The True Threat of Debt Default

The specter of a faux default and raising the debt ceiling is a favorite Uniparty game.  Such a default is a pretense because soon everyone is made whole. Unfortunately, the charade is unrelated to a balanced budget which is necessary to avoid a bona fide default with an inability to pay what’s due.  Congress has no will for balancing the budget.  Our elected politicians have the country on an extended glide path to sovereign debt default.

Growing our economy at a faster rate than government accrues debt, making our debt relatively smaller, seems problematic.  Government growth, consuming resources, is out of control.  Regulatory overreach is unprecedented. Tax cuts are anathema to the Uniparty.  Costs of electricity are rising with ruinous energy policies transitioning from affordable, reliable fossil fuels onto unreliable, destabilizing wind and solar.

The window is closing rapidly to balance the budget.  At some point, the nondiscretionary spending of the Ponzi scheme called Social Security, the military, and debt interest payments lead to exorbitant deficits that even the Uniparty can recognize.  About one decade is left to balance the budget by eliminating discretionary programs, after which Social Security deficits must be funded through general budgets.  Another factor is the growing portion within the budget of debt interest payments.  When the budget can’t be balanced solely by discretionary spending cuts, then military, Social Security, and Medicare spending must be targeted.  More military bases will close.  The air force, navy, and army will be pared back sharply.  Government payrolls, pay, and benefits will need slashing.  It will take bipartisan action to sell off federal lands, offices, and buildings.  This is coming.

If actions still aren’t taken seriously enough to balance the budget, then the prospect of sovereign debt default looms.  In about two decades, bond vigilantes will take notice that there is no intention to service, much less pay down, the debt.  They will get nervous about holding risky sovereign debt. Interest rates on new debt will spike exacerbating the ignominious decline.

Balancing the budget requires great political courage.  House Republican can do this unilaterally by defunding completely discretionary spending by government programs, commissions, offices, agencies, bureaus, departments, and administrations.  Government payrolls can be slashed accordingly.

Equity investors will learn liquidity reduction with a balanced budget, coming with the end of easy money, will threaten unprofitable businesses first.  Solid, well-managed, profitable companies producing goods and services customers want will have no trouble obtaining financing.  There will be weeping and gnashing of teeth against balanced budgets as malinvestment is cleared out and employees lose their jobs.  The military-industrial complex will lament the end of Forever Wars.  Elected politicians will bewail losing their ability to buy votes. Shortly after this dark period, healthy companies will realize improved financing opportunities will enable high growth generating hiring opportunities.  With a balanced budget, the Federal Reserve loses its chief function today of monetizing congressional debt.  The Federal Reserve can be reduced to a small fraction of its current size.

There are few options without stabilizing the debt.  None are attractive.  One is currency devaluation so the debt becomes relatively smaller through monetary inflation. This hammers the poor and middle class disparately and drives up income inequality.  This is the course we have been taking the last few decades.  Consequently, OPEC has noticed oil payments are made in dollars that are worth less.  If they can identify an alternative currency, and the Chinese government wants this to be their yuan, that retains value and has sufficient circulation, then the dollar will lose its status as the world’s reserve currency.  Americans will experience that loss as an inflationary jump, with a lower standard of living, because paying for overseas goods and services will cost additional money through currency exchange.

The likely Uniparty initial response to a debt crisis will be the tired but not worn out, progressive fascist populist appeal for the rich to “pay their fair share.”  This approach has already been tried ad nauseum but will return for an encore.  Of course, any student of a single economics course understands when taxes are raised, you get less of what was taxed.  In this case, the wealthy won’t work as long, or as hard, or invest to the same extent in ventures employing others.  Even progressive fascists understand this, but that’s beside the point.  Having raised taxes first on the wealthy, the confiscatory net will be spread wider to catch the middle class, wherein lies the real money.  The poor and middle classes will experience a lower standard of living, even as tax revenue flatlines or declines.  The economy will stagnate, producing fewer opportunities for the poor and middle classes.  Because this is no real solution, debt will continue to climb.

Along with conventional tax hikes, a Central Bank Digital Currency will be introduced as the means to eliminate the cash economy. Digital currencies are a progressive fascist solution in search of a problem.  CBDC’s are rife for abuse; they are an existential threat to constitutional rights.  As with other confiscatory revenue generating schemes, CBDCs won’t solve the problem of deficit spending.

Successive responses will take half measures and chip away without solving the problem.  In this approach, government theft will be exercised against social program recipients using the time-honored procedure of means testing.  This is blatantly unconstitutional because of unequal treatment before the law.  But thieving politicians have never been deterred, and judges turn a blind eye.  Deficit spending will continue increasing the debt, so increasingly drastic measures will be taken.  Because the big money is in the middle class, the poor and middle class will experience lower standards of living and loss of benefits and services.  The ineffectiveness of this approach means the debt will keep climbing.

It likely will take a couple of decades for these ineffective measures to be trotted out, hyped, implemented, and then recognized as being feckless.  If the budget isn’t balanced with discretionary spending cuts, then we are facing a slow-motion train wreck.

When a government defaults on its debt obligations, things get ugly.  New debt can’t be issued without usurious rates.  Ugly negotiations with bondholders, apart from the Federal Reserve and its portfolio, must be consummated so financial markets resume normalcy.  The United States will lose sovereign discretion over its government budget.  Entitlements and military spending will be in the crosshairs.  The dollar will lose its reserve currency status signaling the fall of the superpower.

Any Balanced Budget Amendment should have the requirement taxes won’t be raised except by approval of a supermajority of 2/3 of each house of Congress plus presidential signoff.  And, the BBA should stipulate taxes may be lowered at any time by the conventional statutory procedure.  Without strong provision against raising taxes, citizens will learn it’s not your money; it’s the government’s.  They want it and they will take it.

It is in every American citizens’ interest to get to a balanced budget immediately with muscular safeguards against tax hikes.  If debt accumulation isn’t arrested soon, we will experience the traditional Chinese curse and live through interesting times.  Liberty and prosperity will become a fond recollection.

Image: Ron Cogswell

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