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Why Americans Would Benefit from a Government Default | Mises Wire

Posted by M. C. on October 11, 2021

Of course, reducing the debt ceiling would force the government to stop borrowing so much money from credit markets. This would leave significantly more credit available for the private sector. The shortage of capital is one of the most often cited reasons for the failure of the economy to recover.

Lowering the debt ceiling would force federal-government budget cutting on a large scale, and this would free up resources (labor, land, and capital) and force a cutback in the federal government’s regulatory apparatus. This would put Americans back to work producing consumer-valued goods.

https://mises.org/wire/why-americans-would-benefit-government-default

Ryan McMaken

The Biden administration’s rhetoric on the debt ceiling has become nothing short of apocalyptic. The Treasury Department has announced that a failure to increase the debt ceiling “would have catastrophic economic consequences” and would, as NBC news claims, constitute a “doomsday scenario” that would “spark a financial crisis and plunge the economy into recession.”

Apparently, the memo went out to the debt peddlers that they are not to hold back when sowing maximum fear over the thought that the US might government might pause its incessant debt accumulation even for a few days. 

The reality, however, is quite something else.  While a failure to raise the debt ceiling would no doubt cause short-term disruptions, the fact is the medium- and long-term effects would prove beneficial by reining in the regime’s chokehold on the American economy and financial system. 

This is explained in a recent column by Peter St. Onge in which he examines just how much of a problem default really is:

In 2021 the US government plans to spend $6.8 trillion. Of which about half is borrowed — $3 trillion. So if they can’t raise the ceiling, they’d have to cut that $3 trillion.

Mainstream media, naturally, claims this is the end of the world. CBS estimates it would cost 6 million jobs and $15 trillion in lost wealth—comparable to the 2008 crisis, which was also caused by the federal government. CNN, more colorfully, claims cascading job losses and “a near-freeze in credit markets.” They conclude, falsely, that “No one would be spared.”

Considering the source, we can guess these predictions are overblown. So what would happen?

Well, $3 trillion is a lot of money—roughly 15% of America’s GDP. But we have to remember where that $3 trillion came from. The government, after all, doesn’t actually create anything, every dollar it spends came out of somebody else’s pocket. Whose pocket? Part of the $3 trillion was bid away from private borrowers like businesses, and the rest was siphoned from peoples’ savings by the Federal Reserve creating new money.

This means that, yes, GDP would decline sharply. But wealth would actually grow, perhaps substantially. The businesses would be able to buy things they need, while the savers keep their money that was doing useful things like paying their retirement.

So GDP drops, wealth soars.

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Ryan McMaken is a senior editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first.

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