Don’t Default on Me

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The Greek bond crisis prompted free-market fantasies of a Treasury default. On Forbes magazine’s May 24 web page, columnist John Tamny suggested that default was coming. His message: let it happen! If the U.S. government defaults it won’t be able to borrow any more, and that would be a good thing.

The idea resonated with some libertarians. A few had said it before, embracing not just “default” but the more radical idea of repudiation. In 2008, Jeffrey Rogers Hummel, associate professor of economics at San Jose State University and author of “Emancipating Slaves, Enslaving Free Men” (1996), had written, “I favor total repudiation of all government debt for the same reason I favor abolition of slavery without compensation to slaveholders.”

Hummel said, “Treasury securities represent a stream of future tax revenues, and investors have no more just claim to those returns than to any investment in a criminal enterprise.” Hummel also called repudiation “a balanced-budget amendment with real teeth.”

Before him, libertarian economist Murray Rothbard had written in Chronicles (June 1992) that it would be good for government to be cut off from private credit:

“Why should more private capital be poured down government rat holes? It is precisely the drying up of future public credit that constitutes one of the main arguments for repudiation, for it means beneficially drying up a major channel for the wasteful destruction of the savings of the public. What we want is abundant savings and investment in private enterprises, and a lean, austere, low-budget, minimal government. The people and the economy can only wax fat and prosperous when their government is starved and puny.”

That is one way of looking at it. But if you own a government bond, the rat hole is you. You may therefore find it strange that defenders of capitalism are proposing to let the government walk away from its contract obligations, thereby cheating people to whom it owes money.

Radicalism is such fun. A damn-the-consequences stance shows how bold you are. Sometimes boldness may be right, as in the case of boldness about slavery: just get rid of it! But comparing normal (even regrettably normal) political issues to slavery is like comparing normal politicians to Hitler. There is a statement circulating in the blogosphere that in any argument, whoever brings up Hitler first, loses — because comparing almost any figure to Hitler is engaging in gross exaggeration. It is the same with slavery.

Radical libertarians like to compare taxes to slavery, and there is a philosophy-class sense in which they are right. But if it were a deep and valid comparison people would be under immediate compulsion to divest themselves of everything touched by the slave money, including San Jose State University.

The issue here is debt — the government’s debt. The government has sold a bond. It takes the cash and proposes to repay it over 30 years. If you want to make a comparison, consider the man who takes out a mortgage. He takes the cash, and he proposes to repay it over 30 years. Now suppose he repudiates his mortgage. He walks away from it, even though he can pay it.

We don’t celebrate this man, or what he does. It is a preda- tory thing. He is breaking his word, taking from others without giving back.

If you are the mortgage holder, at least you can get the property back. If a government repudiates its debt, you will get nothing. Of course, you can keep the government’s bond. It is now a piece of paper that you can put on the wall, so that other people can laugh at it or admire its artistry.

I have one of those pieces of paper. It says: “Imperial Chinese Government: 5% Hukuang Railways Sinking Fund Gold Loan of 1911.”

The bond has a red border that makes it look like paper money, a masthead image of a speedy black steam locomotive, some legal text in fancy cursive, and British and New York tax stamps. It is signed with the fist-sized chop of His Excellency the Kung-Pao Sheng Hsuan-Huai, minister of posts and communications. It is countersigned by a representative of J.P. Morgan & Co., New York. It promises to pay the bearer 2 pounds, 10 shillings, twice a year, until June 1951, whereupon the bearer will be paid 100 British gold pounds.

I bought the bond as a curiosity. But some poor guy, decades ago, bought it as an investment, and lost his money when the bond was repudiated. In those days, 100 pounds would have been worth about $10,000 in today’s money.

What’s being advocated by the let’s-default-on-the-debt people is that all U.S. Treasury bonds and notes, represent- ing more than $13 trillion in U.S. government debt, be turned into Hukuang Railways bonds. And what would be the consequences of that?

The most obvious consequence is the theft of that $13 trillion from the millions of people to whom it is owed.

About 28% of the debt is held by foreigners, much of it by central banks. Here are the totals, in billions, as of April 2010, listing only those in three digits:

China: $900.2
Japan:  $795.5
UK:  $321.2
Oil exporters:  $239.3

Brazil:  $164.3

Caribbean:  $153.2

Hong Kong:  $151.8

Taiwan:  $126.9

Russia:  $113.1

A second consequence readily appears. If all these assets were vaporized, the leaders in these alien lands would be really, really pissed off. God knows what they would do. The United States would have about as many friends as North Korea has. Imagine if you, an American, owned assets in those foreign countries, including any of their bonds, or worked for a company trying to sell them anything. Imagine what might happen to the assets you thought you had, or the business you thought you were developing.

A big chunk of the American national debt, more than $2 trillion, is held by the Social Security trust fund. To the government, its own bonds are promises to itself, not net assets. They are symbolic promises only. But the Treasury bonds held in a private pension fund may be the most solid assets in that fund. Imagine the effects of a repudiation.

Treasury bonds are also held by financial companies. What happens to the banking system, and the insurance system, when the largest class of triple-A assets goes poof? Recall the bank and insurance company panic of September 2008. It happened when a whole class of assets — mortgage-backed bonds — became of indeterminate value. The mortgage bonds were not gone, or repudiated. They were not all bad, either. But the uncertainty about them was enough to implode the financial system.

Who came to the rescue? The U.S. government. Imagine if the deadbeat were the government itself. Imagine a financial vacuum imposed on all these things — banks, insurance companies, the Social Security fund, the private pension funds, foreign central banks, and individual investors — all at once.

Enough of imagination. The U.S. government is not going to repudiate its debt. A U.S. Treasury bond is, as James Grant said in “The Trouble with Prosperity” (1996), “the promise to pay dollars by the very government that prints them.” The Greeks, who borrow in euros, don’t have the ability to print the material of repayment, but the United States does. The risk of a Treasury bond held to maturity is not of default but of inflation

couldn’t be colleges or something. And he went up and saw the governor, and the governor must have agreed with him, because now they’re talking like it’s really gonna happen, because otherwise there will still be racism and so on. Which seems completely bogus to . . . us. So do you know anything about that, Mr. Brattle? Did you have anything to do with that?”

“Yeah, Mr. Brattle,” Phil said. “Do you know anything about that?”

“Uh, yes,” Calvin answered. “I think I did see something on the news . . . . But listen, about the library. I want to explain. I don’t know exactly what you’ve heard, but what happened was this . . . “

So he talked, going through the whole story and discuss- ing it, weighing both sides fairly but emphasizing, through- out, the importance of individual rights and responsibilities and the harmony of ends and means. “As a result,” he con- cluded, “I found that I could no longer stay at Vermillion College.”

Having finished, he expected a lively Q and A about property rights and other issues. Surprisingly, however, Jason got a skeptical look in his eyes, then stared down at his shoes and never glanced up, and Phil’s gaze developed into something.

But the point of the matter is not to think about bonds. It is to think about a way of thinking. It is about the embracing of disaster.

The thing starts, perhaps, with forecasting disaster. There is a long history of this among libertarians. I first wrote about it in the 1970s, when I was on the mailing lists of the Inflation Survival Letter, the Ruff Times, et alia. I received piece after piece of mail warning me of the coming crash — double-digit inflation, triple-digit inflation, famine, and social chaos. Of course, it was a sales pitch to send them Federal Reserve Notes in exchange for their Krugerrands, and I may be unfair in taking it too seriously. But they did say it. They used that sales pitch over and over, which suggests that it worked. Bill Bradford used to say that there were libertarians who believed that when the crisis happened they could take a $20 gold piece and buy a block in midtown Manhattan.

In many cases, the people who took it seriously became the survivalists. To listen to some of them is to hear people who not only worry about disaster but would welcome it. Because they would be ready, which means that they would be right.

Much more common are the folks who embrace disaster in theory. I think of the argument over Social Security. Someone will propose that the system allow the payer to put his Social Security tax into a restricted private account. Then some libertarians will say, no, no, no; that’s not acceptable. It’s statism. The only thing a true libertarian can advocate is abolition. It’s like slavery. You have to be an abolitionist.

What would happen to all the people who contributed to the system, planned on it and rely on it? They would be in the same position as the suckers holding Treasury bonds.

Absolutism is a strong wine, and occasionally I imbibe it myself. When asked about the occupation of Afghanistan, I say, “pull the plug.” Few people I know who have been

involved there agree with me, and sometimes I wonder if my answer is too simplistic. Still, I am sticking with it; it seems to me that for an unjustified war, which daily spreads wreckage and death, “pull the plug” is a good idea. But with problems such as public taxing and spending, retirement systems, welfare, and education, “pull the plug” is often too dire. It sounds good to no one except the already converted, sitting in the pews.

A few libertarians, envisioning a disaster, take the line “the worse, the better.” To improve the current system by creating accounts within Social Security, or charter schools within the public schools, is to shore it up and preserve it, when what is wanted is to rip it down and start over. But “the worse, the better” is a Leninist line, and libertarians are not in that camp. We have a political philosophy that derives from classical liberalism. It is a bourgeois philosophy, a creed of people who work, save, and invest. We aren’t people who wreck things except in the most grievous extremity.

As I write this, I can hear Bill Bradford say, “Liberty is a radical magazine.” The idea of liberty is radical, and radical one’s utopian vision may also be. But Liberty encompasses libertarians and classical liberals whose radicalism is of different amplitudes but whose methods are uniformly peaceful. They have fun arguing among themselves, as I am doing here. But what they propose to the public as a thing that could be done now has to be a step forward from the world that is. And that is the world of Social Security, Medicare, Medicaid, Temporary Assistance for Needy Families, farm subsidies, state universities, public schools, the postal monopoly, Pell Grants, property taxes, the FDIC, the IRS, the UN, Trident submarines, Delta Force, Guantanamo, marriage licenses, and zoning.

And United States Treasury bonds.

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