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In Defense Of Defaulting On The National Debt

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Reprinted with permission Mises Institute Joseph Solis-Mullen

With the acknowledged national debt now a politically and economically unpayable $30 trillion (in reality, its unfunded liabilities are far greater), Americans should start to become acclimated to the realities of the United States’ eventual, inevitable default. While it may seem unfathomable, and the results too catastrophic to imagine, in fact the likely damage to everyday Americans would be minimal in the short term and unquestionably a net plus in the long term.

This is far from surprising and not a new problem. As Carmen M. Reinhart and Kenneth S. Rogoff detail in their comprehensive review of the subject, history shows that great powers defaulting on their debts was long the rule, not the exception, and that the long-term implications of various regimes’ repudiations of their external debts in particular were minimal or a net plus, depending on the circumstances.

As a way of starting, it is helpful to contextualize the current numbers we’re talking about, because, frankly, they would have been unfathomable previously. As the old math joke “What is the difference between a million and a billion? Basically, a billion” illustrates, the orders of magnitude under discussion are scarcely comprehensible. But the reality is that trillion dollars is $999 billion plus another billion.

The present debt level has only been manageable because of the artificially low interest rates provided by successively accommodating Federal Reserve chairs dating back to Alan Greenspan. With both fiscal and monetary policy having been run heedlessly off the rails for twenty years, the reckoning of a higher interest rate environment necessarily awaits. Short of cuts in annual spending drastic enough to produce large running surpluses (not likely), default is the only sensible option toward which to encourage policy makers.

For context, consider that when Ronald Reagan and the Democrats controlling Congress started running budget deficits that hadn’t been seen since the Second World War, the national debt was running in the hundreds of billions—eventually jumping into the low single-digit trillions.

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In the 1990s, as the unipolar moment was beginning, successive administrations and Congress seemed to recognize the foolishness of their previous policies. Compelled by grassroots activism and insurgent Republican candidacies, George H.W. Bush and Bill Clinton both made deals to cut spending and raise taxes. By the time Clinton left office, the country was running a budget surplus and the national debt was projected to be paid off by the end of the decade.

Then came George W. Bush and his disastrous wars of choice. The size and scope of the government grew at the same time that historic tax cuts were enacted. The words of then vice president Dick Cheney should have spooked foreign buyers of US debt more than they did. He was of the opinion that “deficits don’t matter.”

Nor did they matter to Barack Obama, his successors, or their congressional partners—to the point that the mere $30 trillion in openly acknowledged debt amounts to over $80,000 per American.

Nor did the regular trillion-dollar deficits matter to the Fed, which with its accommodating and regularly mandate-violating policies has raised the stakes of the coming financial oppression orders of magnitude higher than they would have been had interest rates been determined formulaically or purely by market forces.

The good news, at least for ordinary Americans, is that we personally just don’t hold very much of the debt. Fully two-thirds is held between the Fed, various other US government entities, and foreign governments. A US government default wouldn’t be the first time the latter have taken a haircut (Alexander Hamilton and Richard Nixon both undertook such necessary actions), and our own government has spent the money so poorly that no coherent argument can be made that justifies paying them back. They would just continue in their profligate ways. As for Wall Street, they’ve lived on corporate welfare long enough to justify their taking a one-time bath.

Apart from not paying perpetual interest on ever-increasing debt, another benefit of default, rarely mentioned but arguably one of the most important from the antiwar libertarian perspective, is that it would essentially end Washington’s ability to practice unbridled military Keynesianism. Slapping pointless wars and military buildups on the credit card has become Congress’s standard operating procedure. It is not a coincidence that our annual trillion-dollar deficits are approximately equal to the trillion dollars dumped into the the military-industrial complex black hole each year.

With foreign investors temporarily alienated, the Fed would be faced with the choice of either absorbing the entire amount of “defense” spending with its own balance sheet (thus sparking a drastic inflationary bout that would visibly discredit the unconstitutional institution) or forcing Washington to give up the myth of global military indispensability.

Either case is preferable to the current course.

It is in the interests of the American people, our children, and our grandchildren, and would arguably do more for world peace than any other realistic scenario imaginable.

So, contact your representative today and tell them you support defaulting on the debt.

A graduate of Spring Arbor University and the University of Illinois, Joseph Solis-Mullen is a political scientist and graduate student in the economics department at the University of Missouri. An independent researcher and journalist, his work can be found at the Ludwig Von Mises Institute, Eurasian Review, Libertarian Institute, Journal of the American Revolution, Antiwar.com, and the Journal of Libertarian Studies. You can contact him through his website http://www.jsmwritings.com or find him on Twitter @solis_mullen.

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6 comments

Dwain Dibley July 1, 2022 at 12:53 pm

What are the primary dealers using to purchase USG securities? We know it’s not US legal tender FRNs because there’s only $2.2 trillion of those in circulation around the globe, which also happens to be, along with US coins, the only US money recognized as such in US law. So, what are they using to make those purchases? Are they simply creating the purchase price as a balance sheet liability that is administered as a credit to the account of the Treasury? When the primary dealers sell the USG securities to the Fed, are they paid with a credit in the amount to their reserve accounts? According to the Fed’s Open Market Operations literature, that would be the case. What two options do the primary dealers have when it comes to that credit to their reserve account? Wouldn’t those options be to either clear the liability they created when they purchased the USG securities or, purchase new assets to cover their liabilities? Maybe a little of both.

Wouldn’t this make the Primary Dealers the progenitors of government spending-induced inflationary pressures and not the Fed?

Aside from the 6% dividend payments, all USG debt held by the Fed is neutral, we don’t owe them for holding it.

Reply
FH Searcy July 1, 2022 at 1:00 pm

Another option is to just nationalize the Federal Reserve and replace all Federal Reserve Notes with US Treasury Notes. In the process, back those notes with gold and silver.

Reply
Dwain Dibley July 1, 2022 at 2:44 pm

Well, that would cover about 3% of what is erroneously referred to as the US money supply, which would lead to about $17 trillion in bank deposit liabilities POOF!ing out of existence.

The Federal Reserve was created by an act of congress and it can be dissolved in the same manner. Whereupon the Treasury takes possession of the notes and the collateral specifically held against them. According to the Treasury, Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks. This means that if there are more notes in circulation than the Fed has posted collateral for, then the Fed owes the Treasury that collateral. I believe that collateral owed would be the gold held by the Fed at $42.50 an ounce. But that’s just speculation on my part.

Reply
Tony Bell July 3, 2022 at 7:17 am

Need another administrator of our currency, nether the Fed or congress are trust worth. They have proven that time and again.

Reply
pc_PHAGE July 2, 2022 at 4:03 am

Reading Dwains Greek has left me exhausted and no more enlightened.
Or is it like reading a dense legal report.
Economics has become so BAROQUE that even its practitioners don’t understand it.
Has it reached the pinnacle of 10th century Medieval Medicine yet?
Tell me Dwain, how many USG securities will fit on the point of a pin?
Janet Yellen would say an infinite amount because they are all imaginary.

Reply
Fantum2 July 4, 2022 at 1:12 pm

A great way to eliminate retirement for half the country and produce a violent retribution on anyone accused of being in the past govt administrations. It won’t work and therefore printing will continue with the digital world.

Reply

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