Can We Privatize the National Debt?
Our national debt is at $13.5 trillion and growing. At current Treasury rates of around 2%, each billion dollars of debt costs around $20 million in annual interest payments. That means taxpayers are on the hook for $270 billion each year, with no reduction in principal.
With Treasury bonds paying only 2% interest, how do you suppose we are going to be able to attract buyers for all of our Treasury bonds? Obama’s answer is to “monetize” the debt -- have the Federal Reserve buy Treasury bonds on the open market. But where does the Federal Reserve get its funds? They print it.
Simply printing money is only a short-term solution. Eventually, most of the foreign owners of our bonds are going to start noticing that the value of our inflated dollars are sinking faster than the 2% interest being paid. Pretty soon, the market is going to demand higher and higher interest rates in order to attract investors to our devaluating paper promises. And what do you think the cost to taxpayers will be when interest rates return to their historic rates of 4% to 6%? Suddenly that cost to taxpayers could easily become a trillion dollars each year.
Is there an alternative solution? Yes, and it's exactly what a GOP candidate in South Carolina’s 6th Congressional District is proposing.
Instead of creating a VAT tax, or raising the rates on “the rich,” or simply ignoring the problem and following the historic path of places like Argentina, where it took a grocery sack full of cash to buy a Big Mac, why not simply eliminate the government’s debt obligation?
Why not do what real family households do when they are asset rich and cash-flow poor? Why not simply sell off some assets and pay down the debt? We all can banter back and forth over how much the national debt is, but does anyone have any idea what the nation’s assets are worth?
In 1995, the Claremont and Cato Institutes estimated the nation’s asset value at around $55 trillion. That was 15 years ago, when there were far fewer dollars in circulation diluting asset value. If we can assume a current asset value of, say, $60 trillion, then resolving a $10 or $12 trillion debt shouldn’t be that difficult.
Recall the S&L banking failure of the early 1990s. The Fed created the Resolution Trust Corporation (RTC) to liquidate billions in bank REO assets and was wildly successful.
What if we had a congressional “BRAC-” like committee that was given the task of selecting which military bases to close after the collapse of the former Soviet Union? Our new “BRAC” could choose one dollar out of every six dollars worth of federal assets and have Congress approve the sale and let a new RTC handle the liquidation.
Since there isn’t enough cash in M-1 or M-3 to facilitate the sale of that size, why not simply allow the “seller” to finance the sales of these assets? That way, in banking terms, we would convert the government’s "non-performing" assets into mortgages which could then be used to collateralize securities that are then exchanged or swapped for our outstanding Treasury bond instruments.
For example: I buy a federal office building for $5,000,000. I put, say, 10% down, and the seller (the Fed) finances the remaining $4,500,000 balance at a point above current Treasury bond rates.