It has been one year since I completed the rough draft of the PACT America report.

I started reading through this original manuscript the other day, and while the rough draft is just that, from within these old words, I have found new inspiration.

“Hello, my name is Adam Florzak. I am 23 years old, and I am currently unemployed. The only title attached to my name is that of American citizen, but I think citizen is the most prestigious credential I could ever hope to possess. I would like to believe that America is a place where regardless of age, income, ethnicity, or social standing, an individual’s ideas and opinions still matter. I hope that people will sincerely listen to a person who speaks sincerely.

“I dropped out of college to pursue a career in futures trading. It was simultaneously the best and worst decision of my life. For two years, these experiences provided me with amazing challenges and a certain sense of adventure. But in the end, trading gave me nothing that I wanted and everything that I needed. In place of riches, I gained wisdom, patience, prudence, and realism. Time will tell, but I think that I may have gotten the better deal. Success is paid out in a lump sum, but failure pays its dividends over a lifetime.

“I’m not exactly sure what label society will give me, but it will probably be something along the lines of loser, dropout, or gambler. While all of these labels could easily be used to describe me, I think there is something within me that no label could ever hope to contain. I don’t have any expectations to live up to, and I have no image to protect. Instead of keeping me down, it gives me the courage to say what I feel needs to be said regardless of the personal consequences. When it comes right down to it, I’m in no position to tell this country anything. Nevertheless, I hope that America will listen to me. While I may not have a rifle in hand, I believe that I am helping to defend the honor of my country.”

. . .

“I’m still learning, but I believe that there is only one governing rule to politics. Grab a tiger by its tail, and it will turn around to bite you. However, grab it by the balls, and you will have its full attention. I believe this plan has accomplished such a feat. While I have little faith in the American government, I have supreme confidence in the American people. The American people possess an unwavering dedication to America and the virtues by which it stands. When it comes right down to it, America’s greatest natural resource is her people; it is the people that make America the greatest nation ever to be assembled among men. The government has become overly complicated and also somewhat corrupt. My plan is simple, and I believe that is what makes it right. Together we can make a better America, a stronger America, a united America. After all, this is the United States of America.”

Can winds be chained? Or fires contained?

Words confine as they define, but freedom will not be held prisoner by bars of steel or margins of page.

Freedom is not a law to be enacted or repealed. It is neither idea nor ideal.

Freedom exists without knowing existence. Though being possessed, it never possesses.

What then, is freedom?

Freedom is.

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I was at a town hall meeting this week with United States Senator Barack Obama, and I have incorporated some audio excerpts from that encounter into this podcast.

“...Let me respond to a couple of points that you made Adam, real quick. First of all, you are absolutely accurate that our long-term sustainability as a country is going to depend in part on how we manage our budget and our fiscal priorities...”

Podcast: 1/21/2006 - Gritty Determination (MP3 - 16.2 MB) | Listen Now!

[Transcript]

Question: What was said in the letter from Senator Obama's office?

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On Tuesday, January 17, 2006, I attended a town hall meeting featuring United States Senator Barack Obama. Thankfully, I was called upon during the question-and-answer session, and I took this opportunity to present the Senator with a copy of the PACT America report for practical Social Security reform.

“You've got a plan? Man, let's take a look at Adam's plan!” - Barack Obama

Copyright © 2006 College of DuPage, Glen Ellyn, Illinois, U.S.A.

Download Video: Standing Tall with Senator Obama (WMV - 10.2 MB) | YouTube Version

News Coverage:

The Daily Herald: “What Does Obama Think?”
The Naperville Sun: “Obama Unplugged”
The Chicago Tribune: “The Senator and His Forum”

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Copyright © 2005. Photograph by David Asscherick of Creator's Canvas.

An entire year of my life has now been consumed by this, and there is no end in sight.

I have sold all that I can sell, borrowed all that I can borrow. I know not when I last had breakfast, lunch, and dinner all in the same day, but my stomach surely remembers what my head cannot. My life is rusting away before my very eyes.

When all that remains is the breath in my lungs, I have no choice but to exhale. As destiny cannot be seen with open eyes, that with meaning cannot be found until that without has been lost. I must walk by faith, not by sight. Alas, eagles fly alone.

I may not have money, power, or title, but I have hunger. And hunger knows no fear.

Patriots now number a slim minority in a land where the majority rules, and I tire of feeling like a foreigner in the nation of my birth. But the wind has changed course, and the fires are burning within. While we may not own it, this country belongs to us.

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“I’ve always tried to be someone who looked forward instead of to the past, but now I’ve realized that the past has a lot to say. I think it is important not to judge the past with should have, could have, and if only, but to let it show you how far you’ve come and how far you’ve yet to go.” (“NQ Trades Journal”)

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Since “the curse of compounding” is a difficult concept to understand, it would probably be helpful to construct an analogy to which most people could relate.

The national debt has been compounding in excess of its effective interest rate, and this means that the government is essentially borrowing the money to pay the interest on the national debt. In other words, even though the interest payments are being made, the overall debt continues to increase.

This is similar in practice to a person who uses one credit card to make the payments on another. Even though the minimum payments are in fact being made, this person is actually making these payments with additional debt, and thus the overall balance continues to increase.

When the credit limit on one card has been reached, this person then applies for an increased credit line. When those requests are eventually denied, this person will either apply for a new credit card or employ a complex system of balance transfers, cash advances, and creative accounting to keep the whole scheme afloat. Meanwhile, the finance charges just keep growing and growing.

Eventually, a point will be reached when all available sources of borrowing have been exhausted, and this person will then be faced with the monumental task of paying back his accumulated debts. However, the debt will likely have grown so large that this person will hardly be able to make the minimum payments, and bankruptcy will become an inevitable conclusion.

Likewise, the government continues to borrow more and more money, and is now so desperate for cash that it has started borrowing money from the communist country of China. Assuming that the government was suddenly and miraculously able to balance the budget, the interest charges on the national debt would amount to 28% of available tax revenue, and this says nothing of repaying the underlying debt.

Would the person in the previous analogy be able to repay a debt whose finance charges had grown to 28% of his net income? How could he possibly afford such enormous interest payments when he could not even manage to live on his full income in the first place?

Think about it.

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“I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.” - Thomas Jefferson

The process by which an initial investment begins to grow exponentially due to compounded returns is often referred to as the miracle of compounding. This means that interest payments will eventually create a substantial increase in wealth if these returns are continually reinvested and allowed to compound.

However, there is really nothing magical or miraculous about interest. In other words, money does not compound in value of its own accord; it first needs to be lent to someone through investment. The person who lends this money is known as the creditor, and the person who borrows it is known as the debtor. Therefore, an interest payment is actually a fee paid by the debtor to the creditor in exchange for the privilege of credit.

Since a debtor must actually earn the money for these interest payments, a debt whose interest is allowed to compound will soon outgrow the ability to repay it.

The national debt has been compounding at an average annual rate of 9.10% over the past 25 years, but the interest expense for this debt has been carefully disguised. For example, a portion of the Social Security surplus is used to pay the interest on the Social Security trust fund, and the remainder is used to support the budget deficit.

Each year, the government is actually creating new debt in order to pay the interest expense on the existing debt. The national debt has been allowed to compound at an alarming rate, but the true interest expense has been hidden from the public. After all, as long as Social Security continues to run a sufficient surplus, the creation of some of this new debt is merely an accounting entry.

Unfortunately, looming demographic factors will not only eliminate the surplus, they will also necessitate substantial disbursements from the Social Security trust fund.

In order to obtain an accurate assessment of the situation, social insurance and retirement receipts must be excluded from federal tax receipts. Therefore, while the national debt has been compounding at an average annual rate of 9.10% over the past 25 years, the net tax receipts of the federal government have only been compounding at an average annual rate of 4.95%. Regardless of other factors, the interest expense for the national debt will consume an ever-increasing portion of our available tax revenue if such trends continue.

For fiscal year 2004, the effective interest rate on the national debt was 4.4%, and this average rate has been kept relatively low due to a massive amount of new debt that was issued in a low interest rate environment. Also, the fact that Social Security has been generating substantial surpluses since 1983 has provided the government with a cheap source of financing for its budget deficits.

However, not only will the government need to find new financing for the special issue bonds in the Social Security trust fund, but many other bonds that have been issued in this low interest rate environment will pose a substantial rollover risk. In other words, the government will soon need to borrow a very significant amount of money at prevailing interest rates, and these rates could conceivably be much higher than they are right now.

For fiscal year 1980, the effective interest rate on the national debt was 8.2%, and the interest expense on this debt amounted to 20.8% of net federal tax receipts. In fiscal year 2004, the effective interest rate on the national debt was only 4.4%, but the interest expense on this debt now amounted to 28.1% of net federal tax receipts.

If the interest rate on the national debt had been 8.2% for fiscal year 2004 as it was in 1980, this interest expense would have devoured 52.6% of available tax revenue.

Even if the effective interest rate on the national debt remains constant, the interest expense for this compounding debt will continue to grow. If the debt continues to compound at an average rate of 9.10% while net tax receipts continue to compound at an average rate of 4.95%, in another 10 years, the interest expense on the national debt will amount to 41.6% of available tax revenue.

In reality, we have not even been paying the interest on the national debt, because this debt has been compounding in excess of its interest rate. However, we must realize that the government will not always be able to borrow ever-increasing sums of money. In the past, surpluses from Social Security have enabled these budget deficits, but such surpluses will soon disappear. We must take control of this situation before we lose control of it, because we are rapidly exhausting the available sources of borrowing. We must not only reduce federal budget deficits, we must eliminate them.

For while compounding interest blesses creditors, it curses debtors.

Sources:

United States Government - FY 2006 Budget Report - Historical Tables (PDF)

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