From: ekp@mcnc.org (Edward Pavelchek)
Newsgroups: sci.econ
Subject: Re: Confronting the Deficit/Debt Boogyman
Date: 16 Apr 92 19:38:07 GMT
Reply-To: ekp@mcnc.org (Edward Pavelchek)
Organization: Good place for a disclaimer

In article <1992Apr11.060220.4026@nuscc.nus.sg> ipser@solomon.technet.sg (Ed Ipser) writes:
>In article <8864@alvin.mcnc.org> ekp@mcnc.org (Edward Pavelchek) writes:
>>In article <1992Apr7.052044.25065@nuscc.nus.sg< ipser@solomon.technet.sg (Ed Ipser) writes:
>><In theory, we are all shareholders in the federal 'corporation' (all of
>><voting age, anyway). Of course, we are not all equal shareholders to judge

>>NO!! Shareholders enjoy limited liability, US citizens do not, and may
>>be liable for all federal debt.

>All right, lets get down to brass tacks.

>How are Americans, as individuals, corporations, and cities, counties, and
>states responsible for the federal debt? To analyze this question
>seriously, we have to hypothesize that there is some limit to federal
>borrowing, i.e. that there will come a time when lenders will be unwilling
>to buy new federal bonds. Lets not debate this now, lets just assume it.
>
>Let's suppose further that Americans continue to hold the line, politically,
>against tax increases and perhaps even demand and receive tax cuts (there
>is no economic sense in which new taxes are inevitable) and otherwise let
>the deficit run its course.

>What happens?

>First, those currently holding bonds suddenly face the prospect of not
>receiving interest or repayment of the bonds. What can they do about it?
>Nothing. If the government defaults, the value of the bonds is wiped out
>without further legal recourse. Under this scenario, people suffer in
>porportion to their holding of federal bonds.

In this scenario, we have Ed Ipser advocating the "sanctity of contract",
indeed.  No person who purports to further rightist or libertarian 
viewpoints could advocate defaulting without demonstrating hypocrisy.

>Now suppose that the federal courts are willing to entertain complaints
                      ^^^^^^ What about the World Court?
>from bond holders. What can they do? At best, they can treat the federal
>government as bankrupt or in Chapter 11, cutting its spending and selling
>off selected assets in an effort to recover the value of the bonds.
>Again, individual Americans are only affected in porportion to their
>holding of bonds insofar as the repayment is below face value.

Haven't municipalities been forced by the courts to levy taxes for
various purposes, against their free choice?  Don't honest Americans
wish to honor their promise to repay  debts?

>However, the most probable sequence of events would be, knowing that
>they are gravely at risk of losing their money, long before they refuse to
>lend altogether, bond holders will begin to demand higher rates of interest
>to cover a perceived risk. As interest rates on federal bonds increase, two
>things happen:
>  1) the whole process is accelerated; and
>  2) interest rates consume an ever higher proportion of spending.

Even more likely is that outside money will have to be borrowed in a
different currency.  By printing more dollars, the interest rate on them
can be kept under control.

>Still, we have not seen a threat to American citizens and their private
>property nor the solvency of the states, etc. At no time are American
>citizens liable above and beyond the politial process itself. American
>citizens will pay only insofar as a reduction in the net assets held by
>the federal government harms the US economy.

So you ARE proposing the trading of Yosemite and the Interstate Highway
System to, say, Japan, in exchange for old T-bills.  Just not Hawaii,
even if you could get a better deal.  I would recommend the sale of the
carrier battle groups and air force first - we will save much in
maintenance costs.

>Just what are the worst cases?
>
>  1) The bankruptcy of the federal government either slowly through a
>     credit squeeze or quickly in a credit crunch.

>  3) The federal government, faced with bankruptcy, runs amok suspending
>     the Constitution and seizing private property, etc.

>The third is most improble and would, in any case, most likely lead to
>the first case when American citizens refuse to cooperate and states assert
>protection of their residents. You seem particularly enamored with the

Morally, how can Americans repudiate a debt contracted by a legally
elected government and spent to their benefit, with their approval?

>It seems that the ultimate result, one way or another, is lower federal
>spending. Hardly an economic catastrophe.

No, since we can supply current taxes, federal spending would not
shrink, just more and more of it go to interest.  Then, as the economy
shrinks or expands with lack of road maintenance, police patrols, etc,
you will be proved right or wrong that we have too much government.

>In no practical nor legal sense are American citizens or states liable for
>the debts incurred by the federal government. In every real sense, the
>liability of Americans for federal debt is strictly limited to the assets
>held by the federal government.

In real sense, the bonds of the federal government are backed not by
specific assets of the federal government, but by its taxing powers,
and the health of the economy it wields these powers over.

Ed, I'm in strong favor of limiting the federal government in size and
power, but this thing Reagan started hasn't worked in 12 yrs.  He
thought if he cut revenues, Congress would be obliged to limit
expenditures - instead we have seen unprecedented peacetime deficits.
Now you seem to be trying the same approach again.
I just can't believe you are advocating default. 
Debt interest is
nearing 20% of budget; should interset rates double and only old
debt be recycled, then 75% of revenues would go to debt service.
Do you really think that it is more likely that tax rates stay 
constant, while SS is cancelled?


-- 
That is the land of lost content,       Ed Pavelchek   ekp@mcnc.org
  I see it shining plain,
The happy highways where I went
  And cannot come again               AE Housman