The National Debt (Part II)

In “The National Debt Part I”, I argued that the national debt should be every American’s greatest political concern, but failed to discuss in any substantive fashion the possible methods by which the problem can be addressed. Having discussed the size of the debt (12 trillion dollars and growing), the nature of its most obvious consequence (ever enlarging interest payments effectively destroying the capacity for American self-governance) and the economic state of affairs likely to follow if proper actions are not taken (hyperinflation), it is now appropriate to discuss the possible methods by which the debt can be addressed. Interestingly enough, USA Today's front page today reads, "Nation's soaring deficit calls for painful choices", so maybe, just maybe, WE THE PEOPLE are awakening to the severity of the problem we now face, which makes talk of solutions to the national debt even more appropriate.

In general, there are five possible courses of action: (1) raise taxes; (2) cut spending; (3) raise taxes and cut spending; (4) lower taxes and cut spending; and (5) print money.

But before discussing which of these are likely to achieve the goal of “getting the debt under control” or, dare I say it, paying off the debt entirely (yes, there was a time when the national debt was ZERO), it is necessary to consider the primary factor which transformed America from being the largest creditor nation to the largest debtor nation. Simply put, the cost of doing business is too high for businesses to compete on the global market. From income taxes, to complex regulatory regimes to huge social liability programs, American producers cannot compete with their foreign competitors. Because of this, capital has fled from the United States to the East.

Generally speaking, there are two methods by which this process can be reversed. The first - reduce the cost of doing business in the United States. The second - increase the cost of doing business in the East. The first, WE THE PEOPLE can control. The second, WE THE PEOPLE cannot control. Of course, this isn’t likely to stop the elites from trying. They are busily working towards a world regulatory regime under the guises of “fair trade” and “global sustainability”, but these are nothing other than thinly veiled attempts at returning capital to the West through control of the East. But it is unlikely that either China or the other wealthy nations will surrender their new found power without a fight. And with the West’s financial prowess weakening it is unlikely that a global government beneficial to the West is likely be established. In fact, if anything comes from attempts at world government it is likely to be a new creditor friendly system designed to help aid the East in its efforts to collect on current Western debts. For those of you who have seen the IMF’s method of debt collection, you have a pretty good idea of what international debt collection looks like. Needless to say, it isn’t pretty. Thus, the United States can either attempt to establish world government, create a uniform regulatory system balancing out the costs of doing business and send production back to the U.S., a long shot which risks placing the United States in a position of subservience to foreign powers, or WE THE PEOPLE can demand a lowering of the cost of doing business in our own territory.

If we are to avoid the “international debt collector” and the exploding interest payment which would result from the amount of time required to establish a global system of governance, Americans must put into effect an immediate change in policy within the United States, such that Americans can go back to work in the private sector creating goods which can be sold to the East in order to pay down our debts and get our financial house in order. That means farming, manufacturing and technology – not census workers, IRS agent and Feds.

Therefore, as to which policy the federal government should adopt in order to address the debt, the answer is clear - lower taxes and cut spending. Raising taxes will destroy our chances of ever paying back the debt as it will lead to even further flight of capital from the United States to the East (See Jamaica and other IMF debtors for all too illustrative examples of this process). Cutting spending is slightly better than raising taxes as it allows for what is left of our private sector to generate the tax revenue necessary to pay down the debt and also decrease or at least create a ceiling to further increases of the national debt, but such measures are likely to be too little too late - a mere band-aid on a bullet hole.
America’s economy is too weak. Once the Federal Reserve removes its 0% interest rate stimulus Americans are going to find themselves right back where they left off in the fall of 2008, tail spinning into the greatest Depression of American history. This, of course, is exactly what we need, but only if the cost of doing business is lowered to such extent as to allow the recession to run its course and Americans to get back to work. But without the lowering of the cost of doing business there will be recession, but no recovery. Thus, a decrease in spending by itself is insufficient to solve the problem of our national debt.

As for the options of “raising taxes and cutting spending” and “lowering taxes and cutting spending”, for reasons already discussed the latter is the preferable option. But only so long as a budget surplus is maintained and used to pay the principal on the debt. This will allow the interest payment to be driven downwards and the overall resources of the American economy to be freed up for greater and greater productive uses. Eventually, the debt should be brought to zero and the American people should act as the intelligent capitalists they once were, having the money work for them, rather than against them.

Now, the astute reader may be asking, but what of option five? What of paying our debts with the printing press? Indeed, it seems like an option any debtor would choose as it requires no raising of taxes and no actual work, which is why so many countries have chosen the path (See e.g., Zimbabwe and The Weimar Republic). But the consequences are not worth it. Life’s savings destroyed and earned wages unable to purchase the basic necessities of life will lead people to riot in the streets. To which governments will respond by marching military police armed with tear gas and other riot control tactics. What will follow from such chaos is impossible to say for too many factors are then at work. But beyond social unrest, is the fact that prices are the signals through which society orders itself. We know whether a job is valued or a good needed by the price it finds on the market. But where there is inflation, people no longer have access to the knowledge necessary to properly order themselves. The results are unemployment, shortage of some goods, surplus of others, and general market chaos.

But worst of all consequences is the lack of credibility that America will have with its foreign neighbors following the destruction of the dollar. Post World War II, the United States was entrusted as the guardian of the world’s currency. We told the world, use our Federal Reserve notes and we will keep them redeemable in gold. We revoked that promise long ago, but the world still depended on the Federal Reserve note, hoping that we would exercise the self-restraint necessary to maintain a stable international order. If we fail in this promise, if we inflate the dollar in order to cheat the world of the debts we owe them, not only will our reputation be marred, but the very backbone of the United States will be lost. We will no longer have the capital necessary to finance war or government in any form – our “money” will be valueless. Furthermore, we will become an enemy of the world as a breaker of promises and a rogue force amongst civilized nations. This, coupled with America’s military presence throughout the world, will lead to an international backlash against the United States of magnitudes previously unimagined. Of course, what will follow from this would then be up to the American people. They could choose to apologize, go back to work and make good on their promises. Or, they could do as their fathers have done, tell the world they care not for the contracts they make and will do as they please until someone can do something about it. And then, one day, someone might just do something about it.