired of it.