Debt Crisis

 The New York Times ran an opinion piece today hinting at an outside-the-box solution to the problem of our swelling national debt (which notoriously passed the $40 trillion mark this past week): namely, simply cancel it. Refuse to pay. 

The piece points out that ancient civilizations did this all the time. In fact, many of them built some sort of periodic debt jubilee into their calendars. 

The author stops short of actually saying that defaulting on the national debt would be a good idea, per se. But he does want us to realize that it's at least theoretically possible. 

His point is that "Money is an invented social construct," as he puts it; "It isn’t real, not in the way a tree or a stone is real." Debt is an idea, and it could be cancelled. 

And yes, obviously that is true—so far as it goes. 

Such a program of default would have to get past all the obvious constitutional and legal barriers, of course. 

But supposing it did—through a constitutional amendment, say—the government could theoretically renege on its own debts by fiat. 

We could say that U.S. Treasuries are no longer worth the paper they're printed on. We could say that all Americans trusting their savings to ordinary banks can no longer have the FDIC to guarantee their deposits. 

What would happen then? 

Anyone anywhere in the world who invested in U.S. bonds—traditionally 40% of the "conservative" investment portfolio—or who even holds cash in a money market account would presumably see the value of all these savings go to zero. 

That is a loss that most Americans with a retirement account of any size would not gladly bear. But even more extreme consequences would logically follow. 

The entire global financial system depends upon the belief that U.S. Treasuries are the ultimate safe asset. Eliminate this guarantee, and the world economy pitches into depression. 

So, yes, money may indeed be a "social construct." Debt may be just an idea—a mere abstract promise to pay. But that doesn't mean that repudiating that promise comes without consequences. 

To break a promise is to violate trust, as we all know. Who would ever trust U.S. government again enough to finance future expenditures, if we once categorically defaulted on our debts? 

The opinion piece does succeed in its main goal, however: that of provoking thought and widening the Overton window. 

Once we realize that we could not possibly repudiate all our public debts without reaping the whirlwind, we might nonetheless be primed to consider less extreme measures that point in a similar direction. 

In order to find ideas along these lines, we don't actually have to go all the way back to ancient Mesopotamia—though this is the example the author provides. 

The specter of repudiating the national debt also stalked political discourse in the back half of the nineteenth century. 

As V.L. Parrington shows in his classic historical work, Main Currents in American Thought, free-silver populists and Greenbackers were routinely attacked in that era for allegedly wanting to repudiate the national debt. 

In reality, they did not actually favor default. All they were asking for, as Parrington explains, was a looser and slightly more inflationary "easy money" regime—which, in some ways, is precisely the one we ended up getting. 

There's a reason we eventually moved off the gold standard and onto a fiat currency, and why central banks around the world target a 2% inflation rate rather than no inflation at all. 

This type of even very modest inflation was highly alarming to financial conservatives in the 19th century, as Parrington shows. They argued (not incorrectly) that it was a roundabout way of reducing the debt burden.

Indeed, countries after World War I faced this same problem in an even more acute form. Bolshevik Russia actually went so far as to repudiate its sovereign debt outright. (The result was the almost total loss of value in its currency, prompting a food crisis.)

Other postwar governments experimented instead with running inflation at higher levels—and this was attacked in turn as repudiation by another name. 

John Maynard Keynes, in his A Tract on Monetary Reform, defends a modestly inflationary policy (such as countries now routinely follow) on the grounds that even the contract rights of creditors should not be held so sacred and inviolable that they require the permanent enslavement of the active part of the economy to the "dead hand" of "vested interest." 

"For nothing can preserve the integrity of contract between individuals," Keynes writes, "except a discretionary authority in the State to revise what has become intolerable. The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half."

This is essentially the author's point in the Times piece quoted above as well. 

Debt cancellation in the ancient world, he writes, was "a response to a persistent problem that was recognized in the ancient world: Debt compounded until it destabilized society."

That is essentially the same specter we may be confronting today, due to the size of our own public debt. The "powers of uninterrupted usury"—as Keynes put it—are indeed threatening to stifle the living and active part of our economy. 

As the author of the Times piece notes: " The federal government now spends over $1 trillion a year on debt interest — money that could otherwise be spent on roads, schools or health care."

But as we've seen above, outright repudiation of that debt would hardly solve this problem. If part of the reason bond investors are demanding so much interest now is because they're losing faith in U.S. fiscal management—can you imagine how high an interest premium they could charge on any post-repudiation debt we tried to issue? 

But how about the more modest compromise measure—advocated by the free-silver "easy money" folks and Greenbackers in the 19th century—and to an extent by Keynes after the first world war as well—namely, that of gradually easing the real extent of the debt burden through currency depreciation, i.e. inflation? 

Well, no politician in America is going to go on the stump and say that what we really need right now is higher prices. Inflation is not a political winner at the moment, even if it has its good points. 

Besides, the strategy of inflating away the national debt would create the same vicious circle we're trying to escape. If bond investors realize that we have no intention of taming inflation, they will just start demanding higher interest rates (as they in fact are already doing—see the financial headlines all this past week). 

So the nominal fee for debt service will just increase in proportion to the real decline in the value of the principal, and the debt burden will not meaningfully be relieved thereby. 

I don't see an obvious way out of our current debt problem, then, by either the extreme solution of debt repudiation or the more incremental and reasonable measure of currency depreciation. 

I certainly don't think we need to fear inflation as much as the financial conservatives of the nineteenth century or Keynes's era did. The silver advocates and Greenbackers did valuable service in getting our financial elites to tolerate slightly higher inflation rates over time than they used to. 

But before we try to increase inflation even further—at a time when we are already in the midst of what politicians on all sides describe as an "affordability crisis"—I think there are some much more obvious solutions to our current plight that we haven't tried—not because they come from "outside the box"—but just because we are currently ruled as a nation by an irrational MAGA death cult. 

Two things we could try right away to alleviate our debt burden: maybe we could cut the military budget by the amount currently being spent on an illegal and murderous and unnecessary war in Iran; and how about we eliminate tax subsidies to the rich included in Trump's reconciliation bill from last summer? 

Raising taxes modestly on the ultra-wealthy and corporations would have the added benefit of easing off our current stimulative policies and thereby cooling inflation. Ending the Iran war would also bring down  prices of essential goods like fertilizer and fuel.

If there's ever a time to raise taxes and run a budget surplus for the year, it's when the economy has been running too hot to keep prices at a reasonable level, and much of our annual spending is going to a needless and unjustifiable foreign war, while the government at the same time cuts food and medical safety net programs (if our national debt were all due to food stamps and medicaid, it would be a lot more defensible—but our current spendthrift government is cutting those programs too, even as it swells the debt—truly the worst of both worlds!). 

The reason these answers to the debt burden aren't being implemented isn't because no one has thought of them. They aren't being implemented because our country is currently run by a group of totalitarian nincompoops. 

Let's start by voting them out of office. That seems like a much easier and more direct solution—before we start thinking of cancelling the value of the one denomination of public debt on which the entire global economy depends.