The Pony in Defaulting on the National Debt


As the federal debt level gets jacked into the troposphere, "Cicero" over at To the People lays out the upside of defaulting on same:

Could defaulting on the national debt hurt the overall economy? Yes. It would likely crash the stock market. But, it would most certainly shake people's faith in government. And that would be a good thing. Once people realized that the federal government could default on bonds in the future, they would be less likely to loan money to the federal government. That would prevent the government from racking up a huge credit card bill ever again (or at least for several decades). Knowing this, investors would become quite bullish. The American economy would rebound and flourish. Without the federal government driving up interest rates through massive borrowing, companies could afford to expand like never before. And the federal government would free-up the $350 billion it spends every year just paying the interest on the national debt. Congress could give this money back to the American people through major tax cuts, further stimulating the economy. (Bone to socialists: Congress could also spend that money on health care, welfare, etc.).

Whole bit here.

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  1. The problem with the theory is that US citizens hold very little of the debt.

  2. Might not this lead to passage of a balanced budget amendment instead? In a catastrophic situation the gov’t usually is galvanized to pass some sort of reform, at least in part because the voters expect them to do something.

    I’m no economist, but I suspect that the ramifications of the gov’t defaulting on its obligations would be more far-reaching than this article suggests.

  3. If it sounds too good to be true, it probably is.

    Not only would it crash the stock market, hardly a small sacrifice in itself, but the dollar would also tank.

  4. I wonder if it is constitutional.

    Amendment 14 cl. 4:

    4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

  5. Come to think of it, the literal language could mean even TALKING about the invalidity of the debt is illegal. This comes after the First Amendment so it would supersede it.

  6. Ignorance. One of the primary reasons our economy is so strong is because of the stability of our institutions. Showing such great instability by refusing to pay our (our government, that is) bills would reverberate throughout the economy scaring potential domestic and foreign investors. It’s stuff like this that makes us libertarian wackos look out of touch with reality.

  7. I agree with Jason and crimethink. If it sounds too good to be true, if it violates basic common sense, then it’s probably a bad idea.

  8. matthew hogan,

    The govt would be questioning validity if it said that it didn’t really owe all that money. Merely refusing to pay it back — while acknowledging the debt’s legitimacy — would not be the same thing.

  9. since dollars are just gov IOUs ,what currency would then make business come back??

  10. We’re not going to default, we’re going to crank up the printing press and inflate the debt away. Look at gold, M3 going away for various unconvincing reasons, etc.

  11. As someone who finds bankruptcy repugnant except for those stricken by unforeseen and debilitating events, the idea that our government would default on the debt angers and offends me. (The existence of the debt angers and offends me as well, but that does not excuse us from our obligation to pay back those that have loaned us this money in good faith.)

  12. The worse the debt becomes, the stronger the argument in favor of ending all drug interdiction and taxing it instead. We’d get debt relief from both ends: Less spending and more revenue.

    Yes, yes, I know, I am hereby banished from the Garden of Ayn for advocating a drug tax. I only did so because I figure that legalization is politically impossible without it, so might as well press that politically distasteful fact into a useful role (eradicating debt) rather than a destructive role (spending on new programs).

  13. The UK’s Times gives us some handy hints to understanding big money (haven’t checked their arithmetic):

    Is roughly four times Britain’s GDP.
    Equates to $1,500 for every man, woman and child in the world.
    Would buy all the tea in China. In fact it would buy all the tea in the world for the next 2,000 years.
    Is enough to solve the Palestinian crisis by rehousing every Israeli and Palestinian family in a ?1.5m detached house in Henley-on-Thames.
    Would build 28 Eiffel Towers – constructed out of gold.

  14. Government debt backs up all sorts of financial institutions.

    Basically the financial infrastructure would be gone overnight, and you’d get hyperinflation to replace it.

    Good luck with your jobs and stuff.

    The debt, incidentally, isn’t a problem, except among those who either :

    1. Think it’s analogous to private debt, when it’s almost the opposite. US Govenment debt serves to take money out of private hands, period. It has no other purpose.

    2. Ought to be attacking government spending, not the way it’s financed, but have been distracted by some news bunny analysis.

    The Democrats want higher taxes and so attack _the debt_ so as to promote financing by _the tax_.

    Others have no such excuse


    “The Fed will back the system with every dollar that it can print. But of course all that would go on top of what is already an uncontrolled federal deficit. The end result, when it does all come together, will be something akin to a hyperinflation, but at the same time you?ll have also a very depressed economy…

    “You?d probably have to have an international conference to reconstitute the global currency system and somehow build confidence in the public that the new system will work and that it?s stable, so that we are not put in the same position as the poor people of Germany, after WWI, because that is the type of hyperinflation that could evolve here.”

  16. I don’t think that the government would actually outright refuse to pay; it has never been that honest before. No, probably it would come out with some sort of “new dollar” for which people would cash in their “old dollars” at ten or a hundred to one,… or some such. It could do this several times over the course of years and probably get away with it.

    As for people losing their “faith in government”,… well I doubt that. If anything there would be a clamor for even more action on the part of government to address the various “crises” that would occur. Don’t think so? Witness the aftermath of Katrina.

  17. matthew hogan,

    You beat me to the punch.


    …if it violates basic common sense…

    Common sense is so often erroneous that the concept is hardly an appropriate criticism.

  18. thoreau,

    The worse the debt becomes, the stronger the argument in favor of ending all drug interdiction and taxing it instead.

    I sincerely doubt that. All the government need is what governments normally do when they find themselves in arrears – print more money.


    Yes, replacing a currency, having a currency devaluation, etc. would be what would happen.

    post pc,

    Maybe we would get large-scale private currencies at that point. Nah. Governments will never let hold their grip of their control of currency unless forced to do so – its too useful a lever for trying to manipulate an economy to suit various political factions.

  19. “A catastrophe would be good because it would shake people’s confidence in the government” was disgusting when the Bolsheviks argued it; it was disgusting when the New Left argued it; and it’s disgusting when a libertoid argues it.

    Worse is Better is the nattering of a morally and intellectually bankrupt mind.

  20. joe, are you incapable of spelling out “libertarian”? dick.

  21. I think “libertoid” is a better word for the person who goes down this line of reasoning.

  22. “A catastrophe would be good because it would shake people’s confidence in the government” was disgusting when the Bolsheviks argued it; it was disgusting when the New Left argued it; and it’s disgusting when a libertoid argues it.

    Worse is Better is the nattering of a morally and intellectually bankrupt mind.

    Comment by: joe at March 18, 2006 01:29 PM

    VERY true.

    I think it’s hilarious that Cicero assumes that that people will automatically not trust the government, when this problem can be directly laid at the feet of Bush.
    I guess he assumes that the default will only hurt, just a little, and then the POWER OF THE FREE MARKET WILL HEAL ALL, when this default will (IMAO) only increase the clamor for government to protect what have left because this will shake loose a lot more shit than he is willing to admit. Doesn’t he even remember what happened after the Great Depression?
    I can just see another wave of Huey Longs, Fr. Coughlin’s, and possibly David Duke’s gaining strenght from this.
    Oh, and did I forget, Kos, Howard Dean, and the “radicals” of the center-Left will be primed to take power after since they have all along been saying that, “Bush did it, and we can govern better”, and what does he think they will do?

  23. Frank A,

    I think you get a sense for who actually respects people and considers their best interests to be tantamount, and who does not, when someone proposes screwing them over in large numbers in order to manipulate them into supporting a political agenda.

  24. joe,

    Its obvious that Cicero is concerned with the long-term best interests of the population, which is why he sees so many benefits accruing from this measure. Duh.

  25. joe,

    In other words, you need not attack his intentions (indeed, they appear to be unassailable) in order to criticize his position.

  26. embutler,

    A private one? A privatized currency system (where various private currencies competed against each other) is something that Hayek advocated.

  27. Utopias are like opinions and assholes. Every river of blood, from France 1789 to Moscow 1919 to Baghdad 2006, was going to water a blooming field of roses for that portion of the common folk who the schemers decided they could afford to spare.

    It’s not that I don’t understand the logic of Worse is Better (including the Better part). It’s that I’m not impressed by it.

  28. yes, I know, I am hereby banished from the Garden of Ayn for advocating a drug tax. I only did so because I figure that legalization is politically impossible without it

    Well, I’m not the God Rand, so I cant banish you out of any gardens.

    However, I think the problem with seeing your idea come to the light of day (as opposed to the logic of the idea itself, which is fairly reasonable) is that our politicos and a goodly portion of the populace will continue to object to legalization on ANY grounds, for emotional, religious, and ideological reasons, no matter what policy you propose or no matter what monstrous level the federal debt grows into.

    I’m sure the tax revenue argument has been put forth behind closed doors many times, but apparently the powers-that-be think it is better to waste human lives and resources on a “War on Drugs” (as endless as the one on “Terrorism”) rather than acknowledge that attempting to try to implement a drug-free social utopia is ultimately futile.

  29. joe,

    It’s not that I don’t understand the logic of Worse is Better (including the Better part). It’s that I’m not impressed by it.

    Apparently you don’t understand that logic, as is evidenced by your attack on Cicero’s intentions.

  30. Agree,

    You are right of course. If the lack of revenue issue were something that would drive the federal government into legalizing and taxing MJ that would have likely happened some time ago. Plus, there is the fact that the government already does “tax” MJ, etc., through the seizure of property, money used in the drug business, etc. Thus, thoreau completely ignores a major barrier to any such trend – the incentives associated with drug prohibition in the form of such seizures of property, etc.

  31. Since a number of people have attacked my proposal to default on the national debt, I should respond. Arguments generally fall into one or more of the following categories:

    1) It would wreck the economy. I agree. At least in the short-run. The question is would the long-term benefits outweigh the short-term suffering? I say yes. Having a government that is never able to borrow money again is a vast improvement over what we have now. Leaving hundreds of billions of dollars in investment money a year in the private sector is extremely beneficial, as is avoiding the massive tax increase that is inevitable if we don’t default on the debt (yes, yes, Congress could enact massive spending cuts to solve the problem, but it won’t).

    2)Defaulting on the debt will lead to hyper-inflation. I don’t see how. It’s paying off our national debt that will lead to inflation. When the government reaches near bankruptcy (when it can’t afford to pay interest on the debt without massive tax increases or spending cuts), it could start printing money to cover it. Better to avoid that mess now by defaulting on the debt.

    3) The real issue is spending. I agree, which is why the federal government should spend less. A good start is to stop paying $350 billion a year just to keep up with the interest on our national debt.

    4) There’s nothing really wrong with national debt. Then why not borrow the entire $2.8 trillion the federal government spends every year. The debt cannot be economically sustained at the rate we’re going. Also, there are moral issues at stake. Public debt is not like private debt. The people borrowing the money are not the people who will be required to pay it back. The national debt is inter-generational theft. Why should the majority of Americans who don’t own bonds be required to pay taxes to upper-middle class and rich people so that the federal government can continue to give money to politically-connected interest groups?

    5) It’s not right to not pay people back. Sorry, I disagree. It’s not right to make people pay other people’s debt. People who colluded with the government to rip-off future generations deserve to be screwed. And screwed badly.

    6) Defaulting on the debt will shake things up so badly that people worse than Bush could take power and expand government. Possibly. But, this depends on how the debate on the issue plays out. The next administration could float a trial balloon. More importantly, the American people are increasingly worried about the national debt. They know that it cannot be sustained. They want a way out. Default is one way. I think they might respond positively. Of course, if the economic consequences of default are severe enough, then that could cause a massive clamor for big government. But, this assumes default would be catastrophic for a long period of time. I don’t think it will be. Maybe there are half-measures that could be taken. Such as agreeing to give people back their principal without interest. This would be a loss to investors and they wouldn’t like it. But, it would limit the impact on the economy, while making the debt more manageable, and making investors less likely to loan money to the federal government in the future.

    When I posted my argument in favor of defaulting on the national debt I knew the idea would be universally attacked, even by libertarians. But, the moral and economic consequences of the debt cannot be ignored forever. Something has to be done. And whatever it is has to be radical. The federal government cannot continue to pile on hundreds of billions of dollars in new debt a year for eternity with no consequences.

    Thanks for your thougtful criticisms.

  32. “The question is would the long-term benefits outweigh the short-term suffering?”

    This is the logic of “Worse is Better.”

    The intention is to screw people over in the here and now, because in the end, the pain caused will lead the people to support policies that will bring about “long-term benefits.”

    Just like the Jacobins. Just like the Bolshies. Just like Al Qaeda in Iraq.

  33. joe,

    That really wasn’t the express position of the Jacobins (however you want to describe that group).

  34. Didn’t Ireland go through something like this thirty years ago? Maybe my history’s bad, but it seems that we could learn something from their response to crisis…they’re doing rather well these days.

  35. joe,

    Of course short-term suffering has been the case of many events that people admire – including the American Revolution. So, the case is that your universal rule is of a more consequentialist stance upon further examination.

  36. Joe,

    Are you saying that if the government is increasing the money supply and causing inflation it should just continue to do so? Because stopping would cause a recession. This recession would be better than the severe recession/depression that would occur once inflation led to hyper-inflation. But, by your “worse is better” logic it’s better to take the really worse in the future than the little pain now.


  37. cicero,

    No, I am not putting forward any affirmative argument about what the government should do. I’m merely exercising my God-given right, as a blog reader, to criticize the ideas of blog writers (you, in this case).

    Were I to come up with such a proposal, it might well include recommendations that could cause some short-term pain. Governing isn’t easy.

    But what I would not do is postulate that pain as a good in and of itself, as something to be positively sought after for the good that it would do in bringing people around to the right way of thinking.

    As you do, when you write, “Could defaulting on the national debt hurt the overall economy? Yes. It would likely crash the stock market. But, it would most certainly shake people’s faith in government. And that would be a good thing.”

  38. Joe,

    This is a good point. You are probably right. Screwing investors by defaulting on the debt to make them too afraid to loan money to the government in the future is probably wrong. I saw it really more as a fringe benefit of default than as a strategy. But, your point is well taken.

  39. I remember a far-leftist of my acquaintence suggesting a few years ago that the government could just default on the debt…periodically…

    I’ve got a better idea (a modest proposal, if you will): let’s show the government what it’s like to be in debt in the real world; we’ll pool our resources and hire an army of collection agents to hassle every Rep and Senator on the hill on bahalf of the creditors (i.e. us)?

    Yeah, yeah…a guy can dream, right?

  40. cicero,

    Is this some kind of trick?

    You’re not allowed to reconsider something you write because someone raised a counterpoint. Not on the internet, anway.

    I’m a little dizzy right now. Would you mind calling me a Nazi? 😉

  41. Every river of blood, from France 1789 to Moscow 1919 to Baghdad 2006,

    did joe just compare the Iraq war to the Gulag and the beheadings of the french revolution?

    Hey joe by the way where is that CIvil war everyone has been talking about?

  42. This theory that “we have to allow things to get real bad so that people wake up to the reality of the situation” is an old communist tactic, which does not work all that well.

    It was this theory of “forcing capitalism to take off its mask” that led them to support the takeover by the Nazis, because after that, people would be disenchanted and would turn communist…

    It is a **very** bad idea.

  43. But, the moral and economic consequences of the debt cannot be ignored forever. Something has to be done. And whatever it is has to be radical. The federal government cannot continue to pile on hundreds of billions of dollars in new debt a year for eternity with no consequences.

    I really don’t see whay it has to be radical. Many people make 50,000 a year and have loans of 300,000 or more. The US produces 12 trillion and has a loan of 9 trillion…the solution is simple and the exact opposite of radical. Cut spending to balance the budget pay off the loan over 30 years just like any home owner does.

    The blow up the economy solution reminds me of a comic book supervillan ploy like in the watchmen when the billonair super genious blew up time square to stop a nuclear war…we all know the sulution to that war was something a little less dramatic and much more pregmatic.

    Cut spending to balance the buget pay off the dept over time simple easy eveyone understands it and no one has to die.

  44. I suppose if I cut off my left foot I’d come to be really good at hopping on my right foot.

  45. The US produces 12 trillion and has a loan of 9 trillion

    A little clarification here… The body with the 9 trillion dollar debt “produces” only 2 trillion dollars. Actually, “produces” isn’t quite the correct word — “steals” is probably more accurate.

  46. I don’t think an explicit default is in the cards. Hyperinflation is more likely. History shows that the working class isn’t troubled as much as you might think by hyperinflation: they have few assets and they mostly live from paycheck to paycheck. The ruin of the currency will lead to a practical reduction in wages and therefore a manufacturing boom.

    Industrials and energy stocks will rebound quickly. Stocks in the service economy will be crushed, especially financials. A little revenge on the bankers for mismanaging the currency to begin with,IMHO. As for the rest, it will look much like the collapse of the Soviet Union: an inability to maintain the military because the government is simply unable to pay for it. The more it tries, the weaker the currency gets. People don’t seem to understand that the US is currently the beneficiary of massive military aid from Asian banks who are buying up US debt to finance the wars. That can only go on for so long.

    Special shout-out to joshua corning: 1) go to Iraq; 2) leave your fortified hotel, 3) stand on a streetcorner in any neighborhood out of sight of US troops. At that point, you won’t have to ask where the war is. It will come to you.

  47. But, surely cicero has a point;

    The people paying the debt are not the people who incurred it. Let us say that I wished to borrow three times my annual salary from my neighbor. So I approach my neighbor and propose the following contract:

    In return for $X today, my son will repay $3X in ten years’ time.

    Would the contract be valid? Absolutely not, I can not bind my child to this contract. Yet in a way that is what we are doing with the national debt.

    Let’s say I did offer such a contract to my neighbor, and he in turn accepted it. Let us then say that he approaches my son when my son is a young man and asks for repayment, and my son refuses to pay. Now, if my neighbor were to sue my son for the money, and you were sitting on the jury would you find for my neighbor? Or would you rule that the contract was invalid and that my son therefore owed my neighbor nothing?It would be one thing if liability for paying this debt was taken on voluntarily, but it isn’t – Certainly I want no part of it, my son and daughter who were both born in the past five years have not asked for it, yet they will be saddled with it.

    Personally, I have little sympathy toward those who invest in treasury bonds. They should be aware that they are investing in an organization that takes wealth by force rather than creating it by production. They seek to share in the plunder, and deserve contempt.

    Additionally I don’t think trust in governmental institutions is propping up our economy. Admittedly our economy is very deformed from the 40% of its production that is plundered by government officials. Removing the plunder could be like removing the stick used to train a tree leaving the deformed trunk unable to bear its own weight. Little that the government does assures confidence that one’s property rights will be respected. That is the crucial element of a prosperous economy and a happy society. Institutions that build this confidence need not be governmental. They are often cultural and social and in fact wither in the face of activist governmental action.

    To continue the arboreal simile, once sufficiently deformed nothing will be able to set the trunk right, and only collapse and planting a new tree will fix the problem. Whether we are too deformed to spring back is debatable, and I tend to lean toward the ‘yes’ camp.

  48. I’m glad to see this idea getting some discussion, even though I think it’s a bad one. But first, one thing: Joe, if you have something other than a moral argument, please make it, and if you only have a moral argument, please flesh it out. Because all you’ve said so far really boils down to “You’re just like Bolsheviks! Jacobins! Al Qaeda!” That’s not an argument, that’s poisoning the well.

    Part of me likes the idea of default, just because it would remind people that the feds aren’t all-powerful, but I’m extremely sceptical of the idea that it would lead to any benefits of any permanence. We have, after all, lots of historical examples of governments defaulting on payments. If any of them led directly to rebounding and flourishing economies, I’m not aware of them.

    I also don’t think that Cicero’s argument is very well thought-out. Yes, the feds are competing for lenders’ dollars, so that should increase rates, but the prime rate has been between 4% and 10% in recent years. That’s hardly extraordinarily high, so I’m not seeing the huge harm done by the existence of federal borrowing. I think almost everyone will agree that the government sometimes needs to do some borrowing, and if it defaults, future rates will go way up, which only means we’ll be paying more interest on anything we do borrow in the future. And, as I think has been mentioned, if we defaulted, the dollar would flop, and that’s not going to be good for too many people in the US. Hope you were holding a lot of non-dollar-denominated foreign debt!

    Last comment: debt as a percentage of GDP is only about where it was in the 1950s, not at some historic high. I agree that the recent increase is troubling, but the debt isn’t really any worse than it’s ever been.

  49. It would be one thing if liability for paying this debt was taken on voluntarily, but it isn’t

    Surely this should be taken one step further. For it is not we who are saddling our children with debt: It is 270 people in Washington, D.C.

    And if they have no right to burden our children, what right do they have to burden us? The fact that we are the putative beneficiaries of their ill-begotten largesse seems immaterial.

  50. I think cicero has not understood that US government debt is nothing like debt.

    Not a penny has gone to pay for interest, and not a penny has gone to pay any off.

    The debt is just a mechanism to take money out of private hands.

    When the Fed wants to increase the money supply, say to match the needs of a growing economy, it buys back government debt.

    When the Fed wants to reduce the money supply, say when the economy shrinks, it sells government debt.

    Period. That’s all there is to it.

    If the government has to “pay interest” on the national debt, it writes checks (launching new money) and simultaneously sells debt (scrubbing out money), a complete wash. No transaction has occurred, the economy has as much private money as before, and no goods have been exchanged.

    Now, in the meantime, the politicians are doing dirty things and spending money for actual goods; this is new money, and the Fed offsets the new money by selling debt, soaking it back up.

    When tax receipts come rushing in on April 15, the government buys back debt so that the money doesn’t disappear from the economy.

    In short, debt transactions keep the money supply exactly what it should be for the condition of the economy ; and a few of the things it accommodates are irregular tax receipt flows, government spending, interest payments, and so forth.

    This is nothing at all like private debt, because private debt has no effect on the money supply. Here it is the entire point.

    If you want to lower the debt, spend less, or raise taxes.

    The latter has the disadvantage that it’s involuntary and so inefficient. It has the advantage that you only get to spend on things that people are willing to support.

    Except that most people don’t pay taxes, thanks to progressive rates, so you get to spend on things people mostly don’t support, since they don’t pay for them.

    An argument for a universal flat tax, no exceptions, no deductions, no credits.

    (Where does it break down, if it gets too big? On the spending side. Too many people want to spend rather than save at once, relative to the amount of saving needed to sell debt; ameloriated by a growing economy requiring a larger money supply, and so less debt in reaction to new money from government spending.)

  51. Ron,

    Your statements don’t make sense. If that were the case, why not solely fund the government through borrowed money? After all, the taxes that are levied by government officials are a serious drain not only on the wealth that is produced but also in distorting the economy.

    Surely if the public debt is so benevolent this should not be a problem?

    Incidentally, I think the savings rate is a useless metric. I think that people do save by investing in goods that are likely to retain value. Since dollars are a very poor method to store value, is it any wonder that they instead choose to save DVD players, cars, houses, and dump the dollars as quickly as they can?

  52. Thoreau

    For nibbling at the Tree of Altruism and Statism, you are hereby banned! No, honestly, I hate to argue it, but I talk about the drug war ending with other people, I always throw them the “safe and regulated market” bone to incite their sympathies.

    Anyway, uh, Ron, I don’t know where you got your information or how you’re justifying it, but the Total Public Debt is held by foreign banks, private investors, corporations, etc. If it’s just a mechanistic thing to control M, how could people own it? And how does it get higher and gain interest? Your assertions don’t pass the BS test.

  53. Look, the invariant hard cold fact is that the economy will have exactly the amount of money circulating that it requires. The Fed buys and sells debt to achieve this, basing it on leading indicators of inflation.

    Dollar money is a ticket in line to say what the US economy does next, presumably something for you.

    If too many tickets are outstanding, too many people bid for services compared to what the economy can do, and they bid up prices. Inflation.

    If too few tickets are outstanding, parts of the economy go idle. You’d get falling prices except people won’t accept wage cuts, preferring unemployment. (There’s a deflation trap here, too, where the Fed loses control of the money supply, which is why the Fed always builds in a little inflation to be safe.)

    The Fed supplies needed new tickets and soaks up excess ones by buying and selling government debt, so that inflation is as low as it dares to make it.

    The money itself, the tickets, are not wealth. They’re crowd control tokens.

    Nothing in this token scheme depends on the “size” of the government debt. There is no size.

    The trouble comes when government wants to spend and there aren’t enough people to give up their turn by buying debt, ie. not enough savers to match the spenders. (saving requires spending and vice versa, a paradox but true.)

    With taxes, there’s no problem. You make them give way by taking their money outright.

    With debt, you need it to be voluntary, so you hit the problem.

    In either case, government spending being too big for the economy is the problem, not the size of the debt.

  54. Ron, I think your analysis is pretty good as long as the total debt is relatively small. However, people only buy the debt because they expect to get dollars back out eventually. As you point out, if there aren’t enough people buying debt, you can make up the difference through taxes. I think, however, that you miss a different point: if few enough people want t-bills, we can’t use them to pay off interest either. If the debt gets big enough, investors might worry that it won’t be repaid; they’ll stop purchasing government debt because they don’t think it’s worth much, and thus we can’t use new debt to pay interest on the old debt. If you cross that line, you have to start paying off the debt with actual currency, and it acts just like private debt. We’ve never had that issue, since we have a stable economy and have never defaulted, so we can treat it just as a money supply control mechanism. But if it gets too big, we won’t be able to control it, and then we’re hosed. This is basically what happened in Thailand, Indonesia, Korea, Russia and Brazil during the Asian crisis in 1998 (see Paul Blustein’s The Chastening.

    For the rest of the argument: if we’re going to discuss this, we should look at the other countries who have defaulted. Russia went through a partial default in 1998, and Argentina a complete one more recently. Both countries have been able to borrow money at only slightly higher interest rates, although there were internal economic disasters that hurt their citizens (and the Russian default basically killed liberal reform, but that was more contingent than a direct result of the default itself).

  55. I’m sorry, Ron, but whoever is teaching you economics is messing you up.

    1) Traditionally money is not a ticket, but rather some commodity. It could be gold, cigarettes (if you are incarcerated in a U.S) prison), bread rations (German concentration camp), salt (Ancient Rome hence the word salary).

    2) What makes a commodity a money is that it has fungible qualities such as divisibility, durability, uniformity and portability.

    3) US dollars ape such voluntary currencies by two means:
    a) The government uses coercion to force citizens to do business in them (the legal tender laws)
    b) Some states that mine oil have announced that they will only buy dollars with that oil. In return the U.S. government defends those states from military attack.

    4) The role of the FED is to permit fractional reserve banks to be able to pyramid debt on their deposits without fear of defaulting.

    5) The Fed does this buy acting as the guarantor of last resort and is backed in turn by the treasury of the U.S. government. Thus banks are free to lend money profligately without having to worry about failing when too many depositors try to withdraw their money at the same time.

    6) The credit expansion thus enabled inevitably leads to price inflation as the banks signal a larger supply of dollars exist than actually do.

    7) However, the credit expansion does not create new deposits. Thus inevitably some of the loans made as part of the credit expansion will not be paid back, since the deposits to repay them do not exist.

    8) This leads to a bust as the guys who can’t pay their loans back go out of business or liquidate their assets.

    9) To avoid this, the Fed prints more money and buys assets with it to make up for the apparent shortfall in deposits.

    10) This of course increases the actual supply of dollars leading to further price inflation.

    Why does the fed do this? Because it makes the cartel members rich! They are shielded from losses by the U.S. government, allowed to keep their profits, and most importantly shielded from competition.

    Of course their benefit comes at expense of everyone else. People are denied a choice in what they use for currency. Additionally the currency that they use is currently eroding in purchasing power.

    Thus, to confuse people into not hanging them from the nearest flagpole, the cartel has constructed an elaborate mythos that states that they stabilize the economy and preserve us from suffering the evils of the “Great Deflation Monster.”

    After all, a deflationary currency will still permit an economy to function. You will still want and need to consume goods and services. You will go to the store to buy bread, the store will purchase bread from the baker, the baker will purchase the wheat and water he needs and the capital equipment he needs to bake it etc.

    The notion that people will give up working does not match historical experience. When given the choice between lower wages and unemployment, most people choose lower wages since that is preferable to none. They still need to consume, and must produce to give something in trade.

  56. The US is bankrupt.
    Denial thereof reminds me of the swashbuckling swordfighters:
    “You missed!”
    “Oh? Shake your head.”

    I’m, thankfully, not a bankruptcy expert, but isn’t a bankruptcy case assigned to a judge?

    This would not happen in the lifetime of the youngest person here, but the judge should be in the UAE.

  57. Special shout-out to joshua corning: 1) go to Iraq; 2) leave your fortified hotel, 3) stand on a streetcorner in any neighborhood out of sight of US troops. At that point, you won’t have to ask where the war is. It will come to you.

    Funny I thought a civil war would look different then that…probably becouse it does and what you describe isn’t.

  58. I guess I don’t know what you call “civil war,” but there are multiple armed groups that have denied the authority of the national government and are vying for control of the country through bombings, ambushes, and kidnappings. The movement is well-funded and widespread. The government is unable to secure the streets of its own capitol and the people are forced to rely on private armies and militias for security. Is Nepal in a civil war? What about Colombia? What about the Congo?

    If you have some kind of different view of what civil war is why don’t you let us know how this particular war has let you down? That would be a much more interesting discussion than you simply asserting blandly that you don’t see anything wrong that a little more positive thinking won’t fix.

  59. Problem: A minority of a minority low level insurgancy consisting of multiple groups with little or nothing in common having little if any political core, mostly active in small geographic areas viaing for power in vacum created by the desolution of a centralized tyranicle regime with a bit of foreign Islamic terrorists thrown in for spice.

    Solution: Fight them, and reward the majority who support democratic rule. Over time the insurgancy will be snuffed out.

    The government is unable to secure the streets of its own capitol and the people are forced to rely on private armies and militias for security.

    Funny, where I come from we call those “private armies and militias”, the sherrif, city police, state patrol, and national guard. All of which have thier origins in “private armies and militias” and all of which still retain local control.

  60. “Except that most people don’t pay taxes, thanks to progressive rates”

    Ron, I think you’re pretty misguided here. I’ve had some pretty low-paying jobs in my life and, with the exception of one year where I was in school without a job for six months, I’ve always had to pay taxes. It’s only the very bottom of the economy that gets out of Uncle Sam’s tithe.

    By the way–correct me if I’m wrong, but I believe there have been no 30-year T-bonds issued since 2001. The longest-term debt being issued right now is 20-year bonds, so it’s a bit of a stretch to say that we’re inflicting this on our children. More like on our slightly older selves.

  61. Once you have wrecked the economy you do not get libertarian utopia. What you get is a call for a man in a black hat on a white horse to put it right by any means necessary.

    FDR is a mild version.
    The Austrian corporal is more extreme.

    Gradual change is best. Nibble at the margins. A position totally anti-Libertarian. So ask me again why I’m no longer a party member.

  62. It isn’t a real civil war unless one side wears blue and the other gray.

  63. Brian24: I blieve that 30 year bonds are back, as of just recently (first auction was Feb 9).

    I am not conviced about the argument that the debt is “intergenerational theft.” After all, we ‘will’ the bonds to our kids when we die, so they are the ones both paying them off and receiving the money. So, the debt is more a means of redistributing wealth, now and again in the future.

    Forget about money for a second and think of the goods instead. The debt does not make goods transport themselves in time. Most goods one consumes are produced at roughly the same time as they are consumed. If you forgo a pizza today, someone else eats it. Thirty years from now someone, your heir perhaps, will present a note and expect to get a just-baked pizza (or two). Goods are not set aside now for the future generation to be paid back with. There is a redistribution of today’s goods today, and another redistribution of future goods in the future.

    So, who gets todays wealth and who gets future wealth?

    The government (borrower) and those close to it get to use todays resources. This reduces the resources available for private purposes. Of course, the savers have forgone consumption they might have done instead of saving. This means that instead of producing things that ordinary people and businesses want, many of us are producing bombs to be used in, and military bases located in Iraq, for instance. We are also producing more items for consumption by bureacrats and welfare recipients and all those others close to the government, leaving fewer resources for producing goods for those not so well connected.

    If and when the savings bonds are retired, the savers and their heirs will be the ones doing the consuption, and they will determine what we all produce at that time. They may also want to exchange their savings from bonds to things like factories. Taxpayers will be the ones foregoing consumption at that point, and the previous savers (bond holders or factory owners) will be the ones doing the consuming.

  64. Brian24,

    This is one of the observations of Mises; that an attempt to “soak the rich” in order to pay for an interventionist government inevitably leads to the mass of the people paying lots of taxes as those programs grow.

  65. What is and is not a “civil war” has been the subject of some academic debate. A barebones definition would be a state of armed conflict between opposing parties within a state (in many circumstances this definition doesn’t of course differentiate civil wars from revolutions). Such a definition would also seem to require some minimal level of violence (e.g., body count, number of “significant” attacks per day, etc.), a minimal length of duration and that the parties be armed in such a way that the conflict resembles not simply a riot, but an organized conflict.

    In light of all the above considerations it seems to me, given my limited knowledge of facts on the ground in Iraq, that that is at least in certain regions in a civil war or fast approaching one.

  66. JD: “debt as a percentage of GDP is only about where it was in the 1950s, not at some historic high”

    look at it on an accrual basis:

    “Back in the mid-1970s, what were then the big 10 accounting firms decided in good public spirit that they would help the federal government set up its books on an accrual basis so that it could prepare financial statements and report its business the same way that a company does…

    “[T]hey tried, and actually got a system going. Into the Reagan Administration, they were actually putting out prototype statements. But something was throwing the statements off?accruals for Social Security. It was decided during the Reagan Administration that dealing up front with those liabilities was really too political. They backed it off and Social Security got thrown into the footnotes. Even so, the accounting system continued to evolve and in 2001, the first annual Congressionally mandated Financial Report of United States Government, for 2000, was published by the Treasury. It is prepared using generally accepted accounting principles, or GAAP, except for Social Security and similar accounts, such as Medicare, Medicaid and the Railroad Retirement Fund. Every year since then, these statements have been published, and to the credit of the Bush II Administration, the recent ones have even included indications of what the Social Security numbers would look like, if they were included in the accounting, similar to the way corporations show pension and retiree benefit liabilities. These financial statements are audited by the Government Accountability Office. But the GAO won?t certify them. They include all sorts of disclaimers and discussions of material reporting issues?things like the fact that Defense Department and Homeland Security can?t track the money that they are spending. Still, those are separate issues. They at least do put out a financial statement. It?s the best they can come up with. Treasury Secretary Snow and his predecessors have signed off on it. Keep in mind, now, that while other than in the footnotes, this financial statement doesn?t include any accruals for Social Security or Medicare liabilities down the road, in general, it is an exercise in accrual accounting. It includes accounts receivable, accounts payable. If they buy a building, it is capitalized and depreciated. Weapons go into inventory. The business of government is treated just like any business. This near-GAAP financial statement stands in sharp contrast to what I call the gimmicked reporting of the government?s budget which is commonly reported. The budget deficit numbers you hear announced at White House press conferences are from accounts kept on a cash basis, with no accruals made for monies owed by or due to the government in the future. Even though the surplus of FICA payments it currently receives over Social Security payments it makes are counted as a cash infusion, there is no offsetting liability for future outlays, so Social Security taxes have been artificially lowering the deficit level for years?actually, going back to the days of Lyndon Johnson. Faced with growing opposition to the war in Vietnam, he decided he had to do something to make the budget look a little better, so he got Congress to go along with changing the accounting of Social Security receipts. And that lopsided accounting has persisted ever since…

    “[I]f you look at 2005, the official deficit was reported at around $319 billion. Using generally accepted accounting principles, the 2005 Financial Report of the U.S. Government published by the U.S. Treasury, showed a deficit of $760 billion. That?s without considering Social Security and Medicare. However, in the 2004 report?s management discussion and analysis section, the Bush II Administration basically said, ?Hey, guys, you?d better be aware of how these numbers work.? Where the official federal deficit in 2004 was reported at about $412 billion, and the GAAP-based deficit was around $616 billion, they said that if you added in the net present value of the underfunding of Social Security and Medicare, the one-year deficit in 2004 was $11.1 trillion. That?s trillion, not billion. That amounted to almost 100% of GDP at the time. Now, that $11 trillion included a one-time spike of about $8 trillion, to account for what Congress and the President did in setting up the Medicare drug benefit without funding it going forward. But you can see that if you back out that one-time charge, that on a GAAP basis, accounting for Social Security and Medicare, in 2003 the deficit was around $3.7 trillion; in 2004 it was $3.4 trillion; and in 2005 it was $3.5 trillion. We?ve had three years in a row here where the GAAP deficit has been basically $3.5 trillion. So the deficit and the total obligations of the federal government are increasing by roughly the amount of GDP every three years. In fact, the fiscal 2005 statement shows that total federal obligations at the end September were $51 trillion; over four times the level of GDP. It is unprecedented for a major country to have its actual obligations so far out of whack… It?s beyond control. Keep in mind that 2005?s $3.5 trillion GAAP deficit is roughly 10 times bigger than the ?official? deficit.”

  67. “did joe just compare the Iraq war to the Gulag and the beheadings of the french revolution?”

    Actually, joshua, I was comparing the terror strikes by jihadists against Iraqi civilians to the Red Terror of the Russian Revolution and the beheadings of the French Revolution.

    Said violence against civilians, in the purpose of furthering the jihadists’ millennial vision, being, allegedly, your current justification for obediently parroting the administration’s “stay the course” strategy, it’s notable that you didn’t get the similarity. I’d almost think that you didn’t actually believe in or understand the argument you’ve been making, and have just been repeating it to defend your position in domestic political debate.

    And the civil war is going swimmingly, thank you very much, at least according to Ayad Allawi. And we have to take former PM Allawi’s word for it, you see, because he’s a brave man. A very brave man.

  68. JD,

    “Worse is Better” is a disgusting, old political strategy that many out of power radical groups have turned to. It involves deliberately sabotaging efforts by the govenrment to deal with ongoing problems, in an effort to discredit the government in the eyes of public, and make the extreme solutions of the radical group seem like the only available solution. To take one example, in the 30s-60s, American Communists would often agitate around problems that the public was concerned about – poverty, racial violence, the Vietnam War – and then come out against pragmatic solutions offered by reformers as “half measures” by “running dogs.” The assassination of the black Superintendant of Schools in Oakland by the SLA is another example – they didn’t want racial and class reconciliation and peace, they wanted war and revolution, and any one who could provide solutions short of that was objectively pro-establishment. This is the logic of terrorism, in which the terrorists kill innocent civilians just to demonstrate that the government can’t keep them safe, in order to get the public to turn against the government. The hope is that they will turn toward some “strong men,” like the radicals behind the attacks.

    Whether by design or through unfortunate phrasing, Mr. cicero’s argument about a default on the debt being good because it would cause enough widespread economic pain to discredit the existing liberal, modern structure of our government in the public’s eyes, and encourage them to turn to the fringe ideology we know as libertarianism, is very similar to this. It is “Worse is Better.”

    Is that fleshy enough for ya?

  69. Social security receipts are in fact cash income to the government like any other, and necessarily (there is no choice!) in the same pot. The Fed offsets their receipt by buying debt, so that the money does not disappear from the economy.

    There is no future obligation at all to be accounted for. A past congress can’t bind a future one.

    When the payouts get unsupportable, which won’t be too long now, they’ll do the only thing that can be done to fix it (if they’re smart enough to see it) _ raise the retirement age. End of problem.

    A corporation can’t do that. They’re bound by past boards of directors.

    (The SS program is one of the few actually beneficial ones that a government can offer _ an annuity that’s guaranteed against inflation. No company is good enough to offer that over 40 years time without risking default. You adjust the cost of the program by adjusting the retirement age, not by adjusting the benefit once you reach retirement age, and everything’s cool. You just have to work longer before you get it _ exactly the right thing, since you have to support the retirees of which you are not yet one, but soon will be.)

  70. I don’t often agree with Hakluyt but he called it: splitting hairs between an “insurgency” and a “civil war” is mindless philosophizing. You got armed groups attempting regime change against their own government. They’ve crippled production in the key export industry and major utilities through bombings and assassinations. A “low-level insurgency” that kills a thousand people a month and requires air strikes and the assistance of a hundred fifty thousand foreign troops to contain? Surely you jest.

  71. You said right, joe. “Worse is better” is an old leftist tactic.

    “Hey, let’s wreck the place completely and after it is wrecked, let’s build our dream palace in the ruins”

    In all the times such tactics have been used there has been no dream palace erected, but plenty of ruins.

    I put up with enough of that retoric from the Left. I do not see why I should put up with it here.

  72. BTW, JD, I should mention that cicero made it clear in a later comment that it was not his intention to argue from a “Worse is Better/prime the populace for revolution” position.

  73. OK, now that we’re done talking about that, I have this great land bill idea. It can’t fail…

  74. And the civil war is going swimmingly, thank you very much, at least according to Ayad Allawi. And we have to take former PM Allawi’s word for it, you see, because he’s a brave man. A very brave man.

    yeah i saw that…then i saw how how he said it was going to spread to america and europe…i wonder should i put on a blue uniform or a grey one.

    Anyway out of power american polititions say some pretty stupid things from time to time. Hell look at al gore. I don’t see why it would not be any different in iraq.

  75. and then come out against pragmatic solutions offered by reformers as “half measures” by “running dogs.”

    I note that everyone has seemingly ignored my modest proposal of cutting spending and then paying off the debt over time.

    Democrats hate this becouse it keeps Bush’s tax cuts in place and risks putting the new deal into the trashcan.

    Republicans hate it becosu it probably mean no new tax cuts at least for awhile.

    Libertarians hate it becouse growth of dept will limit the scope of the government if not the size.

    Probabaly all wrong but if not Cicero’s, what is the Libertarian solution to dept reductions?

  76. But joshua, he’s a Brave Man. A Very Brave Man.

    Easy for you to sit here, safely in America, and discount what he says. Alawi knows the situation far better than you, being Iraqi. And did I mention that he’s a Very Brave Man?

    Yes, I am enjoying this. I’m enjoying myself quite a bit today.

  77. Cicero deserves the bashing for the “worse is better” argument but bashing him for that is avoiding the issue of what the government will do. And I’m fairly confident that the government will continue to do what is has done every year of its existence: default on portions of its debt.

    And then it becomes a contest, and a business opportunity, to see which group you fall into: the group who continues to hold mostly “valid” accounts receivable or the group who loses most of their accounts recievable into thin air. Raising the retirement age is a perfect example, they’ll lop off a few years of debt to you and make specious claims about “longer lifespan” along with screwing up your personal financial planning. It would be governmental suicide to renounce 100% of its debt to anyone, they’ll just make everyone take a 20% hit on average – with some people losing 5% and some losing 40%.

    And then they’ll make some claim that “it’s for the greater good” which is logically equivalent to “worse is better” only with nicer-sounding words.

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