Compound Interest Is Devouring the Federal Budget: It’s Time to Take Back the Money Power

Albert Einstein is often quoted as saying that compound interest is “the most powerful force in the universe.” The quote is probably apocryphal, but it reflects a mathematical truth. Interest on earlier interest grows exponentially, outrunning the linear growth of revenue and eventually consuming everything.

That is where the United States now stands. The government does pay the interest on its debt every year, but it is having to pay it with borrowed money. The interest curve is rising exponentially, while the tax base is not.

Interest is now the fastest growing line item in the entire federal budget. The government paid $970 billion in net interest in FY2025, more than the Pentagon budget and rapidly closing in on Social Security. It already exceeds spending on Medicare and national defense and is second only to Social Security. The Congressional Budget Office projects that interest will reach nearly $1.8 trillion by 2035 and will cost taxpayers $13.8 trillion over the next decade. That is roughly what Social Security will pay out over the same decade (about $1.6 trillion a year). The Social Security Trust Fund is running dry, not because there are too many seniors, but because interest payments are consuming the federal budget that should be shoring it up.

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Why New York City Needs a Public Bank

We will build a city-owned bank — not to serve shareholders, but to serve you. A bank that invests in housing, in transit, in climate resilience. A bank that puts our money to work for our people.”
— Zohran Mamdani, Victory Speech, Nov. 4, 2025 

New York City has elected a mayor who dares to challenge the status quo. Zohran Mamdani swept into office on a platform of affordability, municipal ownership and economic justice. But Mamdani’s plan to fund his reforms through $9 billion in new taxes on corporations and high earners is already bumping up against political and fiscal realities. 

Income taxes are the province of the state, not the city, and NY State Governor Kathy Hochul is standing firm in her resistance to raising them. Pres. Trump has vowed to “cut off the lifeline” to the city, pledging to reduce federal aid to the legal minimum. And Mamdani’s proposals are said to be triggering capital flight. Wall Street is mobilizing. The city’s budget is strained. So where will the money come from?

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How a Fed Overhaul Could Eliminate the Federal Debt Crisis, Part II: Curbing Fed Independence

There has been considerable discussion in recent years about reforming, modifying, or even abolishing the Federal Reserve. Proposals range from ending its independence, to integrating its functions into the U.S. Treasury Department, to dismantling it and returning monetary policy to direct congressional or Treasury oversight. 

The Federal Reserve Board Abolition Act (H.R. 1846 and S. 869, 119th Congress, 2025-2026), introduced by Rep. Thomas Massie in the House and Sen. Mike Lee in the Senate on March 4, 2025, calls for abolishing the Fed’s Board of Governors and regional banks within one year of enactment, liquidating Fed assets and transferring net proceeds to the Treasury. It echoes earlier efforts like Ron Paul’s 1999 bill to “end the Fed”, but the odds of its passing are slim.

Less radical are proposals to curb the independence of the Federal Reserve. Former Fed governor Kevin Warsh is considered one of five finalists to take over as chairman after Jerome Powell. In a July 17 CNBC interview, he called for sweeping changes in how the central bank conducts business, and suggested a policy alliance with the Treasury Department. 

Substantial precedent exists for that approach, both in the United States and abroad. In the 1930s and 1940s, before the Fed officially became “independent,” it worked with the federal government to fund the most productive period in our country’s history. More on that shortly.  

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How a Fed Overhaul Could Eliminate the Federal Debt Crisis, Part I: The Fed’s Hidden Drain

The Federal Reserve’s independence is currently being challenged by political forces seeking to reshape its mandate. The Fed has not always been independent of Congress and the Treasury. Its independence was formalized only in 1951, with a Treasury-Federal Reserve Accord that was not a law but a policy agreement redefining the relationship of the parties. In the 1930s and 1940s, before the Fed officially became “independent,” it worked with the federal government to fund the most productive period in our country’s history. We can and should do that again.

In a Sept. 1 Substack post titled “Fed Faces Biggest Direct Challenge by a President Since JFK – and This Is a Good Thing,” UK Prof. Richard Werner shows that there is no evidence that more independent central banks deliver lower inflation. In fact, per his findings, central bank independence has no measurable impact on real economic performance, and greater central bank independence has resulted in lower economic growth. 

This two-part series will probe the forces in play now to overhaul the Fed, and the feasibility of redirecting it to use its tools, including “quantitative easing,” not just to save the banks but to save the economy. Part I looks at a particularly flawed Fed policy — Interest on Reserves (IOR)  — which burdens the budget, stifles liquidity, and subsidizes banks. Then it suggests ways that eliminating IOR and reining in the Fed’s independence could solve the Treasury’s interest burden altogether.

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Unaudited Power: The Military Budget Nobody Controls

The U.S. federal debt has now passed $37 trillion and is growing at the rate of $1 trillion every five months. Interest on the debt exceeds $1 trillion annually, second only to Social Security in the federal budget. The military outlay is also close to $1 trillion, consuming nearly half of the discretionary budget.  

As a sovereign nation, the United States could avoid debt altogether by simply paying for the budget deficit with Treasury-issued “Greenbacks,” as Abraham Lincoln’s government did. But I have written on that before (see here and here), so this article will focus on that other elephant in the room, the Department of Defense.

Under the Constitution, the military budget should not be paid at all, because the Pentagon has never passed an audit. Expenditures of public funds without a public accounting violate Article 1, Section 9, Clause 7of the Constitution, which provides:

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time. 

The Pentagon failed its seventh financial audit in 2024, with 63% of its $4.1 trillion in assets—approximately $2.58 trillion—untracked. From 1998 to 2015, it failed to account for $21 trillion in spending. 

As concerning today as the financial burden is the wielding of secret power. Pres. Dwight Eisenhower warned in his 1961 farewell address, “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”  

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The GENIUS Act and the National Bank Acts of 1863-64: Taking a Cue from Lincoln

This month Congress passed the GENIUS Act, an acronym for the “Guiding and Establishing National Innovation for U.S. Stablecoins of 2025.” Designed to regulate stablecoins, a category of cryptocurrency designed to maintain a stable value, the Act is highly controversial. 

Critics variously argue that it anoints stablecoins as the equivalent of “programmable” central bank digital currencies (CBDCs), that it lacks strong consumer protections, and that government centralization destroys the independence of the cryptocurrency market. Proponents say the rapidly expanding stablecoin market not only provides a faster and cheaper payments system but can serve as a major funding source to help alleviate the federal debt crisis, which is poised to destroy the economy if not checked, and that the stablecoin market has gotten so large that without regulation, we may have to bail it out when it becomes a multitrillion dollar industry that is “too big to fail.”

For most people, however, the whole subject of stablecoins is a mystery, so this article will attempt to throw some light on it. It will also explore some historical use cases demonstrating how the government might incorporate stablecoins into a broader program for escaping the debt crisis altogether.

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President Trump’s Proposal to Eliminate Income Taxes: Can It Be Done?

In February, President Trump said that tariffs would generate so much income that Americans would no longer need to pay income taxes. 

The latest plan, according to U.S. Commerce Secretary Howard Lutnick, is to abolish income taxes for people who earn less than $150,000 yearly. That move would affect roughly 75% of workers, according to U.S. Census Bureau data. On its face, this could narrow the wealth gap by boosting disposable income for low- and middle-income households without raising taxes on the wealthy — a politically clever alternative to progressive tax hikes. 

Eliminating the burden of income taxes is an exciting proposition, due to savings not just in money but in man-hours — the time spent anguishing over ledgers, forms and receipts. In 2024, according to the Tax Foundation, Americans spent 7.9 billion hours complying with IRS tax filing and reporting requirements. That is equivalent to 3.8 million full-time workers—roughly the population of Los Angeles — doing nothing but tax paperwork for the full year. 

The question is, can tariffs and DOGE replace income taxes? If not, how else could the government fund itself? Is a growing debt bubble that is now carrying a $1.2 trillion interest tab, which must continue to expand just to sustain itself, the only alternative?

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McKinley or Lincoln? Tariffs vs. Greenbacks

President Trump has repeatedly expressed his admiration for Republican President William McKinley, highlighting his use of tariffs as a model for economic policy. But critics say Trump’s tariffs, which are intended to protect U.S. interests, have instead fueled a stock market nosedive, provoked tit-for-tat tariffs from key partners, risk a broader trade withdrawal, and could increase the federal debt by reducing GDP and tax income. 

The federal debt has reached $36.2 trillion, the annual interest on it is $1.2 trillion, and the projected 2025 budget deficit is $1.9 trillion – meaning $1.9 trillion will be added to the debt this year. It’s an unsustainable debt bubble doomed to pop on its present trajectory. 

The goal of Elon Musk’s DOGE (Department of Government Efficiency) is to reduce the deficit by reducing budget expenditures. But Musk now acknowledges that the DOGE team’s efforts will probably cut expenses by only $1 trillion, not the $2 trillion originally projected. That will leave a nearly $1 trillion deficit that will have to be covered by more borrowing, and the debt tsunami will continue to grow.

Rather than modeling the economy on McKinley, President Trump might do well to model it on our first Republican president, Abraham Lincoln, whose debt-free Greenbacks saved the country from a crippling war debt to British-backed bankers, and whose policies laid the foundation for national economic resilience in the coming decades. Just “printing the money” can be and has been done sustainably, by directing the new funds into generating new GDP; and there are compelling historical examples of that approach. In fact, it may be our only way out of the debt crisis. But first a look at the tariff issue.

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‘Quantitative Easing with Chinese Characteristics’: How to Fund an Economic Miracle

China went from one of the poorest countries in the world to global economic powerhouse in a mere four decades. Currently featured in the news is DeepSeek, the free, open source A.I. built by innovative Chinese entrepreneurs which just pricked the massive U.S. A.I. bubble

Even more impressive, however, is the infrastructure China has built, including 26,000 miles of high speed rail, the world’s largest hydroelectric power station, the longest sea-crossing bridge in the world, 100,000 miles of expressway, the world’s first commercial magnetic levitation train, the world’s largest urban metro network, seven of the world’s 10 busiest ports, and solar and wind power generation accounting for over 35% of global renewable energy capacity. Topping the list is the Belt and Road Initiative, an infrastructure development program involving 140 countries, through which China has invested in ports, railways, highways and energy projects worldwide. 

All that takes money. Where did it come from? Numerous funding sources are named in mainstream references, but the one explored here is a rarely mentioned form of quantitative easing — the central bank just “prints the money.” (That’s the term often used, though printing presses aren’t necessarily involved.) 

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Beating Wall Street at Its Own Game — The Bank of North Dakota Model

North Dakota is staunchly conservative, having voted Republican in every presidential election since Lyndon Johnson in 1964. So how is it that the state boasts the only state-owned bank in the nation? Has it secretly gone socialist?

No. The Bank of North Dakota (BND) operates on the same principles as any capitalist bank, except that its profits and benefits serve the North Dakota public rather than private investors and executives. The BND provides a unique, innovative model, in which public ownership is leveraged to enhance the workings of the private sector. It invests in and supports private enterprise — local businesses, agriculture, and economic development – the core activities of a capitalist system where private property and enterprise are central. Across the country, small businesses are now failing at increasingly high rates, but that’s not true in North Dakota, which was rated by Forbes Magazine the best state in which to start a business in 2024. 

The BND was founded in 1919, when North Dakota farmers rose up against the powerful out-of-state banking-railroad-granary cartel that was unfairly foreclosing on their farms. They formed the Non-Partisan League, won an election, and founded the state’s own bank and granary, both of which are still active today.

The BND operates within the private financial market, working alongside private banks rather than replacing them. It provides loans and other banking services, primarily to other banks, local governments, and state agencies, which then lend to or invest in private sector enterprises. It operates with a profit motive, with profits either retained as capital to increase the bank’s loan capacity or returned to the state’s general fund, supporting public projects, education, and infrastructure.

According to the BND website, more than $1 billion had been transferred to the state’s general fund and special programs through 2018, most of it in the previous decade. That is a substantial sum for a state with a population that is only about one-fifteenth the size of Los Angeles County.  

The BND actually beats private banks at their own game, generating a larger return on equity (ROE) for its public citizen-owners than even the largest Wall Street banks return to their private investors. 

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The Florida State Sunshine Bank: How a State-Owned Bank Can Protect Free Speech

Fifteen years have passed since the Occupy Wall Street movement focused attention on the inequities and hazards of large Wall Street banks, particularly those risky banks with trillions of dollars in derivatives on their books. “Move your money” was the obvious response, but what could local governments do? Their bank accounts were too large for local banks to handle. 

Thus was the public banking movement born. The impressive potential of government-owned banks was demonstrated by the century-old Bank of North Dakota (BND), currently the nation’s only state-owned bank. In the last fifteen years, over 100 bills and resolutions for local U.S. government-owned banks have been filed based on the BND model. But while promising bills are still pending, so far the allure of saving money, stimulating the local economy, banking the underbanked and avoiding a derivative crisis has been insufficient to motivate local legislators to pass bills opposed by their Wall Street patrons. State legislators have acknowledged potential benefits, but they have generally not been ready to rock the boat when the situation did not appear to be urgent.   

Now, however, Florida Chief Financial Officer Jimmy Patronis has come up with an urgent reason for a state to own its own bank – to avoid bank regulations designed to achieve social or political ends that state officials believe are inappropriate or go too far, including “debanking” vocal opponents of federal policy. The concerns are Constitutional, testing the First Amendment guarantees of free speech, freedom of the press and freedom of religion, and the 10th Amendment right of states and citizens to self-govern in matters not specifically delegated in the Constitution to central government oversight. 

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How Unelected Regulators Unleashed the Derivatives Monster – and How It Might Be Tamed

“It was not the highly visible acts of Congress but the seemingly mundane and often nontransparent actions of regulatory agencies that empowered the great transformation of the U.S. commercial banks from traditionally conservative deposit-taking and lending businesses into providers of wholesale financial risk management and intermediation services.” 
— Professor Saule Omarova, “The Quiet Metamorphosis, How Derivatives Changed the Business of  Banking” University of Miami Law Review, 2009

While the world is absorbed in the U.S. election drama, the derivatives time bomb continues to tick menacingly backstage. No one knows the actual size of the derivatives market, since a major portion of it is traded over-the-counter, hidden in off-balance-sheet special purpose vehicles. However, when Warren Buffet famously labeled derivatives “financial weapons of mass destruction” in 2002, its “notional value” was estimated at $56 trillion. Twenty years later, the Bank for International Settlements estimated that value at $610 trillion. And financial commentators have put it as high as $2.3 quadrillion or even $3.7 quadrillion, far exceeding  global GDP, which was about $100 trillion in 2022. A quadrillion is 1,000 trillion. 

Most of this casino is run through the same banks that hold our deposits for safekeeping. Derivatives are sold as “insurance” against risk, but they actually add a heavy layer of risk because the market is so interconnected that any failure can have a domino effect. Most of the banks involved are also designated “too big to fail,” which means we the people will be bailing them out if they do fail. 

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Tackling California’s Budget Crisis: Raise Taxes, Cut Programs, or Form a Bank?

In 2022, the state of California celebrated a record budget surplus of $97.5 billion. Two years later, according to the Legislative Analyst’s Office, this surplus has plummeted to a record budget deficit of $73 billion. Balancing the budget will be challenging. Unlike the federal government, the state cannot just drive up debt and roll it over year after year. The California Balanced Budget Act, passed in 2004, requires the state legislature to pass a balanced budget every year. 

The usual solutions are to cut programs or raise taxes, but both approaches are facing an uphill battle. Raising taxes would require a two-thirds vote of the legislature, which would be very challenging, and worthy public programs are in danger of getting axed, including homelessness prevention and funding for low-income housing. 

A third possibility might be to increase the income tax base and state income by stimulating the economy with a state-owned depository bank. The state-owned Bank of North Dakota, which has raised record profits for its state, is a stellar example. In a review of states with the healthiest budgets based on data from the PEW Charitable Trusts, U.S. News & World Report puts North Dakota at No. 1 in Budget Balancing and #1 in Short-term Fiscal Stability.    

California has an Infrastructure and Development Bank, which is already capitalized and has an established track record of prudent and productive lending, but it is not a depository bank and its reach is small. Transforming it into a depository bank would be fairly uncomplicated and could substantially increase its reach. 

But first a look at what happened to the state’s copious revenues.

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Casino Capitalism and the Derivatives Market: Time for Another ‘Lehman Moment’?

Reading the tea leaves for the 2024 economy is challenging. On January 5th, Treasury Secretary Janet Yellen said we have achieved a “soft landing,” with wages rising faster than prices in 2023. But critics are questioning the official figures, and prices are still high. Surveys show that consumers remain apprehensive.

There are other concerns. On Dec. 24, 2023, Catherine Herridge, a senior investigative correspondent for CBS News covering national security and intelligence, said on “Face the Nation,” “I just feel a lot of concern that 2024 may be the year of a black swan event. This is a national security event with high impact that’s very hard to predict.”  

What sort of event she didn’t say, but speculations have included a major cyberattack; a banking crisis due to a wave of defaults from high interest rates, particularly in commercial real estate; an oil embargo due to war; or a civil war. Any major black swan could prick the massive derivatives bubble, which the Bank for International Settlements put at over one quadrillion (1,000 trillion) dollars as far back as 2008. With global GDP at only $100 trillion, there is not enough money in the world to satisfy all these derivative claims. A derivative crisis helped trigger the 2008 banking collapse, and that could happen again. 

The dangers of derivatives have been known for decades. Warren Buffett wrote in 2002 that they were “financial weapons of mass destruction.” James Rickards wrote in U.S. News & World Report in 2012 that they should be banned. Yet Congress has not acted. This article looks at the current derivative threat, and at what might motivate our politicians to defuse it. 

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Three Presidents Who Made Thanksgiving a National Holiday — And What They Were Thankful For

Three U.S. presidents were instrumental in establishing Thanksgiving as a regular national event. On October 3, 1789, George Washington declared the first federal Thanksgiving holiday. In 1863, Abraham Lincoln made it an annual federal holiday. And in 1941, Franklin Roosevelt signed a bill setting the date at the fourth Thursday of every November. All three presidents were giving thanks for bringing the country through a major financial crisis related to war, and they all achieved this feat through what Sen. Henry Clay called the “American system” of banking and finance – sovereign or government-issued money and credit.

For Washington, the challenge was freeing the American colonies from the imperial rule of Britain, then the world’s leading military power, when the new government lacked a source of funding. Lincoln faced a similar challenge, leading the Northern states in a civil war while lacking a national bank or national currency to fund it. For Roosevelt, the challenge was bringing the country through the Great Depression and World War II, when 9,000 banks had gone bankrupt at the beginning of his first term and the country was again without a source of credit.

In 1796, after 20 years of public service, George Washington warned in his farewell address to “cherish public credit” and avoid “accumulation of debt,” and to “avoid foreign entanglements” (“steer clear of permanent alliances with any portion of the foreign world”). He would no doubt be alarmed to see where we are 227 years later. We have a federal debt of $33.7 trillion, bearing an interest tab of nearly $1 trillion annually — over one-third of personal tax receipts. And we have a military budget from “foreign entanglements” that is also approaching one trillion dollars, devouring more than half the annual discretionary budget. Meanwhile, according to the American Society of Civil Engineers, the country is in serious need of infrastructure funding, tallied at $3 trillion or more; but our debt-strapped Congress has no appetite or capacity for further infrastructure outlays.

However, Washington, Lincoln and Roosevelt faced financial challenges that were equally daunting in their day; and the country came through them and continued to thrive, using a funding device that Benjamin Franklin described as “a mystery even to the politicians.”

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War By Other Means: Short Selling JPMorgan

When the FDIC put Silicon Valley Bank (SVB) and Signature Bank into receivership in March, a study reported on the Social Science Research Network found that nearly 200 midsized U.S. banks were similarly vulnerable to bank runs. First Republic Bank went into receivership in May, but the feared contagion of runs did not otherwise occur. Why not? As was said of Lehman Brothers fifteen years earlier, the targeted banks did not fall; they were pushed, or so it seems. One blogger shows how even JPMorgan Chase, the country’s largest bank, could be pushed — not perhaps by local short-sellers, but by China. And that is another good reason not to provoke the Chinese Dragon into “war by other means.”

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The Federal Debt Trap: Issues and Possible Solutions

First posted on ScheerPost.

“Rather than collecting taxes from the wealthy,” wrote the New York Times Editorial Board in a July 7 opinion piece, “the government is paying the wealthy to borrow their money.” 

Titled “America Is Living on Borrowed Money,” the editorial observes that over the next decade, according to the Congressional Budget Office (CBO), annual federal budget deficits will average around $2 trillion per year. By 2029, just the interest on the debt is projected to exceed the national defense budget, which currently eats up over half of the federal discretionary budget. In 2029, net interest on the debt is projected to total $1.07 trillion, while defense spending is projected at $1.04 trillion. By 2033, says the CBO, interest payments will reach a sum equal to 3.6 percent of the nation’s economic output. 

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Banking Crisis 3.0: Time to Change the Rules of the Game

On CNN March 14, Roger Altman, a former deputy Treasury secretary in the Clinton administration, said that American banks were on the verge of being nationalized:

What the authorities did over the weekend was absolutely profound. They guaranteed the deposits, all of them, at Silicon Valley Bank. What that really means … is that they have guaranteed the entire deposit base of the U.S. financial system. The entire deposit base. Why? Because you can’t guarantee all the deposits in Silicon Valley Bank and then the next day say to the depositors, say, at First Republic, sorry, yours aren’t guaranteed. Of course they are.

… So this is a breathtaking step which effectively nationalizes or federalizes the deposit base of the U.S. financial system.

The deposit base of the financial system has not actually been nationalized, but Congress is considering modifications to the FDIC insurance limit. Meanwhile, one state that does not face those problems is North Dakota, where its state-owned bank acts as a “mini-Fed” for the state. But first, a closer look at the issues.

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The Looming Quadrillion Dollar Derivatives Tsunami

On Friday, March 10, Silicon Valley Bank (SVB) collapsed and was taken over by federal regulators. SVB was the 16th largest bank in the country and its bankruptcy was the second largest in U.S. history, following Washington Mutual in 2008. Despite its size, SVB was not a “systemically important financial institution” (SIFI) as defined in the Dodd-Frank Act, which requires insolvent SIFIs to “bail in” the money of their creditors to recapitalize themselves.

Technically, the cutoff for SIFIs is $250 billion in assets. However, the reason they are called “systemically important” is not their asset size but the fact that their failure could bring down the whole financial system. That designation comes chiefly from their exposure to derivatives, the global casino that is so highly interconnected that it is a “house of cards.” Pull out one card and the whole house collapses. SVB held $27.7 billion in derivatives, no small sum, but it is only .05% of the $55,387 billion ($55.387 trillion) held by JPMorgan, the largest U.S. derivatives bank.

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Solving the Debt Crisis the American Way

Our forefathers turned their debts into currency. That Constitutional approach could work today.

On Friday, Jan. 13, Treasury Secretary Janet Yellen wrote to Congress that the U.S. government will hit its borrowing limit on Jan. 19, forcing the new Congress into negotiations over the debt limit much sooner than expected. She said she will use accounting maneuvers she called “extraordinary measures” to keep U.S. finances running for a few months, pushing the potential date for default to sometime in the summer. But she urged Congress to get to work on raising the debt ceiling.

Lifting it above its current $31.385 trillion limit won’t be easy with a highly divided and gridlocked Congress. As former Republican politician David Stockman crowed in a Jan. 11 article:

15 [House] votes and the slings and arrows of MSM opprobrium were well worth it. That’s because the GOP’s anti-McCarthy insurrection obtained concessions which just might slow America’s headlong rush to fiscal armageddon. And just in the nick of time!

We are referring, of course, to the Speaker elect’s promise that there will be no more debt ceiling increases without off-setting spending cuts; and that in the event of a double-cross a single Member of the House may table a motion to vacate the Speaker’s chair.

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