Default on our National Debt Now
Everyone seems to think that defaulting on the national debt is "unthinkable" or would somehow cause the "end of the world."
No doubt it would be very painful. But isn't it better to write off all the bad debts, take your medicine, deal with the problem, learn a hard lesson, and move on?
Let's be honest. There is no way we can repay all the debt with real money.
The other alternative is to inflate or "monetize" the debt away. This may look like the more attractive option, but in effect is at least as morally evil as defaulting, and possibly worse. You're stealing from everyone who was prudent enough to save, to pay back the people who risked their money by lending it to the U.S. government. It lets politicians continue to pretend that the problem is not there, and to postpone the hard choices and the lessons that need to be learned. It stretches the pain out indefinitely, or at least until everyone finally realizes that defaulting and starting over is really the only way out. A default, on the other hand, while it certainly would cause pain to everyone, would mainly hurt those who, having a choice not to, decided to lend their money to a runaway, irresponsible government.
In other words, monetizing the debt only postpones the inevitable default; it makes the problem worse in the long run; it makes everyone miserable for longer, and it steals from people who made the right choices to give to those who made the wrong choices. Monetizing/inflating the debt away is the ultimate bailout, the ultimate "too big to fail" swindle.
I propose that the Republican congress not raise the debt limit when it comes up this spring. It's time to stop passing the debt on to future generations. It's time to be honest: there is no way we can ever pay it back; but the forced austerity that will come after a default will be good for us in the long run and will prevent us from ever getting into this situation again in our lifetimes. There is no guarantee that future generations will make better choices, but we should not let our bad choices from the past take away all the good choices they might otherwise be able to make.
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Jul '10
Re: Default on our National Debt Now
A great deal of that debt - perhaps the majority - is in the hands of United States citizens and financial institutions. And what do you think is in the Social Security "lockbox"?
You seem to think it's an either/or proposition: default or debase the currency. But the fact is a default would send the value of the dollar into a death-spiral.
A default would mark the end of the United States as a super-power.
May '10
Re: Default on our National Debt Now
Kenneth: But the fact is a default would send the value of the dollar into a death-spiral.
A default would mark the end of the United States as a super-power.
How so? Explain this often stated but rarely substantiated assumption.
Companies often emerge stronger after their bankruptcies. Nations also have recovered and become strong again after defaulting. Our national productivity and energy will not be destroyed by a default. (It quite easily may be destroyed by rampant inflation as everyone will spend all their efforts just to get the basics covered.) Our natural resources will be intact.
Our country won't be able to continue on this path. Even severe austerity at this point will be too little too late.
Get rid of the bad debt created by bad social welfare policies. The resulting shock and pain (for it will be painful) will ensure the government does not repeat those mistakes again. And even if they try, who will lend them the money again? It will force us to live within our means.
No doubt our prestige and power will suffer in the short run. But in the long run, our current path is far worse.
May '10
Re: Default on our National Debt Now
You never explained why it is not an either/or proposition. We really don't have any other options.
Do you honestly think we have a prayer for repaying all that debt? Soon the interest alone will eat up all of our taxes.
A libertarian argument (not that I am a libertarian, though I'm much more sympathetic to their economic arguments) is that the government's promise to repay is backed up by their ability to confiscate taxes from future generations-- in other words, slave labor.
Slave owners should not be reimbursed for their slaves when the slaves are set free. Those who lent money to the government, regardless of whether they are domestic or foreign, made a choice to invest in an unsustainable enterprise, and one backed by the "full faith and credit of the U.S. government" which is really just their ability to enslave future generations.
May '10
Re: Default on our National Debt Now
My point with this post is to remove the label "unthinkable" from the default option in your mind. When something is "unthinkable," you never take the time to consider it. Until recently I also recoiled at the very idea of defaulting. But really, if you strip away the mental stigma and consider it pragmatically, it is by far the least bad of the two options we face.
Monetizing or inflating the debt away has much longer-lasting and far-reaching consequences, and enables the government and politicians to postpone and even avoid learning the hard lessons they need to learn.
Moreover, though it's morally wrong not to pay ones' debts, it's even worse to steal from everyone to pay back imprudent investors. Not only that, but inflation rewards those who live on credit, by letting them pay back in deflated dollars, while it punishes those who decide to save for the future.
But actually pulling the trigger on the default option will take a LOT of guts. I'm trying to start the discussion now so that we are all very clear-headed about what we face and what we need to do.
May '10
Re: Default on our National Debt Now
And while we do have a choice now, the choice may be taken away from us in the near future. If investors lose confidence in the U.S. government, which can happen very quickly, the "unthinkable" may happen anyways and the U.S. may be forced into a default. I see us headed towards that situation already, perhaps in the next decade or two, or even sooner. It's hard for us to contemplate-- nothing like this has happened to us in our lifetimes. But it's happened elsewhere before. It's always been painful. And yet life goes on.
Finally, if we debase our currency, no one will want to deal with us in dollars anyways. If we default on our debts without first intentionally debasing the dollar, the value of the dollar may of course suffer, but it will still have a lot more purchasing power at home and abroad. I don't know that it would send the value into a "death-spiral" to default on debts if we respect our currency in the process. In fact, though I'm no macroeconomist, it seems to me the dollar would be in demand as people flee government debt.
Aug '10
Re: Default on our National Debt Now
There would be an enormous impact on global trade with China, right ?
The ripple would wash over Walmart, impacting it's domestic operations, forcing it to refocus on foreign acquisitions in stronger markets. Marginally performing stores will close across the country, opening up markets to smaller business.
Manufacturing would be turned back onto itself and the resulting startups to fill those gaps would revitalize our industrial base. The necessity of raw material extraction domestically would be a deathblow to the EPA. Oil, rare earth,and coal would all source domestically, losing their international market, the prices would fall if the burdensome operating regulations died with the EPA.
Sound good so far ?
Jun '10
Re: Default on our National Debt Now
Okay, I'm not an economist. Nevertheless, why can't our national debt be rescheduled to give us some breathing room? Could we re-float the debt on a new 50-year Treasury bill? We combine the new offer with government austerity and tax cuts, and it seems to me there's still a chance to grow ourselves out of the present dilemma.
May '10
Re: Default on our National Debt Now
Who will buy such a 50-year Treasury bill? There has to be demand for such a thing-- the government can't force anyone to refinance the government's debt on its own terms.
Plus, isn't this just kicking the can down the road mightily?
As for growing our way out of this mess, we tried that fairy tale in the 80s and 90s. Yes, government revenues grew as taxes were cut and economic growth resulted. But spending grew even more. We won't cure politicians of this habit by giving them another lifeline.
No, the only way to stop this wastefulness is to face the painful consequences and learn the lesson the hard way. Enough of kicking the can down the road. That only makes the problem bigger.
May '10
Re: Default on our National Debt Now
You want to see real growth? Get the government back to a much smaller size; get people currently relying on the government largess to be net producers instead of net drains on the system; make people (and governments) responsible for the consequences of their own actions; and then just step aside or be trampled.
The only realistic way I see for this to happen is for us to stop doing what we've been doing so far-- extending lifeline after lifeline to people, businesses, banks, state and local governments, and even whole countries. It's going to be painful. Consequences are never easy. But they are healthy in the long run. Without such pain, governments, people and businesses will never take full responsibility for their actions and learn to live within their means.
May '10
Re: Default on our National Debt Now
I came to the conclusions above with just a bit of outside input, but since putting up this post I have come across the following interesting links:
http://www.marketoracle.co.uk/Article22011.html
http://www.independent.org/newsroom/article.asp?id=2731
http://earlywarn.blogspot.com/2010/05/consequences-of-government-debt-default.html
http://www.econlib.org/library/Columns/y2009/Hummeltbills.html
And, an argument that it is not really even possible to monetize the debt away: http://ftalphaville.ft.com/blog/2009/08/04/65156/the-debt-inflation-myth-debunked-by-ubs/
Re: Default on our National Debt Now
I am glad that you posted this. One should always be willing to think about the unthinkable -- if for no other reason than to sort out whether it is really unthinkable. In this case, let me say that it would be both foolish and immoral. Decent people don't borrow money without paying it back, and those who do soon find that no one will loan them money again -- not, at least, at reasonable rates. Alexander Hamilton is very good on this. We could have repudiated our national debt at the end of the American Revolution. We were certainly less able to cope with it then than we are now. But in doing so under difficult conditions we persuaded the world that loaning to us is a good bet -- which has meant that when we had our backs to the wall and really needed to borrow we could. I would not want to throw that advantage away.
Jul '10
Re: Default on our National Debt Now
Fiat currency depends upon the "good faith and credit" of the issuer.
Once a nation proves that it does not act in good faith and will walk away from its debts, its currency no longer has any basis for stability.
May '10
Re: Default on our National Debt Now
My problem with this is that I don't want anyone to lend us money anymore. Our government-- let's not confuse the government with us-- has proven irresponsible and unable to keep its hand out of the cookie jar. I say, no more cookies.
May '10
Re: Default on our National Debt Now
Kenneth: Fiat currency depends upon the "good faith and credit" of the issuer.
Once a nation proves that it does not act in good faith and will walk away from its debts, its currency no longer has any basis for stability.
I'm talking about the debt here, not the currency.
I'll grant you that a currency based on something tangible depends on the good faith and credit of the issuer to actually back it up with that tangible asset. But the currency has no such backing right now-- it can be created out of nothing. Nevertheless, if the government refrains from inflating it, and people use it as a means of exchange, it will hold its value.
Perhaps I'm ignorant, but I don't see the direct connection between debt and the currency-- how does that work?
How does the government declining to pay back its debts immediately send the currency into a "death spiral"? If the currency is still used as a means of exchange in the market, and people hold assets and accounts in that currency, how does the government failing to pay back destroy the value of said assets and accounts?
May '10
Re: Default on our National Debt Now
The reason we need to address the "unthinkable" is that we-- no, the government-- has already been foolish. Our current situation is foolish and immoral-- borrowing against the ability to tax our children and grandchildren. You are right: decent people don't borrow and fail to repay. But it's not necessarily us, it's the government; and in this case I don't see how we (or people yet unborn) should be held completely responsible for its lack of discipline.
Finally, I truly and honestly think there is no realistic way we can possibly repay the current debt. Severe austerity measures won't begin to put a dent into it. And good luck enacting even mild austerity measures.
So what would you have us do? "Grow" our way out of it like we did in the 80s and 90s, when the debt only got larger, not smaller?
Jul '10
Re: Default on our National Debt Now
Chris, the dollar is fiat currency, but as a practical matter it is pegged at "what you can buy with it." And we actually managed to run a surplus for a couple of years, if you accept the wonky Washington accounting which ignores details like entitlement obligations incurred. If Washington were a business the accounting department would be serving consecutive life sentences.
The silver lining in the dark cloud that was the 111th Congress, cursed be their names and deeds, is that they drove us so deep, so fast, so mindlessly into crisis that the problems became obvious to millions of people, who told millions of their friends, and the Republicans who claimed to own this issue until it was W's turn to drive dad's Ferrari, found themselves whining about new partners with rapidly growing influence and out of work friends and family that get it and march at a moment's notice and clean up after themselves. Which is unique.
We can pay down the debt. We can retire it. Enough voters can make that start to happen in the next three years. You have no idea what a miracle this country is. Welcome to the party.
Oct '10
Re: Default on our National Debt Now
A default would debase the dollar, leading to large increases in inflation.
We have a large current account deficit (i.e. trade deficit) which, by definition, is financed by foreigners. When this financing stops, the dollar would plummet and the mother of all inflation spikes would follow (this has happened to other countries IIRC).
The banking system would be instantly insolvent, as would insurance and pension funds. The financial system would collapse, as would the currencies of almost every nation in the world (our Treasuries are the world's reserves, after all).
This would end either in a world war, or a radically new system of global trade. I think a world war would be more likely; the unrest and social instability of global oil suppliers would be simply too volatile.
Jun '10
Re: Default on our National Debt Now
Cut government by 25% (6% per year over the next four years) in real dollar terms, and I mean all government, federal, state, and municipal. Then maintain that level for another four years. Defaulting on debt is truly immoral when one has made zero attempt to stop spending while continuing to incur more debt, but I see no reason to believe we cannot pay our current debts. We have assets. If we add all of our western slope shale oil, offshore oil and natural gas reserves, and coal we have the equivalent of trillions of barrels of oil energy and we haven't searched diligently for years because of environmental restrictions. I am not saying we darken our skies and poison our waters, but we and the rest of the world need energy. Carbon based fuel will be used for another 100 years. We should be a net exporter of energy. Three trillion barrels of oil at $50 per barrel is, simple math, $150 trillion. Our current National debt is 14 or so trillion and our unfunded liabilities are about 100 trillion in social security and medicaid. We are not bankrupt. We have a cash flow problem.
May '10
Re: Default on our National Debt Now
How? Have you looked at the numbers? How are we going to even cover our interest payments in a few years?
Hope is not a strategy.
More hopey dopey stuff.
This country has great strengths, great productivity, great resources, etc. but we also have great weaknesses. Our culture is being destroyed, our families torn apart; we have very large groups of people who are dependent on the government and for whom anything short of a splash of cold hard reality may not be enough to cause them to grow up.
May '10
Re: Default on our National Debt Now
Good luck with that.