A National Debt That Will Never Be Repaid
As you read this, the U.S. government owes just a sliver under $14 trillion dollars to various suckers who’ve lent it money. And it wants to borrow more.
Timothy Geithner warned that a failure to raise the debt limit would mean the government would not be able to make the payments on the current debt in the very near future.
Consult the official record and you’ll read that the U.S. has never defaulted on its obligations. That’s technically true…but then what about when France’s prime minister Charles de Gaulle politely asked the U.S. to hand over the gold it promised was backing the U.S. dollars held by France and other nations?
“No gold for you!” Nixon was heard to say. That’s because the U.S. had printed a lot of dollars in order to pay for Lyndon Johnson’s social programs and war (among other things). There was no way that the ratio of dollars to gold held by the U.S. was still anywhere near an amount that would support the official $35/oz.
What was the real price of gold with all those extra dollars floating around? Who knows? But when they were allowed to own gold again beginning in 1974 Americans bid gold up to over $887/oz in just six years.
Nixon knew back in 1971 that there was no way the U.S. could make good on the dollar at the official rate. The official rate was a lie. If every yahoo with $35 U.S. were to show up at the gold window then, only a small percentage of them would get their gold. So Nixon “closed the gold window.”
But a default by any other name apparently isn’t really a default.
And now Mr. Geithner tells us that in order not to default, the U.S. government has to take on more debt.
Remember, there are certain ways government gets purchasing power…
Steal it directly by openly taxing its subjects (on income, payrolls, transactions, imports, exports, etc)…
Steal it sneakily through currency debasement (inflate paper money supply or clip the coins).
Number three really isn’t really income, however. And it often leads to number two.
Geithner just admitted that if the U.S. doesn’t borrow more than the current debt ceiling allows, the government wouldn’t be able to meet its obligations. When you can’t pay for your expenses — including the interest on the debt you already owe — is it really a good idea to borrow more?
Maybe you should cut up the credit card, move to a smaller apartment, sell the car and take public transportation, stop eating out so much…any of these things in any combination would help. Borrowing more to fund your lifestyle doesn’t make the list. It just guarantees there will be even more pain to reckon with later.
Borrowing is what got them in this jam. Raising the debt ceiling at this point is about as healthy as having the credit card company extend an individual more credit when he already owes more than he can make in a year.
Some would say not to worry so much. Sure, the national debt is unthinkably high in absolute terms, but as a percentage of GDP the debt isn’t as bad as it was right after WWII. And, say, didn’t the national debt go to zero briefly under President Jackson?
Today the choices for dealing with the debt are pretty simple…
…They raise income by stealing more in taxes, less money is available for business investment and tax revenues ultimately fall.
…They lower expenditures and the net tax recipients could get violent.
…They default honestly and the dollar falls hard and fast.
…They default sneakily by creating new money to monetize the debt and the dollar falls slowly at first…and then hard and fast.
Or they could just raise the debt ceiling and let the next couple of generations worry about it.
They’ll probably just raise the ceiling. They’ll put off the day of reckoning. Who wants to contend with currency collapse and hyperinflationary chaos today? Let it be on our children’s heads…and that of our children’s children.
January 7, 2011