Donald Trump has gotten in trouble for saying a lot of things. He doesn’t get in trouble with his supporters, but the media pundits come out in full strength when they think they’ve got him on something.
One of the more recent things happened when Trump was interviewed on CNBC. He said that, as a businessman, he is used to dealing with creditors. He said that, as president, he could renegotiate the terms of the U.S. government’s debt.
Some were quick to jump on him, saying that he wants creditors to take a haircut. Unfortunately, Trump backtracked on his statement and said that he wants to restructure new debt with lower interest rates, or something to that effect. It doesn’t really make any sense because the government is going to issue new debt and roll over maturing debt at the lowest rate it can.
If Trump becomes president, I think there is almost no chance that he will allow a default on the national debt. If anyone would, it would probably be him. But I still see the chances as slim.
The popular and acceptable opinion is that the U.S. government just could not possibly default on the national debt, or even give creditors a haircut, meaning they would get back less than promised. The whole notion is just supposed to be ridiculous and even childish to think such a thing.
But why is default such a ridiculous notion? From a libertarian standpoint, default makes sense. Of course, if we lived in a libertarian society, then there wouldn’t be a national debt in the first place.
The main objection is that it would not be right to break a contract. Making interest payments and paying back the principal on the debt is a promise that was made to people who lent their money to the government. People say it would be morally wrong for the government to go back on its word.
But why is it ok for people and businesses to declare bankruptcy?
People and businesses are not the same thing as the government. However, if it is morally wrong for anyone to not pay back debt, it is businesses and individuals. It is actually the opposite with government.
Murray Rothbard wrote an essay on this subject in 1992. His view was that it is immoral for the government to keep paying on its debt at the expense of taxpayers (and holders of dollars).
When the government promises to pay back money that it borrows, it is not a valid contract. It is because the government doesn’t have the money to pay it back except by extracting it from others with the use of force or the threat of force.
If I make a contract with Al to borrow his money and pay him back a certain amount with interest at a later date, there is no problem there. I should fulfill the contract.
But what if I make a contract with Al to borrow his money. In the contract, I state that the loan is backed by the full faith and credit of Bob. Bob is my neighbor and I will steal his money in order to pay back Al. If that is the only way I can pay back Al, then it is more morally sound to not steal from Bob and not pay back Al than it is to steal from Bob in order to pay back Al.
All of the people invested in U.S. government debt are no more entitled to the money than the taxpayers from whom the money will be taken. If anything, it is the fault of the creditors for making such a deal with the devil.
I understand that there are many pensions and 401k plans invested in government bonds. It is not just the Chinese and Japanese. But again, why is that the responsibility of everyone?
One of the other major objections is that a default would wreck the credit rating of the U.S. government. I see this as a great reason for default. I want the credit rating to get wrecked so that nobody will lend money to the U.S. government ever again. Aside from the central banking equation, this would force a balanced budget.
Such a default would obviously wreak havoc on the financial system. It would mean a redistribution of wealth, with those who have a stake in government bonds being the losers.
In the long term, most everyone would win, except the politicians and bureaucrats and those who depend heavily on government corporate welfare. It would mean immediate relief of at least a couple hundred billion dollars per year in interest payments from the federal budget. It would also essentially force a reduction in government spending in other areas.
The less that government spends, the more prosperity that we get. It means fewer resources are being misallocated.
We could lessen the blow to creditors by treating this whole thing as a bankruptcy. When a company goes bankrupt, its assets are sold off and the money collected is used to pay off creditors. The shareholders usually end up with nothing.
In the case of the U.S. government, it could sell off millions of acres of land including forests and national parks. It could also sell many of its government buildings. Maybe the U.S. Treasury office could downsize significantly.
The sale of the assets could be used to partially pay off bond holders. We would also get the benefit of privatizing more land and buildings.
I understand this is not going to happen. I know Trump didn’t make a lot of sense and ended up backtracking or contradicting himself. But at least he is bringing up issues that otherwise wouldn’t be touched.
Trump said that the debt can always be paid off because we can just print the money. Hey, at least he is honest.
And that is really the big key here for anyone protesting a default on the debt. This shouldn’t be breaking news, but the government is defaulting on its long-term debt almost all of the time. People get paid back with currency that has depreciated.
If you buy a 30-year bond and the price levels double over that time, then you are only getting back half of your money in real terms upon maturity. So everyone can cry and wail all they want about suggesting a default, but there is going to continue to be a default in some form one way or another.
It is virtually impossible for the U.S. government to fully make good on its promises to pay the debt without resorting to monetary inflation. And the monetary inflation itself is a form of default.
A president Trump would not likely default on the national debt in nominal terms. But at least he has brought up the discussion about the debt.