Americanly Yours

Promoting Free Markets, Free Trade, and Freedom!

Repudiate The Debt?

June 03, 2009 By: Phred Category: Uncategorized

I have been hearing a lot of talk lately about repudiating our national debt.

Last week, my mom even commented that she thought that we should cancel our debt so that we didnt have to pay back China.  No one can deny that my mom is very intelligent.  The old phrase “mother knows best” often applies, but in this case, mom is incorrect.

According to the US Treasury department, our national debt is currently $11,379,966,189,575.05 [$11.3+ trillion].  This amounts to over $37,000 per person! But, the above numbers dont paint the whole picture.  A while ago, I posted a link to a news story which claimed our “real” national debt totaled $78,800,000,000,000 [$78.8 trillion].

However, Richard Fisher who is President of the Federal Reserve Bank of Dallas recently gave a very interesting interview with the Wall Street Journal.  In his interview, he talked about “the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations… [that] we at the Dallas Fed believe total over $99 trillion.” Thats $99,000,000,000,000.  But that is just the money for the unfunded liabilities and the costs of retirement and health care that have already been promised.  That number includes neither the current national debt, nor does it include the proposals by President Obama and the Democratic members of Congress to expand national healthcare.  However, even without including new proposals, the total national debt is astounding to say the least.  If you add the Dallas Federal Reserve’s estimation of unfunded liabilities with our current national debt, you reach a total of over $110,000,000,000,000 [$110 trillion]!  This amounts to a total debt of  over $360,000 for every American citizen!!!

Repudiating the debt probably sounds like a compelling idea.  After all, our national debt is massive and will continue to grow, especially as baby boomers start to retire and Social Security and Medicare costs soar while revenues for those programs drop.

[[And by the way, Mr. Fisher far from being a Republican hack who criticizes every move made by Democrats.In fact, Mr. Fisher is a Democrat who served in both the Carter and Clinton Administrations.  He was also the Democratic nominee for Senate in 1993 against Kay Bailey Hutchinson.]]

With current liabilities of over $360,000 per person, repudiating the debt may sound like a great idea.  Afterall, that is a massive sum for each America to be responsible.  In fact, there isnt enough money in the entire world to pay this debt. But, repudiating the debt is a terrible idea that must be opposed.

Yes, China and other foreign nations now own an increasing amount of our national debt.  This of course represents a massive national security risk to America (I believe that it is the greatest current threat to our National survival).  It is a security risk because the Chinese and other nations can threaten to dump their American debt holdings (making them worthless) unless we comply with their demands.  However, repudiating the debt and telling nations like China that we are not going to pay them the money they lent us in good faith may be an even greater risk to our Nation.

First of all, while China is now the largest foreign holder of our national debt, they hold less than 7% of the total debt.  Allies like Japan, the United Kingdom, Brazil, European nations, Mexico, India, and Israel also hold significant amounts of our national debt.  China’s holdings of our debt represents about 25% of the amount held by foreign governments.  Repudiating the debt to spite China would not only hurt China, but would also hurt many of our allies.

These nations could respond by exiting free trade agreements (if we can unilaterally declare agreements null and void, so can they).

The American public actually owns a higher amount of the national debt than do foreign nations.  As of January 31st of this year, the American public held 31% of the debt while foreign governments held 29%.  Repudiating the debt would adversely effect Americans who purchased government bonds to save for their futures.  Remember those savings bonds that your grandmother used to give you when you were a kid?  Well, those would be worthless if we repudiated the debt.  So would the treasury bonds that many older people have bought to prepare for their retirement.

Another 41% (if you add the numbers up you get a total of 101%–not my fault, these are government numbers) of the national debt is held by the government.  For example, the Social Security Administration holds treasury bills for money that it loaned to the Treasury Department.  Repudiating this portion of the debt would only mean that it would have to be reissued later when the sectors of the government that loaned money out need it in the future to manage their budgets.

[[The above numbers came from The Skeptical Optimist who used only government data.  The data is linked to in his article.]]

Besides all of this, of the $110,000,000,000,000 [$110 trillion] in total debt and obligation, only about 10% of that represents our current national debt.  Even if we repudiated the $11,379,966,189,575.05 [$11.3+ trillion] that we currently owe, we would still be responsible for a national debt of $99,000,000,000,000 [$99 trillion] in the future.  But if we repudiated the national debt, we could NEVER ever run a deficit again.  No foreign government would be dumb enough to loan money to a nation which had previously declared that its debt no longer existed.  That would be the definition of bad banking.  No financial advisor could ever recommend US bonds for his clients without being laughed at.

The political and economic costs of repudiating the debt are extremely high.  Like it or not, we are stuck with this debt.  However, we can think of this as a lesson.  If we balance the budget in the future and pay back the debt over the next 30 years (the maximum time a US treasury bond can be issued for) we will have plenty of time to think about the costs of running large deficits for so long.  All of the interest on the debt which is paid out should serve as a lesson for future generations of Americans about the importance of living within their means.

Repudiating the debt would make it impossible to pay for the bloated government programs which have already been promised to generations of Americans.  Im 100% for balancing the budget.  I believe that we should balance our budget and begin to wind down our entitlement and discretionary programs as fast as possible.  This debt should be taken care of the right way.  In this case, the right way happens to be the hard way:  We must oppose new government programs and discretionary spending, we must balance our budget, we must cut taxes to ensure economic growth, and we must pay back our national debt to those who have put their faith in us and loaned us money.

Americanly Yours,

Phred Barnet

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Want A Bailout Of The Automakers That Is Guaranteed To Succeed? Bailout Toyota!

November 21, 2008 By: americanlyyours Category: Uncategorized

There has been lots of talk about an auto industry bailout. Apparently GM and Chrysler are both in imminent danger of collapse, while Ford has enough money to last through 2009, and claims that it will be profitable in 2010. Quite a few members of Congress have been floating several plans to bailout the “Big 3” US automakers, including a plan that would have the government take ownership stakes in the 3 companies (which is interesting because the combined market value of the 3 companies is less than the $25 billion that the government wants to inject into the companies) and appoint a “czar” to run them.

Sure, we could bailout these 3 large, iconic American companies. The rationale behind the bailout is that it could save a lot of American jobs. Yet, with the possible exception of Ford, I see little chance that any of the 3 companies will be able to completely turn around in the future. Instead, I see continued plant closings and lay-offs in the US along with continued losses. I think that bailing out GM, Chrysler, and Ford will just prolong the bleeding. The truth is that even if the bailout is a huge success and the companies survive, the Big 3 automakers will still close down all (or nearly all) of their American plants. The proponents of the bailout argue that the bailout is necessary to save American manufacturing jobs, but in the end, this will still result in the job losses that the proponents of the bailout are seeking to avoid. True, if the bailout works these cuts will come over the next 5-10 years, rather than all at once, but nevertheless they will still come. It seems to me that this type of bailout will end up subsidizing companies for cutting American jobs, rather than creating jobs.

For the record I oppose bailouts, but if there has to be a bailout, I have a better idea. Rather than subsidize 3 large automakers who have done nothing but cut American jobs and hemorrhage money for the past decade, we could subsidize 3 profitable automakers who in the past decade have greatly expanded their employment of American workers while earning large profits. I am talking of course about Toyota, Honda and Nissan.

You can argue that these companies are not “American” companies. This is true, these companies are headquartered in Japan, yet they do employ many American workers. Ford is headquartered in America, but I often wonder if there is anything besides that which makes it an American company. For example, I drive a Ford Fusion (which I love). My car was designed by Japanese engineers and built in Mexico with Chinese parts. I don’t really know what makes it an American car. If you buy a new Toyota Camry you will find that it was built in Kentucky. Japanese automakers also increasingly use American made auto parts in their cars. From 2000 to 2006, Japanese automakers’ purchases of American parts increased 53% to over $48 billion. And while the American Big 3 has been racing to close down its plants and produce its cars outside of the US, 63% of Japanese cars purchased in the United States in 2007 were manufactured in America.

Between 2004 and 2006, Toyota, Honda, and Nissan have created 4,715 jobs, increasing their employment of American workers by over 8% to over 63,000 workers, while Ford, Chrysler, and GM’s American workforce was cut by 23,264 jobs—cutting over 12% of their American workforce. [[Note, these figures were really hard to find, and the American Big 3 cut an additional 30,000 employees in 2007, bringing the total down to just over 129,000, however I could not find any statistics for the Japanese Big 3 for 2007.]] In that same time span, Ford, Chrysler, and GM have lost billions of dollars, while Toyota, Honda, and Nissan have made billions of dollars. Simply put, the Japanese Big 3 has produced much better results. The Big 3 Japanese companies clearly have better business models, and they have created thousands of jobs while Detroit’s Big 3 has cut thousands of jobs. Loaning the bailout money to the Japanese companies rather than to the American Big 3 will create necessary jobs which will most likely be filled by the highly skilled workers who will lose their jobs when the American Big 3 collapses.

Also, which Big 3 do you think ahs a better chance of paying back a $25 billion loan, bloody Detroit, or profitable Japan? And, if the government has to take an ownership stake in 3 automakers, I would rather it take ownership stakes in Toyota, Honda, and Nissan than GM, Ford, and Chrysler.

Besides producing technological innovations, Japan’s Big 3 is also the industry leader in producing environmentally friendly cars. The Toyota Prius and the Honda Civic Hybrid are great examples of popular hybrid vehicles which Detroit just cannot produce.

It is not just American automakers who are in “need” of a bailout. European automakers have asked their governments for a $40 billion Euro ($50 billion) bailout. Even China is now in the process of bailing out their automakers. The Japanese automakers are the only automakers in the world that are not in need of a bailout. Why fight against the inevitable? The whole world knows that Japanese car companies can make cars better and more profitable than any other group of automakers on the planet. Rather than extending the miserable lives of failing car companies, we should euthanize them and embrace the success of the Japanese Big 3. When companies can efficiently produce a great product and sell it at an inexpensive price, we all win, regardless of where the companies are headquartered.

Obviously, these companies are so well run that they don’t need a bailout. The auto industry in America is still strong; it just so happens that the strong producers of cars in America happen to be Japanese. So what? America is a Nation of immigrants. Maybe giving Honda, Toyota, and Nissan low interest loans to expand American factories could convince them to immigrate to America and move their headquarters to Detroit.

We should reward innovation and punish sluggishness. Thanks to Honda’s innovations, a Honda factory in East Liberty, Ohio can switch from manufacturing Honda Civics to making Honda CR-V’s in only 5 minutes. However, a Ford SUV factory in Michigan is switching its production from SUV’s to small cars, but because of a lack of innovation at Ford, the factory is shutting down for 13 months to retool, which is costing the company $75 million.

Bailing out Detroit will subsidize bad behavior, similar to giving a juvenile delinquent child a raise in allowance in the hopes that it will somehow change his behavior (if you think that will work, ask my parents). The government should reward good behavior, not bad behavior. Rather than raising the allowance of the bad kid, why not reward the good child? Wouldn’t this be a valuable lesson, not only to the “children” involved, but also to all the other children out there (airlines). “Bailing out” the Japanese Big 3 will lead to the creation of American jobs, increased research, and increased profits for these companies. Bailing out Detroit will only extend the pain and slow bleeding.

Americanly Yours,

Phred Barnet