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…
- 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)
- Federal government assets, excluding gold, should be auctioned off in terms of FRNs
- Remaining FRNs would be convertible for gold at a rate based on the remaining money supply and the government’s gold stock
- 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.