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Repudiate the National Debt





On December 12, the Federal Reserve issued a press release. It will pump $45 billion into the economy every month until unemployment falls below 6.5 percent, so long as inflation is below 2.5 percent. The new money will buy Treasury bonds. The Fed also renewed its current commitment to buy approximately $40 billion of mortgage bonds every month.

As long as government refuses to shrink, there is no other choice but to run the printing press until it is white-hot. Even hiking taxes to a confiscatory level is not likely to meet government expenditures, and it would probably cause social unrest.

However you approach the national debt, it is unsustainable. Austrian economist Michael Suede approaches it by holding the debt up against America’s gross domestic product (GDP). He writes,

Presently, the U.S. government is spending $6.3 trillion annually. Total state spending accounts for roughly 40% of U.S. GDP.… In other words, 40% of the U.S. economy exists to serve the purposes of war, imprisonment, welfare entitlements, bureaucrat salaries, regulatory bodies, subsidized housing and subsidized industry.

In early 2012, the national debt exceeded America’s annual GDP. In other words, it is now larger than the entire economy.

The good news is that the time is fast coming when the federal government will be forced to cut back, whether it wants to do so or not. Suede described two events that could spark a drastic reduction. First, “If the Fed were to accelerate [even further] the amount of Treasury and mortgage bonds it is buying, the value of the U.S. dollar may fall faster than the interest being earned by the foreign holders of our debt.” If so, then foreign holders would divest themselves of their debt, and this could cause a bond run. In turn, the value of the American dollar would be gutted.

Or inflation could rise precipitously, as it did in the 1980s. Suede speculated, “Should this occur, the Fed is not in a position to be able to reduce the money supply without driving interest rates up.” Even a 1 percent rate rise would add $160 billion in interest onto the $16-trillion-dollar debt. He concludes that a rise of several points “would completely demolish the state.” I expect it would survive, but the prospect of destruction may well be the only circumstance under which the federal government agrees to roll back.


The case for repudiation




This raises a moral objection. Children in the shadow of the national debt have done nothing to deserve being there. They didn’t buy bonds, suck up entitlements, or vote anyone into office, and yet they are now economic hostages to a national debt clock.






But can’t the bad effects be mitigated? For instance, could selling federal property to private buyers buy Social Security some transition time? In his essay “The Trillion Dollar Question: Should the National Debt Be Repudiated?” historian Jeffrey Rogers Hummel addresses this issue. “First, there is a practical difficulty with this option,” he states.


Then Hummel raised a compelling point. “The government is an institution that has both voluntary and involuntary relationships with its citizens.” In the involuntary relationships, the government has robbed and brutalized people through taxation, regulation, and other abuse. Why should the people who voluntarily bought government debt be first in line for money that results from the sale of federal property?


The historical case for repudiation

The iconic Austrian economist Murray Rothbard was fond of pointing out that American governments had a long history of repudiating debt. In his book A History of Money and Banking in the United States, Rothbard described the repudiations that followed the fiscal crises of 1837 and 1839.

By 1847, four western and southern states (Mississippi, Arkansas, Michigan, and Florida) had repudiated all or part of their debts. Six other states (Maryland, Illinois, Indiana, Louisiana, Arkansas, and Pennsylvania) had defaulted from three to six years before resuming payment.

Elsewhere, Rothbard highlighted a basic principle underlying the wisdom of repudiation, asking “Why should more private capital be poured down government rat holes?”




the states not only left the development and expansion of the railroad network to the market, but also during this period, they finally threw off their mercantilist and interventionist heritage and, for the first time, instituted a reign of near laissez-faire at the state level. Not surprisingly, the period prior to the Civil War witnessed some of the most rapid economic growth in the nation’s history.




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