Repudiate the National Debt
"Repudiation" is not a word used by the political mainstream. Part of the reason is who holds the debt. China is often castigated as the largest holder, but that country actually accounts for less than 8 percent of the money America has borrowed. On September 4, 2012 FOX News reported, "Fully two-thirds of the national debt is owed to the U.S. government, American investors and future retirees, through the Social Security Trust Fund and pension plans for civil service workers and military personnel."
The United States is unlikely to repudiate money "owed" to itself. Nor will politicians voluntarily commit career suicide by reneging on promises to grandmas, civil servants, and veterans. That leaves few choices.
On December 12, 2012 the Federal Reserve issued a press release. It will pump $45 billion into the economy every month until unemployment falls below 6.5 percent, so long as inflation is below 2.5 percent. The new money will buy Treasury bonds. The Fed also renewed its current commitment to buy approximately $40 billion of mortgage bonds every month.
As long as government refuses to shrink, there is no other choice but to run the printing press until it is white-hot. Even hiking taxes to a confiscatory level is not likely to meet government expenditures, and it would probably cause social unrest.
However you approach the national debt, it is unsustainable. Austrian economist Michael Suede approaches it by holding the debt up against America’s gross domestic product (GDP). He writes,
Presently, the U.S. government is spending $6.3 trillion annually. Total state spending accounts for roughly 40% of U.S. GDP.… In other words, 40% of the U.S. economy exists to serve the purposes of war, imprisonment, welfare entitlements, bureaucrat salaries, regulatory bodies, subsidized housing and subsidized industry.
In early 2012, the national debt exceeded America’s annual GDP. In other words, it is now larger than the entire economy.
The good news is that the time is fast coming when the federal government will be forced to cut back, whether it wants to do so or not. Suede described two events that could spark a drastic reduction. First, "If the Fed were to accelerate [even further] the amount of Treasury and mortgage bonds it is buying, the value of the U.S. dollar may fall faster than the interest being earned by the foreign holders of our debt." If so, then foreign holders would divest themselves of their debt, and this could cause a bond run. In turn, the value of the American dollar would be gutted.
Or inflation could rise precipitously, as it did in the 1980s. Suede speculated, "Should this occur, the Fed is not in a position to be able to reduce the money supply without driving interest rates up." Even a 1 percent rate rise would add $160 billion in interest onto the $16-trillion-dollar debt. He concludes that a rise of several points "would completely demolish the state." I expect it would survive, but the prospect of destruction may well be the only circumstance under which the federal government agrees to roll back.
The bad news is that many innocent people will be harmed by the fiscal and social fallout of whatever happens with the national debt. Repudiation would minimize that harm. And the sooner it happens, the better.
There are three possible ways to address the national debt. The first is to continue borrowing and paying interest indefinitely. The second is to repudiate the debt. The third is to pay it off.
Realistically, no one expects to pay off the national debt; it is simply too massive. Moreover, there is no political will to do so.
Instead, the government wants to borrow and pay interest indefinitely at taxpayers’ expense. In essence, the taxpayer acts as the government’s guarantor so that the interest and principal will be paid to the "investors." Just one problem with the plan is that it is a type of Ponzi scheme. To pay off existing investors, the government needs to bring in an ever-increasing flood of taxpayers at the base. It is now so desperate for taxpayers that it is looting future generations by burdening them with crushing debt.
This raises a moral objection. Children in the shadow of the national debt have done nothing to deserve being there. They didn’t buy bonds, suck up entitlements, or vote anyone into office, and yet they are now economic hostages to a national debt clock.
Even Americans who believe in some level of mandatory taxation should be outraged. The ruling elites have created an inevitable economic catastrophe so that they can fund their political ambitions, line their pockets, and pay off crony capitalists. Nothing, not even stealing the future from children, has made them pause.
The politicians and bureaucrats are snatching the bread out of children’s mouths. Full repudiation is the only way to provide fairness to future generations.
But what of the older generations who "depend" on receiving the interest and principal, or who "need" the entitlements funded by borrowing and taxation? There is no sugarcoating the short-term prospect. There will be immense pain, and it will be terrible to watch. But that pain is inevitable. Entitlements such as Social Security will implode, even if repudiation does not occur.
The entitlements may collapse due to their own Ponzi-scheme nature, from the rise of interest rates on the national debt, or from another dynamic. The best outcome is to end the ongoing injustice as soon as possible. To continue an injustice because some people depend upon the proceeds is to enshrine it in perpetuity — or, at least, until it cannot stagger forward one more step.
Repudiation is also one of America’s best chances to reestablish a free and healthy economy. And it means weaning people away from their dependence on the state, especially on entitlements.
But can’t the bad effects be mitigated? For instance, could selling federal property to private buyers buy Social Security some transition time? In his essay The Trillion Dollar Question: Should the National Debt Be Repudiated? (PDF), historian Jeffrey Rogers Hummel addresses this issue. "First, there is a practical difficulty with this option," he states.
Suppose the sale of government assets does not yield sufficient funds to cover the entire debt? Then do you use taxation to repay the remainder, or do you permit partial repudiation? If you’re willing to allow partial repudiation, on what grounds can you object to total repudiation?
Then Hummel raised a compelling point. "The government is an institution that has both voluntary and involuntary relationships with its citizens." In the involuntary relationships, the government has robbed and brutalized people through taxation, regulation, and other abuse. Why should the people who voluntarily bought government debt be first in line for money that results from the sale of federal property?
Surely the state’s victims have a better claim to restitution than people who had a choice and chose the risk of investing in government. The involuntary victims would include people who were forced to pay into entitlements such as Social Security. Thus, the elderly on a pension would deserve a lump-sum payout plus interest for money previously stolen by government.
The iconic Austrian economist Murray Rothbard was fond of pointing out that American governments had a long history of repudiating debt. In his book A History of Money and Banking in the United States, Rothbard described the repudiations that followed the fiscal crises of 1837 and 1839.
By 1847, four western and southern states (Mississippi, Arkansas, Michigan, and Florida) had repudiated all or part of their debts. Six other states (Maryland, Illinois, Indiana, Louisiana, Arkansas, and Pennsylvania) had defaulted from three to six years before resuming payment.
Elsewhere, Rothbard highlighted a basic principle underlying the wisdom of repudiation, asking "Why should more private capital be poured down government rat holes?"
Hummel provides historical data that the economic consequences might not always be as damaging as the panic-mongers claim. He wrote of the repudiations in the 1840s brought on by costly state investments in building canals,
Rather than having disastrous consequences, this repudiation brought on a widening circle of benefits. States became very wary of investing money in internal improvements or in anything else, while investors became very cautious about loaning money to the states.
One consequence is that when a spree of railroad building hit America,
the states not only left the development and expansion of the railroad network to the market, but also during this period, they finally threw off their mercantilist and interventionist heritage and, for the first time, instituted a reign of near laissez-faire at the state level. Not surprisingly, the period prior to the Civil War witnessed some of the most rapid economic growth in the nation’s history.Conclusion
The national debt will only become worse and far more destructive with time. It cannot be paid off. It cannot continue indefinitely. It will end, and badly.
Those who call for the madness to cease by embracing repudiation are not villains who hate grandmothers. The villains are the ruling elite, who cry out insatiably, "More, more, more money!" It is someone else’s money they are spending; it is your money and that of your children. The only thing left to say is "no!"
© 2012 Wendy McElroy
Wendy McElroy essays
Coining at Troynovant