Monetary Policy

The Repudiationist Strikes Again

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Do not look directly into the Repudiationist's eyes!

Jeffrey Rogers Hummel is back, and this time we're all doomed. The Independent Institute fellow and San Jose State University professor of economics has been making the case for the inevitability of a federal government default since 1993. Matt Welch caught up with Hummel around this time last year.

The question is whether that default would be a good or bad thing. Although his argument that default is gonna happen goes back to Bill Clinton's first year, Hummel has been arguing that default is wot we all oughta do since Ronald Reagan was the presidink.

Lately, however, Hummel admits to some doubts about the desirability of what he calls "repudiation" of the debt:

I've accompanied the article with a caveat that includes the following: "If I were writing it today, the article would be a little less strident, and my discussion of the economic consequences of repudiation would be more sophisticated. I would tone down some minor hyperbole in the article's opening section. In particular, the 2007-08 financial crisis has convinced me that I was much too blase about the short-run consequences of a U.S. repudiation. But I still think my long-run economic analysis is correct, that my moral case for repudiation is justified, and that my historical examples (which could be expanded and extended to other cases) is telling."

I'm not getting how 2007-2008 underscored the unique short-term dangers of Treasury default. As Treasury Secretary Tim Geithner points out—accurately for once—during that period capital flooded into Treasuries. Maybe the argument is that had the rest of the world made what must already be looking like the smart move and run away from Treasuries, the GoverFed would have been unable to keep interest rates low and spur the summer of recovery?

I'm objecting to the term repudiation—a Marxist/Leninist/postcolonial trinket that has no bearing on our situation. We cannot reject the debt as having no authority or binding force, nor can we reject it with disapproval or condemnation (except disapproval of ourselves and our ancestors). The American people collectively ran up this debt, and if we default on it we're not repudiating anything. We're deadbeating.

And deadbeating may be a damn good idea. But we need to keep our categories straight.

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  1. you spelled refudiationist incorrectly

  2. Wow, it’s like he’s beaming repudiationism right into me with his eays.

    1. eays? Is that where the ears and eyes merge? Kind of like the third eye maybe?

      1. Kiss my eays.

        Meanwhile, what the hell happened there?

      2. It’s a portmanteau for eye rays.

  3. Screw that. Immediately and dramatically reduce the scope of government to the point that spending and taxes are reduced (stimulating economic activity by those who, you know, engage in such things), and take serious steps to begin reducing our debt.

    Jesus.

    1. We can quit spending any time we want! No, really!

    2. Too simple! It couldn’t work!

    3. Now is not the time for logic, it is time for us to look like we’re doing something and we feel the people’s pain.

      1. Now is not the time for action! Now is the time senseless bickering and pointless recriminations!

        1. Well, if you are going to indulge in “senseless bickering and pointless recriminations” rather than spend money, I’m all for it.

          1. No reason Congress can’t do both, Aresen. Remember, we don’t believe in zero-sum games around here.

            1. No reason Congress can’t do both

              *sigh*

              I know. Blithering and spending at the same time is as easy as whistling while riding a bicycle.

              But I can still hope that, while trying to concentrate on the tune, the bicycling congressman will accidentally turn in front of a speeding eighteen-wheeler.

  4. The American people collectively ran up this debt, and if we default on it we’re not repudiating anything. We’re deadbeating.

    “Collectively ran up” my ass. I didn’t approve of this spending, and in fact have spent years arguing against it, so I accept no responsibility for paying it back. It is an odious debt as far as I am concerned.

    1. I’m sympathetic to that argument, but the last thing we need is to give these spendaholics a belief that there will be no comeuppance if they continue to incur trillions in debt.

      This reminds me a bit of the general knowledge that Fannie and Freddie would be bailed out by the government. Stopped many actors from fearing any consequences to their reckless behavior.

      1. I’m sympathetic to that argument, but the last thing we need is to give these spendaholics a belief that there will be no comeuppance if they continue to incur trillions in debt.

        When the US defaults under the odious debt doctrine, there is no way anyone will be stupid enough to let it (or any other country, for that matter) run up the same level of debt for a long, long time.

        Refer to the long view: we’re only about one hundred years into a blip in the three-thousand year history of finance. I expect a reversion to the mean shortly, followed by a much more honest assessment of monetarism and Keynesianism than we’ve had during their reign of terror.

        1. When the US defaults under the odious debt doctrine, there is no way anyone will be stupid enough to let it (or any other country, for that matter) run up the same level of debt for a long, long time.

          Feature, not a bug.

        2. When the US defaults under the odious debt doctrine, there is no way anyone will be stupid enough to let it (or any other country, for that matter) run up the same level of debt for a long, long time.

          I find this highly unlikely. More likely they will blame the people who lent them the money and keep on with their spendthrift ways.

          That is the pattern that has been followed by most sovereign defaulters in the past. I predict that the US Congress will behave no differently.

          There will be plenty of ‘intellectuals’ who will argue in favor of exactly that kind of behavior. After all, the PEOPLE have a RIGHT to Social Security/Medicare/Food Stamps/Housing/etc and have someone else pay for it all.

      2. the last thing we need is to give these spendaholics a belief that there will be no comeuppance

        How does distancing ones self from responsibility for the mistake give the guys who fucked up….ugh, i can’t even think about it anymore.

        Hey, RC, find a good spot in Costa Rica yet?

        1. They keep getting away with fiscally insane behavior; I’m sure they’ll find new ways to continue doing so. At our expense, of course.

        2. Check out Belize – they speak American there, and the land is cheap.

        3. We’re off to Panama later this year. Shopping for towns, really – will be looking at El Valle de Anton and the Volcan – Boquete area.

    2. If the electorate would regularly, or occasionally, or ever, evince a strong objection to all this debt-fueled spending, that might make the case for odiousness.

      I suppose you could make the case that nearly all the wars have later been discovered to have been launched under false pretenses, that TARP and health care and other gutbusters were passed under cover of night against wide public opposition. But I still don’t see much popular support for getting rid of Social Security and entitlements, so I’m having a hard time seeing how you can claim this is a debt incurred only by persons of the regime, without regard for the will of the citizens.

      I object to the spending, but by keeping my U.S. passport I’m deciding to stay in the deal and accept the deal’s consequences. I don’t see how repudiating the debt would make me any less full of baloney than all those house flippers who blame the bank for their own troubles.

      Deadbeat: Embrace it!

      1. Ok, except I’m not on the hook for the bill when my neighbor gets foreclosed on…

        But hey, since more than 1/2 of americans voted for it, I’ll just pay up and ask what else of mine they need.

        Or, is this all just some trick to get a mass-emigration? Get all the whackjobs to leave the country because their will is not represented, then undo all the bullshit legislation once they’re relocated?

      2. I object to the spending, but by keeping my U.S. passport I’m deciding to stay in the deal and accept the deal’s consequences.

        I will keep my passport as well…and enjoy the peace that the US gives me because of its military. But i will not accept the US as my county any longer. After 8 years of Bush and nearly 2 years of Obama and their respective crappy congresses i now view the US simply as bloated empire that i can leach services off of.

        Fuck em. When inflation hits i will sell my land and convert the cash to Euroes, Canadian loonies, and gold. It is not my debt.

      3. I object to the spending, but by keeping my U.S. passport I’m deciding to stay in the deal and accept the deal’s consequences.

        Feel free. I view this another way: why should I be forced to accept the debt simply by accident of birth? If I could trade my US passport for a (say) Hungarian passport without any waiting period or penalty, I would do so in a heartbeat. But since I can’t, you’re saying I need to take it up the ass from 50+?% of the populace? Sorry, I just don’t buy that argument: that way lies nihilism. I believe in and support freedom, not democracy.

  5. “since Ronald Reagan was the presidink.”

    presidink? WTF?

  6. I’m not getting how 2007-2008 underscored the unique short-term dangers of Treasury default.

    The Recent Unpleasantness occurred when a class of AAA securities went tits up. Imagine what would happen if the financial foundation of the world, US treasuries, went tits up.

    There wouldn’t be a bank left standing in the US, especially since they’ve all been buying treasuries like crazy recently.

    Few, if any, US pension funds would survive.

    I’m guessing, but I think we would see a massive deflation, followed by a desperate round of money printing, followed by massive inflation.

    Outright repudiation of outstanding US debt would probably be the single most destructive financial and economic act in history. But I’m just guessing.

    1. Few, if any, US pension funds would survive.

      Well, that’s one way to fix the spending on pubsec benefits. Tough luck for the private sector’s pensions though.

    2. Outright repudiation of outstanding US debt would probably be the single most destructive financial and economic act in history.

      Can Obama pull it off though? I mean, he’s done a hell of a job spending lots money to make America’s problems worse, but is there really enough money available (on earth or Space Cash) for him to spend to actually destroy the economy?

      1. I don’t think the crunch will come in Obama’s term, assuming he wins arain in 2012.

        It usually takes about a decade after general recognition that a sovereign debtor cannot maintain spending levels and failure to take action before the crisis comes. There is not even the general recognition of the fact yet.

        Since the US$ is still the predominate reserve currency, it may have even a little more time than that.

        My guess is sometime around 2020 – 2025 for the crunch.

        1. Ok, so I’ve still got more time to stock up my homecanned vegetables and ammo.

    3. No country is too big to fail.

      And we are trying to prove it.

    4. Nah…the private sector would start buying euros or Canadian Loons, or yen or silver and gold or oil futures. Just like how consumers put way to much weight in the importance of keeping up their credit scores up you are putting way to much weight in the importance in the stability of our currency.

      We are not Zimbabwe we have internet service and far more access to alternative means of protecting our wealth from inflation.

      1. We are not Zimbabwe

        Yet.

        I mean, the US dollar is still worth more than the Loonie.

    5. Once again, R C, you show why you’re a national treasure.

      I still am not seeing 2007-2008 as a dry run of Treasury default. The dollar was never under threat, the presumed creditworthiness of the U.S. government — as reflected in interest rates and Treasury buyers — seemed to go up, and the bank failures have trickled out over years rather than happening all at once.

      I just think an actual default by the U.S. Treasury would look very different than 07/08: Not just bigger and worse, but different altogether.

  7. my moral case for repudiation

    Which is what, exactly?

    HAHA, SUCKERS!!

    1. P “Precious Roy” Brooks.

  8. I expect selective repudiation. Deadbeating means “you’ll get paid in full eventually”, repudiation means “you’ll never get paid all you are owed.” Means testing, kicking the retirement age higher, etc. is all selective repudiation. Anything more than selective repudiation would be done in concert with the rest of the G20 doing the same.

    I also expect seizure of foreign-owned assets and tariff’s like crazy. As bad as it will be here, it’ll be even worse in Europe.

  9. But I still think my long-run economic analysis is correct, that my moral case for repudiation is justified, and that my historical examples (which could be expanded and extended to other cases) is telling.”

    It’s moral to walk away from your liabilities. I’m sure Hummel has a different view when the people not paying their loans are people that paid too much for their homes.

    I’m not getting how 2007-2008 underscored the unique short-term dangers of Treasury default. As Treasury Secretary Tim Geithner points out — accurately for once — during that period capital flooded into Treasuries.

    Because people didn’t think that the US was going to default. The reason people piled into Treasuries was because no one wanted to purchase private debt. This made it much more difficult for private companies to get financing for operations. If the US stopped paying their debt our trade partners would screw us over, US companies would find it almost impossible to get any sort of non-equity financing and a massive devaluation of the dollar. Plus, what RC said above.

    1. “It’s moral to walk away from your liabilities.”

      The problem arises when “your” is a collective, most members of which have no control over whether those liabilities are taken on or not.

  10. I don’t see how repudiating the debt would make me any less full of baloney than all those house flippers who blame the bank for their own troubles.

    Fucking predatory lending- how does it work?

    1. You see, there’s all these tiny mortgage domains, and when they’re aligned…

  11. The Chinese might take Hawai’i off our hands in partial payment. Anyone else want to trade U.S. debt for Manhattan, Bay Area, Napa Valley, Cape Cod, or Camden?

    1. Can we trade DC, or would China totally not fall for that?

      1. The Chinese stereotype is being inscrutable, not stupid.

    2. Anyone else want to trade U.S. debt for Manhattan…

      Dunno. Do you think you could find anybody to give you 24 bucks for Manhattan?

    3. And then we’ll show the world what a libertarian free market paradise looks like–Alabama!

      1. And then we’ll show the world what a Neo-conservative theocracy looks like– Alabama!

        1. And then we’ll show the world what a black miority-majority district looks like– Alabama!

    4. I think you might actually have to trade something the US government actually owns. So how much debt would the Cascade Mountains and Yosemite retire?

      1. I think you might actually have to trade something the US government actually owns.

        How quaint. I’m sure you can find some blight in any of the regions listed…

      2. Nukes.

        1. China already has em…but i am sure there are a few poeple the US owes money to that don’t.

          Saudi Arabia?

          1. They have the delivery system for Chinese warheads but have no nukes.

            They will probably be in the market for some once Iran gets theirs.

            1. Trips to our space station with American women?

  12. I’m sure the Chinese would be cool with us defaulting on our debt. Considering the lengths debt collectors will go to over 1,000 bucks, I’m guessing we’ll find ? the Bounty Hunter to be significantly less pleasant over the missing trillion.

    It’ll be hard to maintain a top class military with devalued currency and reduced sources of revenue.

    1. It’ll be hard to maintain a top class military with devalued currency and reduced sources of revenue.

      The space between the world’s top military and the world’s 2nd top military is very very large. You could probably cut US Military spending to less then a quarter of what it is and still be on top.

      1. Dude, if public education spending-VS-performance is any indicator, we could make that military spending cut and not lose anything.

      2. True. Unfortunately, we owe money to a lot more than one country.

        1. Don’t know what the actual military budget is but lets say it is 500 billion.

          Cut to one fifth would be 100 billion. Giving the US 400 billion per year to pay off debt. 13 trillion divided by 400 billion it would take 33 years to pay off the debt.

          Yeah I did not put in interest but for the most part it would be canceled out by reasonable inflation.

          Also this would require freezing all other spending to inflation levels.

          The sad thing is putting our debt into a simple 30 year mortgage and demonstrating it can be payed off only makes it easier for politicians to spend more.

          No one let Nancy Peloci read this.

    2. ? the Bounty Hunter

      HA!

      It’ll be hard to maintain a top class military with devalued currency and reduced sources of revenue.

      Hard on the average citizen’s belly, yes.

    3. It’ll be hard to maintain a top class military with devalued currency and reduced sources of revenue.

      Then the US might have to bring its troops home and close its foreign bases and stop invading other countries.

      Oh NOES!!!!1!!1

      1. Well, you won’t be able to buy all those foreign resources and goods anymore, so you won’t need to protect shipping lanes and engage in geo-politics to the same degree either.

        Good luck filling up your truck though.

        1. I think you might be confusing the United States with the United States Federal Government.

          While the Government might be sitting on a freeway offramp with a cardboard sign reading “Will regulate 4 food GOD BLESS!!!” the rest of us will switch to maple leaves or Hong Kong pesos or some currency that’s worth more than the paper its printed on.

          Something tells me that foreign producers won’t stop selling to American companies and consumers just because the Gov deadbeats on public debt.

          1. ‘Cause you’re all going to convert to an alternate currency before the big devaluation happens?

            And where would all that foreign credit that props up US consumer spending come from?

            1. ‘Cause you’re all going to convert to an alternate currency before the big devaluation happens?

              No, afterwards will be fine.

              And where would all that foreign credit that props up US consumer spending come from?

              Probably from the same places it does now.

              I’m not claiming that deadbeating on public debt would have zero effect on the US economy. But the fact is that the US has a lot of land, lots of natural resources, and a population of educated workers who also want to buy stuff.

              Even if public debt apocalypse now occurs, the rest of the world isn’t going to treat the US as a leper colony.

              1. Sure, but your purchasing power and access to capital will be greatly reduced. That means you’ll be buying a lot less foreign goods and countries like China won’t have the large trade surpluses as sources of capital to lend to you.

                And it takes considerable time to exploit your own natural resources. You have to find them for a start, then develop the mines/wells etc, perhaps develop processing facilities, and even adapt/replace plant equipment and power generation facilities.

                If a US public debt apocalypse happens then you will lose a very large proportion of your wealth.

                1. All of those are true. None of them spell the end of the world.

                  1. Yep, it wouldn’t be the end of the world, but it would be universally shitty economic times for the world.

                    1. It beats a false economy built on credit that has no intention of ever being paid back.

  13. It’ll be hard to maintain a top class military with devalued currency and reduced sources of revenue.

    You know who else maintained a top class military with devalued currency?

    1. North Korea?

      1. North Korea?

        Mexico could kick their ass.

      2. I believe he’s referring to a Northern European country post-Great Depression.

        1. Ah, Finland.

  14. The government won’t repudiate the debt outright.

    What it will do is the favorate trick of bananna republics throughout history- print money, debase the curreny and devalue the debt.

  15. Why can’t Peter’s threads be as fun as Tim’s.

  16. What you mean “WE collectively ran up this debt” Kemosabe?

  17. If we cut spending on entitlements to near zero and reduced defense by 1/3, the debt could be paid off. Maybe even in our lifetime. However, that is not politically expedient. All them welfare recipients VOTE, dammit!

  18. Hey it could be worse, he could be “refudiating”!

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