Sunday, March 6, 2011

On Repudiation of the National Debt

Rothbard was a strong opponent of the government and its existence, and with good reason. Seeing as though they have monopolized every sector of economy, the numbers they pump out are always distorted to a large degree. The CBO and all other entities estimating public policy numbers in DC, do so with the power to manipulate and eschew. Obviously any person with a rational sense of mind must be aware that they do this to pass their legislation, and to coerce us into supporting their fraudulent artifice.

The Budget is a mess, and not just because the government has overspent and taxed us to the bone to provide service on top of service, but because they have done so in a manner which has resulted in a huge ponzi and accounting scheme. They use mathematics to cheat us and manipulate us into voting in politicians that bombastically spew out excrements in the form of promises. Indeed politicians are only looking to keep their job and get reelected, for if they had any idea of how economics worked, they would quit their job or try to remove government altogether. Coercion is their game, and extortion is their tool of uplifting their role as a tyrant. They claim what they do is public service, yet that service has crowded out competition in the free market, slamming upon human choice the shackles of forced central planning.

Rothbard was adamant about rejecting any of the silliness coming out of the Directory of Coercion (Washington DC). He presented to us the simplest form by which our society could free itself up from the burden of debt. Rothbard proposed repudiation. His case went as follows:

To think sensibly about the public debt, we first have to go back to first principles and consider debt in general. Put simply, a credit transaction occurs when C, the creditor, transfers a sum of money (say $1,000) to D, the debtor, in exchange for a promise that D will repay C in a year's time the principal plus interest. If the agreed interest rate on the transaction is 10 percent, then the debtor obligates himself to pay in a year's time $1,100 to the creditor. This repayment completes the transaction, which in contrast to a regular sale, takes place over time.

Rothbard gave us the basics of usury here, and he details how it is that nobody should be concerned with how individuals spend their money. As with any private trade or exchange on the market, both parties to the exchange benefit, and no one loses. Individuals willing to overspend and get into debt are doing so out of their own rational self interest. This should only concern the debtor, and the bank to which the loan is due. Yet if it is his check he blows, it is only his business as to how he will feed his family. But there is one crucial difference: if a man gets in over his head and he can't pay, the creditor suffers too, because the debtor has failed to return the creditor's property. In a profound sense, the debtor who fails to repay the $1,100 owed to the creditor has stolen property that belongs to the creditor; we have here not simply a civil debt, but a tort, an aggression against another's property.

In these cases obviously allowing the debtor to repay the loan would be best suited for themselves and their own circumstance with the bank. Many times humans learn from making choices and from the ramifications, whether positive or negative. Pampering exacerbates the bad decisions. When someone doesn’t pay their loan, the bank takes necessary steps within their power to get back the money it was due. Obviously someone’s credit score takes a hit, and reputation mounts upon the back of the debtor. For businesses, they would dissolve and go out of business, something healthy in the process of creative destruction. This scenario is one where no government laws allow for businesses to out payments, as is the case today with their varied laws buttressing bad behavior.

As early as the 17th century, however, governments began sobbing about the plight of the unfortunate debtors, ignoring the fact that the insolvent debtors had gotten themselves into their own fix, and they began to subvert their own proclaimed function of enforcing contracts. Bankruptcy laws were passed which, increasingly, let the debtors off the hook and prevented the creditors from obtaining their own property. Theft was increasingly condoned, improvidence was subsidized, and thrift was hobbled. In fact, with the modern device of Chapter 11, instituted by the Bankruptcy Reform Act of 1978, inefficient and improvident managers and stockholders are not only let off the hook, but they often remain in positions of power, debt-free and still running their firms, and plaguing consumers and creditors with their inefficiencies. Modern utilitarian neoclassical economists see nothing wrong with any of this; the market, after all, "adjusts" to these changes in the law. It is true that the market can adjust to almost anything, but so what? Hobbling creditors means that interest rates rise permanently, to the sober and honest as well as the improvident; but why should the former be taxed to subsidize the latter? But there are deeper problems with this utilitarian attitude. It is the same amoral claim, from the same economists, that there is nothing wrong with rising crime against residents or storekeepers of the inner cities. The market, they assert, will adjust and discount for such high crime rates, and therefore rents and housing values will be lower in the inner-city areas. So everything will be taken care of. But what sort of consolation is that? And what sort of justification for aggression and crime?

Rothbard makes it clear the laws and legislation are like any law and legislation fed through the sluice of the tyrannical central planner; they hinder the economic acclivity and add to the boom bust cycles that disastrously occur. In a just society, then, only voluntary forgiveness by creditors would let debtors off the hook; otherwise, bankruptcy laws are an unjust invasion of the property rights of creditors. Therefore in a free market, the business goes out of business, where the creditor never receives its due on the loan. Also, the same applies to private debtors. The value of the loan would not be paid off completely, and indeed the bank would take a hit. Yet this is why market ordering works. Banks wishing to keep a good reputation would only give out loans to those it knows can pay the full value back. Competing banks would allow for even people with bad credit to receive loans, this is the result of competition.

In a free-market economy that respects property rights, the volume of private debt is self-policed by the necessity to repay the creditor, since no Papa Government is letting you off the hook. In addition, the interest rate a debtor must pay depends not only on the general rate of time preference but on the degree of risk he as a debtor poses to the creditor. A good credit risk will be a "prime borrower," who will pay relatively low interest; on the other hand, an improvident person or a transient who has been bankrupt before, will have to pay a much higher interest rate, commensurate with the degree of risk on the loan.

All of this being mentioned, there is of course a large difference between public and private debt. Most people, unfortunately, apply the same analysis to public debt as they do to private. The two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don't pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.

For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as "inflation." There are some exceptions, of course, such as when the government sells stamps to collectors or carries our mail with gross inefficiency, but the overwhelming bulk of government revenues is acquired through taxation or its monetary equivalent.

Furthermore, repudiation basically removes the existence of debt held in government bonds by other federal agencies. There are vast amounts of debt held in government bonds, one very renowned part of this debt is Social Security. This ponzi scheme is filled with these tricky methods of pretense for tax extortion. It is manifest in the difference between the two measures of the national debt the government tabulates. The "gross debt" is the total of Treasury bonds outstanding. But some of those are bonds that represent lending from one pocket of the Treasury — the Social Security, Medicare and transportation trust funds— to another, the general Treasury. The "debt held by the public" is the amount owed to everyone outside the Treasury. This is the figure most commonly reported as the "national debt." The difference between the "gross debt" and the "debt held by the public" is called "intragovernmental holdings." (Trust funds are federal debt that the government owes to itself, but there also are some minor "revolving accounts" and other details in intragovernmental holdings). Treasuries are spread out by various buyers of them, like China which has a large portion of treasuries (IOUs that amount to the debt).

The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people's property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.

Government is a system by which leaders coerce the populace, and subject them to whims which they randomly concoct. They create nothing, only prevent production and the free market ordering society spontaneously. They live on the grounds of extortion, and build their lives on further extortion after again, miscalculating the allocation of resources, in a world of unlimited wants, but limited means. Never has there been the existence of true justice or freedom with the existence of any government, large or small. Anarcho-Capitalism can provide this, government clearly cannot. It is merely a question of how much a person wants to coerce others, not whether or not they love their country or these hoax beliefs of nationalism.

Apart from the moral, or sanctity-of-contract argument against repudiation that we have already discussed, the standard economic argument is that such repudiation is disastrous, because who, in his right mind, would lend again to a repudiating government? But the effective counterargument has rarely been considered: why should more private capital be poured down government rat holes? It is precisely the drying up of future public credit that constitutes one of the main arguments for repudiation, for it means beneficially drying up a major channel for the wasteful destruction of the savings of the public. What we want is abundant savings and investment in private enterprises, and an absence of government. The people and the economy can only wax fat and prosperous when their government is starved and dissolved.

It would not be a bad thing for the government to not pay itself back, but now that the debt is largely owned by other countries, the method of extorting tax dollars will increase with Fed buybacks like QE2 as well as more government innerworkings of creating entitlements and extortion methods to collect tax dollars. Overall, these problems largely arise because of central banks like the Treasury and the Fed (largely a result of the existence of government). Their schemes add to the conundrum (mainly due to fractional reserve banking). Repudiation is not a new thing, it was performed in the 1800s during deflation periods; and one must remember, there was a government yet this method worked. If repudiation took effect, the country could and should automatically move to free banking and forget the need for even paying back the debt. Yet the smartest move for saving people’s savings and personal dignity, by not promoting slavery with taxation, is to remove government outright. The predicament looks to only get worse in the future, thus it is important to heed Anarcho-Capitalism now. That is unless of course one desires perpetuating artificially large booms and busts in the business cycle as time progresses. It is rationally only preferable to finally dissolve the government.

The quotes in italics were taken from Murray Rothbard’s Repudiating the National Debt