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national politics & policies too much government

Default by a Thousand Cuts

Alan Greenspan half-​smilingly argues that U.S. Treasury bonds will never be defaulted because “we can always print money.” How reassuring. 

It’s one thing to pull money out of the proverbial magic cookie jar and place it in bank ledgers (“high-​powered money,” or QE1, QE2) while people are substituting consumption with saving, fearful of the near-​term prospects (increasing their “demand for money”). It’s quite another to do that while people expect prices only to rise. Massive increase in the supply of money (“printing money”) while people anticipate inflation (lowered “demand for money”) can lead to runaway inflation, hyperinflation.

America hasn’t experienced that since the Civil War. But Germany has (after World War I), as has Zimbabwe (just recently). It can ruin a whole way of life.

After Germany’s hyperinflation, Nazism arose. 

Greenspan may have been trying to make a subtle point, but the blunt point remains: Default is likely, for inflation itself serves as a form of default. Under Greenspan’s scenario, the Federal Reserve, conspiring with Treasury, would, by “simply” printing money, pay debt with decreased-​value dollars. 

The ancient Chinese had a perverse form of torturous execution: Death by a thousand cuts. Inflation is like that, it’s torture for almost everyone, default by a … gazillion devaluations.

The only way around this is to make very different cuts — in federal spending.

That’s not torture, that’s the road to recovery. 

It’s unlikely, of course, because, to politicians and insiders, cutting spending seems like torture.

This is Common Sense. I’m Paul Jacob.

Categories
national politics & policies too much government

Cold, Hard Reality

Yesterday President Obama declared that no one is arguing for government default. But isn’t it amazing to see so many politicians work so hard to ensure that un-​argued-​for goal?

There are two parts to a default. The first is running up debt; the second is not paying it back. Like it or not, advocate it or not, sovereign debt repudiation comes closer as American politicians lumber on with the first part.

Of course, there are folks who think the American people should simply repudiate their government’s debt. Over at the Mises Institute, Justin Ptak provides citations from more than one economist advocating just that.

Gary North states that the day is fast approaching when the phrase “full faith and credit of the United States government” will “provoke universal laughter.…” He insists that “the credit rating of the United States government will be marked down from AAA to AA. It will then be marked down to A.” What’s more, he says this is a good thing: “For every notch down that it falls, the national day of deliverance draws closer.”

Paranoid? Fringe? Hopeful? No matter how you categorize such talk, it’s not crazy to think about, since the probability of default grows as the debt increases.

A default could have a beneficial effect on America’s politicians: They would be unable to finance further deficits. Reality’s cold, hard fist — that is, un-​amused investors — would rein them in.

This is Common Sense. I’m Paul Jacob.