Thursday, October 18, 2012

National Debt and the Mythical Creditor Nation

            National debt is a staple of global society in the current age of economic and political interconnectivity.  The conventional wisdom holds that acquiring debt is fairly cheap, leading nations to essentially sell their debt to other nations.  Virtually every single nation on the planet has a national debt, whether it be America’s nearly twelve trillion dollars or Poland’s three hundred eighty billion dollar debt.  Even China, much maligned as it is today as “owning America’s future” has a large national debt, most of which in fact is owed to the United States, after the Chinese government defaulted on a loan provided them in 1990.  In this entry, I would like to argue that, theoretically, a nation would be much better off without debt.

            Tracing back the origins of national debt in the United States takes one back to, unsurprisingly, President Washington.  Washington named New Yorker Alexander Hamilton as the first Treasury Secretary, although most people regrettably know him only from adorning the ten dollar bill.  As the founder of the Federalist Party, Hamilton sought economic policies to shift the balance of power from the states, which were supreme under the Articles of Confederation, to the federal government.  While he achieved this through a handful of different measures, the only one I will discuss currently is the assumption of state debt. 
            During the Revolutionary War the Continental Congress pumped out “Continentals,” backed by nothing but promises.  Congress and the states could not agree on a monetary policy, leading to fourteen different policies in the rebelling nation.  The Continentals depreciated rapidly until they were utterly worthless.  Due in part to this general meaningless of the currency, the states accumulated large debts from private citizens as well as France and, to a much lesser extent, Spain. 
            In a savvy political move, detested by Democratic-Republicans Thomas Jefferson and James Madison, Hamilton had the federal government absorb the states of their debts, creating one large national debt.  Little more than a year into the new United States of America, the fissure between state-righters and national-righters began to widen.  Jefferson and Madison, both from Virginia, which had nearly paid off its debt, did not believe that the Constitution gave the federal government the authority to implement such a policy. 
            This action had multiple purposes.  For one, it shifted power from the states to the federal government, as the Federalists were wont to do.  Additionally, those citizens who owned some of the government’s debt now had a stake in preserving the national government, as opposed to simply whichever state was indebted to him.  The purpose I am focusing on, however, is that of ensuring foreign states which owned debt in the United States had a financial stake, just like the private citizens, in the continued survival of the nation.   
            The rational is fairly straight forward.  If a nation which owes one debt collapses, that debt becomes impossible to collect.  Even more obvious is that it prevents the creditor nation from attacking the debtor nation, as this would cost even more money, as well as likely collapse the economic system of the debtor, again making the debt all but impossible to collect. 
            Ever since Hamilton instituted the policy, known as the Report on Public Credit, the United States has continuously held a debt, save for 1835, when the government paid off all loans entirely, only to accumulate more debt the following year.  This is not to say that the debt has always existed due to continuous deficit spending (spending more money than the government brings in via revenue); in fact, in the years between the War of 1812 and the outbreak of the Civil War in 1861, the government ran an annual surplus over twenty times.  The government simply spent the money elsewhere as opposed to paying down the debt. 
            Despite the near omnipresence of debt in our nation’s history, as well as the contemporary world as a whole, this does not mean that debt is without risk.  One of the key indicators of debt is the Debt-to-GDP (Gross Domestic Product) ratio, as this factors the nation’s economic standing into the equation.  While Japan’s debt is slightly lower than ours, hovering between nine and ten trillion dollars, that amounts to over two hundred percent of their GDP.  Essentially what this means is that if every dime that any Japanese citizen and the Japanese government earn was put to paying the debt it would take over two years to be debt free.  While America’s is not as high, it is about a hundred and three percent of our GDP, still a highly unfavorable rate. 
            I now will delve into speculation, as no modern country has ever maintained an economy running on capital as opposed to debt for any substantial period of time.  A trend in place since the end of World War Two, and heightened by the end of the Cold War, is that of globalization and global integration.  As economies, culture, and politics become more linked between nations, we see a general unwillingness to go to war.  While, yes, the United States has been in two wars in the past decade, one of which continues to this day, the nations which we invaded were not very integrated.  Iraq and Afghanistan were both very closed off from the rest of the world, Iraq due to sanctions left over from the first Gulf War and Saddam Hussein’s stranglehold on the Iraqi people, while Afghanistan remained isolated due to the hardline Islamic policies in place under the Taliban. 
            Europe, historically one of the most belligerent places on earth, has reached a level of cooperation that has rendered the use of arms irrelevant, in addition to the general unwillingness of Europeans to go through another devastating war as they experienced twice in the first half of the twentieth century.  India and Pakistan, always at each other’s throats, are reluctant to use military force against each other due in part by the economic and political shockwaves it would produce in the region, and also by their unwillingness to unleash nuclear war. 
            While it is true that non-state actors, such as the Mexican drug cartels and various terrorist groups around the world, continue to use force, states themselves have largely moved away from interstate military conflicts.  Whereas military might was once the prime mover of international affairs, in the age where a housewife in Topeka can instantaneously trade stocks in Hong Kong, economics has risen the forefront, which brings us finally to the question of debt.
            People fear China for holding our debt, which could be used against us should an armed conflict ever arise between our two nations.  However, as mentioned previously, China is not exactly debt free either.  Now, imagine a nation had the ability to reduce its debt to nothing, while still maintaining itself economically.  If the debt clock provided by (an incredibly fun/depression website) is to be believed, the United States could accomplish this in roughly twenty years by rising taxes and trimming spending by a fair amount. 
            Supposing this happens and the world remains consistent with how it currently is (aka, the EU doesn’t collapse plunging the world deeper into an actual depression), then the debt-free nation, a Creditor Nation in the world of Debtor Nations, will undoubtedly be the supreme power on the planet, providing that is large enough.  The Creditor Nation, debt-free and prosperous, will be the go-to lender for struggling nations.  This would lead to the Creditor Nation holding the vast majority of foreign debt in the world, creating a system of true economic imperialism. 
            It is unlikely that the Creditor Nation will meddle in the domestic affairs of its debtors, for two reasons.  First, even the slightest bit of involvement runs the risk of spilling into a situation wherein the Creditor Nation must endanger its own prosperity, such as a civil war or similar event.  Secondly, debt-holding nations in contemporary society rarely enforce payment of the debts they are owed, as this removes their power of other nations; the Creditor nation is no different, preferring to let the country operate itself, content with the knowledge that it alone has reached a position supreme over all other states.
            I stake claim to no economic insight nor unique knowledge.  Instead, the point of this entry is to explain the historical precedent of national debt and my own theory of what a nation without debt would look like.  I may come back and expand on this point as future ideas come to me. 

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