New York Times says it is time to stiff the bondholders out of their $40 trillion

“An Ancient Sumerian Solution to Our $40 Trillion Deficit” (yesterday):

The U.S. federal debt has hit $40 trillion. Add the debt owed by U.S. states, corporations and consumers and the figure rises to about $77 trillion in debt, set against an annual G.D.P. of about $32 trillion. The interest on all of it is compounding constantly.

Ancient societies had another method to deal with debt. It was called an amargi — a blanket declaration of public debt cancellation. All public debts written off. Disappeared. It sounds laughable, I know. But, really, that’s just because the idea has been buried so deeply in history you’ve probably never heard of it. In the ancient world, it presented a pragmatic solution to an intractable problem. And now, faced with impossible-to-repay debts that are weighing down our economy, is the time to look at the amargi and the lessons it offers about how to think about finance.

The amargi was a response to a persistent problem that was recognized in the ancient world: Debt compounded until it destabilized society.

Understatement Department:

People who were owed money were, predictably, not always happy about the amargi.

We invented it so we can de-invent it:

The reason the practice often worked in the first place was because the ancient world understood something about our monetary system we have mostly forgotten: Money is an invented social construct. It isn’t real, not in the way a tree or a stone is real. The system of money and credit is a thing humans made up. It’s a record-keeping device for distributing resources. And since money is a human creation, we can alter it when needed.

What would happen if the U.S. were to stiff all of the bondholders, most whom are domestic (breakdown)? Would the stock market collapse because of the evaporation of money people thought that they had saved? A lot of stocks would go to zero, presumably, because a bank or insurance company could go insolvent due to the evaporation of reserves. Maybe some stocks would go up because workers wouldn’t be quite as burdened with federal taxes and, therefore, would have more spending power? That seems unlikely because our fiscal deficits are so high that ceasing interest payments on federal debt still wouldn’t result in a balanced budget (i.e., we would need higher taxes to fund the government services that we demand in a world where the federal government doesn’t/can’t borrow, even after kissing $40 trillion in debt goodbye). This is kind of remarkable. Imagine a family that is so addicted to spending that even if it is magically freed from paying a mortgage, a car loan, or any of its past credit card bills that it still can’t fund the lifestyle to which it has become accustomed and feels entitled.

If this does happen, I guess I’ll be nominally poorer (stock market collapse), but I’ll have some bragging rights because I’ve been a hater of bonds as an investment ever since the Jimmy Carter era inflation (more properly attributed to Lyndon Johnson’s Great Society program, but Carter got the blame because hyperinflation took a while to build steam).

Here’s a misleading chart, by the way. It says “total public debt” is $40 trillion, but doesn’t count debt incurred by state and local governments (also “public”). Supposedly this is only about another $4 trillion, but that doesn’t include state and local obligations to retirees, such as pensions and health insurance (impossible even to guess at what those are because we don’t know how long humans will live).