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The problem of the national debt can seem overwhelming. How do you address $16.4 trillion in gross debt, or even $11.5 trillion in debt held by the public? Congress is gridlocked, President Obama doesn't want to deal with it, and the Congressional Budget Office estimates that we will spend $3.554 trillion this fiscal year, thereby adding another $641 billion to the debt. Caught in such a difficult situation, the problem appears insurmountable.
In part one of this series, I provided a detailed explanation of the national debt. In part two, I explained that we are unlikely to default on the national debt because it is held in U.S. dollars, and we can always print more. However, I added that using the printing press to avoid default could debase the currency. This would lead to rapid inflation, a damaged international reputation, and a violation of our national honor and character. The devastating consequences indicate that printing our way out of a debt crisis is not a viable solution, and so we must therefore still tackle the problem in some other manner.
Is there another solution? Or is the problem already too big to handle?
Is the problem insurmountable?
Many conservatives may find it tempting to answer "yes." The size and scope of the problem is enormous, after all. I've met activists who insist that the country cannot be saved from fiscal collapse. Most of us, however, fall back on our uniquely American optimism and assert that any obstacle can be overcome, including this one.
Fortunately, I do not believe that the problem of the national debt is insurmountable. Although the problem may be extraordinarily difficult and grows larger every day, I do not consider our situation hopeless. Right now, our primary concern is time. If a national fiscal meltdown began tomorrow, then we would obviously be lost. However, if we have years or decades left to go until we reach that point, then we have time to turn this thing around.
I have three solid reasons to think that lenders and creditors will give us enough time to start fixing this problem. First, we have an extremely stable government. Second, we have established a good "credit history" by never defaulting on a loan. Third, there aren't any better options around.
Our stable government
For those of us who actually live in the United States, our government may not feel all that stable. Pundits routinely criticize our persistent gridlock, escalating rhetoric, and "hyperpartisanship." Some, particularly on the left, seem to believe that the country verges on civil war. However, these commentators ignore the fact that we actually live under a very stable regime.
Just think about it. The United States has functioned under a single Constitution since 1789. We have elected 44 different presidents and 113 different Congresses over that time span. Other than the unique case of the Civil War, we have always experienced a peaceful transition of power from one party to another. No serious political observer believed that Republicans would riot in the streets if President Barack Obama were re-elected, and none of them thought that President Obama would refuse to leave power if he were voted out of office, either. Even though we are a flawed people, we are all small-r republicans. We all believe in free democratic elections and in the American Republic.
For the sake of comparison, let's consider the regime stability of another major first-world power since 1789, such as France. I assure you, they've had a slightly more tumultuous history than we have. Feel free to skip down to the next section if you're willing to take my word on that.
In 1789, the original French Revolution began and the "Ancien Régime" of monarchist, aristocratic, and clerical rule in France collapsed. In its place, the early revolutionaries established a constitutional monarchy. This system fell apart as radical egalitarian republicans, who executed the Bourbon King Louis XVI by guillotine in 1793, took over the Revolution. The Reign of Terror began and Maximilien Robespierre effectively ruled France as a dictator.
More moderate revolutionaries overthrew the tyrannical Robespierre in 1795, and the heavily corrupt Directory took power and ruled ineffectually for a few years. Napoléon Bonaparte led a coup against the Directory in 1799 and replaced it with a three-man Consulate, which he abolished in 1804. He became the first French Emperor and ruled for another decade. He was toppled from power and exiled due to military defeat in 1814. Napoléon was replaced with another Bourbon king, but he returned to French soil in 1815 to wage another short-lived "Hundred Days" of war. He was defeated once and for all at the Battle of Waterloo that same year, and the Bourbon monarchy retook power and ruled until 1830.
The Bourbons were overthrown in the July Revolution of 1830 and replaced by the Orleanist monarchy, which was itself overthrown in the February Revolution of 1848. The revolutionaries established another republic in the monarchy's place, but it was troubled by insurrection (such as in the bloody "June Days") and eventually abolished in favor of a new empire in 1852 by Napoléon Bonaparte's nephew, President Louis-Napoléon Bonaparte, who had staged an 1851 coup d'état against the rest of the government.
The new Emperor styled himself as "Napoleon III," and he held power until his 1870 defeat in a war against Prussia and the military genius of Otto von Bismarck. The French established a new, more durable republic thereafter, but almost immediately fell into another ugly civil war between the "Paris Commune" revolutionaries and the national government. Despite many missteps and close calls, this republic managed to last until the French were overrun by Nazi Germany in 1940, early in World War II.
During most of the war, France was divided between the collaborationist Vichy regime and the French resistance, which eventually coalesced under the leadership of Charles de Gaulle. Following the war, another republic was established in 1947, but it grew paralyzed and could not handle the problems stemming from decolonization, particularly in Algeria. Charles de Gaulle came out of retirement and established another republic in 1959 (the fifth, mind you, since 1789), which has lasted to the present day.
Follow all that? No? I don't blame you. The modern history of France is admittedly a loaded example of regime instability, but it should illustrate one point very well: We're fortunate to live under a regime as stable as the United States, and such stability is uncommon. If you're trying to safe place to invest your money, American history suggests that our Treasury would be a good choice.
What's our "credit history?"
We have a lot of reasons to be thankful in this country. As I noted in the previous article, one such reason is that the Founders established a solid "credit history" at the start of our country. Given the choice to repudiate some or all of our relatively massive Revolutionary War debt, President George Washington and his Treasury Secretary Alexander Hamilton decided to honor it instead.
Since that decision, we have always paid our creditors on time and in full. In 1835, we even eliminated our debt entirely for a time. This record may not seem too impressive in the light of my previous point that we probably won't default on our debt because we can always print more money. However, remember that we once stuck to a gold standard. The U.S. dollar was pegged to (and redeemable for) gold. We abandoned the gold standard in 1973, but up until that point, we could not simply print our way out of our debt obligations.
Therefore, this is quite an accomplishment, and it is one reason why people still consider our country a safe place to put their money.
What else is out there?
It's easy to say that those looking to find refuge for their money should look elsewhere, but a lot of countries are facing some serious problems. Just consider the cases of four of our most important global rivals:
People's Republic of China: The current Chinese regime has only been in power since 1949. It is a young, unstable government attempting to perform a difficult balancing act between political oppression and a measure of economic liberty. In 2010 alone, China reported a staggering figure of 180,000 "mass incidents." If China encounters a serious economic crisis in the near future, revolution and a national fracturing could be the result.
India: India only won its independence in 1947. The country remains mired in poverty and corruption, and its notorious caste system endures to this day. India may be a country "on the rise," but it is still deeply unstable and the threat of war with its ancient rival, neighboring Pakistan, persists.
Germany: Although Germany would appear to be a good "safe haven" candidate, its ties to the unstable Eurozone are troubling. Germany has taken on the enormous task of saving southern Europe and the euro itself from collapse, and that has entailed rescuing Greece and other reckless spenders from themselves. The German economy is large and productive, but there are limits to what one country can do and to how much of a burden you can place on your own people for the sake of others.
Russia: Although Vladimir Putin supposedly reduced the amount of corruption in Russia after the ruinous 1990s, Russia is still tremendously corrupt. One Russian think tank estimated the annual cost of corruption to be somewhere between $300 and $500 billion per year, and that's in a country with a Gross Domestic Product of only $1.5 trillion. You don't need me to tell you that that's a ridiculously large percentage of their economy. Would you entrust your money to such a country?
Every country has its own problems. Some are larger than others, but I would argue that there is not a true "safe haven" country in the world right now that is anywhere near the size of the United States. We're confronting massive and even systematic problems ourselves, but we're still probably the best bet left for lenders.
We have time to fix this
Our regime is stable and our "credit history" is solid. As a result, those who are trying to find a "safe" place for their money tend to choose Treasury securities despite our fiscal problems. In fact, enough people are willing to buy our debt that we can afford to offer very low interest rates on the Treasury securities we sell, almost to the point of them being zero.
Some progressives consider this an indication that we don't have a debt problem at all. They see it as "free money" and say that we're a long ways off from any kind of debt crisis, believing that conservatives are just fear-mongers who want to enact massive spending cuts purely for ideological reasons.
However, there's good reason to believe that time is running out. While our regime remains stable, the future and human nature are unpredictable. History is littered with the corpses of supposedly resilient and durable regimes. No country is completely immune to the effects of deep political division and lingering economic malaise, even ours. As for our "credit history," it's beginning to take some serious blows. Major credit agencies have already downgraded our credit rating once, and it could very well happen again shortly. Keep in mind that our expansionary monetary policy probably won't help along those lines. Finally, there is little to prevent other nations from growing more stable and prosperous while we flounder.
Fortunately, we do have time to avert a debt crisis. Ultimately, our primary fear must be that others will stop lending to us. If they do, we will have run out of time. There are three big reasons why they continue to lend to us for the moment. If we put forth a serious deficit (and debt) reduction plan and follow it, they'll continue to lend and we'll be able to tackle this problem over the coming years and decades in a measured, prudent manner.
In other words, the national debt does not constitute an insurmountable problem if we act quickly and resolutely. In the final post of this series, I will address the two steps we must follow to solve the problem of the national debt: spending cuts and economic growth.