In recent weeks, there has been some discussion over how to handle the soaring public debt of the United States; how that debt--its extent & the method by which it is managed--affects the credit worthiness of the United States & the likelihood of default on that debt; finally, the effect of such phenomena on the future economic well being of the people of the United States. There was also a hue & cry, when a popular financial rating agency issued a minor downgrade of the quality of that debt.
In this essay, we will focus on the question of debt default, debt ratings or evaluations & Constitutional, philosophic & moral issues involved with such. We will also suggest that the Standard & Poor evaluation of present Federal debt offerings remains absurdly high; that the recent downgrade was both late & inadequate, continuing a fantasy that misleads savers & investors, while accommodating demagogues & scoundrels.
While we cite the most relevant provisions of the United States Constitution, the whole document should be studied in connection with this discussion--particularly the full context in Article I, Sections 8, 9 & 10, from which the following passages are taken. Understanding context is always essential to perceptions required to rebut common misconceptions, promoted in political circles & circulated in the mass media. (Note the Constitution in the linked articles, that follow.)
The power to borrow money on the credit of the United States is specifically set forth in the second paragraph of Article I, Sec. 8. The fourth & fifth paragraphs of the same section read:
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
The functional linkage of money with weights & other measures was no accident. Clearly the context of those short paragraphs proves a desire that money have a fixed value, standardized as other measures used in commerce; a specific value that the Government is supposed to protect.
The fourth paragraph of Article I, Sec. 9, provides:
No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
While the Sixteenth Amendment now permits tax on incomes, proportioned to income not census, it does not alter the fundamental thrust of the Constitution against punitive policies that penalize some people for the benefit of other people.
The first paragraph of Article I, Sec. 10, provides in part:
No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any . . . ex post facto Law, or Law impairing the Obligation of Contracts . . .
Clearly, the Founders intended to prevent any State from undermining the monetary standard, or impairing the obligations of contracts--the bargains that a free people make with one another.
Under this precisely crafted, even handed, approach to fiscal & monetary responsibility, the Founders' posterity--as well as those who joined them in the days when we were less harshly governed, less crowded & less dependent upon the leave of politicians & bureaucrats to follow our individual lights;--all prospered beyond the prior expectation of any of the constituent human stocks, represented here, in their lands of origin. The Founders' system worked. We have not done so well, since we turned from that clear vision to the quackery of Keynesians, who have altered our measures--the monetary standard--taking much of the predictability out of economic decisions.
The subject is debt default. Let us define it! Surely, when one person loans another money; or sells goods or services for a future promise to pay; or buys the debt obligations of a government, public agency or private obligor, there is (or certainly was, before Keynesian manipulation became acceptable) a reasonable assumption upon the part of one extending credit, that he or she would receive back an equivalent value for value extended. Anything less, most clearly, impairs the obligation of a contract; and is, to the extent of that impairment, a default. Have holders of debt, denominated in a sum certain in U. S. Dollars, been receiving back equivalent value for extensions of credit since the 1930s? Perhaps during brief, deflationary, periods. But what has been the norm?
Since 1933, we have repeatedly defaulted on our debts in real economic terms. We may pay a "dollar" for a dollar owed, but that dollar has been devalued; first by FDR, from 1/20.67 to an ounce of gold to 1/35 ounce of gold, and then--by fits & starts, after Nixon was forced to abandon the gold exchange standard in 1971--to the Bernanke/Obama dollar, now worth less than 1/1750 to an ounce of gold.
In earlier looks at money & gold (below), we noted a decline in dollar value, since 1930 &/or 1933, at compound rates in excess of four or five percent--certainly destructive. But except for the Roosevelt devaluation from a gold dollar at 1/20.67 to the ounce, to a gold/exchange dollar at 1/35 to the ounce, we did at least maintain a partial gold standard until 1971--providing some protection to debt holders during that period. Now, if we compare the early 1971 dollar to the present Bernanke/Obama dollar, we have a 98% devaluation over just forty years. That works out to a loss compounding at better than 9.3% per year--a rate of default, catastrophic to anyone trusting in his Government to do the job it was created to do.
Does this not raise profound moral & economic issues?
The moral issue, here, is more serious even than the economic, which we have already characterized as catastrophic. The United States are supposed to be governed under a Federal Constitution, established by free citizens. Yet present Government policy--and the Federal Reserve's Monetary powers are controlled by the Federal Government, even though the Federal Reserve actually belongs to the member banks;--Government policy has deliberately placed an additional burden on all who have extended credit, even those investing in a forlorn hope to provide steady income for their widows & orphans. This conscious undermining of the value of savings & investment, by cheapening the measure, the monetary standard, is absolutely indefensible as a moral proposition. America's savers, investors, her producing sons & daughters, have a right to the fruits of their labor & ingenuity. Plundering that expectation, in this manner, is the moral & legal equivalent to appropriating their labor against their will--effective theft & involuntary servitude.
This would be true, even if the theft were only a small percentage of reasonably expected value. But as we have shown, the rate of value confiscation has been cataclysmic. No one can justify this under a Constitution, ordained & established to "secure the Blessings of Liberty to ourselves and our Posterity" (Preamble)!
Let no utilitarian collectivist (no Jacobin, Marxist, Bolshevik, Fabian or Nazi demagogue) suggest that there is actually true economic benefit to America--other than to politicians & bureaucrats & a bought following--in creating this enormous uncertainty as to the true value of all contracts, all bargains & economic commitments. Anyone with a modicum of common sense will see in an instant how that uncertainty must hamper the quick decision making that was once the essence of a free market; the ability to adjust rapidly to ever changing conditions; the very qualities, essential to actually deal with such changing conditions as lead to the imbalances that stifle constructive progress.
The monetary quacks are as detrimental in a strict material sense as in that moral, ethical, one. We will continue to suffer them, only to our imminent demise as a significant factor in the annals of human history.
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