DR Exclusive: The Obama Memos (1 of 3)

[Editor’s note: In a series of three memos to President Barack Obama, Sioan Bethel recommends that real US assets be used to amortize or repurchase the US national debt.]

MEMORANDUM #1

To:  President Barack Obama

From:  Sioan Stephen Bethel

Subject:  Financial Crisis

Utilize real asset on America’s balance sheet to generate several trillion dollars of representative money. Employ new income to amortize or re-purchase relevant portions of the national debt, fund or reimburse funds for stimulus packages, bailouts, and additional initiatives as warranted.

Fully Frame the Problem and Solution     

Suitably framed, the financial crisis facing America is an accounting one before an economic one; a balance sheet problem involving America’s overarching assets and liabilities, before the administration of traditional fiscal and monetary policies. For example, the bailout and stimulus packages, operating deficits, national debt, and national debt interest payments all stem from the liabilities column of America’s balance sheet. Liabilities include a $12 trillion national debt with debt interest payments exceeding $3.5 trillion per decade; and an increase in the National Debt of $9.8 trillion dollars, based upon projected federal operating deficits over the next ten years.

To counterbalance massive liabilities one must examine America’s balance sheet, identify a real asset of sufficient magnitude to back several trillion dollars of representative money, and use part of this sum to amortize or repurchase relevant portions of the National Debt. The remainder funds or reimburses funds for bailouts, stimulus packages and other contingencies. This solution requires no borrowing or additional taxation, nor risks hyper-inflation and currency depreciation with over-issued fiat money. It costs a thought.

Historical Precedent and Current Course of Action

In 1790, the nascent French regime inherited a debt dilemma similar to America’s today. France’s public debt totaled several trillion dollars. In response, Church lands were expropriated throughout France (1/3 of all lands) and paper currency (assignats), not based on gold or silver, but on the security of Church lands, was issued. Domestic and international creditors accepted the new currency as legitimate payment. The new currency was initially used to successfully retire a significant portion of the public debt. Afterwards, the country succumbed to moral hazard. For, though Church lands in France were appraised at $1 trillion, the government serially issued $9.5 trillion in assignats leading to hyperinflation and depreciation.

With the benefit of hindsight, a single issue of representative money, backed by American public lands, approximately 700 million acres (1/8 continental United States) with attendant mineral and other natural resources, can be used to amortize relevant portions of the National Debt  An appraisal of $10,000 per acre yields $7 trillion. This process does not constitute a sale of public land, in part because representative money is not essentially redeemable; as the American historical record demonstrates (see below). The U.S Treasury or Federal Reserve Bank would redeem representative money in fiat dollars for the sole purpose of retiring the National Debt, and funding or reimbursing funding for stimulus packages and bailouts. American public land-secured money would not commingle with currency in general circulation; another lesson gleaned from the French experience.

A second approach would harness the U.S. National Debt on behalf of the nation. Save for the Social Security Trust Fund and Federal Reserve Bank, creditors, particularly foreign governments, would be paid off and their creditor status and risk assumed by the American public. With the Public a major creditor of the National Debt, annual debt interest payments, totaling trillions of dollars per decade, become disposable income employed to a) supplement tax revenues: b) tax reduction; c) public investment; d) national debt reduction; e) universal healthcare; f) bolster social security; g) all of the above.

Representative and Fiat Money

The United States economy functioned on both fiat money and several types of metal backed representative money from 1862 to 1971. In 1862, during the Civil War, fiat money “greenbacks,” were first issued. In 1971, the international gold standard (Bretton Woods system) was officially abandoned by the U.S. U.S. citizens, however, were directly barred from trading directly in gold after 1933, and had not been able to redeem their dollars in gold. U.S. dollars (Federal Reserve Notes) were not redeemable in any quantity of precious metal, and were no longer representative money, but entirely fiat money.

Assessment

Working within an enlarged framework, the limitations of a strictly liabilities-based policy to address America’s financial crisis is self-evident. It is fortuitous; therefore, that America has a prized asset, public land, which has not been appropriated yet. Though the lines between representative and fiat money blur at times, their distinction presents the opportunity for America to use her legacy to address not just this crisis but castle resources for the initiatives and challenges ahead.

“We must lay a new foundation for growth and prosperity—a foundation that will move us from an era of borrow and spend to one where we can save and invest.”