08 Jun 2011

Republicans Flirt With Technical Default

Economics 44 Comments

This surprises me. Some Republicans are openly talking about missing a few interest payments, if it would get the Democrats to agree to bigger spending cuts. Fortunately David Frum is there to wag his finger at the children.

I don’t understand why the younger Republicans don’t start demanding widespread asset sales. I would think that would sell politically a lot better than actually missing payments to bondholders. I suppose it might be hard to say you want to dump hundreds of billions worth of student loans, since that would presumably make it harder for the next crop of kids to bury themselves in debt. (Go figure.) But I would think selling off real estate, or expediting drilling rights, would be no-brainers.

44 Responses to “Republicans Flirt With Technical Default”

  1. Silas Barta says:

    My concern (and I don’t know the extent to which others share this) is that government’s tend to treat these one-time influxes of revenue as if they were recurring — not too different from how they treat Social Security surpluses as “w00t! free mon-ayyyy!”

    So it won’t be, “whoa, that was close, guys, we patched up the budget this year by selling a $100 billion in gold from Ft. Knox, but we can’t do that forever! Let’s rein in spending so we don’t have to resort to measures like that in the future.”

    It will be, “Suh-weeeeeeeeet! We just found a way to get $100 billion extra in revenues per year! That’s $1 trillion over the next decade! Okay guys, what kind of goodies can we buy for a trillion? Let’s divvy it up right now. I know my district needs more money for a program that can keep people clinically alive for one or two more hours…”

    And yes, the second scenario will accelerate the onset of a true debt crisis, which some libertarians would regard as good. But really, I’m not that interested in such a turbulent transition…

    • Major_Freedom says:

      I reluctantly find myself inclined to agree with your sentiment.

      • bobmurphy says:

        It’s always risky to say anything besides, “Rothbard for the win! Go anarchy!” in these situations, but on this one I don’t see the problem. Even if they did a dollar-for-dollar increase in spending, that wouldn’t be a problem on net, right, so long as the spending was a one-time windfall? (At least to a first approximation.) This isn’t like switching to a flat tax with no deductions, and then they jack the rate up next year.

        Also, given the political environment, I think the Tea Party types might actually get some leverage out of this, especially if they can say something less “crazy” than, “Maybe a little default is just what the doctor ordered.”

        So let’s say they sell off $100 billion in gold, and increase spending $50 billion more than they otherwise would have (just for this year). Isn’t that still a net transfer of $50 billion to the private sector, in the form of lower deficits?

        • Silas Barta says:

          hey, I’m not saying I disagree with the idea. I’m mainly saying that the *way* it does good will not necessarily be good. Like with so many proposed easy solutions, it requires winning the war of ideas … but if you can get that far, you don’t need fancy tricks to get a saner government because it won’t get desperate for money in the first place .

  2. MamMoTh says:

    Funny because defaulting on the interests is equivalent to raising taxes to pay the interests, and it concerns especially the wealthy.

    • RG says:

      Since taxes are theft and property destruction is a specific form of theft, cutting the dollar like a crack cook cuts coke IS equivalent to raising taxes (on everyone with dollar denominated holdings – especially those on fixed income or living paycheck to paycheck).

  3. AP Lerner says:

    “I don’t understand why the younger Republicans don’t start demanding widespread asset sales.”

    Because even younger Republicans, who know less about monetary operations than most economists, recognize it’s a nonsense policy.

    The deficit is nothing more than accounting figure that represents the difference between revenues and spending. The sale of an asset is nothing more than a one off event that does nothing to impact the deficit. So essentially what you are advocating is an asset swap of some building, student loan, gold, or whatever for interest bearing treasury bonds. You are advocating the exchange of an illiquid asset for a liquid asset, but net private sector financial assets remain unchanged. So what? It’s completely meaningless. But I’m sure your response will be the US government is like a household and must pay down debt or it will go broke, which of course is impossible and a complete and utter failure to understand monetary operations, which takes me full circle back to my first comment.


    • Rick Hull says:

      > The deficit is nothing more than accounting figure that represents the difference between revenues and spending. The sale of an asset is nothing more than a one off event that does nothing to impact the deficit.


      When you sell the asset, you increase your revenue. That’s how the asset sale impacts the deficit — this year’s. Of course it will not help next year’s deficit.

      But the problem being addressed is the debt, and the debt will be permanently impacted by the asset sale.

      • AP Lerner says:

        “Of course it will not help next year’s deficit.”

        Agreed. After the sale, it won’t matter tomorrow. It’s a one time shot. Meaningless. Like you said.

        “But the problem being addressed is the debt, and the debt will be permanently impacted by the asset sale”

        But from the private sector’s standpoint, you are swapping on asset for another. It’s a wash. Nothing new is gained. From the public sectors standpoint (federal, not state/local) it’s meaningless since the ‘debt’ issued is nothing more than a reserve drain, and is not required to fund spending. Again, from a credit quality perspective, the asset sale is meaningless.

        • Brent says:

          And the federal government is earning exactly how much revenue from these assets now? In most – if not all – cases, I’d think that these assets are net costs to the federal government, so not only would selling the assets bring in current revenue, they’d reduce current and future costs, as well as bring in future tax revenues from private sector activities.

    • Silas Barta says:

      Yeah, good point, the government could satisfy everyone’s desires just by continually printing money and buying stuff. Let’s give it a whirl.

    • RS says:

      “You are advocating the exchange of an illiquid asset for a liquid asset, but net private sector financial assets remain unchanged.”

      Sounds like the failure to understand monetary operations is yours AP. You presume that a currency (e.g. the US dollar) is always and forever an asset, that is not necessarily the case. The moment a currency ceases to be usefull it is an asset no longer and a fiat currencies are particuarly prone to losing their efficacy in that regard, especially when it is inflated to sustain the unsustainable.

      People who own houses and operate on a limtted budget know this, it is called “living within ones means” or stated more explicitly it means that one cannot consume more than one produces, the US government does not produce anything (except fiat dollars) and yet it is consuming more real wealth than the next dozen generations of Americans can produce.

      • MamMoTh says:

        If you mean one cannot spend more than one’s income, the the sectoral balances show you that for that to hold for the whole private sector, the government must run a deficit (large enough to offset the trade deficit in an open economy).

    • Zack A says:

      I don’t see why these MMT’ers don’t understand the fact that having a printing press is not our ace in the whole when it comes to avoidig default. Maybe MMT is right in the sense we can’t default in nominal terms, but in real terms we certainly can.

      The printing press is not a get out of jail free card, in the sense that we never have to worry about defaulting because we have the ability to issue currency. What if our creditors do not want to get paid back in an inflated and debased currency?

      Issuing currency to pay back your creditors is a form of defaulting. If I was a creditor of the U.S gov, I wouldn’t want to be paid back in monopoly money, and I certainly wouldn’t recognize the worthless fiat paper the U.S gov issued me as legitimatly fulfilling its obligation to me because the currency in which they are issuing wouldnt have any value.

      If everyone had a printing press in their basement, technical no one could default on anything. Just print more money. Or heck, just do it on the computer, because after all its nothing more than an accounting entry right?

      The question still remains for these MMT’ers. What if our creditors no longer accept our worthless fiat paper notes? Bottom line is you can default through inflation. Just like I wouldn’t accept some worthless note some dude printed up in his basement or punched into his computer as having any value. I simply wouldn’t accept it.

      • MamMoTh says:

        Bond holders have no other choice but accept what was promised to them, for their bonds to be redeemed principal plus interests in nominal terms. The government has no other obligation towards them.

        Anyone can issue an IOU, the question is to get it accepted. As far as I know there is plenty of people willing to accept US government IOUs.

        I already invited anyone who considers them worthless to send them to me.

        • Zack A says:

          Question is not what you think they are worth, the question is what the majority of the bond holders think. (and please, don’t cite the low yield on the 10 year as “evidence” that there is a strong demand for U.S treasuries, because we all know the fed is manipulating the market)

          If the Fed engages in policies that makes our creditors believe they will get paid back in an inflated currency, they will be less likely to buy more bonds, much less continue to roll them over, or they may start to liquate their bond holdings, which will send interest rates through the roof and send the U.S back into a depression. The Fed can’t buy 80%of all new treasuries in perpetuity.

          It seems to me you assume there always will be a demand for U.S bonds no matter what. I think that is a dangerous assumption, if that’s what you’re suggesting.

          • Jon O. says:

            Save your breath. In the world of MMT bond and currency markets can’t collapse.

          • MamMoTh says:

            This has nothing to do with the fact that when bonds are redeemed in nominal terms that’s all bond holders can expect.

            • Jon O. says:

              So what you’re saying is: when bonds are paid off all bond holders can expect is payment?

        • Bob Roddis says:

          Paying in nominal terms and not real terms is fraud and theft. The founding fathers would have executed the perpetrators. It’s real hard arguing with moral degenerates because they aren’t shamed, shocked or appalled by moral degeneracy. Hey! The government isn’t constrained by morality! How cool is that? That’s what all these “debates” with Keynesians and MMTers ultimately come down to.

          • MamMoTh says:


            • Bob Roddis says:

              As I would expect.

          • Zack A says:

            Absolutely Bob. You could argue that the U.S has been defaulting in real terms for decades. I believe I have heard Ron Paul suggest that before. If you can’t pay back your creditors in real terms, you are defaulting.

            Having a printing press and the ability to create accounting entries on the computer with the flick of a keystroke does not absolve the U.S from the capability of defaulting on its obligations.

          • MamMoTh says:

            As I said, bond holders have no other choice but to accept what was promised to them, that is, for their bonds to be redeemed principal plus interests in nominal terms.

            That’s all that the Treasury promised, and bond buyers knew that when they bought them.

            If they prefer to keep their dollars at 0% instead of buying bonds, so be it.

            • Zack A says:

              Creditors lend to the U.S government expected to be paid back in real terms. They do not expect to get paid back in a depreciated currency. Bond buyers probably expected that the country holding the world reserve currency would be responsible with it.

              Bond holders have choices. Bond holders can sell off their bonds if they want to, or even stop rolling them over for that matter. Even worse, they can strait up stop buying our bonds in the first place.

              If our creditors did any of these things, surely there would be devastating economic consequences for the U.S. Interest rates would rise sharply, and the Fed would be forced to decide whether or not to buy up all the bonds and monetize the debt or simply send the U.S economy into a depression.

              • MamMoTh says:

                Bonds are nominal unless indexed to inflation. Period.

              • Zack A says:

                That still doesn’t explain why simply issuing currency is not defaulting in real terms, because it still is. If your bonds are denominated in a worthless currency, who cares if you got paid back in nominal terms.

                If you can’t buy anything with the currency in which your bonds are denominated in, or if that currency has fallen so dramatically against your own domestic currency, as a creditor, you still got ripped off.

                Again, having a printing press and a computer does not magically absolve anyone from the possibility of true default.

  4. david (not henderson) says:

    How about selling off the interstate highways? The best highway I have been on is the orivately operated highway 407 in Ontario.

  5. Blackadder says:

    I don’t think any of the Republicans are talking about missing interest payments on the debt (indeed, in the article you link to Republicans are trying pass legislation that would ensure debt service is prioritized over other spending if we hit the debt ceiling). The idea that we would keep making our interest payments on time, but since we can’t borrow anymore we would have to cut spending immediately.

    Personally I think this is too risky a strategy, but if you accept the idea then selling off assets would be counter-productive, as it would just mean you wouldn’t have to cut as much spending.

    • bobmurphy says:

      In the article at least one guy said it would be OK to be 5 days late on interest payments.

      • Blackadder says:

        Fair enough.

  6. Bob Roddis says:

    Throughout these long and pointless debates with the MMTers, I’ve tried and tried and tried and tried again to get them to explain where all of the REAL WORLD STUFF is going to come from to satisfy the government debt ($62 trillion or so). We all understand where the funny money comes from. When 80% of my generation (40 million people) is senile in 20 years, who is going to change our diapers and how are they going to get paid?

    • MamMoTh says:

      Will 8 million unemployed people be enough to change your diapers? Or do you really have a mammothian ass?

      • Bob Roddis says:

        I’m sure many people would apply for jobs at the right price. Where’s the stuff going to come from that they will be able to purchase at reasonable prices with the funny money with which they will be paid? Seeing that there are no savings available to pay them.

        I don’t think you guys understand the question or the issues involved. I didn’t see a single MMTer address the issue out of the 400 commenters on the original Murphy MMT go-round.

  7. Bob Roddis says:
  8. Daniel says:

    Excellent Post Pof. Murphy! I got to this blog via Ludwig site, because I was reading your article about the FED can go Broke question. Just passing to leave a note about this here. What about USA Gold Reserves in Fort Knox? As per my understanding, Gold is marked at the FED and the US Treasury Balance Sheet at 42 dollars and we all know Gold is trading at 1545. So Why not just increase the mark to market position of this gold in the FED balance sheet to let’s say 1000? I would not tell you to sell the gold, cause I think it would be better to hold a little longer to that gold cause it will appreciate, but marking it up seems logical to increase the capital of the FED, said to be today at USD 52bi (and the FED balance Sheet is 50x leveraged as we speak). The accounting changes made by the treasury and the FED in January this year (after your article) transferred all the risk of the FED balance sheet to the treasury.

    Ok, in last instance let’s say they sell the gold. As per my research and understanding if marked at market process today, USA has USD 400bi worth of gold in Fort Knox.

    The only problem is that I was researching on Fort Knox and people seem to have doubts about the real existence of such amount of Gold in Fort Knox. Do you think there is any gold in Fort Knox? Would this be a possible short term solution for the FED and the US Treasury? Would love to read your opinion on this. Bellow you will find some interesting material about the Gold of Fort Knox.

    Russia Says IMF Chief Jailed For Discovering All US Gold Is Gone
    Where Is America’s Gold?: The Mystery of Ft. Knox
    Craig Hulet – there is no Gold at Fort Knox
    Federal Reserve Admits: We Have No Gold !

    Best regards

  9. Bob Roddis says:

    Pater Tenebrarum summarizes the problems with MMT and the Chartalists:


    He suggests reading Bob Murphy’s takedown first.

    • Zack A says:

      That was awsome piece by Tenebrarum. Im going to add that one to my growing list of anti MMT literature, which includes Murphy’s piece, the Jack Sparrow article, and Tyler Cowen’s refutation of Mosler 7DIFEP.

      Am i missig any others?

      • MamMoTh says:

        All those that actually refute MMT.

        • Zack A says:

          All of those refute MMT, or at least bring up legimate criticisms of it. Not just those pieces, but every other piece explaining why Keynsian style aggregate demand management and stimulus are bogus and actually the cause of our problems.

          I have yet to see any MMT’er, even the great MMT guru Warren Mosler, even muster up a coherent response to any of those pieces, let alone pose any reasonable objections to them. If you want to, go ahead, dig in, have fun.

          MMT is nothing more than Keynesian aggregate demand management laced up in accounting and mathematical jargon. Austrians have refuted and eviscerated the whole idea of demand management and Keynesian style stimulus decades ago. We still continue to do it to this day.

          The Austrian critiques of Keynesianism apply to MMT as well, because much of MMT is based upon many of the fundamental tenets of Keynesianism.

          • Bob Roddis says:

            The anti-Austrians cannot even spot the issues as you beat them over the head with them much less begin to think about mustering a response to those issues.

            That is their bright line mulish stalwart defense to Austrian theory and they are sticking to it. It’s worked for decades, hasn’t it?

          • MamMoTh says:

            So the problem seems to be that Austrian worshippers don’t make the difference between a critique and a refutation, and they conclude every critique they make is an evisceration of non Austrian theories.

            Not surprising when they can’t tell the difference between market based exchanges and any other kind of voluntary exchanges.

            Why would anyone ridicule his/her own position to such extent is beyond me.

  10. bobmurphy says:

    Looks like only Warren Mosler can go to China.

    • MamMoTh says:

      Did they start a one MMTer policy too?