August 12, 2011 2:39PM

Deficits, Debt, and Debasement

The New York Times editorializes that the Federal Reserve should be "more aggressive" in pumping more money into the slow economy. A couple of weeks ago the Times was breathlessly hyping the mythical fear of "default" if the debt ceiling wasn't promptly raised. With that problem out of the way, the paper now quietly recommends a slow default on the national debt:

A more aggressive strategy would be letting inflation rise above the Fed’s comfort level of 2 percent or so to, say, 4 percent. That could help the economy by easing the repayment of debt.

"Easing the repayment of debt": that is, paying your creditors less in real terms than they had expected. That's a slow-mo default. And it's the path that Scott Beaulier and Peter Boettke warn about in the cover story of the current issue of Cato Policy Report: "Deficits, Debt, and Debasement":

Debasement is the "pretend payment" of debt that occurs when governments inflate their currency by printing money. It's a problem of nearly every government, from the "bread and circuses" of ancient times through today. In the 18th century, governments debased their currencies by trimming metal coins and recirculating them. By making a coin worth less in real terms, governments throughout Europe were able to spend beyond their means. "The honour of a state is surely very poorly provided for," Adam Smith wrote in 1776, "when in order to cover the disgrace of real bankruptcy, it has recourse to a juggling trick of this kind."

Today, paper money limits governments' ability to physically trim the edges of metal coins. But by printing money to pay off debts, governments debase the currency and ultimately erode its purchasing power. Simply put, they are using a slight variation of the same "juggling trick" to achieve their ends: by pushing the debt problem into the future, they hide the full cost of repayment to the public.

I like that Adam Smith point, so here's a bit more of it:

When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. … [P]ublic bankruptcy has been disguised under the appearance of a pretend payment. … When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor. The honour of a state is surely very poorly provided for, when in order to cover the disgrace of real bankruptcy, it has recourse to a juggling trick of this kind. … Almost all states, however, ancient as well as modern, when reduced to this necessity, have upon some occasions, played this very juggling trick.
It's a shame to see a great newspaper, much less a newspaper for whom Henry Hazlitt once wrote editorials, endorsing such underhanded juggling tricks.