Trump Addresses America’s Debt
Stephen Michael MacLean’s take on Trumponomics
‘The Open Conspiracy.’ That is what Henry Hazlitt, the renowned New York journalist, called the political effort to ‘monetise the debt’ by inflating the currency so that U.S. government debts incurred to-day will cost less to pay to-morrow; or, as is the case, years into the future — if ever.
But in an interview with CNBC on 5th May, Donald Trump, presumptive Republican presidential candidate, took a swing at the conspiracy by matter-of-factly stating that, as President, he would seek to restructure the payment of U.S. Treasury bonds at lower returns.
Trump then cracked the conspiracy wide open four days later, acknowledging America’s — and all countries with fiat money — dirty little secret: ‘you never have to default because you print the money’.
And, in the process, Trump unleashed yet more political opprobrium upon his head. Analysts argue that by threatening to make creditors ‘take a haircut’ on America’s debt obligations, future lenders will become scarce and interest rates rise as a result.
Financial historian John Steele Gordon calls it ‘a breathtakingly stupid idea’.
‘Businessmen such as Donald Trump are often known to force their creditors to accept less than what is owned,’ Steele writes. ‘This is a dishonorable way to do business, but Trump has used the tactic often.’
Meanwhile, Josh Boak, economics scribe for the Associated Press, reports that ‘experts see it as a reckless idea that would send interest rates soaring, derail economic growth and undermine confidence in the world’s most trusted financial asset.’
Such a move, never before attempted by the U.S. government, would likely spook investors whose trust in Treasury notes keeps global financial markets operating.
The need to refinance would likely cause interest rates to spike as investors demanded a greater return for the perceived risks of non-payment. More tax dollars would have to go toward repaying the debt. Many investors would shift their money elsewhere. And the economy could endure a traumatic blow.
But what is the alternative? Apart from random admonishments from his erstwhile Republican opponents (and crickets from Democrats Hillary Clinton and Bernie Sanders), Trump is taking the issue head-on. (With due acknowledgement to the physicians Paul, father and son who, Cassandra-like, have warned that the greatest threat to America’s security is her indebtedness.)
Parsing the Open Conspiracy
Hazlitt’s diagnosis, more than half-a-century ago, still holds true. ‘Our politicians, and most of our commentators, seem to be engaged in an open conspiracy not to pay the national debt — certainly not in dollars of the same purchasing power that were borrowed, and apparently not even in dollars of the present purchasing power,’ he lamented. There is of course no explicit avowal of this intention. The conspiracy is, rather, a conspiracy of silence. Very few of us even mention the problem of substantially reducing the national debt. The most that even the conservatives dare to ask for is that we stop piling up deficits so that we do not have to increase the debt and raise the debt ceiling still further. But anyone with a serious intention of eventually paying off the national debt would have to advocate over-balancing the budget, year in, year out, by a sizable annual sum.
No more. The bien-pensant conservative camarilla in Washington (and its auxiliaries in the heartland) grumble about deficits and debt ceilings with little enthusiasm and simply go through the motions of resistance, beaten down by fears of Progressive, social-democratic assault and sustained only by their own flaccid principles.
Both Gordon and Boak seem willingly oblivious to the consequences of quantitative easing that has besmirched American greenbacks since the country went off the Gold Standard in the early 1970s; Seth Lipsky, editor of The New York Sun, knows different. Lipsky is the author of The Floating Kilogram (a collection of essays in favour of sound money) and The Citizen’s Constitution: An Annotated Guide.
‘The right answer is that America has already defaulted on its debts — and it wasn’t on Donald Trump’s watch,’ Lipsky retorts. ‘It was when the Congress, which owns the power to borrow money on the credit of the United States, allowed the dollar to collapse to less than a 1,250th of an ounce of gold.’ (Lipsky is referring to Art. 1, § 8, of the U.S. Constitution, which gives Congress the power to ‘coin Money’ and ‘regulate the Value thereof’.)
In 2001, when George Bush became President, the American dollar was worth 256th of an ounce of gold; in 2009, when Barack Obama took the oath of office, the dollar was 853rd of an ounce of gold — according to Lipsky’s numbers.
Or, from another perspective, from 2009 to 2016 inflation rose 11 per cent; from 2001 to now, 34 per cent. The jump in quantitative easing (a.k.a. ‘money-printing’) by the Federal Reserve to offset the Global Financial Crisis of 2007-09 and the continuing economic doldrums, are two reasons for the drop in the dollar’s purchasing power.
For Lipsky, the conclusion is obvious: “If we started paying back today debts incurred during the Bush administration we’d be paying back with scrip valued at less than what the money was lent to us. Nobody wants to call that a default. Then again, too, huge sectors of the economy, including the administration, have a vested interest in running down the value of the federal government’s obligations. The Democrats and the Fed are plumping for 2% inflation.”
Such practices were well known from ancient times, whether as coin ‘clipping’ or by debasing the currency by alloying gold or silver with base metals.
Adam Smith chronicled this statist monopoly power in Wealth of Nations. ‘When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and compleatly paid,’ the Scotsman complained. ‘The liberation of the publick revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.’
Smith’s liberation was accomplished through ‘the raising of the denomination of the coin … the most usual expedient by which a real publick bankruptcy has been disguised under the appearance of a pretended payment.’
And therein lies the rub, another unspoken alternative: sovereign debt default. Murray Rothbard, anarcho-capitalist extraordinaire and godfather of libertarianism, was one who dared speak its name. ‘I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: outright debt repudiation,’ he advocated in 1992: when, incidentally, the national debt was a piddling $4 trillion — those were the days!
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 a lean, austere, low-budget, minimal government. The people and the economy can only wax fat and prosperous when their government is starved and puny.
Smith was more sympathetic to the plight of creditors and those caught up in the public tsunami. The eighteenth-century advocate of capital and the division of labour championed the dynamism of la théorie des débouchés — the ‘law of markets’:
‘A pretended payment of this kind, therefore, instead of alleviating, aggravates in most cases the loss of the creditors of the publick; and without any advantage to the publick, extends the calamity to a great number of other innocent people. It occasions a general and most pernicious subversion of the fortunes of private people; enriching in most cases the idle and profuse debtor at the expence of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it, to those which are likely to dissipate and destroy it. When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor. The honour of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious’.
This was Hazlitt’s grim conclusion, too. ‘One suspects that there is at the back of the minds of many of the politicians and commentators who sense the dimensions of the problem an unavowed belief or wish,’ he surmised. ‘This is that a continuance of inflation will scale down the real burden of the debt in relation to the national income by a constant shrinkage in the value of the dollar, so reducing the problem to “manageable proportions.”
Hazlitt was indignant at the attempted political ploy of prestidigitation: ‘Such a policy would be indignantly disavowed. But this is precisely what our reckless spending is leading to.’
Turning the Corner on the Debt?
And so, with two options of inflation and default as national debt responses, is there another?
Yes. Economic growth. It is slow; more vexing still, it depends upon the good faith of politicians not to pursue further debt monetisation. Why? Because true economic growth depends upon investment, which itself depends upon savings which are put at the service of capital formation and accumulation. And people won’t save if their money loses value through expansion of the money supply (and concomitant low/negative interest rates). Savings, investment, capital formation, and entrepreneurial initiative — the framework of a supply-side economic revival, employment, and growth.
Consider, too, that one reason for the rise in the national debt has been funding the welfare economics of unemployment and poverty programmes. Were the economy to grow and unemployment levels to drop, there would be more money to dedicate to debt repayment. Crony capitalism, or ‘rent-seeking’ favouritism for those with access to political power, adds insult to injury.
This is where the rubber hits the road. As financial analyst Peter Schiff notes, ‘Trump knows a U.S. government default is inevitable.’ America can only conceive of repaying her debts with a low interest rate. At an interest rate that will encourage savings and investment, the national debt — a staggering $19+ trillion — becomes an insurmountable burden. Even servicing the debt becomes unimaginable at ‘natural’ interest rates. ‘If rates go up, refinancing [debt] doesn’t help. The only thing that helps is restructuring,’ said Schiff.
The choice is simple: either continued obfuscation and inexorable financial disaster, or frankness about America’s ability (and willingness) to pay her debts. It should be equally clear where Donald Trump stands on this issue.
Trump is the presumptive Republican nominee because he spoke truth to power on questions of American security, defence, and cultural issues like political correctness. As President, it is just as likely that Trump will apply power to truth, and take steps to address the Burkean sublime[*] national debt that America’s Establishment has left as a shameful legacy.
How America answers this debt débâcle will signal its intent and course on other economic questions; of currency, budgets, taxation, trade, and welfare. Once cracked by Trump, this polycephalous conspiracy can no longer be concealed — except by the wilful, the gullible, and the guilty.
[*] Edmund Burke, A Philosophical Enquiry into the Origin of Our Ideas of the Sublime and Beautiful , I. §7: ‘…whatever is in any sort terrible, or is conversant about terrible objects, or operates in a manner analogous to terror, is a source of the sublime…’
Stephen Michael MacLean is a freelance researcher, residing in Canada. He blogs as the Organic Tory at the Disraeli-Macdonald Institute