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Full Faith and Credit?
Why is the United States Government today still considered the finest investment risk in the world? The answer traces to Alexander Hamilton:
In 1789, Alexander Hamilton, the first U.S. Treasury secretary, faced a dilemma still challenging Congress today. The new nation was deeply in debt, and there was a lack of consensus in Congress about how to pay for it. Of the $75 million total debt, everyone back then agreed that the U.S. had to pay in full the $10 million loans from France and other nations to finance the American Revolution. Otherwise, no nation would ever loan money to the U.S. in an emergency again. More than $44 million, however, was owed to American citizens who had purchased war bonds during the war. Many of the original purchasers of these bonds had died or sold them at a significant discount to wealthy speculators. They had lost confidence in the ability or willingness of the infant nation to pay.
More:
Some leaders, including James Madison, argued that the new government should pay the current or market value of the bonds, rather than the higher, original face value. Others argued that the government should attempt to discriminate between the original purchasers of the bonds who paid the higher price and the speculators who paid the lower market value.
Adding to the complexity of the issue was the fact that some states had incurred $20 million of debt fighting the Revolution. Other states, which had already paid off their war debts, argued that their citizens shouldn’t be forced to pay the debts of other states. Some even suggested that some of the state debts were the result of non-war spending.
Hamilton’s “Report on the National Credit of 1790” stunned everyone, including President George Washington. Hamilton advised paying off the entire national debt at full face value and assuming all existing state debt. To do otherwise, he argued, would cause citizens to lose faith in the credit and integrity of the struggling government and sabotage the new Constitution. The Revolution had been fought for the benefit of all states, and the unity of all states would be critical to the survival of the new nation.
We often fail to understand just how important belief is to financial investors. Even the mere suggestion that America might default on its debt could induce widespread panic, a loss of faith in the dollar, and much, much higher borrowing costs for the government. Rational investors will not give money to people who did not pay them back last time. Institutions geared to minimizing risks will avoid “bad” sovereign debt like the plague.
Now consider this:
One day after assuring Americans he is not running for president “to make things unstable for the country,” the presumptive Republican nominee, Donald J. Trump, said in a television interview Thursday that he might seek to reduce the national debt by persuading creditors to accept something less than full payment.
Asked whether the United States needed to pay its debts in full, or whether he could negotiate a partial repayment, Mr. Trump told the cable network CNBC, “I would borrow, knowing that if the economy crashed, you could make a deal.”
From my perspective, this might all end up (after enormous pain) to be a good thing.
The simple fact is that US Government debt needs to be handled. There are, as far as I know, only four ways to do this:
- Grow like crazy. This requires enormous regulatory and tax reform, which — sadly — is not happening. We are stagnated and regulations continue to grow.
- Cut entitlements. Also not happening.
- Hyperinflate by printing money, third-world style. Debts become worthless (though so do savings, of course). The government will openly seize assets to pay entitlements, as they have done in Japan, Venezuela, Greece, Cyprus, Portugal, Argentina, etc. But in the end, most entitlements will become worthless.
- Default/bankrupt. Offer debtors a haircut. Destroy faith in the United States as the default safehaven in the world.It also means, in the end, cutting pensions for most Americans, not just those who have worked for the federal government.
I think that the nation — lacking the will for either of the first two — will end up hyperinflating under Clinton or defaulting under Trump.
Either, I suppose, would make it easier to for states to secede and start a new America, one reconnected to limited government and maximum individual rights to life, liberty, and property.
Am I missing something?
Published in General
There must be some circumstances under which secession is Constitutional.
I may soon have to sit down with a cup of tea and try to figure out what they are.
Yes. Everyone else’s problems are pretty bad (or much worse). It is a race to the bottom, and the US is still doing very well comparatively. That certainly has forestalled the inevitable reckoning this far, and it might continue to do so for years to come.
But eventually…. it will come down to one of those four options. And options 1 and 2 won’t do the job if they need to deliver in the short term, whereas options 3 and 4 can be effected in days and weeks.
No constitution can provide for its destruction. Secession is unconstitutional. The right to revolution, however, is all about the end of the political state-
Every contract has a termination clause. The constitution does not mention the matter.
If a state can “sell” secession to its own citizens and to the larger nation, then it can happen. I continue to think that if Texas left, it would be seen as a “lock in” of Democrat majorities for all time for Blue States – and could be sold on that basis, avoiding all armed conflict over the matter.
Throughout history the refusal or inability of the sovereign to repay it’s debt without further crippling forced taxation, has led to civil war and revolutions including the American Revolution and the French Revolution.
The English civil wars of the 17th century finally resolved the Stuart’s propensity to spend money by forcing loans which were not repaid. In 1688 William of Orange became the “King in Parliament” and the Bank of England was established to essentially force the king to repay debts. According to North and Weingast, among others, that led not only to a period of greater sovereign income but to a flourishing of private enterprise based on a banking system.
But that, of course, was before paper money.
A Nobel laureate picked option 3. Guess which one said the following (once upon a time)…
” ‘Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.’ So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest. ”
…”my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.
And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. … But unless we slide into Japanese-style deflation, there are much higher interest rates in our future. “
The constitution does not mention how to destroy it? You’re shocked?
There is a contract that’s the basis for all other contracts: That’s the Constitution. I know in the modern liberal world, people act like private life is better than public life & conservatives profess that too much politics is the liberal’s or progressive’s disease–but for all that, without the very public part of life, the most obvious part of which is the Constitution, none of the others make sense. People have to have some kind of community before they can have private lives. All those private lives depend continuously on the survival of the union. There is a principle by which to sunder the union–but it is the principle by which it was made: The rights of equally human human beings. That’s the right to revolution. Except intolerable despotism, sundering the union is necessarily destroying its rational principle.
Sure, try your hardest. It’s your right, after all-
Two reasons why the Republic of Texas will not be threatened by Russia or China.
We will not stick our nose into other people’s business around the world. We will trade with tyrants rather than expend blood and treasure to overthrow them and grant a chance at democracy to people that do not want it.
There are more female CHL holders in Texas than officers in either the Russian or Chinese armies.
Only when the Constitution is taken in isolation from equal or higher law.
But I’m an Originalist, and I can see one way out.
Perhaps it can be shown that the original meaning of the Constitution actually entails that the Constitution is not a law existing in isolation from equal or higher laws, and that it depends on a higher law–natural or divine law or both.
If, then, the federal government is sufficiently opposed to the higher law, it is no violation of the Constitution to secede–any more than it is a violation of the laws of Texas that they are overruled by federal law.
Do we have reason to believe that this is the original meaning of the Constitution?
I don’t. But I have reasons to consider it at least a possibility.
To be precise: It sounds awfully like the attitude of the Declaration of Independence; it’s awfully like Blackstone; and it’s pretty dang Lockean.
Not that those three sources guaranty that such a doctrine is in original authorial intent, the original understanding of the adopters, or the original public meaning in the text.
But they suggest it’s at least plausible.
I expect someone wrote a book about it. I feel like I can almost remember reading about the book.
But I don’t trust my memories. My brain’s mostly running on auto-pilot, and my conscious self is mostly along for the ride. I really need to stop working right now–and that entails getting off of Ricochet for a while.
It may be the weird zoned-in situation I get into after writing for a while–I just finished a first draft on a really fun paper.
I hope it’s not the fumes from the termite poison sprayed recently in another room of my house.
I’m not sure I see any improvement in your argument over mine: Despotism, if it becomes intolerable–the language of the Declaration is prudential on this matter–puts an end to the political state & returns people to their apolitical situation, which is as natural as their rights. That is the right to revolution, as the Declaration declares. That, I believe, is the meaning of the ninth Amendment. One could argue that the Constitution would by then have been so corrupted it were unfair to accuse the revolutionaries of destroying it. That seems right to me.
So the argument from nature for revolution is that sometimes people treat each other like they’re not human. It is that denial of humanity that leads to revolution. Government is supposed to offer people a chance at safety & happiness–that’s the political fulfillment of human nature.
Of course, the Civil War was not fought theoretically on the grounds of the Founding: The discovery of human nature. People who enslave human beings cannot go prattling about their rights not to be supposedly enslaved by Lincoln. So that’s secession in the special case.
By the way, if you want to ask yourself what’s the difference between the Declaration & the Constitution, ask yourself whether the Declaration can justify other regimes than that of the Constitution & just how different they could be-
This is an AWESOME statistic!
This assumes that the “like-minded” States would not form a military alliance to provide for Defense. I believe they would and there are studies to show that a disproportionately high number of US Armed Forces members come from Red States. I think the Blue States would have much more to worry about in this regard. California would be flying “El Tri” in the blink of an eye.
Yeah, I do believe that if the states turn out red, they would just form another America, but I don’t see any reason to believe it would be better. But if their being different states matters more to them than their redness–they will fall apart like the original colonies & states would have without the Constitution & the Founders running the government.
No. They do get paid in full every day. What happens is we borrow more money to pay off the principal and the cycle continues.
There is a little bit of game theory here. Strategists talk about games of imperfect information, and how that changes the strategy. There’s little strategic difference between (a) not knowing the relevant factors and (b) playing with someone who (you already know) lies to you. In both cases, the information cannot be relied on with certainty.
However, that doesn’t make the game unplayable. Instead, when you have imperfect information, you (basically) proceed with caution and compile a track record. Mostly, you assign initial probabilities to certain actions, and you adjust the probabilities according to how your opponent actually plays the game.
Or in simple English, actions become louder than words.
Trump — and for that matter, Obama and Clinton — have a blizzard of words, and the words dominate the moment. (Words always dominate the media.) But they also have a sizable record of actions. Let’s face it, we all know that the three of them will do whatever will immediately make the current problem go off headline. We know they’ll take credit for success (and, if they can’t get success, they’ll manipulate the press to make it sound like success). They always pursue the short-term to the long-term. Creditworthiness is a long-term skill, so we doubt they’ll have much of that.
So let’s presume that they’ll elect to “inflation” our way out of debt.
What should be our smartest response to that? What’s our counter-strategy?
I agree that secession is contrary to the Constitution, but permitted by the Declaration, which declares the higher law in this instance. This must necessarily be the case, because the legitimacy of the Constitution derives from the legitimacy of the Declaration. If the Declaration is invalid, then we Americans are properly subjects of Queen Elizabeth II.
I’ll only quibble about the wording. Secession is too much associated with the South, which could never have stood on the Declaration, having dedicated its Confederacy to radical inequality.
But yeah, American freedom includes the radical freedom known as the right to revolution, because it is grounded in that old Greek discovery, nature. This should be a sobering warning to conservatives, but has turned, for some, into enthusiasm. We mock lefties for their insane love of nature–which we well know is red in tooth & claw–but are excited about our natural rights as human beings–when we should remember that life without politics is intolerable, & natural rights only allow for the fulfillment of human nature as political rights in a tolerable political association!
Regionally? Secession.
Personally? Invest in things that are basically immune to recession. Pull assets out of things that the government could readily seize.
I can get behind this. We could call it what they call it in Europe: “Devolution.”
Regarding the options, inflation is far superior to even a partial default. We don’t need a hyperinflation to put a serious dent in the debt. Ordinary inflation will do.
The fed’s inflation target is 2%. Average inflation in the US from 2000 to 2015 was about 2%, and from 2008 to 2015 was about 1.5%.
Federal debt held by the public was about $13.1 trillion at the end of fiscal year 2015.
30 years of 2% inflation, which is what is currently expected, effectively reduces that debt by 45%.
30 years of 4% inflation effectively reduces that debt by 69%.
4% inflation is not disastrous, and is certainly not hyperinflation. This is why I consider inflation of this magnitude to be the most likely solution to the debt problem.
Of course, inflation has downsides, though most economic activity can adjust fairly easily. For government finances, the biggest problem is that increasing the inflation target from 2% to 4% would likely drive up interest rates by about 2%, which would worsen the annual deficit.
I’d ask Texans what they like to call it. Maybe they’d like to call it being Texan. They seem an inordinately proud race… But when I think of a Republic of Texas, I cannot help but feel it might be a pretty great thing. I’d like to see Texas doing astoundingly well in their Texas way even in the US.
They can use this for an interim anthem:
I agree with you as does Dr. Edwin Vieira, but some very bright attorneys I hold in high regard here on Ricochet do not.
It is a fascinating debate.
I would go so far as to say that, if we are honest about it, we never have perfect information. The question is whether we are comfortable making decisions on that basis, or whether we lie to ourselves about it.
Consider the original post: For centuries the world has known that the United States has not, does not, and never will, default on its debt. It is simply ruled out.
Now Trump has ruled such a possibility in. If people believe him, heads will explode, because there is a huge gap between the highest credit rating in the world, and its potential leader saying that we might default, as if we were some failed casino project. The risk premium, for anyone betting their own money or career, will soar.
I think the entire debate shows what eggheads we are. From a simple and practical level, secession will either happen or it will not. Whether or not it is legal is an abstract question that has almost no relevance.
History is not decided by legal opinions on the actions of leaders and nations.
Not so. People with far better education than us worked overtime at yapping the mouth to make the Revolutionary War happen-
Good point: milder inflation can do the job, if we can somehow avoid a crisis in payments when interests rates climb. I am not sure how that can happen (what would the payments on the debt be with interest @ 5%? 10%?).
Such an approach would still have to cap and reverse the ever-growing debt ceiling, would it not? Which would go back to Option 2: reduce the growth rate of entitlements.
Lawyers surely worked the question, but had we lost the Revolutionary War on the ground, the Brits would not have yielded to our legal arguments.
I think you should be thinking instead, without the political philosophy that inclined people to all these arguments, would the leaders of the war effort have led? Without their arguments, would they have had as many followers? That seems to me the way to think about reasoning in politics–remember there is a difference between friends & enemies…