A Federal Government Bankruptcy

With the whole issue of raising the debt ceiling being in the news again, we hear stories about how the U.S. government could default.  Of course, in terms of defaulting on U.S. government debt, it is completely false.  The interest on the debt is "only" a few hundred billion dollars per year right now.  The federal government collects well in excess of $2 trillion per year, maybe soon to exceed $3 trillion. So the government may have to break some promises, but it can easily pay on the debt.

But the issue of defaulting on the debt brings some interesting discussion with it.  From a purist libertarian standpoint, the government should default on its debt.  The only way to pay off the debt is by using force or the threat of force to extract money form people.  The contracts made between the borrower (the U.S. government) and the lenders (investors, foreign central banks, etc.) are not really valid contracts.  They are not valid because one side is promising to pay back the other by forcing a third party (American taxpayers) to make the payments.

But how would a default work?  Would someone just hit the delete key and erase more than $16 trillion in debt?

My suggestion is that the U.S. federal government should essentially file for bankruptcy and wipe out its debts.  However, it is not just a matter of simply erasing the debts and being done.  The bankruptcy should be similar to the procedures of when a company files for bankruptcy.

When a company files for bankruptcy, it doesn't just shut down, with everyone going home and all investors getting nothing.  In most cases, the company still owns assets and has some things of value.  The company can just no longer keep up with its bills, including its debts.  It is a cash flow problem.

When a company goes bankrupt, the typical procedure is for the assets of the company to be sold off.  This may all be sold in one piece or various parts sold separately.  With the sale of assets, the money can then be used to pay off bondholders and others who are owed money.  It is usually the stockholders who are the last to get paid anything.

With the government, the same should be done.  The U.S. government owns massive amounts of land, particularly in the west, and it isn't all just desert.  Much of this land is quite valuable, including land with oil in it.  The government should sell off its assets.  While land is by far the most valuable, there are also numerous museums, monuments, and other buildings.  It is hard to say how much all of this would be worth.  There is no way to know unless it is auctioned off in the free market.  Perhaps it might be better to auction it off over the period of a few years so as to get a reasonable price.  But with all of the land owned by the government, the amount would certainly be in the trillions of dollars.

This was actually a suggestion by Libertarian candidate Harry Browne when he ran for president.  I don't remember him suggesting a default on the debt, but he advocated that land be sold so that Medicare and Social Security recipients could be paid off and the programs could be ended.

Of course, the big question would be, who gets paid first.  This is sometimes an issue when companies file for bankruptcy and it would certainly be an issue with a U.S. government bankruptcy.  There are all of the holders of government treasuries and bonds.  But there are also Medicare, Social Security, and government pensions.  Given who has the voting power and the numbers, my guess is that Social Security and Medicare recipients would be at least partially taken care of first.

While I don't think this whole bankruptcy plan is likely to happen, I can foresee more advocates of a plan to sell some government land in the future.  The budget is only going to get tighter, especially once the Fed has to cut back on its purchases of government debt.  When things become more desperate in the years ahead, more people will be open to the idea of selling government assets to make up some of the shortfall.

I wouldn't mind if Yellowstone is sold to private investors.  The owners would probably take better care of it than it is now.  And if all of these national forests were sold off, maybe we would stop seeing millions of acres burn in fires.  The idea of the government selling land and other assets should be viewed as a win-win situation for libertarians, assuming the proceeds aren't used to start another war.