Of Course the US Government Will Default on Its Debt
Last week Donald Trump set the financial punditry class aflame with his suggestion that the United States may end up asking lenders to take a haircut on its debt obligations. The resulting firestorm created a race to see who could come up with the strongest condemnation of Trump, David Ader of CRT Capital Group told Bloomberg the comments were “stupid and ridiculous,” while Business Insider’s Josh Borro labeled them “insane.” Vox’s Matt Yglesias described the proposal as a threat to “incinerate the world economy.”
While Yglesias is correct that a US default would have major ramifications for the global economy, lost in all this hand wringing is the fact that the damage has largely already been done. As Jim Grant noted in his Time cover article this month, the United States debt situation is far more serious than most "experts" would like to believe. By accumulating a debt that now towers over $19 trillion, the United States government has written a check it will not be able to cash.
Of course the irony here is that many of the same pundits attacking Trump for his comments today are those who have encouraged on the fiscally reckless policies that have led us to this point. For example, The Weekly Standard described Trump’s comments as a “Plan to Destroy the U.S. Economy”, highlighting the pain that Americans would feel from such a move. Of course, this publication was perhaps the loudest cheerleader for the Afghanistan and Iraq Wars, which could end up costing taxpayers over 6 trillion dollars, and continues to campaign for further expansion of America’s military presence that currently costs over $700 billion a year. Meanwhile, conservative estimates of the cost of bailing out Wall Street — actions that would still be defended today by most of the mainstream financial class - weighs in at over $3 trillion dollars.
These expenditures, added on to firmly implanted and growing welfare state managed by a political class lacking the courage required to make serious attempts at debt reduction, has always made default, in some form, inevitable. As Congressman Ron Paul (who was discussing the reality of US insolvency during his last presidential campaign in 2012) was always fond of pointing out, government spending is itself a form of taxation. So while the Weekly Standard is correct that a debt default will hurt the pocketbook of American families, this is an inevitable consequence of the spending it advocated — an insidious form of tax collection, the consequence of electing politicians who followed the publications own advice.
So the real question about an American default has always been less a matter of if, and more a matter of how and when.
While it is still popular to claim that the United States has never defaulted on its debt, this is a myth. The US has been forced to default a couple of times throughout history, the last of which being when Richard Nixon&rsquo closed the gold window. By cutting the ability of foreign governments to redeem US dollars for gold, America was allowed to pay back past debt with devalued fiat money. This form of default has long been a popular option for governments with debt obligations it can’t or won’t honor.
Of course, as Peter Klein wrote last week, even Trump’s suggestion of the US restructuring its debt isn’t the doomsday scenario CNBC talking heads have made it out to be, noting that:
[T]he idea 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 himself advocated for outright repudiating the national debt, arguing:
The government is an organization, so why not liquidate the assets of that organization and pay the creditors (the government bondholders) a pro-rata share of those assets? This solution would cost the taxpayer nothing, and, once again, relieve him of $200 billion in annual interest payments. The United States government should be forced to disgorge its assets, sell them at auction, and then pay off the creditors accordingly.
Trump himself has even touched on the possibility of selling of assets held by the Federal government as a form of debt reduction. This solution would have the added benefit of a number of additional benefits, including solving many of the issues that currently exist with the Federal owning of land used by ranchers. Plus, the country as a whole would benefit if Federal bureaucrats were kicked out of the various government buildings that pollute America’s capitol city — perhaps they could follow the lead of the old DC post office and be turned into Trump hotels?
Unfortunately, lost in the media firestorm over Trump’s comments about the debt is the rapid deteriorating hope that The Donald would offer a challenge to the reckless monetary policy that has helped facilitate the US government’s disastrous spending spree. As I touched on last week, Trump, in stark contrast to past comments, praised the work of Janet Yellen and fully endorsed a continuation of the US’s historically low interest rates. Even more troubling, he seemed to endorse some disastrous aspects of Modern Monetary Theory by suggesting that the United States could never default because it could simply print more money.
The ramifications for this are far more dangerous than his pointing out that the government has no real plans to pay back its debt.