National Debt – A way out?

History is replete with examples of governments’ attempts to manage their debt.  Usually the governments wanted to spend money for a program or war or they were trying to pay for the last popular program or war.

Many techniques have been used over the years, but the most often utilized method was to simply not pay.

Recall the expression “Not worth a Continental”.  It referred to the currency issued by the Colonies during the Revolutionary War.  There was so little confidence in the ultimate success of that startling venture that most folks wouldn’t accept the paper money of the Continental Congress as payment for goods and services.    As an aside you can imagine the anguish this caused Geo. Washington when trying to supply his troops.  He was very reluctant to simply confiscate food stuffs and livestock, but his troops had to eat.  At the end of the war Congress defaulted on most of the obligations of its bonds it had issued to people who bought them to support the war effort.  The Continental bonds were sold for pennies on the dollar.   It caused great turmoil for a time.  But here we are now.   The US did survive its defaults and financial distress.  Years later the expression was “sound as a dollar”.

I have wondered several times over my lifetime if our current Government might someday simply advise it would default on some of our issued Treasury bills.  With the dollar falling in value, a terrible import-export debt structure and the national debt being so high, it is possible.  No doubt the Feds would be very selective with the default.  Remember it takes hundreds of billions each year to service just the interest on our national debt.  You know that a great deal of our national debt is held by foreign countries.

What if the Feds said one fine day that they would only pay 60 cents on the dollar for all the debt held by China for instance.   Oh, yes there would be a huge uproar for a while.  Would the Chinese go to war with us? No.  Serious wars are never fought over money they are fought over ideologies.  They would withhold shipment of toys?  Cheap clothing?   In the long run it would do them no good.  Yes, our credit would be crippled, but for how long?   And remember our debt would have been significantly reduced by the stroke of a pen.  They could even add a few other countries that are not so friendly–maybe some Arab ones.   Would those Arabs really refuse to sell us oil? And even if so, for how long?  They can’t eat the oil or build bridges with it.  They have to sell it.

You think about it.  Think it through to the end game.   Curious to see how you think it would work out.  Remember embargoes and defaults have happened before, many times.   The Romans managed defaults and still endured for centuries afterward.

Anyway, it is an interesting mental exercise.

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Filed under Economics, government

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