Saturday, July 27, 2013

Know What the 'Fuel' For The American Revolution Really Was?

'Don't tax you, don't tax me, tax those colonists
across the sea!'-King George III
We all know that the 'spark' was the Stamp Act, the Townshend Act, the 'Anything That King George III Did' Act that placed more taxes on the colonists, especially since the colonists did not have full or fair representation in Parliament.

We have stated this many times before but it bears repeating:

'In America today, we have taxation WITH Representation!'

So how's that working out for you?

But what was the underlying reason, the 'fuel', the basic fact that forced the King to impose such onerous taxes on tea, foodstuffs, linen, tools, rudimentary machines, anything that was used by the colonists which was imported from England (which was most of the manufactured goods at the time)?

Debt. Great Britain racked up enormous debt of £130 million during the French and Indian War from 1754-1763. *

More specifically, the problem directly faced by the King and Parliament was paying the interest on the national debt incurred by the Crown as they prosecuted the French and Indian War. With many American loyalists at the time, by the way, as Colonel George Washington from whom the English would hear from later in his life.

Actually, it was the 'interest paid on exorbitant debt' just to put a higher exclamation point on it.

What was the debt service to the King way back in 1770?

4.5 million pounds Sterling. £4.5M. Solely in interest to be paid each year on existing debt at the time. At least the interest rate was only 3.46%

Think we have trouble with exploding national debt and out-of-control interest payments at the federal level?

That £4.5M payment per year in interest on the national debt of Great Britain accounted for 50% of the entire annual budget of the English government at the time.

50%. That would be like paying $1.9 Trillion per year in interest on our national debt in the FY 2013 American federal government budget.**

Out of a $3.8 trillion annual budget.

'That could never happen to us!' some of the less alarmed 'experts' (sic) say. Or less informed, we might add.

What would it take to get our annual interest payments to equal 50% of the federal budget?

Not a whole heckuva lot if you really think about it. 11% interest rates to be more exact about it.

'Could that EVER happen in the United States of America?' you might be wondering?

'It already HAS happened in the United States of America!' Check out the interest rates from 1979-1982, right about the time many of our readers were coming out of college looking for a job in what was at least considered to be the 3rd Worst Recession Since the Depression at the time.

10-year government bond rates reached 16% in 1981. 16%. That is pretty high. But it happened.

The scary thing about our current debt situation is that it is not just its enormous size but the fact that so much of it is in short-term bonds, not long-term 30-year bonds. Meaning that as interest rates rise, as they are doing now and have to as a matter of economic cycles, most of it will be refinanced at increasing, ever-higher rates of interest until interest rates top out again once day.

Think of the problem faced by the King of England in 1770 as being akin to the dire situation faced by the city of Detroit today. Except the City of Detroit has no 'loyal subjects' anywhere else they can levy a hefty tax on to pay for their economic and fiscal mess that has basically been created and engendered by their own elected officials over the years including the corrupt Mayor Coleman Young who reigned forever it seemed.

The good news about bad fiscal practices is this, as stated succinctly by Herb Stein, Chairman of the Council of Economic Advisors under Presidents Nixon and Ford and father of Ben Stein, Ferris Bueller's Economics Teacher:

'If something cannot go on forever, it will stop"

Borrowing money due to overspending in Detroit's municipal government ended when lenders stopped lending to them. The risk of forfeiture became too high. So the money stopped flowing to Detroit.

Money can and will stop flowing to any government, business or family when it looks like the chances of getting repaid are far less than making a profit out of it in the form of interest. It stopped flowing to the Roman Empire, the Ming Dynasty, the Soviet Union and even Great Britain in 1956 when President Eisenhower shut off American funds to build the Suez Canal. That was the last nail in the coffin of Great Britain being a world superpower as they had been for most of the previous 300 years.

If our elected politicians won't address and correct the underlying cause of the buildup of debt, the free market forces of finance will do it for them. Just as we are now getting a chance to witness in real-time in Detroit, Michigan.

Interest as a part of the US federal budget is now still only around 6%, even with the explosion of debt that we have added on since President Obama was elected in 2008. Don't take it lightly though because if inflation expectations start to blow hot, interest rates will rise and will rise faster than they ever fall.

Here's the good news: Somehow, someway, Great Britain paid off this debt and interest costs declined as a part of the national budget over time. Somehow. They had another war to prosecute you might have heard of 6 years later in 1776 called the American Revolution for Independence.

Maybe our $17 trillion national debt will somehow magically evaporate in America in the next couple of years. But we sorta doubt it.

*From the great book 'Washington: A Life' by Ron Chernow

**Part of this exercise is a little bit strained by the fact that '$17 trillion in national debt' is actually more like $12 trillion in 'real' national debt 'owned by the public'. Meaning 'actual checks have to be cut to pay these bondholders, domestic and abroad every month and requires 'real money' to do so.. The interest 'imputed' on the other $5 trillion in debt relates to the intra-government debt owed to Social Security and other trust funds which is both a liability and asset for the federal government and cancels each other out.

Plus, this 'imputed' interest is not ever paid out on a monthly basis and correspondingly has zero economic impact or value according to CBO

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1 comment:

  1. .

    'In America today, we have taxation WITH Representation!'

    So how's that working out for you?..."

    Well within reasonable expectations, quite frankly. Progress is slow and steady with ever room for improvement...

    Taxes are one of the privileges of living in an advanced civil society.

    "Think we have trouble with exploding national debt and out-of-control interest payments at the federal level?"

    No. Quite honestly, the national debt does not cross my mind. It might be important (I guess) but it is well within the nation's ability to service.

    As some chump said, "Here's the good news: Somehow, someway, Great Britain paid off this debt and interest costs declined as a part of the national budget over time. Somehow."

    Ema Nymton


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