Looming Treasury “Default”: Theater of the Absurd
By Robert Higgs • Wednesday July 6, 2011 8:17 AM PDT • 16 Comments
For weeks, we have been treated to comic opera in D.C.’s theater of the politically and economically absurd. On the stage, the actors—President Obama, the Secretary of the Treasury, congressional leaders—hop about, shouting moronic lines about the national “default” that will occur unless the government’s statutory debt limit is raised, reciting Chicken Little lines about how such a default will trigger worldwide economic catastrophe. According to a report in yesterday’s Christian Science Monitor,
Facing an Aug. 2 deadline, Congress and the White House are stepping up face time to avert what the Treasury Department has called “catastrophic economic and market consequences” of a default on the national debt.
Think about this statement. Have governments defaulted in the past? Of course, they have, on hundreds of occasions over the centuries. Have these defaults triggered “catastrophic economic and market consequences”? No. When a government defaults, there are consequences, of course, including heightened reluctance of lenders to lend to the deadbeat government in the future or at least to lend at such favorable interest rates. Often partial payments of principal and interest are arranged or debts are restructured. The world keeps spinning.
Has the U.S. government ever defaulted before? Yes, in 1933, by refusing to honor the gold clauses in its bonds, the Treasury engaged in a massive default. Ironically, for mainstream economists and economic historians, the government’s abandonment of the gold standard, along with its associated default on its gold obligations, is seen as the decisive government action that stopped the Great Contraction and set in motion a recovery from the Depression. (Don’t laugh: for some time, this interpretation has been the reigning view in academia.)
If we attend to the lines being mouthed by the actors in this absurd play, however, we see quite plainly that the whole “crisis” is as phony as a $3 Federal Reserve note.
Despite a sense of urgency acknowledged by both sides, partisan positions are still far apart. Republicans say that tax increases are off the table and that a debt deal must include trillions in spending cuts at least as robust as the trillions the White House aims to add to the debt limit. Democrats aim to protect entitlements such as Social Security and Medicare and are pushing for new spending to stimulate the economy.
Mr. Obama said on Tuesday that a “balanced approach”—combining spending cuts and tax increases, including cutting tax breaks for the rich—is within reach.
“I believe that right now we’ve got a unique opportunity to do something big, to tackle our deficit in a way that forces our government to live within its means, that puts our economy on a stronger footing for the future and still allows us to invest in that future,” Obama told reporters.
In response, House Speaker John Boehner (R) of Ohio said that tax increases, even those targeting unpopular loopholes, are not politically feasible.
“The legislation the president has asked for—which would increase taxes on small businesses and destroy more American jobs—cannot pass the House, as I have stated repeatedly,” he said in a statement. “The American people simply won’t stand for it. And their elected representatives in Congress won’t vote for it.”
In short, the whole show is a farce, nothing more than a convenient occasion to seize a public-relation lever to move a mass of money out of the taxpayers’ bank accounts into the Treasury’s account at the Fed—but only for an instant, because the Treasury has plans to spend every cent it snatches and, of course, to spend even more, financing its profligacy by going even more deeply into debt (again, not the government officials’ personal debt, but yours and mine, to be serviced under threat of fines and imprisonment).
If you had maxed out your credit cards and nobody would lend you a dime, you would have to bring your expenditures into line with your income. Going ever more deeply into debt is universally recognized as ruinous for any individual or family. Yet people seem to believe that this simple economic fact of life does not apply to an organization that styles itself “the government.” Of course, this gang does have an option that you and I do not have: the ability to threaten violence against the peons it rules in order to make them hand over loot. But this option has obvious limits, and when those limits are reached, increased borrowing by the government portends the same ruinous outcome that excessive indebtedness brings to an individual or a family that consistently lives beyond its means.
In the case of government irresponsibility, however, the ruin takes a somewhat different form: it comes not to the irresponsible decision-makers themselves—members of the criminal gang can expect to get off scot-free. The ruin comes to those who were foolish enough to permit such criminals to rule them in the first place, and hence to strip the society of potentially productive resources and to divert those resources to wasteful uses and to the enrichment of the gang’s principal supporters and crony capitalist pals.
Sail on, sail on, Columbia! Even if this crackpot-criminal gang gets its debt limit raised in the end—and it almost certainly will do so—its heading remains on course for a smash-up on the bigger rocks ahead.
Tags: American History, Budget and Tax Policy, Economics, Great Depression, Politics, Taxation, The State 
Great points, Bob. The whole thing has a mystical, semi-religious aura, as I noted a few weeks ago:
http://organizationsandmarkets.com/2011/05/30/the-treasury-bill-as-myth-and-symbol/
Peter Klein | Jul 6, 2011 | Reply
Obama promised to go over the federal budget, line by line, and cut out the waste, fraud and abuse of taxpayer funds. He has not done it. The billions that are spent on stupid projects that benefit nobody except the recipients, continue to be snuck into the budget bills, along with funding for duplicate and outdated projects and bureaus (100 billion dollars worth). Unneeded subsidies in the agricultural department (why are we subsidizing tobacco and land barons who don’t want to grow anything), overpayments to government contractors for ordinary things that can be obtained at a hardware store, overpayments for salaries and pensions to rich people that don’t need our money, and of course, the pork barrel spending for unneeded projects. Meanwhile, the elderly, children and disabled who need the money to survive are being cut from the Budget. And you wonder why we, the people, are angry?!!! we don’t like or trust the congress anymore, to do the right thing. It seems that when you get to DC, you become these greedy, self-serving, do-nothing for the people you are supposed to serve, kind of people that we were trying to replace in the last election. What’s with that?!!!
Carol Friendly | Jul 6, 2011 | Reply
Mexico and Canada are looking better than ever.
ralph | Jul 6, 2011 | Reply
“The ruin comes to those who were foolish enough to permit such criminals to rule them in the first place”
It don’t think “permit” really had much to do with it. I recognize the overwhelming power of “such criminals” so I submit. Whether this submission is foolish or not is debatable. Certainly it will cost me.
steve | Jul 6, 2011 | Reply
Uruguay is looking particularly appealing. Need to learn Spanish....
Steve Hogan | Jul 6, 2011 | Reply
I agree this whole debt ceiling is staged.
I thought we are still in some economic war with communist china? China is holding over 35% of all US T-bills [china has been known to buy up as much as 65% of Tbills during auctions].
So if the US defaults, China doesn’t get paid. Since China’s reserve currency is effectively the US dollar, I’m thinking the global economy as a whole is a farce and socialism [or dictatorships] will come back to countries that do not have sound currencies.
aj | Jul 8, 2011 | Reply
If the US does not pay China for the upcoming maturing Tbills, China will be forced to change their buget expenditures. They probably could burn up some of their savings; reduce their subsidize for exporting goods [to the US and Europe]; They possibly could nationalise US corporations that reside in China causing havoc on US markets.
aj | Jul 8, 2011 | Reply
Bob,
What do you say to the claim by Terry Zivney (Ball State U., finance), cited in a Wapo article by Brady Dennis, that there was a brief partial default in 1979 that cost tens of billions of dollars through an increase of 1/2 point on T-bills? In fact, the article seems to suggest that that was the only episode of partial default in our history.
Voltaire in '08 | Jul 11, 2011 | Reply
Do These Things and the Debt Crisis Disappear Overnight
Obama, Geithner and Bernanke (all members of Hillary’s shadow government) continue their insane orgy of spending and looting our economy for their cronies and special interests.
If Hillary’s puppets, Barack Obama and Kathleen Sebelius, sincerely wanted to lower unemployment (9.1%) and underemployment (18%), they could do, oh so easily:
• Repeal Obamacare post haste….why spend a trillion dollars to buy health care for the 32 million Americans who are currently receiving it for free right now?
• Give current Medicaid and Medicare recipients vouchers and let them purchase whatever health insurance fits their needs…this would cut the cost of these corrupt programs by an amazing 70%.
• Commercial health insurance policies with enforceable deductibles and co pays would return the Medicare and Medicaid consumers to the real world medical marketplace! Doing so would lower health insurance premiums for the rest of us by a whopping 45%. Because there would be much less Medicare and Medicaid cost shifting (to the rest of us poor suckers).
• Sell all government hospitals…Army, Navy, Air Force, VA, US Public Health Service…sell all the government hospitals to the highest bidder…and instead, give this group of patients vouchers and let them buy with the vouchers, whatever health insurance that fits their needs….many of these patients would end up using the same hospitals, doctors and nurses… but for all parties, on a happier, more polite, more professional, outcome orientated, fee for service basis
• Issue a federal mandate that would allow patients to cross state lines, in order to purchase more competitive health insurance….in other words break up those cozy BCBS monopolies like the BCBS scam that Kathleen Sebelius and her trial lawyer cronies ran in Kansas, for years and years.
Do these things and bingo, our economy rights itself almost overnight. But continue as Hillary’s shadow government, including Obama, Geithner and Bernanke….continue as Hillary’s Marxists have been manipulating us, and we will continue our national slide into the abyss.
To learn more about Sebelius’ role in Hillary’s corrupt shadow government go to http://www.sebeliuscoverups.com or just search:
George Meredith MD Comments
George Meredith MD | Jul 11, 2011 | Reply
“Mr. Obama said on Tuesday that a “balanced approach”—combining spending cuts and tax increases, including cutting tax breaks for the rich—is within reach.”
This is the most direct and understandable description the regime has made on the subject. Mr. Obama simply proposes to reduce spending and raise taxes. Most folks would agree the purpose of federal spending is to provide public services; that is its raison d’être.
If we take away the ambiguous verbiage, he’s saying his policy is to charge more and do less.
Perfect.
Pfc. Parts | Jul 11, 2011 | Reply
“• Commercial health insurance policies with enforceable deductibles and co pays would return the Medicare and Medicaid consumers to the real world medical marketplace!”
May I assume you’re saying current deductibles and co-pays aren’t enforceable? Who would’ve known!
I’m not certain this is really doable given the old adage “you can’t get blood out of a turnip”. I suspect there will always be an economic class that isn’t able to pay its medical bills and that will be the albatross around the neck of MDs forever. It’s the attempt to spread that risk that’s led to institutions like Medicare and Medicaid in the first place; we can observe how effective those programs have been, providers still don’t get paid.
Aside from that, the rest of your plan looks first rate.
Pfc. Parts | Jul 11, 2011 | Reply
What’s the big deal about the debt limit? Why won’t the politicians just ignore it, the way they ignore every other law that gets in the way of what they want to do (the War Powers Act, the Fourth Amendment, etc., etc.)?
David Smith | Jul 13, 2011 | Reply