Ask Archer
Do we really need to pay the national debt?
A reader asks: Do we really need to pay the national debt?
Archer replies: It seems likely that the value of the country’s assets – its parks, highways, government-owned real estate, an original copy of the Constitution etc. – greatly exceeds its liabilities. So in that sense we are “money good” on the national debt, but these holdings aren’t especially liquid. We can’t just offload Yellowstone National Park or the Washington Monument to raise money. So what we really have is a cash flow problem and a mismatch of assets and liabilities, kind of like Silicon Valley Bank.
Let’s be honest: it seems a little third worldish to stiff our creditors. And while they’ll probably get over it – people still lend Argentina money, after all – it will take a while for the dust to settle, and it’s likely to be a lot of dust. Next time around the lenders will be wary, and loans will get more expensive. Even a small bump in the cost of funding adds up when you’re borrowing upwards of $385 million a day.
Who are the losers in this deal? At the end of last year about $17 trillion of the $31 trillion or so in federal debt was held domestically by mutual funds, pension funds, insurance companies, and state and local governments among others, according to the Peterson Foundation. (Just as an aside, this Peterson seems like my kind of guy, described in his NY Times obit as a “dogged advocate of government fiscal prudence.” But let’s face it, he was also a bit of scold, putting up those national debt clocks all over the place.)
Ironically, the Federal Reserve was the single biggest holder of the country’s bonds, with a 35% share of domestic debt. Don’t ask me how that works. Outside the US the biggest lenders were Japan ($1.1 trillion), China ($860 billion), and the United Kingdom ($468 billion).
Different bond holders will feel a default differently. The short-term impact would fall most heavily on those who draw their paychecks from -- or have their invoices paid by – the government; they will be massively inconvenienced. That includes everybody from members of the armed forces and your grandmother (or you) on Social Security to those applying for various federal licenses and approvals. There will be ugly knock on effects from this that will get uglier the longer it goes on.
While it seems reasonable to assume most everyone will be made whole eventually, the longer term impact is unknowable. Not too many people were around in 1944 when the Bretton Woods conference was convened, laying the groundwork for the global monetary system. By the same token, few can now remember when the dollar was not preeminent as the world’s medium of exchange. But these things can come and go, something we should keep in mind.
Most importantly, you don’t want to do anything more than we’re already doing to encourage our ideological competitors to look for an alternative reserve currency. As it stands, the US can bigfoot it through the global monetary system, going after grifters, imposing financial sanctions, etc. That has its advantages. Plus you get to pay your bills in a currency you print. You don’t want to lose that.
Fortunately, with the exception of one serial deadbeat, no one has really suggested default might be a good idea. But as Jamie Dimon of JP Morgan Chase said about that oddly coifed individual, “It’s just one more thing he doesn’t know very much about.”
Woof.