Saturday, October 05, 2013

How to fix the debt:

Step One: Balanced Budget Amendment

The wording I propose is very simple. With the addition in red:

The Congress shall have Power... To borrow Money on the credit of the United States in a time of War as declared by Congress.
I personally don't see any reason why Congress needs the "flexibility" provided by the opportunity to borrow outside the circumstances of a life-and-death struggle... that is, War. Note that the adoption of this amendment amounts to a declaration of bankruptcy. Without the authority to roll over the debt day by day, the Treasury become incapable of managing the debt within months, possibly weeks, maybe even days or hours. This leads us to

Step Two: Organize US government debt holders for a massive class action suit. The representatives of debt holders would be empowered to renegotiate the debt.

Step Three: Seek an appropriate mediator of the renegotiation. If most of the debt were held by US citizens, the the Supreme Court would be an appropriate venue... but a lot of the debt is held internationally. I don't know how much. Possibly a special tribunal appointed by the United Nations would work.

Step Four: Establishment of a realistic schedule of repayment.

The fact of the matter is that the government can't actually repay the current debt. Instead, it relies on others to repay it for them. They get the money to pay back the debts by borrowing from other lenders. They then pay back those lenders by borrowing from someone else. I'm guessing the reason that the "debt ceiling" has been in the news so much over the past decade is that, during a bad economy, it becomes difficult to find the next borrower to pay back the previous one.

This is the government equivalent of shifting credit card debt around from one card to another, and back again. It only works until the card issuers pull the plug. What I am suggesting is the government equivalent of debt consolidation.

Let new bonds be issued, with repayment lengths as long as 50, 100, even 200 years, if necessary. Let some of the principal be written down. Restructure the entire debt into a form that can be gradually paid off without having to shuffle it around. With the amendment from Step One in place, there's no other option.