The U.S. government owes over $28 trillion after the 2020 coronavirus. That is also known as our national debt. It is also the total amount of U.S. government bonds we have sold. You can see the real time amount of it zooming up like a rocket car odometer at http://www.usdebtclock.org/.
We are increasing the national debt each year by the amount of our annual deficit spending.
Defaulting would mean stealing the money we borrowed from the bond buyers by reneging on paying it back.
Would that be immoral?
My personal code says,
Tell the truth.
Keep your promises
Treat others as you want to be treated.
Would the U.S. government defaulting on its debt violate the second of those three provisions?
So how can I suggest such a thing?
1. We may not have a choice.
2. It may be the least immoral of multiple choices, all of which are immoral.
The important immorality was borrowing more and more which with each passing day knowing we had no hope of ever paying it back. Default after doing that is inevitable anticlimax.
The national debt and interest on it can only be paid from U.S. tax revenues. Those are about $3.5 trillion a year. But we spend more. So like Tennessee Ernie Ford sang in Sixteen Tons.
You load sixteen tons
And what do you get?
Another day older
and deeper in debt.
To payoff the national debt, we would have to cut spending enough that we ran a government surplus each year, and use that surplus to pay down the debt. There is no plan to ever run a surplus.
At some future combination of interest rate, national debt, and national tax revenues, the total taxes collected will not even be enough to pay just the interest on the debt. For example, if the interest rate on the national debt were 10%, our current tax revenues of $3.5 trillion would exceed the interest of 10% x $28 trillion = $2.8 trillion. When the national debt reaches $30 trillion, our $3.5 trillion of tax revenues would mostly go to interest with little left for the military, Social Security, Medicare, FBI, and so on.
In short, we cannot pay off the debt now and with each passing day, we become less able to pay off the debt. We are headed for default whether we like the idea of default or not. If we are truly moral people who do not default, we should have behaved accordingly starting in the mid-2000s.
The other kids are all doing it
It may be that we are about to witness multiple defaults by developed countries like Greece, Portugal, Italy, and Spain. Iceland already defaulted. Russia and many other developed countries have defaulted in the last several decades.
The U.S. government has defaulted partially in the past, like reneging on its promise to pay back World War I Liberty Bonds in gold.
If multiple countries start defaulting, I wonder if the U.S. and the others might all just say, “To hell with it. Let’s all default and start over fresh.” Call it MAD: Mutually Assured Default. It could also be retaliatory default.
During World War I, the U.S. loaned huge amounts of money to European countries. In 1930, the U.S. passed the Smoot-Hawley Tariff Act. Europe was so pissed about the tariff that all the countries there but Finland defaulted on their World War I debts to the U.S.
Multiple developed countries may also default for copycat reasons. If you are the only one, you look bad, but if everyone is doing it, what the hell.
What choice do we have?
Protesting against defaulting suggests we have another choice. And what exactly might that be?
Actually, we do have another choice in theory: cutting federal spending by the amount of the current federal deficit—$4.4 trillion according to the national debt clock when they incorporate the 2020 coronavirus bailout. That would at least stop the national debt from growing.
Since that same clock says we are spending $7.9 trillion a year. Eliminating $4.4 T of deficit spending (after the 2020 coronavirus) would require spending cuts of $4.4T ÷ $7.9T = 56%.
Can we do that?
Yes, we can.
Does the political will exist to do that?
Not at the moment. You would have to cut social security direct deposits by 56%. 56% of federal employees including many military would have to be cut.
Will it ever?
Sure. When the world refuses to accept U.S. dollars.
It’s not my opinion. It’s arithmetic.
Our only real alternative to defaulting is to just “print” the money to pay off our debt. I am afraid that is what the politicians will do on the theory that they will be able to blame retail merchants like Exxon, Wal-Mart and McDonald’s for higher prices.
That would cause hyperinflation. Hyperinflation of the U.S. dollar would be a disaster for the nation and the world. Who would it hurt? Everyone on earth who owned a dollar or a dollar-denominated asset like a U.S. government, corporate, or municipal bond or any U.S. mortgage or account receivable.
Hyperinflation is so bad that it cannot last for long. The most famous hyperinflation was in Weimar Republic Germany, where it was perpetrated in response to the reparation burden imposed by the victorious countries of World War I. That hyperinflation lasted 16 months, but arguably led to the election of Hitler to chancellor of Germany and World War II.
Who would be hurt by default?
Who would be hurt if the U.S. government refused to pay off its bonds? The people who bought U.S. government bonds in the last 30 years or so.
Here is a pie chart of who that is.
In other words, a lot of U.S. citizens and entities as well as many foreign citizens and entities and governments, especially Japan and China.
Do America’s bond owners deserve to lose all of the money the trusted the U.S. government with?
Actually, they sort of do.
For decades, knowledgeable observers have warned that Social Security was going to bankrupt the U.S. The 78 million Baby Boomers began receiving Social Security in 2013. Social Security already went into the red as far as the amount paid out exceeding the amount received in Social Security taxes.
All the warnings were true, yet the bond buyers still bought. The dumping of an intolerable debt burden on our children and grandchildren has been done not by Congress and the White House, but by a conspiracy of Congress, the White House, and the bond buyers.
Since January 2010, they have also been warned that Obamacare was going to bankrupt the U.S federal government, which it most definitely will.
Canada and almost all of Western Europe are also going bankrupt because of too many entitlement programs. It has been in all the papers. (In mid 2010, some of those countries started to adopt austerity programs.)
Someone should have stopped the U.S. Congress and Oval Office from all this government spending. Who could have done that? No one but the bond buyers. They could have, and should have, just said no. The voters never had a fiscally-responsible alternative in the voting booths. Democrat politicians created most of the entitlement spending, but Republican politicians were afraid to oppose it for fear of losing elections.
The bond buyers have been the enablers of the “drunken sailors” in Congress and the White House during the last 79 years.
When Congress and the president said, implicitly, “We want to place a huge debt burden on our children and grandchildren,” the current U.S. bond owners answered, “We want to own a piece of those children and grandchildren.” Screw the bond buyers who helped perpetrate that crime against those children and grandchildren!
Who would be helped by the default?
Our children and grandchildren would be the beneficiaries of the default. They would be born into a debt-free America. America would have the cleanest balance sheet in the world.
Perhaps even better, Congress’ and the White House’s credit cards would have been sliced up and cancelled.
Various efforts to pass a balanced budget amendment to the Constitution have failed. They should be renewed until successful. Better yet would be an amendment that prohibits new federal borrowing and that requires all refinancing of maturing debt with 30-year self-amortizing bonds. That would result in the national debt going to zero in 60 years.
In the interim, default on the national debt would have the same effect. It would prevent the Congress and White House from engaging in any deficit spending. It takes two to tango. And it takes two to deficit spend: legislators to pass an unbalanced budget and bond buyers to lend the U.S. government the money to spend more than it takes in in taxes.
A default on the national debt would at long last force America to live within its means. It is disgraceful that America’s “leaders” have to be forced to behave in a responsible manner. But no one can claim they did not have to be forced. There are few in politics who have even suggested cutting entitlements. But it is also mathematically impossible to solve the nation’s fiscal problem without cutting entitlements.
Is there a moral basis for default?
Absolutely. There are actually several moral bases for defaulting.
Taxation without representation
Borrowing money that is to be paid back by our children and grandchildren is immoral taxation without representation. Children and unborn grandchildren cannot vote. Yet bond buyers will be indignant if and when the upcoming generations refuse to pay those debts. The bond buyers should have thought of that when they bought the bonds.
Sons should not be punished for the sins of their fathers.
The Doctrine of Odious Debt
There is a legal or perhaps philosophical, ethical Doctrine of Odious Debt. A pertinent Patricia Adams article has the title “The Doctrine of Odious Debts: Using the Law to Cancel Illegitimate Debts.”
Should the citizens of Germany have had to pay back the debts of Hitler’s Third Reich after World War II? Are Russian citizens obligated to work for decades to pay off the debts of the former Soviet Union? The Soviets sure as hell renounced the Czar’s debts right after the Russian Revolution. And the current Russian government also defaulted on its bonds in the late 1990s.
Our current impossible debt level (including unfunded liabilities for future entitlements) was generally created by Democrat politicians to buy votes and the loyalty of voters to cement themselves into power forever. Republicans went along because they felt it would be political suicide not to. In other words, they placed their own political careers ahead of the needs of the nation and the oath they took when they got elected.
Here are some quotes from Alexander Sack, a Russian law professor who taught in Paris in the 1920s:
If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State. This debt is not an obligation for the nation; it is a regime's debt.[It is] a personal debt of the power that has incurred it. [When this power falls, that debt] consequently . . . falls with the fall of this power.
And here is the pivotal point of Sack's doctrine: "the debts of the state must be incurred and the funds from it employed for the needs and in the interests of the State," in order to be considered legally enforceable.
the creditors have committed a hostile act
Here are some quotes from the Wikipedia article on Odious Debt;
Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.
Defaulting on the national debt will mean fewer wars
Patricia Adams of Probe International said,
by giving creditors an incentive to lend only for purposes that are transparent and of public benefit, future tyrants will lose their ability to finance their armies, and thus the war on terror and the cause of world peace will be better served.
If the Doctrine of Odious Debt were more widely applied, nations that have used deficit spending to wage war would not have been able to do so and there would have been fewer wars. If citizens of the U.S. are not willing to fund a war out of pocket with tax revenue, it should not be fought at all.
More frequent application of the Odious Debt doctrine would make bond buyers reluctant to buy bonds being used to fund dubious wars thereby preventing any such wars from happening in the first place. It is pretty clear that our wars in Iraq and Afghanistan would not have happened if we were unable to borrow the money to fight them.
We like to call ourselves the world’s only remaining super power. Here’s a news flash on that subject. The world no longer has any remaining super power. We are too poor to be a super power. We talk about military intervention in Iran and North Korea to prevent them from getting or keeping nuclear weapons. We can only do that if China will lend us the money to do it. They won’t.
Recently, when China gave less money to Haiti than we did after their earthquake, we chided China for their lack of generosity toward Haiti. When you consider that we have no money and only got money to give to Haiti by borrowing it from China, our tongue-lashing of China seems a bit much.
Nowadays, we are a super power in hock who has to go hat in hand to economic super powers like China to ask for the money to throw our leased weight around.
It is often said that the Constitution is not a suicide note. Actually, it is in the sense that it establishes our fealty to principles that trump mere survival of a form of government. But the Constitution is not a document that should be able to condemn our descendants to eternal serfdom in a poor house constructed for them by long-dead Democrat politicians. That leads me to the next moral grounds for default: bankruptcy.
Governments cannot declare bankruptcy
Americans are supposed to pay their just debts. But American individuals and companies are also allowed to declare bankruptcy.
The moral idea behind bankruptcy is that there is a tipping point at which a person or entity, however well-intentioned, cannot pay all their debts. Since the bankrupt person or entity has demonstrated an inability to manage their own financial affairs, a third party takes over and distributes the assets of the bankrupt person or entity equally to all creditors limited only by priority given to secured creditors and provision being made in individual cases so that the bankrupt person has enough left to get a fresh start and have a chance to return to prosperity.
Prior to bankruptcy, those unable to pay their debts and their families were incarcerated in a poor house or poor farm and kept there until the family paid off its head’s debts.
The vengeful European victors in World War I essentially put all of defeated Germany into a virtual poor house by the mechanism of the Versailles Treaty which forced Germany to pay huge reparations for the war. The result was Germany defaulted and started World War II.
After World War II, little or no reparation burden was placed on the defeated nations. Indeed, in Europe after World War II, the U.S. Marshall Plan provided huge amounts of charity to both allies and former enemies.
Bankruptcy is considered best for all concerned including creditors. Because of its size and economic potential, it would not be in the interest of the world to put the U.S. into any sort of Versailles Treaty poor house.
What happens to countries that default?
For a while, they have to do without borrowing or pay higher interest rates. In other words, they get about what they deserve creditwise. Ultimately, it appears that past defaults are largely forgotten. For example, U.K. never paid the U.S. back either the money we lent it in World War I or World War II. It has ultimately just been forgotten.
says Shakespeare gave great advice in Hamlet Act I, Scene II when one of his characters said,
Neither a borrower nor a lender be,
The United States should have followed that advice. We failed to, and we failed to behave in a financially responsible way. Now, it may be best for us to admit it and get on with our lives and let our children and grandchildren get on with theirs.
A reader called my attention to the fact that Forbes.com did a similar article on 5/24/10. It was called “Learning to Love a U.S. Default” by John Tamny. It says the same as I do plus some other things I did not think of. It also leaves out some of the arguments I made.
John T. Reed
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