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A $5 Trillion National Debt

Hans F. Sennholz

By the time you read these lines the debt of the federal government will have passed the $5 trillion mark. Does it surpass your imagination and ability just to write the number? How many digits does it take? Are you aroused and alarmed about the ever-rising debt? Many Americans are fearful that it will lead to bankruptcy in one form or another.

They are right if we define bankruptcy in the broadest sense: the inability or unwillingness to pay legitimate debt, causing a loss of faith and reputation. In this sense, the federal government went bankrupt on the first day it resorted to inflation. After all, inflation is an insidious policy which allows government to make payment in depreciated dollars. The U.S. government has willfully inflated the dollar ever since the 1930s, has defaulted internationally on its gold-payment obligations, and continues to plunge into domestic and foreign debt without any thought of repayment.

If we view bankruptcy as the condition of being judicially declared bankrupt, the federal government cannot go bankrupt. There is no power on earth that can force the U.S. government to disclose all its properties and distribute them equitably to its creditors. Even if there were such a supreme authority, the American people probably would rise in anger if the authority were to liquidate the vast land holdings and countless office buildings of the U.S. government and hand over the proceeds to foreign and domestic creditors.

There is no thought of voluntarily submitting to bankruptcy proceedings, liquidation, and distribution. Surely, no one expects the habitual spenders in government to vote for a liquidation of government property and its distribution to creditors. “The government can always meet the debt obligation,” they assure us. “It has the power to tax and the right to print money.” Indeed, the power to tax may prevent government default by placing the debt on the shoulders of taxpayers. But instead of one government defaulting, thousands of taxpayers may be forced to default. The number of American bankruptcies precipitated by tax exactions is legion. And the power to print legal-tender money creates the legal right to seize income and wealth from unsuspecting owners of money and monetary claims by debasing the value of money. It confers the legal right to defraud creditors.

The spenders do not see it this way. “We owe it to ourselves” is their favorite motto. If they refer to American ownership of debt, they are mistaken. The federal debt is not held just by U.S. citizens and institutions. Foreign holders are the single largest group of U.S. creditors. The Bank of Japan is by far the largest owner, financing large blocs of U.S. budget and trade deficits and lending vital support to the U.S. dollar.

Even if it were true that “Americans own it,” such an attitude completely distorts the situation. It ignores the difference between a creditor and a debtor, between a lender and a borrower. Facing an insolvent debtor, a banker will not take heart from the debtor’s reassurance that “we owe it to ourselves.” Similarly, the creditor of a U.S. Treasury obligation cannot take comfort from the assurance of the spenders that “we owe it to ourselves.”

Are we placing it on the shoulders of our children? The present generation is postponing paying for goods and services and is shifting the cost to the future. In this sense, the $5 trillion national debt becomes a huge pyramid of wealth consumed in the past and payable in the future. But the federal spenders reject such explanations. They see a flow of future income from present spending. There is no net burden shifted to the future, they contend, as long as future income exceeds the interest costs of the debt.

In reality, there is little, if any, future income from present deficit spending. A present entitlement gives rise to loud demands for future entitlements, a current subsidy for future subsidies; it does not raise productivity and earn interest on the expenditures. Even where government invests its funds, the expenditures usually are diluted by waste, corruption, and malinvestment. A public enterprise normally depends for its survival on tax exemption and taxpayer subsidies.

The economic consequences of debt depend on the age of the debt. There is old debt to which the economy has completely adjusted and new debt to which the economic structure must still adjust. The primary burden of new debt occurs in the present in the form of a reduction in private consumption. The generation that wages a war bears the primary burden. Government expenditures withdraw resources from private production and consumption. World War I withdrew some 25 percent, World War II almost 50 percent. The same is true in the case of peacetime deficit spending. It withdraws economic resources from private production and redirects them toward government consumption. Surely, the redirection differs materially from wartime direction, but the process is the same.

Deficit financing generally involves the consumption of someone’s savings. Government enters the credit market and offers IOUs in the form of Treasury bills, notes, and bonds. Massive deficits consume productive capital on a massive scale. As capital lends productivity to labor, the capital consumption instantly reduces labor productivity and output. If the deficit is not promptly corrected by a budget surplus and the capital consumption replaced by capital formation, productivity and output will be reduced forever. It is impossible to fathom the costs of the $5 trillion federal debt in permanent income and wealth.

Government deficits not only consume productive capital but also cause much remaining capital to readjust toward government consumption. As wartime deficits not only consume productive capital but also cause private capital to move into ammunition and armament industries, so does peacetime deficit spending consume productive capital and cause capital to move into the favored industries. Unhampered private production and consumption thus suffer a double punishment and contraction.

Future generations which inherit the debt are wronged in several ways. They come into an economy that is enfeebled and emaciated by capital consumption. The apparatus of production is maladjusted, addicted to political spending, and susceptible to political intrigue and arbitrariness. The whole financial structure is made to rest on the pyramid of federal debt, which makes all finance rather precarious. Worse yet, they must tax themselves to cover the interest on the debt which they did not incur. Failure to bear this burden would have consequences too ominous to contemplate. To expect them to repay our debt is to indulge in airy hopes and golden dreams.

Debts, follies, and crimes are generally mixed together; the federal debt is a $5 trillion mixture.


Hans F. Sennholz

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