Full Faith and Credit

Until now, the universal expectation was the U.S. government would honor its notes. The Bandit is the very first President - the first ever! - to suggest the United States might not honor its IOUs.

The Constitutional Convention was tied in knots about this very issue: whether to trash or honor the debt assumed in fighting the British. It was common in those days to skip out on loans, if you could get away with it. While ordinary citizens might get thrown in jail for non-payment, governments - especially governments on a far-away continent - might escape responsibility. The fledging Confederation had not assumed war debts, but left them to the States. In addition, the States and Congress had ducked paying veterans their claims for wartime service. It was the conservative argument in the Convention that the Federal government should assume war debts from the States as national debt. This was to be seen as an act of financial integrity, which put doing business in the former colonies on a par with Europe.

The Constitutional Congress and then Washington's Treasury Secretary, Alexander Hamilton (a New York business conservative), assumed (from the States) and honored the war debt. Although the new Federal government avoided payment as long as it could, in the end many veteran's claims were paid. Thus, in the very foundation of the United States, the conservative principal of financial responsibility was established and largely honored. This laid the foundation for all that would follow in the economic development of the United States. (Although I am a socialist, I strongly agree with the decision of the Convention and Hamilton's policies.) Those initial acts of the United States government gave meaning to the "full faith and credit of the United States."

What the Bandit is suggesting - and, again, it is astounding that he should even make the suggestion - is the United States will not honor its IOUs. That is, that the full faith and credit of the United States is a fiction, worthless. As indicated in the NYT editorial, if the Japanese and Chinese took the Bandit's words at face value, there would be a rush on the bank to collect whatever they could. With his suggestion, the Bandit is putting the money and credit of the United States at risk.

From many points of view, liberal and conservative, it is really unthinkable that the United States would default on its debt. Such an event is likely to bring about a worldwide depression; certainly, at least, a lengthy global recession. The reason for such a drastic result is simple: most economic decisions, and especially big ones, are based on trust. Everyone involved in an economic project has to trust that everyone else will do what they agreed. Money will be lent at a certain rate, people will be employed, workers will show up for their jobs, and the invested money will be repaid on a schedule. All that and much more is routinely agreed whenever some deal is made, regardless of whether the deal is private or public. Short of a drastically totalitarian State, as happened in Hitler's Germany and Stalin's Russia, thousands of little understandings are made in trust, without the beneift of Gestapo or KGB enforcement. States that require a KGB to enforce contracts in detail are thereby highly inefficient, as the Soviets eventually experienced.

The Netherlands lost its freedom when it defaulted on its debt, and so did many Medieval Italian City-States. So, default is not innocent or without consequence, especially when your creditors can get back at you. Default destroys credit because it betrays trust.

So, I must admit not understanding why the Bandit would pull out all the stops, raising the specter of default over the Social Security program. I can only guess that the man is either crazy or ignorant, or maybe a Manchurian Candidate. Whichever or whatever he may be, his statements amount to gross misfeasance and malfeasance; enough to justify impeachment by an honest Congress.

Finally, the worst part of it is this: no one takes the Bandit seriously. It is assumed the empty bank vault and threats of default are just a ploy to get support for his plan. So, we don't hear calls for impeachment except here, at Left and Free. Once again, I feel like I must be a crazy person, so I am gratified the NY Times noticed the same, severe problem.

I have a FAR-SIDE cartoon of a nervous technician working on a nuclear-armed ICBM. Just behind him is a joker about to pop a paper bag. Great joke. The serious question is this: What odds do you give that those fellows survive the POP? [Assume they are far, far from any populated area.]