President-Elect Obama has recently announced that the national deficit will be in the trillions over the next several years as he proposes to spend the United States out of depression. China may stop buying United States bonds, which means the money will not be available for the trillion dollar deficits being proposed.
Worse still for the government, creditors may start demanding repayment of the debt.
There are three solutions for repayment. The first is a mix of tax hikes and spending cuts. The second is to print the repayment. The current policy appears to be a mix of the two. The third is to renege on the National Debt.
The third is the policy favored by most libertarians. Although there is ample historic precedent, most people seem not only unfamiliar with the idea, but seem to think that it is a unique idea when it is proposed. Even the United States has already engaged in the practice twice, once under F. Roosevelt and once under R. Nixon, when they refused payment in gold. Additionally many states reneged on their individual debts after the looting that took place after the War Between the States.
There are four principle arguments that need to be looked at as to whether the United States Federal Government can renege on the debt: the legal, the international, the economic, and the moral.
The legal argument asks whether or not the government has that authority. The answer is simply "yes". Whereas it is the government that makes the laws, the government can decide that the actions of the government are legal.
Then there is the international argument, specifically with relation to those foreign nations that hold the bulk of the United States debt. Usually this question comes down to the potential for hostile relations with China.
It is not a secret that the Chinese government views the United States as a rival, or perhaps even as an enemy. The purchase of debt is seen in intelligence circles as a deliberate action to gain leverage against the United States by the threat to dump that debt if the United States stands too boldly on a position that is against China's own interests. Dumping United States debt would ruin the value of that debt on international markets, crippling the ability of the United States to act in many areas.
Some outside of military or intelligence circles protest this analysis by pointing out that such an act would hurt China as well. The assumption is that the Chinese government would never take any actions that would hurt China. Based on that assumption no country ever goes to war against any other country because even the victor in a war is hurt by the war. The question is who is hurt more and some think that China would be able to take the blow but the United States would be hurt more.
In addition to hurting the United States, this move would also hurt Japan, an ancillary benefit. Historically either China or Japan is strong, making the present situation with both of them strong historically rare.
If the United States were to renege on the debt, that would nullify the threat of the Chinese held debt on a timetable more acceptable to the United States. While it would hurt the United States, a planned dumping of the debt by the United States is much more manageable while it hurts Chinese plans, if any, to use the debt as a weapon.
The third consideration is the economic one. It is said that dumping the debt would be a financial catastrophe for the United States economy. Actually it would only really hurt the credit rating of the United States government. It should be remembered that the debts of individuals, corporations, cities, and states are all not part of the national debt. A renege by the United States government would only impact the credit rating of the United States government, not the credit rating of every entity in the United States.
Some claim that the repercussions of such a renege would send the United States further into recession. Perhaps it would, but it would also remove many of the destabilizing factors of that are presently in the economy and more quickly enable the United States to climb out of recession.
Some claim that a renege would make it impossible for the United States to fund various obligations. So would a dumping of the debt.
The economy is in bad shape. Such a move, while painful, is a restorative move.
The final consideration is the moral one. Does the United States have a moral obligation to pay the debt?
In contract law, one cannot make a contract to receive stolen goods. It is not allowed, and any contract that says otherwise is considered null and void.
Another consideration is that once is not required to inherit debt. If someone dies with massive debt, nobody is required to inherit it. Many of those expected to pay this debt were not alive when the debt was initially acquired, and many of the rest were not voters when more of the debt was acquired. Given that much of this debt is in the names of people who were not able to consent to it, this debt is inherited.
Thus those who purchased the bonds should not have an expectation to receive payment, and those who are expected to pay have no obligation to do so.
The United States not only does not have an obligation to pay the debt, it has an obligation not to.