Monday, July 19, 2010

The Trillion Dollar Question: Should the National Debt be Repudiated?

Jeff Hummel emails:

I have been PREDICTING that the U.S. government would default on its debt since 1993. But I have been ADVOCATING total repudiation of the government's debt for much longer. My article making this case from the August-September 1981 issue of CALIBER (publication of the Libertarian Party of California) is now available as a pdf download on my personal webpage (

I've accompanied the article with a caveat that includes the following: "If I were writing it today, the article would be a little less strident, and my discussion of the economic consequences of repudiation would be more sophisticated. I would tone down some minor hyperbole in the article's opening section. In particular, the 2007-08 financial crisis has convinced me that I was much too blase about the short-run consequences of a U.S. repudiation. But I still think my long-run economic analysis is correct, that my moral case for repudiation is justified, and that my historical examples (which could be expanded and extended to other cases) are telling."

Hat Tip: I would like to thank Less Antman for originally publishing and editing this article, and Ross Levatter and Buzz Grafe for helping me create this pdf copy to post online.

Jeffrey Rogers Hummel teaches economics at San Jose State University


  1. I agree that the costs of default are overrated compared to inflating away the debt, but it does not have to be a complete dichotemy. Monetizing debt is inflationary, but default is probably deflationary. Debt is partially a subsitute for currency. Banks can use it as collateral for lending. You could purchase assets offering debt in exchange. There is almost certainly a Pigou effect when bonds are issued allowing people to “save” (as the MMTers would say). Very high debts might lead to expectations of monetization of that debt, increasing inflation expectations. Default is a way to reduce those expectations. Debt paid by taxes reduces people’s future wealth by the amount of the taxation and so a default would reduce people’s expectations of the future tax level, perhaps generating some supply side effects. Perhaps there is some split between monetization and default that would allow for a stable price in the event that a government cannot raise enough money to pay for the debt via taxation.

  2. I never personally borrowed any money from China to finance wars and ponzi schemes, and in fact, if I had personally had the power to put a stop to such nonsense, I gladly would have. So, debt repudiation has my blessing.

  3. "I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson to John Taylor, 1816

  4. I haven't read Jeffrey's essay and perhaps he deals with the following: Why can't we simply charge the people who incurred the debt? The politicians and bureaucrats who's jobs were created by this debt. We could set them up on a very convenent monthly payment plan.

    Better yet, why not simply close down all government and direct the saved money to repay the debt. The debt holders (many are U.S. citizens) could than re-invest the money they received in new businesses to employ the laid off bureaucrats and politicians. This sudden increase in private voluntary commerce would have a dramtically positive impact on productivity. And as soon as the debt was repaid, just imagine the benefits to all U.S. citizens in reduced taxes and increased productivity.

    Government is always and everywhere a burden, an expense a barrier to human well-being. Our goal should be to move assets out of this coercive life-crushing sector and into the voluntary life-giving sector. Why screw the debt holders which destroys the idea of living up to your promises? Better to repay them by eliminating government and they will re-distribute the WEALTH!