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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
What’s the point of getting out of it through inflation when it won’t do a thing to fix the underlying problem? All you do is give the regulators and centralizers who caused the problem an excuse to redouble their efforts.
The point is, live to fight another day. You’re right that it won’t be solving the problem. But it won’t be collapse either. Is this not the right compromise between people & principle? Let’s find a better!
It will entrench the fundamental problem deeper. I’m 100 percent against it. I say don’t let the bad guys do it. Why make life easier for the people who got us into it, and who benefit from it?
Sorry, no one is thinking like a politician. The ‘answer’ has been floated on the air in Washington for a long time. The answer for all the politicians and their worries, and the entitlements go on. All anyone is waiting for is the right crisis, a really big crisis that can ‘unite’ all the politicians to finally bite the big bullet.
A national VAT tax. The revenue would be a flood overnight. You will hear the praises sung from the Capital walls; ‘Its a new day in America! This solves all insolvency and everyone can have their medical and social programs and we are even going to add more!’
To be against such a plan, when all the leaders of both parties are supporting it, means you must be against America. And all the pols keep their jobs and provide cover for all, simple… and by the way, all of Europe will applaud and wonder why it took us so long to be ‘enlightened’.
I agree with your sentiments, but disagree with your judgment. My bottom line is, keep America from collapse. I don’t pretend it’s justice & full faith. I know people who like me are going to like me less for saying it. I know I’m powerless to affect things. But for all that, I have to beg people–keep the country going. You have no idea what power for good it exercises…
I don’t think so. For one thing, the country as a whole is over $12 trillion in debt. It’s not as if Maryland can beat the check and start from scratch. The rest of the country isn’t going to overlook that. (We can skip a pizza check for a couple bucks, but if the bill is over $250 billion, they will come after us.)
True, we are always working on some degree of probability. But as I say, Trump+Clinton+Obama do have a track record, and at this point, their probabilities are strikingly clear.
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Instead, I suggest, we should anticipate the mechanisms by which Trump would use to trigger inflation … he can’t just declare that by fiat; he needs banks and the Fed and a few others to implement any such scheme … and that’s where we could target our efforts.
Oddly enough, I suspect we could find enough Democrat allies to help us.
I agree with my sentiments and my judgment. The America that is unwilling to even cut corporate welfare, because that would lead to other reforms, deserves to collapse. Propping it up is a disservice to humanity.
Do you understand what will happen to the rest of the world the day the weakness of America becomes not only a conviction in the minds of famous gangsters & tyrants–but a confirmation of their judgment? Do you understand the extent to which American failure is a matter of faith with famous evildoers?
Mr. Walker, I hope you are able to tell the differences between the different wars you mention–secession is not a useful term for this. I suppose the language of the political art, the terms of art are problematic in an essential way, because they are in part polemical, but that applies as much to your choices of words as to anyone else’s. In short, secession, my foot!
Then this other matter: What part of American politics or law do you think is independent of the Constitution or could defeat it in a political or legal contest?
What you’re asking is that we prop up the sick man a little longer.
The problem with giving in to a little inflation now so we can fight another day is that it gives away both the practical weapons and the moral high ground for fighting another day. There is now some leverage for dealing with the problems of government. “Solving” it all through inflation takes away all the leverage we have to press for reforms. And since inflation usually hits the lower socio-economic classes, or at least the middle class worst, while maintaining the wealth of those who are well off, it takes away the moral high ground. (Inflation hits those worst who don’t own assets that hold their value in inflationary times.)
Another thing, too: The Constitution has a hold on the minds of Americans far beyond the concerns of law & politics as understood in the narrow liberal or modern mode. Americans incessantly choose a chief executive officer when they want to get things done & are as adamant about taking votes whenever they have to decide what to do–although no law requires them to do it. They, if asked, would deny that the Constitution has a hold on their souls, & instead say something about being practical. Being practical itself has been changed by the Constitution.
They are every day practicing these habits of mind & every day spreading them throughout the world without trying to do so. It is public diplomacy of a very high level, beyond what is available to the innocents who deal with your foreign policy.
There was never a republic with the chief executive office–nor no democracy. It is against the faith. America has invented it & has been to a great extent defined by it, for better & worse. The Constitution is for that reason not going anywhere.
Americans are incapable of shaking it off–anyone with the sense can see that super-hero movies are incessantly quarreling about the relation between the legislature & the executive. Recently, they’ve become overt about it. See the new Batman movie… It is fixed point in the minds of people & it cannot be shaken simply by their ignorance of political or constitutional matters. It has a force of its own-
Yes. Civilization will not give you anything more. The world is full of moralistic people, but only Americans move as though they were demigods. But even so–there was a world before America & there would be one afterward–but no civilization, I fear.
I agree with this. I do not say, giving in would be great or easy. It would be a fight forever, & difficult, & unhopeful-
Most excellent point and one has to learn how to use the uneducated interpretations of the MSM that seem to focus upon destroying the reps of perfectly profitable companies.
Hint when you feel like indulging in a little day trading: Buy a lot of a financially sound company during a MSM downgrade and sell it after positive quarterly reports.
And then do it again.
We’re already there.
Speaking as a 3rd-generation Canadian sleeper cell family member, I welcome any talk of secession (for as it says in The Protocols of the Elders of Winnipeg: How long before secession of states leads to a bunch of bickering counties that even posers and hosers like us can scoop up?) Problem is: it takes way too frickin’ much patience.
Americans have a seemingly infinite (and infuriating) capacity to endure misgovernment. In living memory the country got through the monetary/fiscal shambles that began in 1965 and ended with the Reagan-Volker confluence without Austin becoming the capital of anything new.
Moreover, as useful as the Federal Reserve’s incompetence should be to Ottawa’s triumph, their ability to induce hyperinflation (especially when they want to) is questionable. What monetary theory suggests you can debauch a currency at all well with a pack of frightened regulators standing on the necks of a crowd of equally frightened bankers, the current situation? V (monetary velocity) is still mostly banks, after all.
Rest assured the Look There’s a Squirrel–Regardez il y a un écureuil signs will be popping up here eventually. Just not soon. Damnit–Bon sang.
I didn’t say Texas you did. How about Alaska and Russia. How about Hawaii and Guam and the Philippines by China, it’s a stretch but how about Cuba and the Keys. Cuba was able to project forces to Africa. Remember under you plan there will be national forces.
Hawaii would be gone before you could say something about a day living in infamy-
Hawaii is a democratic state. It would remain with the Union.
Half the states could secede and operate their own little countries. Even absent any external threat, that still wouldn’t fix anything, because none of them will touch state-run corporate welfare much less get to the problem of entitlements.
When I see them working at these problems locally, I might change my mind.
Practically speaking, it would be very hard for states to work these problems. The Federal government runs most of these programs, and ties federal dollars to state programs as well.
But I agree in the main: states have been content to let the government infantilize their own populace.
Because nobody had a chief executive of any organization or held any sort of vote before 1787? I like the Constitution too, but really?
Voting was invented in Greece about 500 years before Christ. Chief executive is a new phrase for a concept that predates written history.
Another name for CEO is king. I’m not sure what you mean by written history: The Bible? Indian poems? Gilgamesh? By my lights, history really is political history–& that starts with kings. Greeks had’em. But free peoples always had at least two–like Rome & Sparta. Do you want to figure out why…
As for Greek voting, sure, but Greeks did not go through life voting for everything from president to where to go for dinner tomorrow. I’ve nothing against talking over antecedents or what have you. But if you mean to deny the shocking pervasiveness of these forms in informal life…
The Creature From Jekyll Island
and
Why not. Mexico has successfully invaded the US.
Actually, it should not be by States, or we would leave a lot of our conservative brothers in bondage. If we went by county, the Blue areas would be little islands in a sea of Red.
Oh, surely. But this is the kind of situation where the state that leads the charge gets to set the terms. Being “red” is not enough. Who is going to decide that it is time to divorce from the Federal Government, and start afresh?
That state/region will set its own immigration terms, etc. But if they are smart, they’ll go back to basic political and economic principles: no government welfare. Anyone who wants to live here and provide for themselves is welcome.
Remember that Texas could take the entire population of the world and be no more dense than England. There is plenty of room. And as Singapore and Hong Kong and the Netherlands have all proven, wealth is a function of productive humanity, not natural resources.
I think once the fuse is lit, it will become a second Confederacy in nothing flat. This time, we would have the guns, and the food.
Now your view, if I follow you, is that secession would at some point be right yet without being Constitutional.
I think, if I follow you, that I also am not sure I see any superiority in the theory I overviewed (but did not endorse).
I suspect your theory and the theory I overviewed would apply in much the same circumstances, so I’m optimistic that it doesn’t matter which one is right.
What do you think is happening right now? We are seven years into America’s version of Japan’s lost decade.
I think it is going to be option:
5) Continued anemic growth and deflation driven by low interest rates.
Higher wages with higher taxes and everything but housing staying cheap. Americans will start living in multi-generational and/or group housing to keep living costs low.
We have had near zero interest rates for going on 8 years and it has yet led to inflation. Japan has had deflation going on 20 years.
It is almost as if the fundamental axioms of economics – scarcity and infinite demands no longer apply. This is not true. What has happened is that all the economic growth is occurring in the digital sector which is hard to measure.
What is the economic value of this comment? It is certainly cheap. I have made over 4000 comments in four years of being on Ricochet. That comes out to about $40/yr * 4 yrs/4000 = 2.5 cents.
Look at the market caps of Google and Facebook – neither of which make money from physical things. Even newspapers used to have to purchase large quantities of newsprint.
Don’t get me wrong. Things would be much better with regulatory and entitlement reforms, mainly because it would free people from the soft tyranny of paternalism.
But, America today has largely conquered the tyranny of physical scarcity.