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Repudiating National Debt Will Happen Whether You Like It Or Not

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June 22, 2011 – Comments (17)

Governments have all kinds of bad ideas.  They're like Bad Idea Factories.  Oh sure, I concede that every now and then a good idea gets churned out, but they're hard to notice under the avalanche of bad ones.

Little Fiefdoms, All the Same

But before I get into today's topic, I want to address a common them you will hear from both Republicans and Democrats concerning the government.  They tend to separate government into different "mini-governments."  For example, if I point out the Bad Idea of Iraq to a Regressive, they will respond that foreign policy is somehow separate from the "government of welfare" or the "government of regulation."  If I say to a conservative that the government is a fiscal nightmare, they can separate this "government of the budget" from the "government of warmaking."

The problem with this type of thinking is that the larger issue is not that a certain policy is flawed.  The problem is that no matter how rosy the government's intentions, they derive their income via force and have no incentive to provide the best value to the people they are supposed to serve.  So rather than delivering service, these mini-governments end up turning in to power centers where every decision is measured not by how it best serves the public (though that is the meaningless rhetoric often employed), but rather by how it will impact the department in question. 

This is not a revulotionary concept that I am proposing.  Many prominent scholars of both the statist and non-statist variety have discussed these issues, without much success in finding a solution.  Voting every two years is not a solution.

A Gold Medal Run

That is your backdrop for today's topic: the National Debt.  All national debts will eventually be repudiated.  We are seeing Greece's national debt being repudiated right now.  Greeks are turning to gold. This an outright rejection of Greek and Eurozone fiat money.  This is an outright rejection of Greece's national debt.  You don't buy gold in order to repay the bankers.  You buy gold to stick it to the bankers, and to stick it to your government.

National debts are an immoral arrangement. The govenrment borrows on your behalf, without your consent, and uses force to recoup the payment.  They don't consult you on the terms.  There is no fine print.  In fact, there is no "print" at all.  Recently, Regressives worked themselves into physical orgasm over the prospect of Elizabeth Warren's newly formed CFPB simplifying the terms of borrowing.  When is Ms. Warren going to break down the stipulations of government's borrowing on "your behalf?"  Never, of course.  Regressives would have you believe that the "government of regulation" is there to protect you.  If only.... 

So while the CFPB works to make borrowing more transparent with one hand, it will work to increase your indebtedness with the other.  You have to appreciate the irony.

Who Will Watch the Watchman?

The truth is that no one regulates the regulators, and so the government will continue to borrow trillions of dollars "on your behalf."  Public creditors are also at fault here.  They have to implicity understand the arrangement.  As the national debt of a nation balloons out of control, the only solution is to tighten the screws on the unsuspecting citizenry in order to recover the promise.  Money borrowed must be paid back, they claim, whether the borrower squanders it or not.

But why should the citizens, who never saw or signed a legal contract to borrow the funds, be left holding the bag?  The answer, whether Regressives or Neocons want to hear it or not, is that they won't.  They will reject the currency, and therefore they will repudiate the national debt.  At this point, both liberals and conservatives will join hands in tightening the screws on American citizens.  And so the police state grows more wicked.

A couple of years ago I proposed the idea of repudiating the national debt as a matter of policy.  It has been done before in America (at the state level.)  The idea was not welcomed.  Many felt at the time there was no reason to be concerned.   In fact, today several economic schools advocate that any concern over the national debt is foolish in the era of paper money.  Why, the government can just print more!  These schools overlook or deny the subjective value of the currency.  They do not understand that all value extends from the human mind.  These schools view value as a result of mechanical functions that can be explained with simple equations.  Nuts.

Can We Legislate Away Gravity?

Governments have many bad ideas.  Falling prey to the belief that economic laws can be ignored or, even worse, that they do not exist is among the most dangerous.  Believing that you can borrow money forever on someone else's behalf is so foolhardy that proponents of these schemes would be tarred and feathered were it a simpler time.  In today's bizarro world of rampant etatism, these charlatans are instead awarded nobel prizes and large speaking fees.

No supporter of liberty can look upon the world of government finance and the views of government economists without complete revulsion.  To even give such ideas more than the fleeting moments it takes to note their lunacy is to waste your own precious time. 

These debts will be repudiated.  They will be rejected by the people. It's not a matter of "if" but a matter of "when."  For Greece, "when" is now.  For the rest of us, the time is coming. 

I suggest you take the time now to protect yourself from the inevitable, but if you prefer to be run over by the stampeding horde as it scrambles to convert its last pitiful savings into something real, be my guest.  I ain't gonna stop you from believing in fairy tales.  Just don't crap on my Twinkie and tell me it's frosting.  Deal?

David in Qatar

17 Comments – Post Your Own

#1) On June 22, 2011 at 3:03 PM, Jbay76 (< 20) wrote:

Deal!

Another great post David

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#2) On June 22, 2011 at 3:05 PM, catoismymotor (< 20) wrote:

Good rant! It may unfold as you say. Time will tell. I can't do much more than I have to position my portfolio. Sadly each of us are along for this ride.

BTW: Isn't a brown coated Twinkie called a Dingdong?

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#3) On June 22, 2011 at 5:52 PM, whereaminow (< 20) wrote:

Thanks jbay!

Cato, you always have me cracking up dude! 

David in Qatar

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#4) On June 22, 2011 at 6:32 PM, rfaramir (29.34) wrote:

I gotta think a bit more about why the Greeks would be buying gold in such large quantities. They use the Euro, and it's not like euros are in any more danger of sudden valuelessness in Greece than anywhere else in Europe, are they?

Or are they? Maybe they see Greece leaving the Eurozone, reinstituting a local fiat currency, and they are already rejecting the new drachma before it happens!

Just say No to a store of value that cannot store value!

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#5) On June 22, 2011 at 6:52 PM, dbjella (< 20) wrote:

If Greece repudiates its debt doesn't it still have a problem?  It spends more than it takes in and has future obligations with insufficient taxes to cover those obligations.  So, they still need to borrow don't they.  If they repudiate, then who would take on the risk of the new debt?  ....our Federal Reserve?

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#6) On June 22, 2011 at 7:42 PM, ChrisGraley (29.73) wrote:

dbjella, no one will take on their debt if they repudiate. Their only option will be to leave the Euro and print Drachmas. 

All those retired 45 yr olds are taking notice and have figured out that being on a fixed income at 45 isn't such a good thing if the money that you are being paid is suddenly worthless.

Buying gold now is the only hope many of these people have. 

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#7) On June 22, 2011 at 7:56 PM, rfaramir (29.34) wrote:

 

The good thing (for them) about repudiating their debt is a clean slate to start over, without so much of their past sins hanging over their heads.

The bad thing (for them) about repudiating their debt is that no one will lend to them again. So any problems they have will have to be paid for with their own money.

The good thing about repudiating their debtis that since no one will lend to them again, they'll be forced to only overspend other Greeks' money, which means they'll feel the pain of their mistakes earlier this time, instead of papering it over with foreign loans.

The bad thing about repudiating their debt is that they'll think they can continue doing the failed things that got them into this mess (socialist overspending other people's money).

 

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#8) On June 22, 2011 at 8:24 PM, whereaminow (< 20) wrote:

Doug, 

They are many ways to look at the issue, and Chris and rfaramir have covered several of them.

One thing I would like to add is the impact of debt servicing on the people.

Think about it this way.  And we'll use Greece as the obvious example.  First, and let me get this out of the way, when the citizens fall prey to socialist fantasies, I'm much more forgiving of them than I am of the interlopers who spun those fantasies.  Few citizens of any nation are actually socialists.  The intelligentsia and policy makers generally love to spin the socialst grail, but the man on the street sees only promises.  The common man can be a sucker.  That's for sure.  But I'm generally forgiving of the sucker, and much less forgiving of the promise maker.

So in the case of the Greeks, here you have big ole bags of cash, one after another getting shipped off to repay loans that the common Greek never agreed to (acquiesced, sure, but did not contractually agree to.)  That's capital for investment.  That's money to pay for goods and services.  That's money for medicine, food, housing construction.  That's money for education and entertainment.  That's money... gone.  Poof! 

And so we see a country with rapidly rising unemployment and falling standards of living.  And why?  So money can be paid back to public creditors based on promises, not actual contracts.  Not a single Greek is bound to owe the public creditors anything!

What the Greeks need to do is to turn the tables.  To go from being suckers to making suckers of the creditors.  These vultures lent money based on faux promises.  These creditors knew exactly what they were doing.  Keep the nation in debt and it matters little who writes the laws. 

It's time for the Greeks, socialist suckers or not, to take back their country. 

Sadly, they are already having the police state screws turned on them.  Their own countryman, dressed up in full battle gear, are weilding batons and tear gas in exchange for an increasingly worthless paycheck.  These "servants of the people" expose themselves as servants of the ruling class.

So it may be too late for the Greeks.  The iron fist may already have grown too strong.

But I'm rooting for the people.  So I'm rooting for the rioters.

David in Qatar

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#9) On June 23, 2011 at 11:32 AM, Betapeg (< 20) wrote:

whereaminow,

You're rooting for the rioters? Aren't they the socialists angry over austerity. Are you rooting for socialists!? :-P

Interesting bit about Greeks buying gold. It's serving as a check and balance on fiat currency. Would it be easier to buy gold or Swiss francs? Check this out. 

"Switzerland called off bond sales in November and December, saying it didn’t need additional funds to finance the budget. The benchmark 10-year note yields 1.80 percent, compared with Portugal’s 5.48 percent and Greece’s 9.06 percent. Soaring public debt in the 1990s prompted Swiss voters to approve a constitutional amendment requiring that revenue and expenses must balance over an entire economic cycle, though the government may run annual deficits. That restraint has paid off, pushing Switzerland’s borrowing costs to the lowest in Europe as investors rush to the safest investments."

Does this prove that a properly managed sovereign debt strategy works, thus making fiat currency very much still the best means of economic liquidity? 

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#10) On June 23, 2011 at 12:12 PM, rfaramir (29.34) wrote:

I'm rooting for the people, but not the rioters. I'm against initiating violence. They may claim they're just responding to violence done to them, but I think they're overreacting. A cut in benefits they have no right to to begin with is not violence.

When the people demonstrate peacably, I'm with them. When the police crack down violently, then I support violence back. But the rioters are initiating the violence. I'm not for that.

I'm rooting for the police to join the protests, once they look at their own worthless paychecks. But keep it peaceful, please.

If they don't keep it peaceful, and the police respond in kind, I'd like to say a pox on both their houses! It was the lack of respect for private property in the politicians they purposefully elected that got them into this mess. The rioters reinforce this lack of respect. They don't deserve a bailout, and it's lost money for anyone who tries. They've got the ruination they deserve. Leave them with it.

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#11) On June 23, 2011 at 12:36 PM, whereaminow (< 20) wrote:

rfaramir,

Well said!

David in Qatar

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#12) On June 23, 2011 at 1:38 PM, smartmuffin (< 20) wrote:

David,

I guess I'm less forgiving than you are.  I'm not sure the difference between agreeing and acquiesing is significant.  Especially in the age of the Internet.  Maybe back in the 1930s, people could claim that the common man just had no way of knowing what the New Dealers were up to.  Today, these things are no longer a secret.  It's right there in front of your eyes, if you choose to open them.

I don't think I'm some kind of psyhic or super-genius by virtue of knowing these things, and I suspect you don't think that of yourself either.  I'm not sure what the excuse is, then, of the people who DO support socialist policies.  In America at least, we still do have a functioning electoral process.  There is nothing inherent in the law that prevents Ron Paul from winning the presidency, and libertarians from winning 100% of congressional seats.  People choose.  They might choose based on ignorance, but the ignorance itself is also a choice.

When we elect politicians who make no attempt to hide their disdain for the free market, we, as a collective society are, at the very least, implicitly giving them permission to run up massive debts, debase our currency, and take away our freedoms.  You and I may not be making this choice, but a majority of our fellow citizens are, and a larger majority of Greeks seem to.  I feel no sympathy for the average Greek.  Nor will I feel any sympathy for the average American when it happens here.  Societies reap what they sow the same way individuals do.  Greeks and Americans alike wanted a bunch of free stuff from the government and checked the "bill me later" box, hoping the bill wouldn't arrive until after they were dead.  Oops!

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#13) On June 23, 2011 at 2:42 PM, whereaminow (< 20) wrote:

smart,

Good stuff dude, but I am in disagreement.  Hard to see it coming if you never learned what "it" is.  I was a statist once too, so I know the fog that such beliefs can cause. :(

David in Qatar

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#14) On June 23, 2011 at 8:44 PM, ChrisGraley (29.73) wrote:

smartmuffin, I understand where you are coming from and do agree a bit.

There have been more than a few times that I've looked at the Greeks and said to myself "How can they be so stupid!"  only to realize that we have the same views here.

Even on this site, where I think that we have a population that is very intelligent, we have people selling the same beliefs and other people that are buying.

Some inflation is good for the economy...

Government only has the best interest of it's citizens in mind...

The people that you elect will not take advantage of power...

We can borrow our way to prosperity...

Buy now pay later...

Debt is different for countries than it is for individuals...

I can be mad at the stupid, but I can't fault them for it. What I can fault is the people selling stupid. 

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#15) On June 24, 2011 at 7:59 AM, skypilot2005 (< 20) wrote:

  On June 23, 2011 at 8:44 PM, ChrisGraley (99.66) wrote:

"I can be mad at the stupid, but I can't fault them for it. What I can fault is the people selling stupid. "

A recent example of "stupid" here at The Fool is the leadership "pronouncing" that the Consumer Financial Protection Bureau  (CFPB) is going to be great for the country.

Then, running a "lame" follow up piece after they were challenged for not being "Motley".

 

Sky Pilot

 

 

 

 

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#16) On July 19, 2011 at 3:57 AM, mtf00l (50.20) wrote:

rfaramir,

I realize I'm way late to the party however, if Greece repudiates I think there will be many banks lining up to loan them money so the process can begin anew.

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#17) On July 19, 2011 at 5:17 PM, rfaramir (29.34) wrote:

Banks will always be stupid about supporting sovereign spending, even though those are the riskiest clients, since they can default with near impunity, unlike private persons.

But hopefully it will be at a higher interest rate. Much higher. Once bitten, next time maybe a little more cautious? Maybe? Depends on how stupid they are and how much their local government overlords lean on them to support a fellow regime.

A higher interest rate will only help the Greeks manage their spending better. It may hurt enough to make them think before spending. At least a little. Probably not enough, though, as new fiat money creation inhibits free market interest rate formation. "Lowering interest rates" is a moral hazard from the client perspective, let alone a rape of purchasing power for all current currency holders.

End the Fed. 

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