March 1, 2011
America Should Default
Neither individuals nor nations ever come to terms with their indebtedness and overspending until catastrophe looms. Only when the repo man comes for the car, the credit charge is rejected, and the bank forecloses on the house do we finally admit to our excesses and irresponsibility. America is living on the same kind of borrowed time, and it would be better for us to honestly default at a time of our own choosing than to be globally humiliated by our mercantilist creditors.
Our current level of national debt and future unfunded liabilities are so grotesquely gigantic as to hypnotize most of the nation's leaders. Our unfunded liabilities are at least $100 trillion -- more than twice the economic output of the entire world.
Barack Obama acted numb and powerless, like a wartime head of a government-in-exile, and gave up any pretense of behaving like an adult, or a chief executive, by explicitly refusing to address the catastrophic state of our entitlements programs in his recent travesty of a fiscal 2012 budget. His lack of action defies the recommendations of his own vaunted debt commission. Obama's and the Democrats' strategy seems to be to force Republicans to assume the role of the fiscally disciplined grown-ups in charge. If Republicans act first to curtail federal largesse, Americans will be so angry at the reductions in their benefits that Obama will breeze into a second term.
Since Republicans are going to be assaulted by the lunatic left for starving infants and defenestrating the aged, they should at least propose a solution that could actually stave off our national financial ruin. Default is the answer.
The most satisfying result of a default would be the opportunity for us to christen a Constitution-based national renewal. The slate would be wiped clean, and we could relaunch our 18th-century destiny with a massively shrunken government and perhaps even a gold standard.
Certainly the pain would be awful, for us and our creditors. An unprecedented stock market massacre would ensue, and unemployment would rise to Depression-era levels. We wouldn't be able to borrow except at the most exorbitant rates. Creditors would be apoplectic, and their reactions could range from the seizing of assets to the threat of military action.
But just as default would redirect us on a sustainable economic path, our creditors would eventually come to recognize us as a more sober and stable partner. We might negotiate a payout of 30 cents on the dollar and extend our payment terms to forty or fifty years, but at least our creditors would be paid. And if we adopt sound money and Austrian economic policies -- and enjoy the latter's mild deflationary forces -- the dollars our creditors get paid in will grow more valuable in time. The alternative for the external money-lenders is repayment in an increasingly dubious fiat currency dropped from helicopters by Ben Bernanke and his successors. An unbacked flood of dollars from QE3 to QE50 that is sure to follow the current QE2 program concocted by the Federal Reserve is a horror infinitely more painful than default for both the lender and the borrower.
Complaints from sources as varied as the grandees in the European Union and starving Tunisian peasants indicate that the world is growing weary of and angry over importing our inflation. Bernanke and the entire economic ruling class see no evidence of inflation whatever, but that's only because they don't fill their own gas tanks or shop for their own food. If you don't drive or eat, the world looks rosy.
Default might seem a bit impractical and radical, but seriously examining it reflects our diminishing options and dire straits. Thomas Woods has proposed something at least as unthinkable in his new book, Rollback. Since Woods believes there is no practical way to service our liabilities, he proposes allowing Americans to opt out of entitlement programs completely. In exchange for relinquishing Social Security and Medicare benefits, citizens would be granted exemptions from income and estate taxes. Ron Paul has been lauded for a similar proposal, his plan consisting of a 10% flat tax if we dissociate ourselves from our insolvent government. And economist Zambisa Moyo argues in her new book, How the West Was Lost, that though "[d]efault sounds like a cataclysmic option, the attraction would be for America to wipe its slate clean and for the government to reset its financial statement."
We've heard for years that our deficit, debt, and entitlement spending are unsustainable. But we have sustained them. We are now effectively bankrupt, and if the lawless, thuggish third-world scenes playing out in the statehouses of Wisconsin, Ohio, and Indiana are any guide, we are in for ugly civil turmoil for years to come.
Reality can descend upon us quickly if we default. We can starve the government to death in a brief instant. Only in the context of default can we begin the wholesale elimination of government agencies and departments. Only in default can we address excess government compensation and attack not only future pension obligations, but current ones as well. We might need a decade to rebuild our global reputation and reset our domestic expectations, but at least we will have something left worth rebuilding.
Claude can be reached at firstname.lastname@example.org.