From: ipser@solomon.technet.sg (Ed Ipser)
Subject: Re: Confronting the Deficit/Debt Boogyman
Organization: TECHNET, Singapore
Date: Thu, 16 Apr 1992 05:13:38 GMT

In article <8874@alvin.mcnc.org> ekp@mcnc.org (Edward Pavelchek) writes:
>No, my contention is that, in the minds of the lenders, the national
>debt is backed by that fraction of the total national assets which they
>expect the federal government to be able to 'mobilize' in service of
>that debt, not only by nominal federal assets.

Just what do you mean by "mobilize"? In particular, what can the federal
government do to "mobilize" an asset that a private owner cannot? More
importantly, why are economists so naive as to believe that the federal
government is politically capable of "mobilizing" resources (other than,
say, for war)? Didn't you guys learn your lesson with the USSR? Even
Lester Thrurow doesn't extoll the virtues of socialism anymore.

What makes you think that a political climate in which politicians
have to buy votes with deficit spending will suddenly change into
one in which people are willing to pay more in taxes and/or property
seizures than they receive in public "benefits"? The deficit, itself,
is prima facia evidence of a lack of political will to balance taxes
and spending if not an outright desire to run a deficit. In fact, I
submit that as interest payments become an ever greater percentage of
the federal budget, the alternative of running a surplus will become
increasingly remote.

Indeed, the easiest assets for the federal government to seize is
the federal bonds! It can effectively seize those assets simply by
defaulting on them.

In general, what happens when the political process is incapable of
balancing the budget?

Finally, even if we accept your argument that, "in the minds of the
lenders, the national debt is backed by that fraction of the total
national assets" (by which I assume you mean privately held assets)
what does that have to do with the deficit/debt? Increasing the
federal deficit/debt does not affect total national assets, only
the net assets legally held by the federal government! (Think of the
federal deficit as passing federal assets into private ownership
which is what is happening in net.)

>I'm sorry, but the federal government has not only the power, but the
>right and obligation to tax, confiscate, mobilize or seize the assets of
>you and I to pay its obligations.

I'm sorry, but the only legal authority that the federal governent has
to tax is through legislation and its authority to seize, confiscate and
otherwise mobilize private assets is, maximally, legislative and, more
importantly, unconstitutional. In particular, the suggestion that most
Americans are going to stand by while a Communist-style nationaliztion
of private assets takes place is absolutely loony. You're sounding more
and more like an advertisement for the NRA. (Stock up on ammo, boys, the
federal government's fixin' to come seize your car and home to pay
down the federal debt.)

>Are you not aware of several Colorado towns which were  incorporated by
>developers and issued municipal bonds to fund roads and sewers for,
>say, 10,000 people.  After only hundreds had moved in, the land boom
>ended, and no others bought in.  These people's property is now
>worthless, since the tax bill is greater than 10% of previous market
>value.

Without knowing more about the political structure of the town, I really
can't give meaningful comments. But suppose that the people of the town
voted their taxes down to 0%. What happens? The bond holders get shafted
instead of the property owners. The real question is what secures the
bonds. To what extent are the people of the town actually liable for the
debts of the municipal government? What recourse do the bond holders
have with respect to the municipal corporation and the residents? And
how does this compare with the federal situation? (Think of the Colorado
municipality as a failed business. If the bonds are secured, say, by the
assets of the municipal corporation, i.e. the sewers and roads, then you
could well have a bankruptcy judge handing these over to the bond
holders who would then charge for their use. Privatization.)

>>> >If bond holders are not worried about default or inflation, why
>>> >should we?
>
>Because they are backed by the country's net worth, not the
>government's.

This is unsupported either by legal or practical circumstances. I have
refuted this argument time and again (particularly in your separate
thread which I hope you are going to respond to at some point.)

>>The only true test of value is what the asset will fetch on the open
>>market.
>
>The only true test of the parts of RJR was their sale on the open
>market, true, but banks and brokers loaned $20B on them.  I think 
>they had previous estimates which they trusted.

The previous estimates are theoretical at best and the motivation for
obtaining accurate estimates is to avoid getting stuck with worthless
bonds or getting forclosed on. Again, I don't know what secured the bonds
in this situation but someone took a calculated risk in the loan procedure.
Either way, though, the important economic consequences of the sale were 
the effects on the productivity of the RJR parts (under new management),
not the structure of the debt arrangements.

>Your estimates, please.

Ask a banker or a broker. Better yet, ask someone who rates bonds.

An interesting question:

Suppose that bond raters (who give federal bonds a AAA+++ rating) are
basing their estimates on the assumption that, sooner or later, the federal
government will run a surplus and pay down the debt. Now suppose further
that the political situation does not change, that the deficit keeps on
climbing. Will we get a slow disolve of bond rating or will their be a
bubble pop with the bond rating going from AAA+++ to junk?
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