Why We Should Have Defaulted
It was not at all surprising to see that the House of Representatives passed a debt ceiling bill on Monday. I tend to view politics from a cynical vantage point, and knew that House Republicans would “compromise” and pass a bill that would raise the debt ceiling. Although many in the media are praising the bill and hailing it as a victory for the Tea Party movement, this bill represents an affirmation of the status quo of government spending and debt and makes the case for a default even stronger.
The bill purportedly consists of “spending cuts,” but it in fact does no such thing. Any supposed cuts are not a reduction in current spending but a promise to cut $2 trillion over the next 10 years in future spending increases. Maybe my math is a little bit off, but given that the Obama administration has added almost $3 trillion in debt in just over two years, calling this a “cut” is quite the Orwellian wordplay.
But, comes the usual response, even if neither side is totally pleased, at least we averted a government shutdown. Or even worse, a default! Our representatives may be kicking the can further down the road, but that’s nothing to the outright horror, chaos, and anarchy that would ensue if the U.S. government were to default on its debts. The media claims that this would be the case, and so it must be true.
But what about the strength of T-bills and the “full faith and credit” of the U.S. government? A Treasury bond is just like any other bond, it has no mystifying or magical characteristics. Plus, markets have been restructuring debts for centuries, and there is no reason that financial institutions could not do the same here. Default-risk premiums are a great option to ease worries over bonds. When faced with debt, companies in the private sector routinely sell off assets to keep their heads above water. The U.S. government currently owns more than $1.6 trillion in liquid assets. Why not sell some of its portfolio off to institutions that are regulated and disciplined by the profit-loss mechanism to ease the worries of bondholders and pay the bills?
Although Obama says that default is “off the table,” the cost and benefits of a default compare favorably to a future of increased debt and spending. True, bond yields would rise in the event of a default, but it would give the federal government a chance to own up to its recklessness, trim the fat, and narrow its focus. It will also take government bonds off of the “risk-free” pedestal that has created the age-old and dangerous illusion of something-for-nothing, reward without risk.
The controversy over the debt ceiling did not happen overnight, of course. The last 100 years of public policy have virtually guaranteed that the U.S. government would default one day. Inflationary money printing and the existence of a vast welfare-warfare state can not last forever.
The heart of this debate is philosophical. Instead of viewing government as an institution that exists to protect our life, liberty, and property from aggression, the White House and Congress see the problem as an accounting issue, implicitly accepting the idea that it is government’s job to fight multiple wars and maintain a global empire, take on lavish stimulus and welfare programs, subsidize the losses of large corporations and financial institutions, and inject the economy with easy credit. When the debate begins from these premises, very little change can be made to a system that is ultimately unsustainable, economically damaging, and antithetical to a free society.
Is default a perfect solution? Of course not. It does, however, address the root of the federal government’s debt problems and looks for solutions based on long-term economic prosperity instead of short-term political posturing. Unless radical changes are made immediately, the U.S. government will default on its debt sooner or later; it is only a matter of how, not if. And as the federal government goes further into debt with every passing second, here’s to hoping it happens sooner rather than later.
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