Repudiating Public Debt

"That's a helluva good idea."
--Lou Brown (Major League)

My a-ha moment of the day came from this Rothbard article. In it, Rothbard contrasts private debt and public debt. He also suggests that public debt should be repudiated.

Stated differently, Rothbard thinks that we should default on our public debt.

Private debt involves a borrower who contracts with a lender for the use of some of the lender's property (usually in the form of money) for some period of time. Typical terms require the repayment of principal plus interest over some period of time. If the borrower takes on more debt than can be repaid, then the debtor has effectively stolen property that belongs to the creditor. One individual has committed an act of aggression against another's property.

In a just society, only voluntary forgiveness by the creditor would let the debtor off the hook. Otherwise, government's proper role is to assist the creditor in defense against this aggressive act. (As Rothbard observes, draconian 'debtor's prisons' are seemingly ineffective in this regard as they inhibit the debtor from working to pay back the delinquent loan.)

Where property rights are respected, private debt is policed by the need to repay the creditor; there is no bailout coming from the government. The price of credit (a.k.a. the interest rate) also governs lending in unhampered markets. Borrowers deemed to be higher risks will be charged more by lenders.

Public debt is different.

In public debt transactions, the borrower is the government. Both the borrower and the lender understand that the loan will be paid back not out of the pockets or hides of politicians, but out of the looted pockets of taxpayers. And here is my 'a-ha' straight from Rothbard:

"The government gets the money by tax coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future."

Rothbard really connects the dots here. A buyer of government bonds is essentially funding government projects under the expectation that government will plunder its people for repayment. That plunder occurs through either direct appropriation of property via taxes, or indirect appropriation of property via inflation. Either way, holders of government bonds can be seen as proponents of forceful invasion into the freedom of others.

Why should citizens be bound by debt taken on by a ruling elite that contracted these debts at the citizens' expense?

Rothbard suggests that the just and least destructive way to settle such debts is outright repudiation (read: default). Various US states have done so before, including waves of defaults following the Whig-run Second Bank of the United States inflation/bust of the late 1830s and the end of Reconstruction in the 1870s.

But wouldn't default destroy the credit of the United States? Wouldn't future borrowing costs would go through the roof as no creditor in his/her right mind would lend to a country that has defaulted on $trillion$ of loans?

Precisely, says Rothbard. The primary argument for repudiation is that it impairs future regimes from taking on public debt again. Savings and investment stay where they make the most impact - in the private sector. Moreover, private sector contracts are voluntary, and no one is forced to borrow and repay (as is the case with public sector debt).

One implication for me personally is that, if I want to be consistent with this idea (and I do), then I should not own any government bond that employs taxes as means for repayment (which is essentially all of them). Today I sold all of my government bond exposure except for cash proxies that might hold short term paper directly or indirectly tied to the government. Given the arrangement of most securities accounts, not sure how I can avoid cash-like instruments that carry short term government debt exposure.

At any rate, I now understand that if I buy government bonds, then I am sanctioning the use of force on others.

no positions