The State of the Union: An Annual Reminder of Inevitable Default
Last night’s State of the Union was particularly noteworthy for its showmanship. Scholarships were given away, medals were awarded, families reunited. At a time when national politics is bad theater, President Trump is clearly its most gifted star.
Trump also knows what sells. As a political figure, he’s motivated not by any consistent ideology, but rather by transactional legislation. Following the performance, an MSNBC pundit noted that the speech was a “microtargeted ad” to various demographics aimed at expanding his base before next year’s election.
Combined with his Super Bowl ads highlighting criminal justice reform, his focus on charter schools and honoring a hundred-year-old Tuskegee airman are aimed at eroding away the Democrats' 90 percent control of black voters. The cameo by Venezuela opposition leader Juan Guaidó was an appeal to Hispanic families who have fled communist regimes—perhaps a poke at Bernie Sanders. Paid family leave, a policy focus of his daughter, is intended to help him with suburban women.
What doesn’t sell? Fiscal responsibility.
The political equivalent of Crystal Pepsi, the Republican Party has given up its long-standing façade of budgetary restraint. As Donald Trump told donors earlier this year, "Who the hell cares about the budget?”
Of course, some people do care, particularly those who understand the real costs of runaway spending. Unfortunately, politics isn’t about the economic literacy of the few, but the prevailing ideology of the masses. As Jeff Deist noted in 2016, the implicit ideology of the American population is much closer to Bernie Sanders than it is to Ludwig von Mises. As such, it should be no surprise that the policies of the country align more closely with the “deficits don’t matter” vision of Modern Monetary Theorists than the sober analysis of Austrians economists.
Of course, the popularity of political positions cannot shield a society from the consequences of their actions.
A recent Congressional Budget Office (CBO) forecast now has America on track for a 98 percent debt-to-GDP ratio by the end of the decade, and that’s with a built-in assumption that spending trends won’t significantly increase—a bet I wouldn’t feel comfortable making.
Left out of this measure, of course, are the true costs of the current American government—including unfunded liabilities built into to America’s entitlement system. For example, social security has a projected long-term deficit of over $13 trillion. Medicare adds another $37 trillion. Factor in federal pensions and veterans' benefits and the number gets to $122 trillion.
Working to DC’s benefit is the fact that American debt is still treated globally as one of the world’s most secure assets. Global demand for US Treasurys remains strong, and directly subsidizes our leviathan state even as we simultaneously weaponize it against the rest of the world. While it’s impossible to predict exactly how long this status will continue, history informs us that it would be foolish to assume it will go on forever.
To his credit, Donald Trump seemed to instinctually understand this as a candidate. While running, he was remarkably honest when he talked about the need for American creditors to eventually take haircuts. The self-dubbed "king of debt," he compared it to his own approach in business:
I've borrowed knowing that you can pay back with discounts. And I've done very well with debt. Now of course I was swashbuckling, and it did well for me, and it was good for me and all of that. And you know debt was always sort of interesting to me. Now we're in a different situation with a country, but I would borrow knowing that if the economy crashed you could make a deal. And if the economy was good it was good so therefore you can't lose. It's like you make a deal before you go into a poker game. And your odds are much better.
While his comments shocked (shocked!) the Very Serious pundits at the time, they were a refreshingly honest look at America’s future. As is often the case with Trump, he was attacked by the press for saying aloud the things you're supposed to keep quiet—like his reportedly saying “Yeah, but I won’t be here,” when given a brief on America’s growing debt crisis in 2017.
Of course, although any sort of default by the American government would be a major chaotic event for the global financial system, it’s something we should embrace and prepare for. Peter Klein has noted, “that the US can never restructure or even repudiate the national debt—that US Treasuries must always be treated as a unique and magical "risk-free" investment—is wildly speculative at best, preposterous at worst.” Murray Rothbard advocated for the repudiation of the national debt, which he viewed as a “part of the American tradition.”
At the end of the day, however, whether one agrees with the idea of debt default is inconsequential. The political system today is inherently unprepared to tackle the issue. The incentive structures of democracy actively work against restraint and responsibility. So long as the economic profession is dominated by bad economists and our education system is dedicated to government indoctrination rather than economic literacy, we will continue to lack the political will to make the difficult choices necessary to get our fiscal house in order.
Luckily, America’s political disorder doesn’t mean that American citizens have to be unprepared. Awareness of the real problems we face doesn’t require taking the black pill, it simply means being aware of practical steps we can take as individuals to best prepare for the future.
Just as we can arm ourselves to protect ourselves against inept law enforcement, we can safeguard our wealth outside of the American financial system to protect ourselves against inept fiscal management. Be it gold, silver, bitcoin, or whatever, the future may very well belong to those who refuse to leave their destiny in the hands of politicians, bureaucrats, and central bankers.