Government Debt: Not Unfunded Liabilities but Fraudulent Promises

The U.S. government reports its debt at more than 17 trillion dollars. To put this sum in perspective, it’s well over 50 thousand bucks for every man, woman, and child in America. Of course children and retirees don’t work, so the debt burden on each working adult is much higher.

Unfortunately, this is only a small part of the total debt. The government excludes a much larger sum from its books, commonly called the unfunded liabilities—future obligations it must pay, but which it has no way to pay. These obligations stem from numerous programs.

For example, bank deposits are guaranteed through FDIC and mortgages via Fannie Mae. These guarantees have risk and cost, in other words, financial liability. Together they add up to trillions of dollars. The largest of the unfunded liabilities are from Medicare and Social Security, which dwarf the liabilities from all others combined. I’ll focus on Medicare to keep it simple, but most of what I say also applies to Social Security.

Government spending

Government spending (Photo credit: 401(K) 2013)

Medicare is like insurance in many ways. Here’s how insurance is supposed to work. The insurer charges a monthly premium and in exchange, promises to pay claims. So long as the insurer follows two simple rules, it will be able to pay. One is the premium must be high enough. The other is the premium must be invested properly. The investment is the key. It’s the asset that funds the liability.

Medicare does charge a big premium, in the form of a tax on your paycheck. It may or may not be high enough, but the government spends it entirely on current benefits and its general budget. It does not invest it. This is why we say that Medicare liabilities are unfunded.

Medicare is a complex and massive government program. To see its fatal flaw more clearly, let’s look at a simple example first. Mendacious Corporation (not a real company) sells a policy that’s guaranteed to pay $1,000 next year. The company charges only $100 premium, so obviously it won’t be able to pay.

So an investigative reporter interviews the CEO and asks him how Mendacious can possibly honor its promise to pay next year. He looks into the camera and says, “Don’t worry, we will sell more policies before then. The premiums will give us plenty of money to pay out.”

Of course this is fraud, a classic Ponzi scheme. Money from new participants is used to pay the old. Every Ponzi scheme is always one step ahead of insolvency. Each new dollar keeps it alive for a day, but at the same time adds to the burden. Mendacious will implode sooner or later.

With Medicare, the government is Mendacious. It takes in new money from current workers and pays it out to beneficiaries. It promises workers that it will pay them in the future, but it fails to plan, or account, for that. It just assumes that there will be perpetual growth in the number of new workers entering the scheme. Meanwhile liabilities are growing out of control.

Medicare and Social Security should be put into receivership immediately, to minimize further losses for retirees and workers. The problem only gets worse and bigger every day we kick the can down the road.

So how much has the government racked up in unfunded liabilities? No one knows for sure, but I’ve seen credible estimates starting at $127T and going up from there. Assuming the bottom end of the range, the burden on each and every working person is about $1M.

The term unfunded liabilities is a dry and antiseptic term that makes people’s eyes glaze over. It serves to conceal a crime so big, that it makes Bernie Madoff look like a fourth grader stealing his classmates’ lunch money.

The reality is not very complicated. Our government has been making promises that it cannot honor. When it defaults, retirees and workers will realize that they’ve been robbed of their savings and pensions. Most will never fully recover.

The best way to help everyone understand the truth is to use plain and accurate language. Instead of unfunded liabilities, I suggest fraudulent promises.


Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona. In March 2015 he moved his Gold Standard column from Forbes to
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  1. Serban V.C Enache

    I’m sorry Mr Weiner, but it’s just not true. The government debt represents the movement between two buffer stocks: the currency and reserves. The government debt represents tax-credits (dollars) outstanding. The government debt = private sector savings. The difference between a government security (a treasury bond) and a regular banknote is this: the former has a maturity date & interest attached to it – the latter is a permanent bond (no maturity date) and no interest attached to it. What we (foolishly) call the government debt represents savings accounts at the Central Bank. Issuing government debt is an idyosyncratic leftover from the gold standard/fixed exchange rate epoch – it’s not some implacable operational necessity. Moreover, issuing government debt is part of monetary policy, not fiscal policy. There’s no solvency problem for a government who taxes and spends in its own free floating nonconvertible fiat regime. There are no ‘unfunded liabilities’. The real constraints on society are physical: available labor, unused resources, and know-how (technology). Money is just records. The root demand for all dollars is government money taxation – all other demand stems from that alone. The purpose of government money taxation is create a permanent demand for government IOUs. The purpose of taxation is to drain the economy of aggregate demand (aggregate demand = income + the change in private debt).
    Returning to logic and operational reality, before the government can tax & or borrow its own currency, it must spend it first into creation. All horizontal transactions net to zero. Loans create deposits is an operation in endogenous money that leaves the net zero. The money supply grows (but not in net terms) when people contract bank debt. And the money supply shrinks (but not in net terms) when people pay off those debts or default on them. The only way the net in nongovernment sector can be positive or negative is via vertical transactions (aka fiscal policy).
    The government fiscal deficit = the nongovernment sector’s net financial surplus. (Everyone in the mainstream forgets the other 1/2 of the balance sheet). The government fiscal surplus = the nongovernment sector’s net financial deficit. Fiscal deficit funds are liability-free money for the private sector. All the funds that go to paying taxes and buying government debt (government securities) comes from government spending.
    All that I said is not an opinion, it’s not an ideology – it’s basic double-entry bookkeeping. It is fact.
    (S-I)=private sector balance (aka savings minus investment)
    (G-T)=government sector (aka government spending minus taxation)
    (X-M)=foreign sector (aka net exports)
    (G-T)= -(S-I) -(X-M)
    Government sector = nongovernment sector
    Both the deficit hawks and the doves got it wrong. The problem is that the fiscal deficit is too small. The problem is that private sector debt is too high. Permanent & involuntary unemployment is a macroeconomic/monetary phenomenon caused by government taxation – and is always the evidence fiscal deficit spending is not enough to cover the private sector’s tax bill and its desire to net save.

    1. Keith Weiner

      Serban: Thanks for your comment.

      I think you make some great points, especially that the only difference between a dollar and a 30-year bond is the duration. You also make an interesting identification in noting that the savings of the people are government debt, though I disagree on the significance of this. In fact, the government’s promise to pay it back is fraudulent. When a productive enterprise borrows from savers, it uses the money to finance production. By contrast, the government is always borrowing to spend. It does not add to production and hence has no means or intent to repay.

      I agree again when you say that the real constraints come from the real world: finite capital, labor, brainpower, etc. A major theme of my writing is to document capital consumption. And that’s what an increase in (non productive) debt to fuel a one-time shot of GDP is: capital consumption.

  2. Keith Weiner

    Flickett: The government is borrowing. That is, it consumes real things like labor, resources, and the use of capital. The only reason why savers give these things to the government is that the government promises to repay. The only way it could do that is by using the proceeds to build something productive. But the government simply spends it. There are two fundamental limits to this process.

    One, people can lose their faith in getting repaid. Since holding the paper currency is to lend to the government, people can refuse to hold the paper. This is a currency collapse.

    Two, the government can run out of everyone’s resources. You cannot borrow what people don’t have.

    The government borrows in dollars, and the dollar is just a small slice of its debt. It cannot go bankrupt in the usual way. It does not “print”. It’s borrowing. I do not agree that rising prices gets the government out of the hole. Nor do I agree that the government can cause prices to rise at will, i.e. by issuing more dollars (just witness the period 2012-2015).

    I have written a lot of material on these topics. There is only so much I can address in comments written off-the-cuff.

  3. Serban V.C Enache

    @Keith Weiner
    Sir, you are mistaken. Government does not borrow from the people in order to deficit spend. Banks don’t even borrow from the people in order to lend, because loans create deposits. It’s endogenous money at work. It was true during the gold standard and it’s true in the present.
    When the government spends, the CB simply credits the bank accounts of the recipients. When the government taxes, the CB simply debits the bank accounts of the recipients. The government currency is a government issued liability, an IOU. Thus, it is an asset for the private sector. A tax obligation is a liability for the private sector. Tax-revenue are assets for the government, from an accounting perspective. Critical note here is that the government is NOT like a household at all. It can issue all the IOUs it deems necessary.
    As I stated before, all the funds that go to paying taxes and buying government debt, come from government spending. The foreign sector & private domestic sectors combined cannot create net financial assets. All the transactions created horizontally, nongovernment agent to nongovernment agent net to zero. The only way the net in the nongovernment sector can be positive is if the government is running a fiscal deficit.

    The size of the government is a political question. Reasonable fiscal policy is that which achieve & maintains full employment and price stability. The government doesn’t necessarily need to buy labor & resources from the private sector, it can simply be a net payer of funds to households. Check out the research
    “…the paper finds that increased public investment raises output, both in the short term and in the long term, crowds in private investment, and reduces unemployment. [] Public investment is also more effective in boosting output in countries with higher public investment efficiency and when it is financed by issuing debt.”

    Moving onward…
    All monetary economies are dependent on credit expansion offsetting demand leakages. For everyone who spends less than their income, someone else has to spend more than their income, else the output remains unsold and you slip into recession. The nongovernment sector is composed of domestic private (firms and households) and foreign sector (foreign firms and households). The nongovernment sector = (S-I)+(X-M)
    The government fiscal position = the nongovernment sector’s net position
    Since the nongovernment sector is pro-cyclical, only the government sector can fuel the economy with sufficient aggregate demand (net financial assets) in the downturn, either by reducing taxes, increasing spending, or both.
    Here’s what the St Louis FED is saying – and remember, St Louis FED is a bastion of monetarism (this is accepted from right to left):
    “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets”

    Now, as you might have noticed, neither I nor Flickett are subscribers to neoliberal (orthodox) zombie economics. We are heterodox thinkers. Both of us grew up with the same myths and dogmas – that the government is like a household or should behave like a household. Myths that are dangerous and totally untrue – myths which keep the citizens slaves to special interest groups and clueless politicians. Being curious and reasonable people, however, when the facts changed – we changed our minds. You should do the same thing, sir. The dollar is a unit of account. The US federal government cannot run out of dollars, just like you can’t run out of meters or kilograms. The money cost is not the problem; what matters is the socio-economic and environmental benefits that investments reap. I’m not here to debate politics or ethics; I’m simply stating how the monetary system and banking works under a free floating nonconvertible fiat regime. I’m simply stating facts.
    This is how the accounting looks like. (G-T)= -(S-I) -(X-M)
    With our present foolish and criminally policy, we’re depriving future generations of the education, infrastructure, and capital goods that could have been created, had we acted in the present to bring those things into existence – instead of tightening our belts needlessly, all the while inequality grew, poverty rose, suicide rates went up, crime rates went up as well, skills were eroded, businesses closed down, homes foreclosed, and lives were destroyed. Look at the accounting side. Look at the other half of the balance sheet, and you’ll see that the vast majority of people got it wrong. The fiscal deficit is not too big, it’s too small. What’s too high is private debt. Both the deficit hawks and the deficit doves get it wrong. Look up Modern Monetary Theory on youtube and convince yourself.
    For instance, begin by watching the first minutes of Randy Wray’s quiz and see if you get any of the answers wrong.

    1. Keith Weiner

      Serban: One point I would like to address. I have been called many things, but orthodox isn’t generally one of them. 🙂

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