The moral case for default

I recently made the case that the government has only 2 real options for dealing with the debt crisis, default or hyper inflation. While it is logically possible that the government could raise taxes or cut spending and actually pay off the debt, these are not feasible options.

While the official debt is in the neighborhood of 17 trillion, the real debt is at least an order of magnitude greater because of the unfunded liabilities not just for Social Security but for Medicare. With the baby boomer generation entering retirement, these liabilities are going to exacerbate the current crisis.

If the only two possible options are default and hyperinflation, which option should the government choose? We could discuss the economic impact of both options but regardless of which is best economically, which option is the most ethical? We do not debate gay right and civil liberties based on their economic impact but on what is the moral choice.

Hyperinflation is a form of wealth destruction. Any wealth held in currency is quickly destroyed as the currency is debased. Those most dependent on holding cash in order to complete transactions will be hurt more than those who can hold wealth in assets. This means hyperinflation greatly hurts the poor more than the rich. Clearly hyperinflation is a bad choice.

There are negative consequences to default as well. People who hold government debt were promised a return for their investment and reneging on that promise would be wrong. But unlike with hyperinflation, those holding government debt are not innocent victims. They know that they payments they are expecting are the result of taxation. The government must steal from the people in order to repay these loans. If an individual loaned in order to finance criminal activity and expected a return from such activity, we would not consider it unjust if the criminals abandoned crime and refused repay their debtors. These debtors are accomplices to the crimes the helped fund.

The moral case is clear, we can either hurt the innocent and disproportionately hurt the poor or we can deprive accomplices to government criminality of ill gotten loot.