Good default, bad default

On August 15, 1971, President Nixon announced to the world that the U.S. Government is defaulting on its promise to redeem dollars to foreign institutions that had the right to exchange their greenbacks for gold at the official rate of $35 dollars per ounce.  This is in an example of a bad default because the U.S. Government had the legal obligation under the 1944 Bretton Woods agreement that shaped the postwar international monetary system to maintain the dollar as the world’s reserve currency by making it redeemable into gold at a fixed rate.

With the dollar no longer tied to gold, the Federal Reserve has had the ability to create dollars at an alarming rate for the past forty years.  The inevitable result, the dollar has lost about 80% of its purchasing power in two generations, while the price of gold is now more than $1,600 dollars per ounce, reflecting the massive supply of dollars at home and abroad.

President Nixon, who surrounded himself with so-called free market economic advisers, violated one of the basic principles of monetary integrity, not to default on a nation’s commitment to holders of its currency.  Instead, Nixon defaulted on the dollar, imposed wage and price controls, and blamed speculators for causing some of America’s economic difficulties.

Nixon’s illegal and immoral actions were preceded in 1933 by President Roosevelt who confiscated the American people’s gold as one of his first acts in office claiming that the depression required bold action to get the economy on the right track. Roosevelt’s default and confiscation did not end the depression, but prolonged it as uncertainty gripped the nation.

The moral of the story is that presidents, members of Congress, and justices of the Supreme Court have systematically violated their oath to uphold the Constitution.  The federal government has egregiously confiscated the American people’s property—their gold — told foreigner that it will renege on a solemn pledge to redeem their dollars for gold, and has inflated away a substantial portion of the purchasing power of the people’s money, enriching the financial elites in the process.  The other moral of the story is that government cannot be entrusted not to devalue the value of money.

The debate over raising the federal government’s debt ceiling hinges more about political posturing rather than any great financial principle, because Republicans in Congress were silent when President George W. Bush spent like a lunatic for eight years to fund an expansion of the welfare state and invade Afghanistan and Iraq.   In short, congressional Republicans are hypocrites when it comes to fiscal discipline.  For them to lecture President Obama on the virtues of the federal government living within its means is pathetic.

One solution to the debt crisis is for the federal government to repudiate the national debt.  This sounds irresponsible.  Opponents of a debt repudiation would assert that it would cause chaos in the world economy because the nearly $9 trillion in government debt held by the public would be totally worthless, and nearly $200 billion in interest payments would vanish in one stroke depriving holders of T-bills, bonds and notes income.  All true.

However, what would be the upside to a repudiation of federal debt?  According to Murray Rothbard (1992), who argued nearly two decades ago why debt repudiation would provide a much-needed tonic to the American economy.

But if this scheme is considered too Draconian, why not treat the federal government as any private bankrupt is treated (forgetting about Chapter 11)? The government is an organization, so why not liquidate the assets of that organization and pay the creditors (the government bondholders) a pro-rata share of those assets? This solution would cost the taxpayer nothing, and, once again, relieve him of $200 billion in annual interest payments. The United States government should be forced to disgorge its assets, sell them at auction, and then pay off the creditors accordingly. What government assets? There are a great deal of assets, from TVA to the national lands to various structures such as the Post Office. The massive CIA headquarters at Langley, Virginia, should raise a pretty penny for enough condominium housing for the entire work force inside the Beltway. Perhaps we could eject the United Nations from the United States, reclaim the land and buildings, and sell them for luxury housing for the East Side gliterati. Another serendipity out of this process would be a massive privatization of the socialized land of the Western United States and of the rest of America as well. This combination of repudiation and privatization would go a long way to reducing the tax burden, establishing fiscal soundness, and desocializing the United States.

So there it is.  In one fell swoop, the American people would no longer have to be chained to the debt the Republicrats have issued to grow the welfare-warfare state.  With the debt being extinguished over the next few years as the federal government’s assets are exchanged for debt and the federal budget downsized so it can live within its means, a free market economy would replace our semi-socialized economy.  That’s why the repudiation of the federal debt is an idea whose time has come.

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