Federal Debt

[Nikki]

In a separate thread / post / galaxy far away, Number Six casually mentioned

I don't know if the federal debt can be repudiated as some have proposed, and what would be the consequences of doing so.

Such a simple statement (and specifically NOT in the sense of simple-minded) seems to warrant discussion in a thread of its own. (and if this is not the appropriate sub-forum, please move it)

At first glance, it seems that repudiating The Debt would take -- at most -- an act of Congress, but might even fall completely within the scope of the Executive Branch.

If the former, it would be a long, painful process as the legislation wends its way through both houses and various committees. In the meanwhile, the entire financial structure of the world would be undergoing convulsions beyond imagination AND the US Dollar (having lost the full faith and credence ...) will be trading at a heavy discount against Ugandan currency.

Whatever. The question is what happens AFTER the debt is repudiated, not while it is being done.

For the sake of argum<<<<< discussion, let's include ALL the debt: T Notes, T Bills, Savings Bonds, various trust funds, the IOUs outstanding to Social Security, etc

Ladies and gentlemen and Harvester; the floor is open.

[Number Six]

I read about this at the Lew Rockwell site. Now I know this is immediate cause for suspicion since the articles over there literally scream anti-government extremism, even if the government does something right, there will be an article by someone there that in reality, if you look closely at what was done, it was not really done right. Any pro-government economic position is almost immediately tarred with the term "Keynesian". When Paul Krugman fields a call from a Lew Rockwell fan, on an "Austrian School" of economics expert, he usually doesn't take it too seriously, because he regards these people as radicals. I would like to see a serious debate between leading experts such as Krugman and Ken Rogoff from Harvard with the experts from the other side. Ideas have consequences. People win and lose with any government policy.

Murray Rothbard was an advocate of "repudiating" the federal debt. There are others.

http://www.lewrockwell.com/rothbard/rothbard190.html

[Brandybuck]

Repudiating the federal debt is the nuclear option. You can only do it once. Thereafter there will be no more borrowing. Bonds will be worth exactly what it costs to recycle them into toilet paper.

One part of me sides with Rothbard, but the more rational part knows that the gubment will not change its ebil ways, and will continue to spend like a drunken sailor who just won the lotto. There will be huge tax increases to make up for the inability to borrow. Inflation will continue, just using a different mechanism.

[Nikki]

Potential outcome of repudiating the debt (assuming it is ALL repudiated and not just pieces)

Everyone holding Savings Bonds, of any series or type, is left with pieces of paper not even suitable for use as toilet paper. Parents and grandparents will see money they've put aside for offspring's college education vanish. People who have been regularly investing towards a nest egg will have yolk on their faces.

Our ability to import ANYTHING (including OPEC oil) will stop overnight. Since the dollar will be worth absolutely nothing, no one will accept it in commerce. Kiss goodby to all fresh flowers; all out-of-season fruits and vegetables; 90% of what you see on the shelves of WalMart, Costco, Sam's Club, Target; computers, IPods and all other high-tech products, and so on. Watch domestic energy prices shoot up to levels beyond imagination.

On the other hand, our EXPORT business will take off beyond belief. Since every other currency in the world will be worth orders of magnitude more than the dollar, the goods we export will be too cheap not to buy.

Government tax receipts will plummet as people write off their losses from investments which have a value of zero, overnight.

Either tax rates will rise to levels exceeding pre-Ronnie, or 90% of the government will have to shut down since there will be absolutely no ability to borrow funds for defecit spending.

Any more thoughts?

[Number Six]

To get something definitive on this Nikki, would involve getting a competant Austrian economist to counter arguments opposed to the Austrian school's position. Robert Higgs is a prolific libertarian writer, and there are some other notables. Whether he would be game is doubtful, however.

[LDE]

Hey, J.D.s, am I missing something?

Repudiate the debt? Not without a constitutional amendment, repealing Amendment XIV section 4:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. …

[Brandybuck]

Hey, J.D.s, am I missing something?

Repudiate the debt? Not without a constitutional amendment, repealing Amendment XIV section 4:

You don't have to repudiate it, just not pay it

Which ameliorate's Nikki's concerns somewhat. Defaulting on every bond out there would be beyond disastrous, but I don't think anyone outside the Fever Swamp of Auburn is advocating that.

[Brandybuck]

To get something definitive on this Nikki, would involve getting a competant Austrian economist to counter arguments opposed to the Austrian school's position. Robert Higgs is a prolific libertarian writer, and there are some other notables. Whether he would be game is doubtful, however.

Lew Rockwell and his sycophants at LvMI are not representative of the Austrian School as a whole. They are rigidly dogmatic Rothbardians, and consider Austrians at FEE and George Mason to be heretics in need of a good burning.

[absdes96]

Any more thoughts?

Nikki,

I work for a large insurance and financial carrier in the midwest. 33 Billion dollars our Life Insurance company's assests are tied into Bonds - government and corporate.

These underlying investments enable a company to be solvent to pay death claims for ....owners of businesses who have buy/sell agreements...breadwinners of households who have mortgages and debts...etc. And there are annuities that provide streams of income for the retirement of people and their spouses.

I suppose we could get into the disaster that would unfold with all private pension plans that have huge underlying bond investments. Not to mention all the guaranty associations, PBGC, and re-insurance firms that use similiar investment strategies to back all the private pension and life insurance providers.

Yip, my life insurance (to cover my mortgage and replace my income should I check out before I see my greatest farting and drooling days) and my pension plan to supplement my retirement income (so I can fart somewhat comfortably before passing away) as well as the entities that back all these would all become insolvent.

Not a pretty picture from where I sit.

Mortgage industry anyone?