THE DEFAULT OPPORTUNITY
Default on the National Debt is a frightening concept. For one thing, historically default on sovereign
debt has meant restructuring the debt and paying off part of what's owed. For another, this
restructuring is accompanied by creditor's demands for reductions in spending. It's a mess and it can
drag on for years, partially crippling economies.

Add to this, for several reasons, we are on a track that leads inevitably to default.

1. The National Debt has passed 100% of the Gross National Product. At 90% of the Gross National
Product, research suggests that the National Debt will slow growth about 2%. Slow growth can pile on
more debt.

"More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. The
coauthor, with Harvard professor Kenneth Rogoff, of This Time It's Different: Eight Centuries of
Financial Folly (Princeton, 2009), Reinhart has found that a 90% ratio of government debt to GDP is a
tipping point in economic growth. Beyond that, developed economies have growth rates two
percentage points lower, on average, than economies that have not yet crossed the line." (Daniel
Fisher, "The Global Debt Bomb," Forbes Magazine, February 08, 2010, see Forbes.com.) More debt
leads to less ability to repay, which leads to default.

2. The Federal Reserve has tied the American currency to debt by instituted a system of loaning money
into existence instead of merely printing bills, as the Constitution allows Congress to do. This debt
currency system seems to rely on the amount of world debt doubling every eight or ten years.

Total credit market debt for the United States, federal, state, local, corporate and household debt,
illustrates the point. Starting in 1970, total credit market debt doubled by 1977. It doubled again in seven
years, then doubled again in eight years, then again in eleven years. Total credit market debt stopped
increasing in 2008. (Chris Martenson, "Chris Martenson's presentation at the Gold & Silver Meeting in
Madrid," YouTube, Nov 29, 2011.)

Scientist and economic analyst, Chris Martenson, has this to say about has happened to our economy
since 2008: "We have a money system that is designed to grow exponentially (double periodically),
whatever reasons it hit a limit to growth, it couldn't grow any further..." (Ibid).

Martenson goes on to explain some of the reasons for the limit to growth. Not only oil but also other
natural resources are being rapidly used up. At the current pace of use, known reserves for many
metals and minerals will be gone within a generation. The energy needed to get metals and minerals out
of the ground is growing rapidly. (Ibid). The escalating cost of growth acts as to a limit to growth, which
means less ability to repay, which leads to default.

3. I believe financial corruption, and the political corruption that allows it, also have played a part in
ending growth in America. And I would blame the policies of the Federal Reserve, which periodically
jacks interest rates into the stratosphere to stop inflation (as if adding more interests costs and slowing
the production of goods were not inflationary all by themselves).

Viewed as an event, default is a horror story of struggling to balance the budget on the backs of the
poor. About forty cents of every dollar the federal government spends is borrowed, that forty cents will
be gone.

(When you default on sovereign debt, generally people won't lend you any more money unless you let
them run your country. Based on Eurozone experiences, appointed financial overseers protect the
interests of bankers, so accepting a financial overseer is not in America's best interests. Far better to
make the cuts ourselves and do without further borrowing.)

Adding to the pain of default, the government and the media have been grossly misleading the
American voters for years. (See www.shadowstats.com, Home Page, click Primers on Government
Economic Reports. Author John Williams is a distinguished economist.) Most Americans have been
seduced by happy news stories meant to keep them buying. This hopeless effort to sustain the failing
debt money system will make the reality of default such a shock to the average misinformed American
that they will respond emotionally rather than rationally to the hardships that result.

Viewed as an opportunity to undo things that got us into this economic mess, default could be a good
thing, particularly if the American people have some advance notice. There are some decisions in
America's past that were absolutely and utterly wrong, and some programs that were faulty either in
conception or in design or in implementation. Default is a compelling reason to fix our government.

The Federal Reserve

In 1913, Congress passed the Federal Reserve Act. The Federal Reserve created the debt money
system that we have today, the same debt money system that has to double in size every decade or so
to allow the economy to grow. The same debt money system that seems to have hit a growth limit in
2008. The same debt money system that is drowning the Eurozone and America in debts to big to be
repayable.  

The very first thing America needs to do is repeal the Federal Reserve Act. In conjunction with this,
America must also stop redeeming treasury bonds as they come due for perhaps two years. Just set
them aside as America gets its financial house in order. That will save America perhaps twelve cents of
the forty cents that was borrowed and will be gone in the default.

At the same time, America will need to start creating its own money, perhaps partially backed by gold
and silver instead of debt. This money supply should be tapped as little as possible, but it could be used
to keep the country afloat as costs are cut.

The American dollar is currently the reserve currency of the world. In order to protect that status, not
only must America minimize loss to its creditors, it must also balance its budget in ways that will insure
that government spending will stop exceeding revenue. (And a balanced budget amendment is a great
idea.) Here are some proposed cuts and a guesstimate of how much each will save. I will start with
social programs, because more than half of federal spending goes for social programs.

Social Security

In 1935 the Social Security Act was an attempt to limit poverty in old age and unemployment, and protect
widows and fatherless children. I agree with most Americans that this is a good idea. But Social Security
is a good idea that is badly funded. It is funded as if it is as insurance plan, which occasionally pays,
when in fact it is primarily a pension plan which usually pays. There was never enough money for Social
Security's long term obligations and when extra money from rate increases arrived, the government
borrowed it, so it is part of the National Debt and during the crisis will be unavailable.

I believe that America should keep Social Security, but should create a program that is closer to poverty
insurance. I have already suggested this in a former article. Note that the reductions in benefits would
effect those with higher incomes, those who have their own private pension plans or other income.

"My Suggestion: Gradually convert Social Security from a pension and disability plan to a disability and
poverty insurance plan. Convert the plan in 3 stages: Initially reduce benefits for current and future
beneficiaries by $1 for every $4 of other income. After 5 years, reduce benefits by $1 for every $3 of
other income. Finally, after another 5 years, reduce benefits by $1 for every $2 of other income. Reduce
the maximum benefits at each stage toward a minimum consistent with reasonable, if frugal, comfort.

"Since the highest income workers would tend to receive the least benefits from this plan, reduce the
maximum salary on which taxes are deducted with each benefit reduction, perhaps ending with $25,000.
If at all possible, reduce payroll tax rates as well." (No. 134, "Suggestions, Solutions And Wild Ideas.")

In the shock of default, this type of reduction would have to be immediate and large, perhaps
immediately reduce benefits by $1 for every $2 of other income. The maximum benefits might have to be
frozen or reduced. About twenty cents of every dollar the federal government spends is for Social
Security. Cutbacks in benefits for those with other means might save the government another five
cents of the forty cents that was borrowed.

Unemployment Insurance.

Unemployment Insurance is a good idea on a very limited basis, to tide people over while they search
for work. Unfortunately, the Federal Extension of up to 53 weeks on top of the State Programs of 26
weeks is too much of a good thing. In a time of default, it will be impossible to subsidize people who are
able to work. Eliminating the Federal Extension will save over one cent.

At this point most of you are indignant because I am suggesting taking money out of the pockets of
people who are out of work when jobs are scarce. You believe many of these people will become
homeless and they will be living in cars or on the street. And you are right.

So, at this point, I will tell you what will happen to these people. They will go to the churches and many
of the churches will take them in. God will use homeless people to sort out which of the Christian
churches are walking in the shoes of their Master Christ and which are social clubs.

Matthew 25 speaks of Christ coming in glory to His earthly throne and awarding the Kingdom of God to
the nations that act as His sheep.

"When the Son of man shall come in His glory, and all the holy angels with Him, then shall He sit upon
the throne of His glory: and before Him shall be gathered all nations: and He shall separate them one
from another, as a shepherd divideth his sheep from the goats: and He shall set the sheep on His right
hand, but the goats on the left.

""Then shall the King say unto them on His right hand (the sheep), "Come, ye blessed of My Father,
inherit the kingdom prepared for you from the foundation of the world: for I was an hungered, and ye
gave Me meat: I was thirsty, and ye gave Me drink: I was a stranger, and ye took Me in: naked, and ye
clothed Me: I was sick, and ye visited Me: I was in prison, and ye came unto Me."

""Then shall the righteous answer Him, saying, "Lord, when saw we Thee an hungered, and fed Thee?
or thirsty, and gave Thee drink? When saw we Thee a stranger, and took Thee in? or naked, and clothed
Thee? Or when saw we Thee sick, or in prison, and came unto Thee?"

""And the King shall answer and say unto them, "Verily I say unto you, Inasmuch as ye have done it unto
one of the least of these My brethren, ye have done it unto Me."" (Matt. 25:31-40).

If this judgment applies to the nations that are called by the names of men, how can it fail to apply to the
churches that are called Christian in honor of their Master Christ. In the time of turmoil following a
default of the National Debt, the churches must define themselves as either goats, who go their own
way (social clubs), or sheep, followers of Christ who do things His way (Christian Churches).

Those churches that follow Christ
must open the far edges of their parking lots to the cars of the
homeless, provide them with bathroom, kitchen and dining facilities, and a phone line where
prospective employers can leave messages. I would note that churches do not have to offer parking
and services to anyone, but may freely pick and choose who they allow to stay on their grounds and
eject drunkards and troublemakers as they see fit. They may demand that church areas used by the
homeless be kept spotlessly clean.

At their option, churches may also encourage their parishioners to donate old vans and SUVs for people
who have no vehicles to live in, organize sentries from among the homeless to patrol the encampment
at night, and organize parishioner to personally interact with the homeless in helpful ways or donate
useful things to them.

In the time when the nation can not help everyone, the churches will step into the breech and be a
blessing to America.

SNAP/Food Stamps

Food Stamps (actually cards now) are used by almost 50 million people. In total the cost is about 2% of
the Federal budget. I propose that the amount of food stamps per person be cut in half and that foods
that can be purchased through the food stamp program be strictly limited to fruits and vegetables,
beans and grains, meat and dairy products. With the exception of bread, all processed and prepared
foods should be eliminated. Prepared foods are expensive and usually not very nutritious.

In the third world, families eat on much less because they cook their own meals. (The minimum wage in
Mexico is $5 per
day.) If people cook, using grains and beans to stretch their meat, they will not only
spend much less for food, they will eat a better diet and be healthier. I also suggest that, when their
food benefits are cut, they be mailed a cookbook of penny stretching crockpot meals and a voucher for
a crockpot. Cutting about half of the cost of the SNAP/Food Stamp program will save about one cent.

Medicare/Medicaid and the Children’s Health Insurance Program (CHIP)

The Medicare/Medicaid/CHIP costs have risen to over 20% of the Federal Budget, primarily because they
were implemented without much in the way of internal controls on costs. I propose that a strict schedule
of covered expenses be instituted and drug reimbursement be limited to the cost of manufacture plus a
standard retail markup of 100%. Depending on the schedule of allowable expenses, this could save up
to five cents.

So far I have found five cents of the forty cent default shortfall by reducing benefits to middle and
upper class SSI recipients, and seven cents by reducing benefits to the poor, doctors, hospitals and
drug companies. Added to the twelve cents realized by ending debt interest payments because of
default, and I only need to find another sixteen cents.   

The War in Afghanistan

The War in Afghanistan is costing America over $100 million a year, over 3% of the federal budget. There
are less overt costs as well, long term care for the injured, etc. Ending the Afghan War will save at least
three cents.  

The Defense Department

The Defense Department is to my mind the most essential department of the Federal Government. I see
the world as a dangerous place. Parts of the world, where human rights are not respected, seem
blatantly evil to me. So I agree with the philosophy of former President Theodore Roosevelt: "Speak
softly and carry a big stick; you will go far."

I believe Americans are best served by a military that is big enough to support America's status as a
super power. However I also believe that our military should exist primarily as a deterrent and a force to
enact retribution. I do not believe in "nation building." In the past the benefits of "nation building" have
been fleeting, and generally the expense is not justified.

Because the military account for at least 20% of federal spending, perhaps some cuts could be made,
perhaps some non essential bases could be closed. After deliberation, the military might be downsized
by 5%, this would result in savings of one cent.

The Federal Government

The Federal Government is too big, it has too many employees. To start, every unelected federal
employee over the age of 60 should be retired. There should be no new hiring until the National Debt is
paid off. Federal salaries should be capped at $100,000 per year. This downsizing of the number of
government employees would save perhaps one cent.

(Note that I do not think that people over 60 are not skilled and productive employees, but this group is
the most prepared for retirement and therefore the least likely to need government assistance.)

The Government Accountability Office (GAO) has identified 81 areas where duplication of services or
inefficiency have driven up costs. (GAO) "Opportunities to Reduce Potential Duplication In Government
Programs, Save Tax Dollars, and Enhance Revenue, " March, 2011). Oklahoma Republican Senator Tom
Coburn, who requested the report, estimates savings of $100 billion annually if the waste is eliminated.
(Ben Rooney, "U.S. bureaucracy wastes billions, watchdog says," CNN Money, March 1, 2011).

A $100 billion saving would represent almost three cents, but because some of these savings would
come as a result of reduced personnel needs, these two should be combined for a savings of three
cents overall.

In summary, ending the War in Afghanistan and military downsizing and reduction in Federal Employees
and elimination of duplication and inefficiency in programs would save about seven cents, I need to find
another nine cents. The easiest way to find the money is to abolish any bureaucracy that is duplicated at
the state level or is simply unnecessary.

To determine which Departments to delete, I consulted the work of that famed cost-cutter, Ron Paul. If
elected, he would try to eliminate the departments of education, housing and urban development,
commerce, interior, and energy.

Federal Department of Education

The Federal Department of Education had a budget of $70 Billion in 2011. It probably does very good
work, but the country can't afford it and the States could easily replace it. Savings would be about two
cents.

Department of Housing and Urban Development

The Department of Housing and Urban Development had a budget of about $45 billion in 2011. If the
budget were cut to $10 billion, it could phase out all operations except rental and maintenance of
existing properties it controls. Savings would be about one cent.

Department of Commerce

The Department of Commerce is concerned with promoting economic growth. There are two important
functions of this Department, the National Weather Service and the Patent and Trademark Office. If we
can get out of the World Trade Organization, I see an expanded role for this department in
recommending actions to curb unfair trade practices, which could be imposed by Congress. I would
keep this one, at about $6 billion a year, it is earning its keep.

Department of the Interior

The Department of the Interior concerns itself with native peoples and natural resources. I have to
agree with Ron Paul, the $12 billion for this program is not earned. Savings would be about 1/3 of a cent.

Department of Energy

The Department of Energy's responsibilities include the nation's nuclear weapons program and nuclear
reactor production, radioactive waste disposal, and domestic energy production and conservation. The
nuclear energy responsibilities of the Department of Energy could be transferred to the Department of
Homeland Security and then this Department could be scrapped. The savings would be 4/5ths of a cent.  

Federal Prison System

The Federal Prison System can be reformed in several ways. First, send most of the illegal immigrants
home. In 2008, illegal immigrants accounted for over 28% of those locked up by the federal government.
(The PEW Center on the States, "Prison Count," April, 2010). Mark them before deporting them, perhaps
by removing the last joint on their right pinkie, so they can no longer work in America. If they are in
prison for a violent crime, remove the whole pinkie. This would save about a billion dollars a year in the
Federal Prison System.

Second, require three
violent offenses to trigger the three strikes laws of the states and forbid the use
of mandatory sentencing for all non-violent crimes. (Under the due process of law provision of the 5th
Amendment to the US Constitution, every person is entitled to have the judge who is able to mitigate his
sentence based on the specific details of his case.) This will reduce the inmate population in all prisons.

Third, end the War on Drugs except in cases where minors are the purchasers. This will eliminate the
Drug Enforcement Administration (DEA) (other law enforcement can keep track of drugs in schools) and
further cut the prison population. More than half of the persons in Federal Prisons are there because of
drug charges.

The Weekly Population Report of the Federal Bureau of Prisons counts the Total Federal Inmates:  
216,976. (Dec. 21, 2011). Removing 100,000 of these prisoners, the drug offenders, would save about $4
or $5 billion dollars annually. The DEA budget is in excess of $2 billion. The total would be $7 or $8
billion, about 1/5th of a cent. This falls far short of a penny saved, but it opens the way for a substantial
source of revenue, legal recreational drugs in their herbal form (see next week's article).

Federal Research and Development Grants

Federal Research and Development Funding calls for an expenditure of $148 billion in 2012. If the
projects to be subsidized could be rated for their commercial or defense applications, the funding of
projects not commercial or essential could be eliminated. A 25% cut in the total cost of this program
would save one cent.  

Federal Farm Subsidies

Federal Farm Subsidies are mostly paid to big farmers. The budget for these subsidies is $15 billion.
Ending these subsidies would save about 2/5ths of a cent.

Federal Oil, Coal, Nuclear and Ethanol Subsidies

These subsidies amount to about $64 billion, $41 billion for oil, $8 billion for coal, $9 billion for nuclear,
and $6 billion for ethanol. (Mark Clayton, "Budget hawks: Does US need to give gas and oil companies
$41 billion a year?" The Christian Science Monitor, March 9, 2011). Cutting all of these subsidies would
save over one and 7/10th cents.

At this point, I have totaled cuts of about seven and 1/2 cents, but I needed nine cents. I am beginning
to understand why the Congress keeps kicking this problem down the road. However, I have come
within one and 1/2 cents of the forty cents needed to balance the budget and the only poor people
whose benefits I have cut are poor people that are able to work. They will be scrambling, but with the
help of the Christian churches, they will make it through.

Other Federal Subsidies

There are 2185 Federal Subsidy Programs available to State and local governments, tribes, territories,
organizations, institutions, groups and individuals. Perhaps some savings could be found by cutting
some of these programs.  

I have broken the solution to default into two sections, balancing the budget and (next week) raising
revenue. I did this because I wanted America to retain its primacy among the nations. To that end, I
believe the additional revenues should be spent in paying off the National Debt. This will help preserve
the American dollar as the reserve currency of the world.

Should the dollar cease to be the primary world reserve currency, the cost of almost everything would
increase, because every transaction would include a fee for changing currencies. "The top reserve
currency is generally selected by the banking community for the strength and stability of the economy in
which it is used." (Reserve Currency, Wikipedia).

America can only keep its primacy among the nations by maintaining the strength and stability of its
economy. That requires getting rid of debt currency and balancing the budget with minimum damage to
American businessmen and American consumers, the foundation of American prosperity.

Before I sign-off, I have one more plea, please help presidential candidate Buddy Roemer. There is no
candidate better prepared to attack the default problem and turn it into an opportunity.

Amo Paul Bishop Roden