Steve G.

The government is bankrupt: Repudiation or liquidation?

In Politics on June 2, 2008 at 5:31 pm

I’ve been having an ongoing debate with another libertarian about the subject of debt repudiation. I think it’s a bad, impractical, and ultimately elitist/statist idea. My opponent thinks it’s a populist issue that could be used to garner support for libertarians from untouched segments of the electorate.

The idea behind repudiation is fairly simple: The federal government simply says, “We’re not paying” to its nearly $9 trillion worth of creditors. Of course, this would render the U.S. dollar (properly known as the Federal Reserve Note, or FRN) effectively worthless. It would also enrage foreign governments, perhaps to the point of provoking military hostilities, and most certainly cause international trade to grind to a halt.

The “populist” idea behind repudiation is that future taxpayers should not be made to pay for the government’s past excesses. But of course, by crushing the U.S. economy, likely provoking war, and redistributing wealth from those who held it in dollars (i.e. the middle class) to those who held it in hard assets and foreign currencies (i.e. the rich), I’m not sure the sons and daughters of working Americans would be all that thankful.

My alternative: The debt is owed in terms of Federal Reserve Notes, which the government may create at will. Current Federal Reserve Notes are backed by nothing but “faith” in the government, which could be seen as a residual claim on the government’s assets in the event of default. This puts FRNs on par with government bonds. Those who purchase government bonds do so with the expectation of receiving future revenues diminished by inflation, and with the full knowledge that government policies will impact the value of their returns. So here is what should be done…

  1. FRNs should be printed to pay off the debt, after which time, the Federal Reserve would be abolished (along with most of the rest of government)
  2. Federal government assets, excluding gold, should be auctioned off in terms of FRNs
  3. Remaining FRNs would be convertible for gold at a rate based on the remaining money supply and the government’s gold stock
  4. The federal government goes out of business

This would be bankruptcy and liquidation as opposed to debt repudiation. The main difference is that those with paper assets would have some relief, and, at the end of the liquidation, the government would be out of business. Under repudiation, only those who held wealth in hard assets and foreign currencies (the rich) would benefit, and the government would still own everything it owns today. Debt repudiation, in my mind, cannot stand up to intellectual or moral scrutiny, and libertarians should avoid making it part of their program.

  1. Sorry to hijack this post, but I hope you understand.

    Most of you may not know him, but please keep Bill Bradley in your thoughts. Bill Bradley is one of the founding members of the Libertarian Party of Southwest Michigan and a former South Haven City Councilman (just recently stepped down).

    He was going to run for State Rep this year but has withdrawn prior to the LPM convention this weekend due to health issue. He’s an older gentleman and frankly, hasn’t been in the best of health of late.

    Not only was Bill among the few of us who actually achieved success as a Libertarian candidate, but he’s just a very wise old man who I really looked up to.

    Keep my friend in your thoughts. When I read his email, I was instantly drawn to tears.

  2. I like the bankruptcy and liquidation plan. It would teach people to not place faith in government. That lesson is always a very good thing.

  3. Kent – Well, the best thing about it would be that after the bankruptcy and liquidation, there would be no more government to place faith in!

  4. Your alternative creates the same problem. If they printed FRN’s to pay off the debt, the currency becomes worthless to the point that it would be the same as not paying it. It would also piss off the countries that hold our debt, if they haven’t completely written off their dollar holdings as a loss already.

    Our currency is backed by a little more than faith. It is backed by oil (petro-dollar). Most oil transactions use the dollar, therefore other countries such as China need lots of dollars to buy oil. This keeps the dollar alive. Saddam Hussein moved away from the dollar right before we invaded. Iran has just done the same thing, thus the reason we are about to go to war with them.

    They know the dollar is about to collapse, and they have a backup in place: the Amero. None of this is happening by accident. You will see another huge transfer acquisition of property for pennies on the dollar when the dollar collapses – thus the purpose.

    Buy real property (land, rental units, gold, silver etc) while the dollar is still worth something (though not much). That is what I am doing.

  5. disinter – Printing FRNs to cover the debt would not make the FRNs “worthless” — it would reveal their true worth. Those FRNs WILL be printed in time. The government’s assets and property would be auctioned off — what really “backs” the FRN is the coercive power of government; get rid of that and you’re left with the property. All FRNs are debt instruments and, in my opinion, should be offset with the government’s assets.

    It would piss off debtors (including other countries) who hold dollars and debt, but what’s the alternative? It’s all going to shit. When it does go to shit, liquidation is what’s going to happen. The system is immoral and unjust and my plan, I believe, is the most moral and just way out of it.

    You are 100% correct on your evaluation of the “petro” dollar. The reason dollars are used, as you hint at, is because the U.S. military says that only the dollar can be used for gold.

    I agree that individuals should buy hard assets. But do you think repudiation is the right thing to do? Under repudiation, it’s true that people who were savvy enough to buy hard assets will do well, but I still don’t think it is just to repudiate the debt. Liquidation would leave hard-asset owners on top, but not to the same degree as repudiation.

    The fact of the matter is, The dollar and all dollar-denominated financial assets are speculative. This is known, even if it’s not advertised. There is no guarantee on future purchasing power (excluding TIPS, but even these are bogus since the government’s CPI numbers are fake). I see only two ways out: Repudiation or liquidation, and I think liquidation is clearly the more honest route.

  6. I agree. Liquidation is occurring right now, has been for years. This is how all fiat currencies collapse. This is happening by design.

    A very good video series that explains the background information:

  7. I think this one gets to the issue at hand:

  8. Oops, that one focuses on the war aspect. The next one, #18, is more relevant.

  9. Debt repudiation isn’t in and of itself bad or immoral.

    Indeed, it has been argued as a moral response to stop the problems associated with some outrageous and immoral actions taken by government for which innocents pay the tab.

    International groups representing many “debtor nations” have proposed debt repudiation where not all debt is renounced, just illegitimate or so-called “odious” debt.

    Odious debt can be defined as that which was created for purposes of lining the pockets of politicians, bureaucrats and/or government vendors rather than for achieving any necessary and legitimate function of government.

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