Mr. Greenspan’s WMD

While the media and world fret over the existence or non-existence of Saddam Hussein’s weapons of mass destruction, there is an actual, real, and verifiable WMD already in this
country. Moreover, those at the top echelons of government know where it is. Hell, they created it.

This WMD is a Debt Bomb. Not only is it a weapon of mass destruction; it’s one of mass deception as well.

During the 2000 election, both George W. Bush and Al Gore based their campaigns on the preposterous lie that the federal budget was in surplus, and argued over who had a better
program for spending the trillions of dollars that were about to drown the Treasury. Just four years later, the government’s official budget figures for fiscal 2004 show a whopping US$413
billion deficit, and this time around, both Bush and John Kerry blithely promised that, if elected, they would balance the budget.

Not only is that promise hopeless to fulfill, even the published deficits are lies. Check total federal debt and you’ll see it jumped by US$596 billion for fiscal 2004, almost 50% higher than
the official deficit.1 Hold on, though, that US$596 billion figure is another lie. Overall government IOUs are rising at triple this rate, or close to $2 trillion per year. And there’s more: a study
commissioned by former Treasury Secretary Paul O’Neill concluded in 2003 that there are more than US$44 trillion in future unfunded IOUs to Medicare, Social Security, federal pensions, etc.2  (O’Neill was quietly fired after releasing that study).

Year after year, the government’s financial sleight-of-hand camouflages massive promises to Social Security and Medicare beneficiaries, as well as government retirees. Washington further
distorts estimates through over-optimistic projections of revenues and expenses. If an ordinary taxpayer did what the government does in his own accounts, he would be jailed for tax fraud.

A. Haeworth Robertson, Chief Actuary of the U.S. Social Security Administration from 1975 to 1978, blew the whistle in 1992 in his book, Social Security: What Every Taxpayer Should Know,
and a later book titled The Big Lie: What Every Baby Boomer Should Know About Social Security. Of course, no one in Washington paid any attention to his devastating insider insights.

And Robertson’s not the only government insider to criticize this chicanery. In 1996, Peter G. Petersen, Chairman of the Federal Reserve Bank of New York, wrote that if federal law required
Congress to fund Social Security the way private pensions must be funded, the annual federal deficit would instantly rise by US$675 billion. Unfunded federal-employee pensions would kick
it further to US$800 billion, and Medicare would take it to $1 trillion. That was in 1996. Those figures are much higher today.

There is no cure, for curtailing entitlements in a democracy is politically impossible. Voters will always vote themselves greater benefits, especially if they think someone else is paying for
them. Profligate spending is the problem, and politicians have found that issuing IOUs is their answer.

Which brings me to Mr. Greenspan’s role in constructing this economic weapon of mass destruction and deception. In 1987, when Greenspan became Federal Reserve Chairman of the
Fed, federal debt stood at US$2.3 trillion. In just 17 years, politicians borrowed an additional US$5 trillion, more than twice as much as had been borrowed in the previous 200 years of U.S.
history.

This enormous borrowing would have strangled the credit markets if Greenspan had not come to the rescue by buying more than US$700 billion of those government-backed IOUs. With
strokes on a keyboard at the Fed, US$700 billion in new reserves appeared in commercial banks. Through the magic multiplier of fractional-reserve banking, these new reserves completely replaced the $5 trillion the Treasury had borrowed. The Fed “monetized” the government debt.

While I don’t know how or when it will end, this sleight of hand can’t go on forever. Federal Reserve notes (currency) as well as Treasury bonds, bills, and notes payable in money, are all
promises of future payment. Interest rates and bond prices appear to be under the control of the central bank. They are not. Rates and prices are set by the value judgments of you, me, and
millions of other individuals. We decide whether to buy, hold, or sell IOUs, or save or spend our cash, based on our confidence in the purchasing power of our dollars.

By endlessly propping up failing debtors, including the government, for 17 years, Greenspan has deluded the public into believing these irredeemable government IOUs are all as good as
gold. In so doing, he has engineered the biggest financial bomb in history. When the Debt Bomb explodes, Americans will experience, simultaneously, a catastrophic drop in their purchasing power, the disintegration of Social Security and Medicare, a stock market collapse and the bankruptcy of all but the strongest U.S. banks. The fallout from this bomb will lead to massive business failures, unemployment, price controls and perhaps even foreign exchange restrictions. It will make the Great Depression of the 1930s look like a Sunday School picnic.

History gives ample lessons on how to survive and even profit from the detonation of any debt bomb. When confidence in money and debt evaporates, people get out of money and into real
goods, causing rising prices. When prices rise, interest rates rise. Bond prices fall. CDs, annuities, insurance products, and other fixed income assets lose.

What is the best defense for the individual? First, avoid debt and debt instruments, especially those denominated in U.S. dollars. (There are, however, a few special exceptions, which we’ll
periodically bring to your attention.) Strongly consider using gold instead of U.S. dollars as your currency. This is easier and more practical than ever, thanks to projects such as James Turk’s
GoldMoney. Check it out at http://www.goldmoney.com.

Second, focus your investments on real assets, not paper ones. Mining, forestry and oil and gas producers will all do well as the debt bomb explodes, particularly as the dollar falls. This brings
us to commodities, the raw materials that we consume. Prices of copper, nickel, zinc and uranium have soared in the last 18 months, but I think there are further gains ahead. Last, but far
from least, buy gold and silver, the ultimate fallout shelter from the debt bomb.

Finding safety and individual sovereignty in a complex and dangerous world is made immensely more complex and dangerous by weapons of mass destruction and deception
created by government. With the flow of ideas from our members and our Council of Experts, The Sovereign Society will continue to seek out safe havens from the Debt Bomb Greenspan
and Washington have unleashed upon us all.

John Pugsley is Chairman of The Sovereign Society and the author of many books on economics, investing and politics.


By John Pugsley