Thomas Jefferson was opposed to a ‘national debt‘. He thought it was immoral that one generation should spend on credit, forcing the next generation to pay the bill.

Jefferson knew what a burden debt could be – especially when it is debt for spending he didn’t enjoy himself. He had inherited debts from his father-in-law. You’ve heard of ‘something for nothing’? On the flip side is a second condition as disagreeable as the first is pleasant: nothing for something.

‘Nothing for something’ describes the financial situation of America’s youth. If things go according to plan, they will pay a large portion of their incomes (if they have incomes) to pay for social welfare ‘benefits’ that they will never enjoy themselves.

Professor Laurence Kotlikoff of Boston University puts the total of US government debt and unfunded pension and healthcare liabilities at $222 trillion. The biggest part of that money will be spent on the baby boomer generation…as it heads into retirement homes, nursing homes and hospitals. This is such a huge sum that it cannot be paid. But the burden of trying to pay it (and not succeeding) will fall heavily on younger generations.

Large debts also retard growth. This is the conclusion of professors Rogoff and Reinhart in ‘This Time it’s Different’ – their study of 800 years of financial folly. Much of current output must be used to pay for past consumption.

That is part of the reason that today’s growth rates are only about half of those in the 1960s and 1970s. Low growth means fewer new job opportunities. Those that do become available are generally at lower salaries. The real growth that doesn’t happen leads to the real jobs that will not be created and to the real careers your children and grandchildren may never have.

High debt levels also mean higher taxes. Taxes tend to be levied on earnings, not on pensions and healthcare consumption. An estimate for how high taxes on young people would have to go (if it were possible) to finance this debt: about 80%.

Today, I take up the cause of our children and grandchildren. In the modern vernacular: They’re screwed.

Our job is to unscrew them. First, by trying to understand how the system works. And second, by setting up parallel or alternative systems of our own that help them protect themselves.

Let’s begin with the big picture. The economies of the US and other modern, developed social welfare nations are based on several conceits and delusions.

Serious observers keep saying that if we continue doing what we’re doing bad things will happen ‘sooner or later’. We never know when sooner or later will get here. But it’s a fair bet that it will come during our children’s and grandchildren’s lives.

Remember Herb Stein’s law: Things we all know can’t last forever will come to a halt sometime. Most likely, it will be during the working careers of our children and grandchildren.

For example, the credit expansion that began after World War II had to end sooner or later. For the private sector, it ended in 2007. It almost ended, too, for many governments – such as Japan, Greece, Spain, California and others.

But large nations with their own printing presses are still going at it – with public debt-to-GDP ratios reaching up over 200% already. (If you included the aforementioned unfunded pension and health obligations, the ratio for the US is already at nearly 1,400% and growing 20 times faster.)

The system of indirectly funding deficits through money printing (QE), while holding interest rates at the zero bound, will also have to end sooner or later. More alarmingly, the current system of fiat money is one for the record books. None has ever lasted this long. But it, too, will go away sooner or later.

So too will the system of intergenerational wealth transfers to fund health and retirement benefits. This system, developed in the 19th century, and brought into wide service in the 20th, was an illusion from the get-go.

In a stable society, the contributors – in the aggregate – can never get out of the system what they put in. Bureaucratically managed programs are too wasteful and beset by too much fraud. And it doesn’t really make sense for people to go along with a system where they get less out of it than they put in.

Nevertheless, there was – and still is – wide support for these programs. Why? Because people still expect to get ‘something for nothing’ – or at least more than they put in. That has been the experience of the last 100 years.

Citizens were able to get more than they put in because the following generation was always bigger and richer – until now. Now, in the US, Japan and most of Europe, birthrates are so low that the native-born population is falling. And, for the first time in US history, the next generation may actually be poorer than we are.

In other words, our children and grandchildren are getting a bum deal in more ways than one.

The short version of this story is simple: Old people vote. Politicians found they could be bribed. Promise them something they couldn’t get by honest labour – someone else’s money – and you are a shoo-in for elective office.

Year after year, the promises got to be more and more costly. How high have the promises gone? The median retiree has a total of about $120,000 in net savings. But he’ll consume about $275,000 worth of healthcare services before he finally adjourns. Who will pay the difference? Who bears the burden of this unfunded liability?

The Social Security Fund – which was the source of the phony ‘surpluses’ of the Clinton era – is now in deficit. This year, it will pay out about $100 billion more than it takes in. That’s $100 billion more to retirees than working people contribute in Social Security tax payments. And the baby boomers have only just begun to retire!

Old people vote for higher Social Security payments. They vote for more healthcare. They vote for pills, wheelchair access and senior discounts. They vote for spending in the here and now…and a few brief tomorrows. As to the long term, it can take care of itself…

Regards,

Bill Bonner
for The Daily Reckoning Australia

Let’s wind the clock back to 2008.

The world was thought to be ending. Lehman went bust. Markets were plunging. Everyone was scared that growth was over. It was as though the global economy was grinding to a halt.

But then China’s stock market bottomed. The Chinese Government announced a massive stimulus plan to turn its economy around. And sure enough the Chinese economy took off again.

A few months later, the US markets bottomed courtesy of extraordinary stimulus from the US Federal Reserve. Three months after that, the US economy was showing what everyone claimed were “green shoots.”

And the world began to gradually shift towards growth and increased confidence.

Why do I bring all of this up? Because it was China’s stimulus and China’s economy that supposedly lead the world back towards growth again. China is the proverbial canary in the coalmine, the economy that most quickly reveals what’s coming and where we’re all heading…

……read more HERE

With the Federal Reserve’s easing program still providing support to bonds, they are unlikely to move in a single direction soon, says Pimco CEO Mohamed El-Erian.

“The bond market, like every other market, is artificially valued by the involvement of the Fed,” he tells CNBC. “In the short term, we think that we are range-bound on Treasurys. And the range is 1.85 to 2.25 percent on the 10-year yield.”

That yield stood at 2.04 percent Wednesday morning.

As for the long-term “a lot depends on if you believe in this handoff … from [Fed] assisted economic growth to sustained growth,” El-Erian says. “If you believe in this handoff, then you should migrate over time into risk assets. If you think this handoff is going to be a problem, then you should have a diversified asset allocation.”

He hasn’t seen anything of the mass exodus from bonds that many commentators have predicted. “What you do see is an encouraging inflow into equity funds.” 

Stock mutual funds have attracted $36 billion over the past nine weeks, El-Erian says. But that’s coming from cash rather than bonds. 

“We have seen no sign as of yet of the ‘great rotation’ that people are talking about,” he says.

When the Fed exits its easy monetary policy, it “will be one of the most challenging issues facing any central bank.”

“There is no doubt that by artificially altering prices the Fed has changed behavior, and some of the behavior that has changed is the normal lending that goes on to various sectors,” he notes. “The problem is that it has also changed massive behavior elsewhere and that is asset-allocation behavior. So it will be very delicate.”

Backing up El-Erian’s view of bonds trapped in narrow bands, the 10-year Treasury yield hit an 11-month high of 2.08 percent Friday, but now bonds are seeing buying interest having made that move.

“These are semi-attractive levels,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald, tells Bloomberg. “The U.S. is not ready to break significantly higher in yields. … There are just buyers out there.”

Will Bonner here again…

Dad is still without power on the ranch. He’s working on restoring the solar panels. But he’s still out of reach.

So instead of his regular Diary entry, here is Part II of his essay to members of his family wealth preservation advisory Bonner & Partners Private Wealth. (To find out more, read this.)

Unscrew Your Kids, Part II

Thomas Jefferson was familiar with debt. He carried a substantial burden of it throughout his adult life.

At the time, there were no bankruptcy protection laws. If you did not pay your debts, your creditors hounded you… could take everything from you… and get you sent to jail.

Jefferson had such a reputation that his creditors were perhaps awed by it… or sympathetic. They did not push him too hard. Otherwise, he might have been ruined. Or even put in prison for non-payment of debt.

There he might have joined his fellow Declaration of Independence signatory James Wilson.

Wilson was put in prison for non-payment while serving as Associate Justice of the U.S. Supreme Court. There too, in the Walnut Street Debtors’ Prison, in Washington, D.C., he might have encountered his old friend Robert Morris, also a signatory of the Declaration of Independence. Morris was once one of the richest men in the colonies and was described as “the most powerful man in America.” From 1781 to 1784, he acted as the new nation’s secretary of the

Treasury — as its “Superintendent of Finance.” But he was bankrupted in the Panic of 1796 and sent to debtors’ prison.

The Great Danger

Another illustrious veteran of debtors’ prison was Henry “Light-Horse Harry” Lee, father of Robert E. Lee. He was a hero of the Revolutionary War, but nevertheless busted and sent to prison in 1808. He used his time there to write his Memoirs of the War.

Throughout history, excessive debt has been a great danger — with serious consequences for the unwary. There were heavy penalties for not satisfying your debts. In Ancient Greece, for example, the debtor could be taken into “debt bondage.” He was made a slave.

So many people became enslaved in this way that Athenian statesman Solon enacted a law in about 600 B.C. that banned the practice. Called the seisachtheia, it allowed the debt slaves to return to their farms as free men. But the debt was not erased. The debtor was still at risk of becoming his creditor’s slave if he failed to respect the new credit terms.

The penalty for failure to pay debts in Europe during the Middle Ages was prison. Conditions were appalling, as you might imagine. Typically, the debtor’s family had to continue providing food and clothing. If the prisoner had no family support he would starve. In prison, of course, he had little means to repay the debt, which commonly brought the story to a miserable conclusion.

Going broke was also an abominable disgrace. It was a blemish on a family escutcheon, telling the world that a member of the family — often the head of it — had let down his friends and associates. Read the novels of Thackeray and James; you will find young women of good society who can’t get married — ever — because their fathers defaulted on their financial obligations. Non-payment of debt sullied the family — for generations. To avoid this stain, uncles, cousins and other would come together to discharge the debtor’s obligation.

The penalties of excessive debt also figured heavily in commercial relations — especially in the banking industry. Until the creation of the Federal Reserve System in 1913… and the later Depression Era reforms that allowed banks to operate behind a corporate shield… bank owners were personally responsible for their bank’s losses. There was no federal deposit insurance and no private banking cartel that could come up with funny money when it was needed.

Money was real — expressed as a unit of gold. Losing it meant real losses. Failed banks went into receivership. The receiver would tally up the losses and send a bill to the owners. Each paid his share of the losses… or he would be judged insolvent too.

As you can imagine, bankers were a lot more prudent back then. So were borrowers. Both shared a keen interest in not overdoing it. Because both were directly exposed to penalties if anything went wrong! There was a direct connection between the debtor and his suffering — whether or not he operated behind the big brass door of a bank or the flimsy wooden door of a tenement apartment.

Today’s Debt Slaves

Times have changed…

The system today allows some people to make reckless bets and extravagant promises, while putting the penalties for failure onto someone else. Sooner or later their speculations go bad. Sooner or later they spend more than they can afford. Sooner or later they make wasteful and disastrous investments.

Who cares? Someone else pays the penalty… sooner or later!

Bankruptcy protection laws now permit debtors to continue to live normal lives, as their accounts are brought back into balance by court order. The modern debtor is usually allowed to keep the family home… provided it is not too extravagant… and enough of his earnings to allow him to carry on. Otherwise, his assets are seized and distributed among his creditors.

But public debt is another matter. Never before in history have we seen anything like it. A young man in the 19th century might inherit his father’s debts (along with his assets); he now inherits debts incurred by people completely unrelated to him.

An old man in Arizona gets free pills from the government in 2010; a young man in Maine will still be paying for them in 2030. A middle-aged banker pays himself a $10 million bonus in 2011 thanks to EZ money from the Fed; a plumber just starting out in 2025 wonders why his own money is worth so little. Washington goes $7 trillion further into debt in 2012; some hapless college grad 10 years from now finds he can’t get a job.

Calculated by Professor Lawrence Kotlikoff of Boston University, your grandson’s share of the total U.S. government debt burden is about $700,000. This is not a fiction. It is real. And as the baby boomer generation retires and grows old, this obligation will come due and payable.

It would cost your grandson about $20,000 a year, over a 40-year career, to discharge it. And that assumes that the government immediately stops adding to it. This young man will probably pay about 40% of his income just to keep the feds current on spending. On earnings of $50,000 a year, he would pay another 40% for the benefits his parents and grandparents consumed many years before.

We have yet to meet the young man or woman who would stand for this. None would. No government would dare impose it. And the markets would get the heebie-jeebies and collapse long before it came to pass.

Instead, what will really happen was outlined in last week’s Outlook. The feds will delay serious budgetary reforms as long as possible. They will raise taxes here and there. They will postpone spending cuts. The can will be kicked — and booted — so many times that it will be battered and bumped into an unrecognizable shape when it finally comes to rest against a brick wall. That will be the brick wall against which the feds will have their backs when all hell breaks loose.

Prices will begin to rise. Investors, fearing inflation, will sell U.S. Treasury debt. The feds will have only two choices: raise interest rates to stifle inflation (thereby protecting the dollar and the bond market) or print money to cover deficits (thereby protecting their jobs and benefit consumers). The first choice will mean recession, maybe depression, and possibly riots and looting. The second will mean hyperinflation.

This wall is out there. Where exactly this wall is, no one knows. I have been surprised by the example of Japan. The country has been racing toward its own brick wall for more than a decade. Shinzo Abe, the incoming prime minister, has promised to speed up! But so far investors and savers still consent to transferring more and more of their money to the government in return for IOUs (Japanese government bonds) that can’t possibly be paid off. They too must collapse… sooner or later.

A Lot of Ruin

The U.S. has “a lot of ruin in it” too, to borrow an expression from Keynes. How much? I don’t know. But it is certainly doing its best to find out. And it will be a costly lesson.

Succeeding generations (probably the next) will bear the costs of the debt. This will likely come in the form of a disastrous period of financial whammies… crashes… bear markets… and hyperinflation. They will also bear the cost of living and working in a debt-saturated zombie economy (one that is essentially moribund but that appears alive).

From a distance — or from the figures provided by the U.S. government — you might think the U.S. economy is “recovering” from a serious ailment. But if you hold a mirror up to its nose, you will not see much fog. Hold its wrist. The pulse will be hard to detect.

The false impression is primarily the result of faulty reporting. Real employment and inflation measures are distorted by changes to the system put in place at the Bureau of Labor Statistics. According to John Williams of ShadowStats.com, properly measured, the numbers would show the U.S. economy now in its seventh year of recession… with a 20% real unemployment rate. That is to say we are living through a depression, and young people are bearing most of the pain.

The young will also bear the brunt of the feds’ clumsy efforts to repair the system. Government is always reactionary — favoring existing capital interests over those of the (non-voting) future. But never before in a “free market” economy have governments so vigorously defended the past at the future’s expense.

In the U.S., Washington’s deficits and bailouts protect current jobs at the expense of future jobs. Its QE programs protect today’s bondholders at the expense of those of tomorrow. Its Social Security and Medicare programs protect present beneficiaries. Those who will come into the program 20 years from now can go fish.

In short, the young are today’s debt slaves. But unlike the debt bondage of ancient Athens, today’s young people never even got their hands on the money. Our job as parents is to help our children and grandchildren unscrew themselves by giving them a source of real capital and showing them how to use it.

Editor’s note: It is our mission at Bonner & Partners Private Wealth to ensure a secure future for our children. To make sure they can “unscrew” themselves. Independently, of course. We take this mission very seriously and have built a small group of members that do too. If you would like to know more, here’s the entire story.

About Bill Bonner:

Bill Bonner started Diary of a Rogue Economist to share his over 30 years of economics and market experience with as many interested readers as possible.

Diary of a Rogue Economist is always free, and it’s delivered to your email each business day. Sign Up HERE

“Give me control of a nation’s money and I care not who makes the laws.” Mayer Amschel Rothschild

Ed Note: Sage advice also comes from Richard Russell whose Dow Theory Letters is the oldest service continuously written by one person in the business. He’s old. Russell was a bomadier on a B-25 over Europe when another legendary Marketeer, Jim Rogers, was yet still a glint in his father’s eye.

Indeed, while Russell was thinking about markets and bombing the living daylights out of Hitler another potent financial legend, Bernard Baruch, was whispering into Roosevelt and Churchill’s ears.

He not only lived through the 1929 Stock Market Collapse, the following Depression, booms, war, peace, good times and bad times…….he was well experienced and able to call important bottoms and tops like the1949-’66 bull, almost to the day the bottom of the great 1972-’74 bear, the beginning of the great December 1974 bull market and so on. All the while both protecting his customers from and helping them gain after from the big bear market smashes like 1987 and 2007. 

Richard on Yesterday’s Drama: “I thought the quote above fit right into today’s situation.  And, of course, the Federal Reserve has control of our money in the USA.  But the very extent of the Fed’s control is unprecedented … My PTI sees the market heading higher.  I checked with the latest statement by Fed head Bernanke, and it’s clear that come hell or high water, Ben Bernanke will do everything in his power to send this market higher.  This market lives and dies by the latest edict from the Fed.”

“Last but far from least, I received Barron’s Saturday morning, and right there on the upper right-hand corner of the cover page I read the fateful words, “Dow 15,000 Very Likely By Year End.”  Ah hah, Barron’s not only gave us a number, but they also gave us a time. The time is — “By the end of the year.”

“Yes, I know that this market is uncorrected during its long rise from the 2009 low, and I know that there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth, but my suggestion is that my subscribers should take a chance (after all, Columbus took a chance) and take a position in the DIAs”.

….Richard has more charts and much more to say HERE