People often say that the US dollar is no longer backed because it is no longer backed by gold or silver.  The truth is that the American Household backs the US dollar.

The currency value of the US dollar is the perceived value of the US government’s ability to collect taxes and repay its debts.  This being the case, lets review the fundamentals of the US economy and dollar.

 

GOVERNMENT DEBT:

DEBT TYPE	DEBT AMOUNT
Federal Government Sector debt - a record high as of year end 2007.	$9.2 Trillion
State & Local Government Sector debt - a record high	$2.0 Trillion
(State & Local Government Spending Report)
Un-funded Social Security contingent liabilities estimated looking forward	$7 Trillion
Un-funded Medicare/Medicaid contingent liabilities *	$50 Trillion
Un-funded federal employee pension contingent liabilities (incl. Postal service)	$4 Trillion
Un-funded state & local government employee pension & medical contingent liabilities	$1 Trillion
Other off-budget Federal Govt. borrowings	?
Total Government Debt	$73.2 Trillion

Source: Grandfather Economic Reports

 

Above is a summary of unfunded federal, state and local government debt in the US as of 2007.  If we take that $73 trillion in government liabilities and divide it by the 111 million households in the US we find that the average household liability to the government for its promises is $657,657.  Government budgets are not currently balanced and are unlikely to become balanced as tax revenue declines during the recession.  However, assuming government budgets were balanced lets consider the following chart:

 

Average Household Government Liabilities:	$657,657
Average Household Income Before Taxes:	$67,163
Average Household Federal Tax:	$22,929
Average Household State and Local Tax:	$6,783
Average Household Income After Taxes:	$37,451
Income As a Percentage of Government Liabilities:	5.7%

Sources: US Census Bureau, The Heritage Foundation, CNN Money

 

Total household income in the US is roughly 5.7% of total government liabilities already in place without future unbalanced budgets.  In other words, if everyone living in the US spent their entire income after taxes - without food, clothing, or shelter – they could pay the interest only on that obligation as long as the interest rate was 5.7%.  Since people generally need food, shelter and clothing, lets look at household budgets to see how much more they can afford to pay the government:

 

Source: US Bureau of Economic Analysis

 

Nothing!  Given that the US savings rate of disposable income is hovering around 0%, it is clear that the average household already spends everything it earns buy its food, clothing, and shelter.  One problem is that the government has indebted itself beyond the brink of physics, another problem is the average American household has done the same.  According to the Grandfather Economic Reports, the household sector has an additional $12.8 trillion in its own debt – and the interest rate on that debt is much higher than the government’s treasury interest rates.

 

I often hear that the government can raise tax rates and increase its revenue.  Sounds like a great idea, but it once again defies physics.  In reality, the higher tax rates go, the lower tax revenues go and vice versa.  If the government really wanted to increase its revenue it would have to lower tax rates.  As tax rates increase, taxpayers increasingly turn to

Fight, Flight or Fraud to avoid paying more taxes.  This trend can be seen clearly below:

 

Source: The Heritage Foundation

 

Conclusion:

 

In the past, debts were manageable and households saved so the US dollar had perceived value.  Some of this perceived value still exists. However, today it is clear that the US government will be unable to fulfill its obligations.  While people may perceive or believe in the US dollar and government, the truth is that both are insolvent.  It is only a matter of time before perception catches up to reality.  If the government diluted $73 trillion in obligations against the current M3 monetary supply of roughly $14 trillion in an orderly fashion, the dollar would fall in value to about 16 cents in today’s dollars.

 

The US economy and markets are undeniably past the point of no return in its path towards a historical renaissance.  There is no way out.  While many free market proponents are pushing for smaller government, balanced budgets, increased savings, and criticize the Federal Reserve for its inflationary policies, it makes much more sense to support the nation’s current trajectory because it is much easier to go forward that back and it is too late to change.  Despite fairy tale stories by the media and politicians, the laws of physics dictate that the dollar and the US economy will default either through the default of obligations or default of the currency itself through inflation.
The pendulum of monetary, economic policy, and political policy has been stretched beyond the brink. Greenspan may still be an objectivist free market supporter after all. Whether planned or not, the Federal Reserve and the Federal Government are leading the US through a path of creative destruction. A measured approach in destructive behavior taken by US officials could have lasted many generations. However, the US is probably now less than a decade away from a free market renaissance in which it achieves complete collapse and economic rebirth.

 

 

 

 

 

 

 

Chris Mack writes the Mack Report and can be reached at mackreport@gmail.com