Why is the “Default” Option off the Table?

Matters economic distress many people of late.

Rightly so, too: debt continues to mount, and the ability to pay it back grows ever more in question.

On the table of political opinion lie two ways of dealing with this: austerity, and stimulus. In practical terms these could be called “spend less” and “spend more”. In actuality, they’re turned into “slowing the rate of growth of spending”, and “keeping the rate of spending growth right where it is”.

Tell me, then, why defaulting on the debt is not an option?

Global public debt has now amassed to more than twice the estimated value of the entire planet — all its resources exploited, every hectare of land industrially farmed, nothing left untouched. If that’s the case, then truly it cannot be paid back.

So why not look at the alternative?

Take my province of Ontario. Interest — at today’s minimal interest rates — on the public debt of this province is about to pass education spending for 13 million people and become the second-largest line item in the provincial budget.

It’s true that some decisions still have to be made — the current deficit isn’t quite under that interest expense. But to wipe out that debt with a simple “here’s 0¢, we repudiate it” would come close to balancing the provincial budget.

It would put money in people’s hands, too, since charges for the stranded debt in Hydro bills would disappear.

Yes, Ontario would have to live within its means going forward. So what? It should be, anyway.

Repudiation and default would remove a great millstone from this generation, and especially the ones that follow.

It would create manoeuvring room. Does transport infrastructure need more? Maybe now it could be found.

It would force the hands of politicians going forward, for the ability to promise “free goods and services” without raising the monies to pay for them would go away for a few years. Perhaps enough time to let the province’s electors get over the notion that you don’t have to pay for the goodies.

Now suppose we did the same thing Federally. Just wiped out the 80%+ of GDP that is the national debt.

Ottawa would be in surplus. Decisions could be made about reducing federal taxes, or adding federal programmes, or transfering tax points to the provinces to pay for things in provincial jurisdiction.

Again, there would be room to manoeuvre.

Again, there would be discipline imposed on political promises and behaviour. When you can’t go into debt, “value for money” suddenly takes on a new meaning.

If we were to back our currency at the same time — it needn’t be gold, or another currency: it could just as easily be backed by joules of energy — to stop it from being a debt-based currency (like all the others), we would see savings from around the planet move into Canada just for the safety.

Increased capital pools. Stable, patient money (because it’s not losing value in the way others are). Just what we need for a nation of entrepreneurs building the economy.

Meanwhile, as in the nineteenth century (during our first thirty years), a general deflation saving Canadians money year after year, instead of an inflation eating away at the underpinnings of their finances.

Hmm. Tell me again why we can’t have this option on the table?

Oh, yes. It would tick off the bankers.

Too bad.

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4 Comments

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  1. William F. Spaulding 24/05/2012 — 14:32

    Count ME in, I Love ticking off bankers, after all whatever ticks them off, is always good for the rest of us.

  2. Repudiating the debt is a sound idea, but I suppose we would have to go beyond that, and establish a new way of creating money. In our current economic system money is loaned into existence, and owed back with compound interest.

    The Inflation Calculator is a handy way to visualize the consequences of a debt-based economy. http://www.westegg.com/inflation/

    The important number to look at is the annual rate of inflation. Typically, in the US, it’s about three percent a year. Doesn’t sound like much, but it adds up over time because it is compounded, the same as interest is compounded on all that money that is being loaned into existence.

    When the interest-owed becomes unsustainable there have historically been periods of adjustment, called panics, recessions or depressions. These occur with remarkable regularity, and more frequently than you would imagine – about every sixteen years.

    http://goo.gl/Dh7UP
    http://history1800s.about.com/od/thegildedage/a/financialpanics.htm

    As a way of organizing an economy it is incredibly effective at stimulating economic growth. When your money loses value at an exponentially increasing rate, there’s a built in incentive to invest. Use it or lose it. In a debt-based economy it is not enough to save, it’s necessary to collect interest just to break even.

    Not only would we need a new way of creating money, we would need to protect our economy from the old system, which has a long history of rolling over any attempts at change. The real question is: how can an economy that sets reasonable limits compete with one that creates exponential amounts of wealth?

    • Interesting points, John. I look at Japan — two decades in a slow deflation, certainly remaining competitive enough — and wonder to what extent there are lessons there. The same is true of the long depression of the 1873-1896 period: gentle deflation, debt collapses, yet a period of sustained positioning.

      That’s not an answer, of course, but maybe it’s a starting point?

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