An alternate default; inflation

Clay Hegar

In a July 25th video which went mildly viral in libertarian circles, Ron Paul (R-TX) declared that a United States default is inevitable given the nation's level of indebtedness.


At this point in the dog days of summer, the Congressman's assertion can hardly be dismissed as hyperbole. Yet, his definition of default is a curious one. The financial definition of default is when a debtor is unable or unwilling to fully comply with a borrowing agreement, such as missing a payment or seeking to restructure the payment schedule. Paul stretches that definition to include default by inflation. In this scenario, a nation "defaults" by reducing the value of its fiat currency, which diminishes the debt. Five thousand dollars of credit card debt seems significant, unless the average household income is fifty thousand dollars a month and a loaf of bread costs eight hundred dollars.


Most American Conservatives, the author included, are hesitant to enthusiastically support Congressman Paul. In this case, however, he is absolutely right and Conservatives had best not take that fact lightly. The Bureau of Labor Statistics published Consumer Price Index data  in mid-July which shows the inflation rate to be 3.6% annually and rising quickly. Given the Federal Reserve's monetizing of deficit spending (known as QE1 and QE2), rising inflation is not unexpected and could accelerate.


Also distressing is the ruling Democratic Party's pedestrian efforts at legislating a fix to the deficit issue. Displaying no sense of urgency as the August 2nd borrowing deadline looms, Barack Obama and Senator Harry Reid have eschewed governing and planted themselves in front of every news camera available in order to tear down anything concrete emanating from the House of Representatives.


Even as the crisis heightens, it is clear that the idea of spending reductions has simply not occurred to Democratic leaders. Mr. Obama and his party seem to be unfazed by the increasing likelihood that America's credit rating will suffer a downgrade, but horrified at the prospect of having their credit cards cut up. The Boehner plan, which passed the evening of July 29th, features cuts so weak as to be trivial: $917 billion in cuts spread over ten years (in return for a $900b increase in the debt ceiling), with more cuts to come from a committee (don't get your hopes up). This bill's poison pill is that it seriously restricts future spending in the form of a balanced budget amendment to the Constitution.  This mild bill was tabled by Senator Reid hours after it left the House.


The absolute refusal of Democratic leaders to enact non-trivial spending cuts in the present, and the inability of future congressmen to commit to ten year cuts packages decided upon before their elections brings us to a regrouping point. 


It is apparent that much of our elected government has no intention to slow deficit spending. It is equally clear that continued deficit spending at current levels will negatively affect our nation in the form of debt downgrades and rising inflation. Savers, investors, workers, and business owners will pay for the free lunch enjoyed by those Americans who are integrated into the Democratic Party's political machine. Wealth will be taken from productive Americans, and paid to dependent Americans to secure their loyalty on election day. Such a devaluing of the dollar is much less likely to spark a tax revolt than would be a simple wealth seizure. Those of us who save responsibly should look at the debt clock with dismay, and take seriously Paul's warnings of an alternate default.


Clay Hegar

clay.mh@gmail.com


In a July 25th video which went mildly viral in libertarian circles, Ron Paul (R-TX) declared that a United States default is inevitable given the nation's level of indebtedness.


At this point in the dog days of summer, the Congressman's assertion can hardly be dismissed as hyperbole. Yet, his definition of default is a curious one. The financial definition of default is when a debtor is unable or unwilling to fully comply with a borrowing agreement, such as missing a payment or seeking to restructure the payment schedule. Paul stretches that definition to include default by inflation. In this scenario, a nation "defaults" by reducing the value of its fiat currency, which diminishes the debt. Five thousand dollars of credit card debt seems significant, unless the average household income is fifty thousand dollars a month and a loaf of bread costs eight hundred dollars.


Most American Conservatives, the author included, are hesitant to enthusiastically support Congressman Paul. In this case, however, he is absolutely right and Conservatives had best not take that fact lightly. The Bureau of Labor Statistics published Consumer Price Index data  in mid-July which shows the inflation rate to be 3.6% annually and rising quickly. Given the Federal Reserve's monetizing of deficit spending (known as QE1 and QE2), rising inflation is not unexpected and could accelerate.


Also distressing is the ruling Democratic Party's pedestrian efforts at legislating a fix to the deficit issue. Displaying no sense of urgency as the August 2nd borrowing deadline looms, Barack Obama and Senator Harry Reid have eschewed governing and planted themselves in front of every news camera available in order to tear down anything concrete emanating from the House of Representatives.


Even as the crisis heightens, it is clear that the idea of spending reductions has simply not occurred to Democratic leaders. Mr. Obama and his party seem to be unfazed by the increasing likelihood that America's credit rating will suffer a downgrade, but horrified at the prospect of having their credit cards cut up. The Boehner plan, which passed the evening of July 29th, features cuts so weak as to be trivial: $917 billion in cuts spread over ten years (in return for a $900b increase in the debt ceiling), with more cuts to come from a committee (don't get your hopes up). This bill's poison pill is that it seriously restricts future spending in the form of a balanced budget amendment to the Constitution.  This mild bill was tabled by Senator Reid hours after it left the House.


The absolute refusal of Democratic leaders to enact non-trivial spending cuts in the present, and the inability of future congressmen to commit to ten year cuts packages decided upon before their elections brings us to a regrouping point. 


It is apparent that much of our elected government has no intention to slow deficit spending. It is equally clear that continued deficit spending at current levels will negatively affect our nation in the form of debt downgrades and rising inflation. Savers, investors, workers, and business owners will pay for the free lunch enjoyed by those Americans who are integrated into the Democratic Party's political machine. Wealth will be taken from productive Americans, and paid to dependent Americans to secure their loyalty on election day. Such a devaluing of the dollar is much less likely to spark a tax revolt than would be a simple wealth seizure. Those of us who save responsibly should look at the debt clock with dismay, and take seriously Paul's warnings of an alternate default.


Clay Hegar

clay.mh@gmail.com