The Learning Curve

New tricks for an old dog.

The National debt is not a problem

July 11, 2011 Update:  I stand corrected. It seems there was a minor default, or delay, in paying U. S. T-bills in 1979. It is described by Brady Dennis here. A study by Terry Zivney and Dick Marcus, “found that even that brief failure to meet some obligations had expensive consequences. The pair concluded ‘that the series of defaults resulted in a permanent increase in interest rates‘ of more than half a percent.”

One-half of one percent of $14 Trillion is $70 Billion per year in additional interest payments.

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This is an open letter I am sending to my Senator, Mitch McConnell.

Dear Senator McConnell,

The National debt is not a problem to be solved, it is a valuable resource to be managed. To do this correctly requires the constant application of an old fashioned value called  ‘prudence.’  Prudence is one of the most conservative of virtues.  Prudently managed, as any first-year business school student will tell you, the existence of debt allows business management accesses to the alchemy of leverage and liquidity.

The national debt is also a national heritage with a two hundred twenty-two years old tradition. it has the fingerprints of Thomas Jefferson, Alexander Hamilton, James Madison, a majority of the first United States Congress, and President George Washington  etched in documentary acid upon it. Debt is part of our national DNA and the founding fathers liked and approved of perpetual debt.

If that doesn’t get your traditional and conservative Constitutional juices flowing, what does?

Best of all, it is all absolutely true, with no hype added.

In 1789, Alexander Hamilton as first Secretary of the Treasury, submitted a report to Congress titled First Report on the Public Credit.  The major drift of Hamilton’s recommendation was that the brand new and totally impecunious Federal Government voluntarily assume all the debts resulting from the Revolutionary War, which adjusted to present value amounted to about Four Trillion Dollars. 

Hamilton, Jefferson and Madison got together for dinner one night in New York City and hammered out a compromise upon which all could agree in good faith.  The Congress enacted the resulting legislation and President George Washington signed it into law. Thus it was that those who bet their resources on the success of the new Nation received 4% interest-only promissory notes that would never repay the principal. As far as I know, part of the current National Debt is the eleventh generation spawn of that 222 year-old promise. Also a part of the legislative compromise was to enable the U. S. Treasury Department to raise and collect taxes.

Frankly, I don’t know if the United States has ever been debt free since the time of George Washington, but I am sure that it is not a goal worth achieving.

Old folks like to pay down their personal debts to zero when they think of retirement and plan for reduced earning capacity, but the United States of America and its leaders need to plan for perpetuity. This is what the founding fathers considered a prudent thing to do. The founding fathers knew the value of having good credit established by a history of promises made and promises kept.  The founding fathers knew those who build up piles of gold to sit upon like to see their money at work for them earning low-risk interest, so that our country’s leaders could put that money to better use by building a better and more prosperous future.

National roads of the Nineteenth Century evolved into Interstate highways of the Twentieth Century, and commerce and industry were prime beneficiaries, not to mention the land speculators. It was all made possible through the wise and prudent use of public debt.

Federal investment in public wealth and welfare funded with borrowed money has a very long and honored tradition in this country, as even the most superficial reading of history shows. The United States of America has never defaulted on any fiscal promise in its history, and that has earned a credit score worth its weight in gold.

Any politician who might intentionally threaten our outstanding National  credit score is a traitor to the country, in my opinion.

I’ll leave you with something to think about. Is the evaluation of a well established and well informed credit market in a free market system better at determining when a debtor has borrowed too much, or are you? In this case the debtor is the United States government, and by my best present reckoning the world credit markets are still willing to lend low interest money to us, assuming politicians don’t screw things up. Are you really willing to substitute your individual judgment for the free market’s judgment on the issue how much Federal debt is too much?

Despite your good intentions, Senator, please don’t make things worse.

Sincerely yours,

Tom Fox
Louisville, Kentucky

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Written by Tom Fox

07/06/2011 at 10:28 am

Posted in Politics

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