March 25, 2023

Whenever they Say the US Government Has Never Defaulted They’re Lying

The default would certainly be problematic. But despite what you are being told, it’s not unprecedented. The government has defaulted before.

The  fake debt roof fight   is certainly on and the Biden administration has ratcheted up the frighten tactics. One of its strategies is to make you think the world will collapse if the US defaults on its debt commitments. After all, the US  always   pays its bills on time — so we’re told.

A arrears would certainly be problematic. Yet despite what you’re being taught, it’s not unprecedented. The US government has defaulted before.

I call this a fake debt ceiling battle because we all know how it is going to end. Congress will raise the debt ceiling. It may or even may not come with some moderate spending cuts. But we all know that any cuts will be superficial. Actual spending keeps going up. It always will.

But at the moment, we have to endure the dog and pony show as Conservatives and Democrats haggle.

Republicans say they desire spending cuts. (One needs to wonder where this urgency was when the GOP managed both houses of Congress and the White House, yet that’s a discussion for another time. ) Democrats say they will not negotiate.

Here we are.

In order to fortify their position, the particular administration tells us that increasing the debt ceiling is a matter of economic life and death. As I mentioned, the concept is the US always will pay its bills on time. Since Mises Institute senior editor Ryan McMaken pointed out, as part of the strategy, Treasury Secretary Jeremy Yellen is parroting the oft-repeated claim that the US never defaulted.

This sounds compelling. We all want our federal government to keep its word, right?

Of course , keep in mind that keep its word which claim that the US has consistently paid its bills promptly since 1789 is a rest. The US has defaulted more than once. And as McMaken points out, in case you expand the idea of default to incorporate inflating away the debt within real terms, default is definitely even more common.

McMaken highlights the most well known instance of US government defaults.

The following was  originally published by the Mises Wire . Any opinions expressed are those from the author and do not necessarily reflect those of Peter Schiff or Schiff Gold.

In 1934, the usa defaulted on the fourth Freedom Bond. The contracts between debtor and creditor on these bonds was clear. The bonds were to become payable in gold. This presented a big problem for the US, which was facing huge debts into the 1930s after the First World War.   As described by John Chamberlain :

By the time Franklin Roosevelt entered office within 1933, the interest payments by yourself were draining the treasury of gold; and because the treasury had only $4. 2 billion in precious metal it was obvious there would be no chance to pay the principal when it grew to become due in 1938, let alone meet expenses and other financial debt obligations. These other financial debt obligations were substantial. Ever since the 1890s the Treasury had been gold short and had financed this deficit by making new bond issues in order to attract gold for having to pay the interest of previous issues. The result was that by 1933 the total debt was $22 billion and the amount of precious metal needed to pay even the curiosity on it was soon going to be insufficient.

So how did the government deal with this? Chamberlain notes “ Roosevelt decided to default on the whole of the domestically-held debt by refusing to redeem in gold to Us citizens. ”

Moreover, with  the Precious metal Reserve Act of 1934 , Congress devalued the dollar from $20. 67 per ounce to $35 per ounce— a reduction of 40 percent. Or even, put another way,   the amount of gold represented by a dollar was reduced in order to 59 percent of its former amount .

The US offered to pay its creditors in paper bucks, but only in brand new, devalued dollars. 1   This  constituted default on these Freedom Bonds, since, as the Great Court  noted   in  Perry v. United States , Congress had “ regulated the cost of money so as to invalidate the particular obligations which the Government experienced theretofore issued in the physical exercise of the power to borrow money on the credit of the United States. ”

This was obviously not a case of the US making good on the debt obligations, and to state this is not default requires the type of hairsplitting that only the most credulous Beltway insider could embrace.

Indeed, Carmen Reinhart plus Kenneth Rogoff  in their  book  This Time Differs   list  this particular episode as a “ default (by abrogation of the gold clause in 1933)” so that as “ de facto arrears. ”

The Short Default of lates 1970s

A second, much less egregious case of default occurred in 1979. As Jerrika Zweig  noted this year :

In April and May 1979, amid computer malfunctions, weighty demand from small traders and in the wake associated with Congressional debate over increasing the debt ceiling,   the U. S. did not make timely payments   on some $122 million in Treasury expenses. The Treasury characterized the problem as a delay rather than being a default. While the error affected only a fraction of 1% of the U. S. financial debt, short-term interest rates— after that around 9%— jumped 0. 6 percentage point and the U. S. was quickly sued by bondholders to get breach of contract.

Apparently, the usa sometimes does   not  pay its debts. While the 1979 default was relatively small, the 1934 default affected countless Americans who had purchased Liberty Bonds mistakenly considering the government would make great on its promises. They were very wrong.

So , it is simply untrue that the US has never defaulted  as Yellen claims. But this claim remains a good tactic in sowing anxiety about “ unprecedented” functions that would bring the entire ALL OF US economy crashing down.

Default through Accounting allowance

But outright repudiation of contracts is just one way of defaulting on a person’s obligations. Another is to intentionally devalue a nation’s currency— i. e., inflate it— so as to devalue the amount of financial debt a government owns in real terms.

And Zweig writes investors view this as a true form of avoiding one’s debt obligations:

Perhaps the biggest worry [among investors] isn’t arrears but … “ financial repression. ”   In dozens of cases, governments possess dug out from under burdensome debts not by refusing to pay interest but rather via other harsh means. For example , by keeping short-term interest rates below the level of inflation, a government can pay off its bondholders with cheapening money. Through regulations, it can compel banks and other financial companies to buy its own debt, much like geese being force-fed intended for foie gras. As a result, present yields and future inflation-adjusted returns on government provides fall.

This strategy, Zweig concludes, “ stiffs bond investors along with negative returns after pumpiing. ”

Zweig categorizes this as something separate from default, yet Reinhart and Rogoff obviously consider  it a form of sobre facto default. They  create: “ The combination of increased financial repression with increases in inflation was   an especially popular kind of default  from the 1960s to the early 1980s” (emphasis added).

(In the United States, a key event in this respect occurred in 1971 when  Nixon closed the gold window . It was an explicit repudiation of the US’s obligation to repay bucks in gold to international states, and it also greatly enabled the US government in terms of financial repression and monetary inflation. )

Since the Great Recession,   economic repression is popular once again . This method of de facto default has enabled the federal government to take on massive amounts of new debt at rock-bottom interest rates. In real conditions, the US government— or any authorities using this tactic— pays back its debts in devalued currency, essentially enabling the government to make good on the full extent of its debts. The cost to the public manifests  in asset price inflation, products price inflation, and a “ hunt for yield” driven by  a famine of earnings on safe assets. Americans of more modest means are those who suffer the most, and the result has been  a widening space of inequality in prosperity .

It might very well be that a arrears could lead to significant economic and financial disruptions. But take a look at stop pretending that a arrears is  unprecedented or how the United States always pays the bills. It’s true that this US’s current debt device,   enabled by means of financial repression , is a type of  slow-motion  default. But that doesn’t associated with US government any less of a deadbeat.

The Fed Needs One more 9/11

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