Ron Paul Appeals To America: "Default Now, Or Suffer A More Expensive Crisis Later"
By Ron Paul, op-ed first posted in Bloomberg
Default Now, Or Suffer A More Expensive Crisis Later
Debate over the debt ceiling has
reached a fever pitch in recent weeks, with each side trying to
outdo the other in a game of political chicken. If you
believe some of the things that are being written, the world
will come to an end if the U.S. defaults on even the tiniest
portion of its debt.
In strict terms, the default being discussed will occur if
the U.S. fails to meet its debt obligations, through failure to
pay either interest or principal due a bondholder. Proponents of
raising the debt ceiling claim that a default on Aug. 2 is
unprecedented and will result in calamity (never mind that this
is simply an arbitrary date, easily changed, marking a
congressional recess). My expectations of such a scenario are
The U.S. government defaulted at least three times on its
obligations during the 20th century.
-- In 1934, the government banned ownership of gold and
eliminated the right to exchange gold certificates for gold
coins. It then immediately revalued gold from $20.67 per troy
ounce to $35, thus devaluing the dollar holdings of all
Americans by 40 percent.
-- From 1934 to 1968, the federal government continued to
issue and redeem silver certificates, notes that circulated as
legal tender that could be redeemed for silver coins or silver
bars. In 1968, Congress unilaterally reneged on this obligation,
-- From 1934 to 1971, foreign governments were permitted by
the U.S. government to exchange their dollars for gold through
the gold window. In 1971, President Richard Nixon severed this
final link between the dollar and gold by closing the gold
window, thus in effect defaulting once again on a debt
obligation of the U.S. government.
No longer constrained by any sort of commodity backing, the
federal government was now free to engage in almost unlimited
fiscal profligacy, the only check on its spending being the
market’s appetite for Treasury debt. Despite the defaults in
1934, 1968 and 1971, world markets have been only too willing to
purchase Treasury debt and thereby fund the government’s deficit
spending. If these major defaults didn’t result in decreased
investor appetite for U.S. obligations, I see no reason why
defaulting on a small amount of debt this August would cause any
The national debt now stands at just over $14 trillion,
while net total liabilities are estimated at over $200 trillion.
The government is insolvent, as there is no way that this
massive sum of liabilities can ever be paid off. Successive
Congresses and administrations have shown absolutely no
restraint when it comes to the budget process, and the idea that
either of the two parties is serious about getting our fiscal
house in order is laughable.
Boom and Bust
The Austrian School’s theory of the business cycle
describes how loose central bank monetary policy causes booms
and busts: It drives down interest rates below the market rate,
lowering the cost of borrowing; encourages malinvestment; and
causes economic miscalculation as resources are diverted from
the highest value use as reflected in true consumer preferences.
Loose monetary policy caused the dot-com bubble and the housing
bubble, and now is causing the government debt bubble.
For far too long, the Federal Reserve’s monetary
policy and quantitative easing have kept interest rates
artificially low, enabling the government to drastically
increase its spending by funding its profligacy through new debt
whose service costs were lower than they otherwise would have
Neither Republicans nor Democrats sought to end this gravy
train, with one party prioritizing war spending and the other
prioritizing welfare spending, and with both supporting both
types of spending. But now, with the end of the second round of
quantitative easing, the federal funds rate at the zero bound,
and the debt limit maxed out, Congress finds itself in a real
It isn’t too late to return to fiscal sanity. We could
start by canceling out the debt held by the Federal Reserve,
which would clear $1.6 trillion under the debt ceiling. Or we
could cut trillions of dollars in spending by bringing our
troops home from overseas, making gradual reforms to Social
Security and Medicare, and bringing the federal government back
within the limits envisioned by the Constitution. Yet no one is
willing to step up to the plate and make the hard decisions that
are necessary. Everyone wants to kick the can down the road and
believe that deficit spending can continue unabated.
Unless major changes are made today, the U.S. will default
on its debt sooner or later, and it is certainly preferable that
it be sooner rather than later.
If the government defaults on its debt now, the
consequences undoubtedly will be painful in the short term. The
loss of its AAA rating will raise the cost of issuing new debt,
but this is not altogether a bad thing. Higher borrowing costs
will ensure that the government cannot continue the same old
spending policies. Budgets will have to be brought into balance
(as the cost of servicing debt will be so expensive as to
preclude future debt financing of government operations), so
hopefully, in the long term, the government will return to sound
Raising the Ceiling
The alternative to defaulting now is to keep increasing the
debt ceiling, keep spending like a drunken sailor, and hope that
the default comes after we die. A future default won’t take the
form of a missed payment, but rather will come through
hyperinflation. The already incestuous relationship between the
Federal Reserve and the Treasury will grow even closer as the
Fed begins to purchase debt directly from the Treasury and
monetizes debt on a scale that makes QE2 look like a drop in the
bucket. Imagine the societal breakdown of Weimar Germany, but in
a country five times as large. That is what we face if we do not
come to terms with our debt problem immediately.
Default will be painful, but it is all but inevitable for a
country as heavily indebted as the U.S. Just as pumping money
into the system to combat a recession only ensures an
unsustainable economic boom and a future recession worse than
the first, so too does continuously raising the debt ceiling
only forestall the day of reckoning and ensure that, when it
comes, it will be cataclysmic.
We have a choice: default now and take our medicine, or put
it off as long as possible, when the effects will be much worse.
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