Posted on 05/10/2023 9:41:16 AM PDT by SeekAndFind
No one lends or borrows dollars. They lend or borrow what dollars can be exchanged for.
Please keep this in mind amid all the hyper-ventilating over potential default. Janet Yellen, the walking, talking-est contrarian indicator on earth claims default would be "catastropic," while the always and everywhere expert reverent Catherine Rampell tells readers "If you're not afraid yet [about default], you should be." Wise minds will be calm. This is such a non-story.
For one, As evidenced by the floating, occasionally very weak dollar over the decades, the U.S. has defaulted numerous times. And that’s not a partisan point. Left-of-center economists Carmen Reinhart and Kenneth Rogoff are clear in their book This Time Is Different that when FDR revalued the dollar from 1/20th of a gold ounce to 1/35th, the U.S. defaulted.
All of which brings us to the present. In contemplating the present, it’s useful to think about another book written by left-of-center reporters Peter Baker and Susan Glasser, The Man Who Ran Washington: The Life and Times of James A. Baker III. Baker and Glasser’s book was very fair, and among other things the authors noted about President Reagan was that much as he wanted a smaller, much more limited government, the act of achieving “it proved harder than Reagan’s team had imagined – every program they wanted to cut had a constituency, it seemed, often including fellow Republicans.” Translated, while some politicians want limited government, they all have at least one program that’s near and dear to them. Since they all do, government will always and everywhere grow as votes are traded back and forth so that everyone gets what they want.
Please keep what Reagan experienced top of mind with the latest battle over the debt ceiling very much in mind. What Reagan saw ably explains why no one need fear Treasury not paying its bills.
For now, though, consider what would happen if the debt-ceiling isn’t raised only for Treasury to cease paying its bills. Will this cause Treasuries to collapse and a global financial meltdown? Not a chance. To see why, consider what’s happened when fiscal brinksmanship has led to mere government shutdowns over the years. There’s been no panic, after which everyone eventually got paid. Even “non-essential” federal workers. Once back at work, they received back pay for time off of the job. Nice work if you can get it, which apparently you can if the gargantuan size of government is any kind of indicator.
Which explains why Treasuries won’t collapse if we reach “default.” In reality, there will be a rather liquid market for future claims on the U.S. Treasury. Same will be true if the warring between the White House and Congress results in a drawn out battle. Figure that Treasury yields actually fell (meaning their value rose) in the months after Moody’s downgrade of Treasury debt in 2011.
Back to what could happen in the form of a so-called “financial crisis” allegedly born of default, it won’t happen simply because every federal program has a constituency. It’s as basic as that. While it’s once again true that some in Congress might prefer a smaller government than others, everyone’s got a pet as it were. Since everyone does, it’s no reach to say that eventually the White House and Congress will reach agreement to raise the debt ceiling. Once the agreement is in place, bills will be paid and spending will resume.
The simple truth is that every senator and every congressman wants a cushy retirement. The latter is a function of a massive government the size of which lucratively employs politicians once they’re no longer politicians, and that employs various family members and friends while they are.
In short, any default will be very short. Politicians ultimately love to spend the money of others precisely because they love the money that finds them and those close to them for spending the money of others.
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John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution.
Do you want to be a reserve currency or not?
Welcome it.
It merely means the FED cannot create more M2 fiat that we never pay the principle, and forever pay a fee (interest) for that service.
“The terms of the bond included: ‘The principal and interest hereof are payable in United States gold coin of the present standard of value.’ This type of “gold clause” was common in both public and private contracts of the time, and was intended to guarantee that bond-holders would not be harmed by a devaluation of the currency.”
“when the US Treasury called the fourth bond on April 15, 1934, it defaulted on this term by refusing to redeem the bond in gold, and neither did it account for the devaluation of the dollar from $20.67 per troy ounce of gold (the 1918 standard of value) to $35 per ounce. The 21 million bond holders therefore lost 139 million troy ounces of gold, or approximately 41% of the bond’s principal”
https://en.wikipedia.org/wiki/Liberty_bond
The U.S. should declare bankruptcy and get the debt canceled and go for restructure. IOW, let’s start all over again. ;)
What do you think rampant inflation is? Its stealth default.
RE: Do you want to be a reserve currency or not?
Of course I do. But the author is saying that default won’t happen, and even if we don’t hit the debt ceiling by the deadline, the US can and will continue to pay their debts.
And here’s the other question — what is the alternative reserve currency that people have in mind? The Yuan?
The lack of transparency will be the main drawback against the yuan and most countries know that.
The yuan, is tightly controlled by the CCP and policies can change on a whim. As late as last April, China was insisting on market interventions, sprucing up the yuan to avoid a disruption as the world’s second largest economy shifts from export dependence to domestic consumption.
Expecting China to loosen its grip on the yuan is like hoping for its Politburo to hold democratic elections soon.
In short, the yuan is yet to grow up, an infant that is vulnerable without the nanny government.
So, the question then becomes — WHAT IS THE ALTERNATIVE?
The US can use the Argentina approach.
Never declare bankruptcy, just convert all the one month and longer T bills to fifty year T bills.
You can redeem your T bills in fifty years—no sooner.
I think there will no one alternative—instead it will be a wide variety of currencies depending on what the currency is needed for...the Yuan if you have a lot of trading with China, the dollar if you have a lot of trading with the US etc.
Will it be chaotic?
Absolutely.
If we spent less than we took in, there would be no need for a debt ceiling increase.
Who much interest are you getting on your money Mr. Congressman?
X%
If the federal government backed by the IRS tax collection power offers more than X% (on the same terms), will you lend to it?
Well, yes.
Even if it defaults?
Well, yes. I’m not going to quit my day job. I’ll get paid eventually and I don’t kick gift horses in the mouth.
People put money in the banks simply because selling a 2-year Treasury security is more difficult than cashing out a 2-year CD.
In the worst case, Congress could simply lower the FDIC insurance limit until Treasury sales picked up.
The Federal Government brings in over 5 Trillion Dollars a year in revenue, that is plenty of money to pay the interest on the national debt, pay social security, pay medicare, pay the military, and many other things.
Simply pay for all these things anything left over has to be prioritized.
There is no possibility the USA will default.
😆
The Republican Party can not allow the Democratic Party to continue to bribe voters to such a large extant.
I think Democrats now recognize that the Republicans have no choice but to play hardball.
Almost every Democrat living in San Francisco, LA or New York City needs to realize that giving out Medicaid and SNAP benefits without work requirements is turning their city into a campground for bums.
The possibility of default in my opinion is over 50%.
Biden and Schumer are playing a game of chicken they think they know well.
The probably of default is less than 5% probably less than 1%, even if a payment is missed that doesn’t mean default, it means missed payment.
While the lede is correct - there are too many constituencies vested in the bloat of government - just using the word ‘default’ is part of the scare mongering DC loves to weaponize against each other and the American people. Default just means it can’t make debt payments. They can make debt payments if they wanted to. They are just negotiating how much more bloat to keep or add to the budget and default is their excuse to convince us to go along.
To a point true, except that 1) as we refinance our bonds we have to pay a higher yield so more money goes towards debt payments and 2) inflation devalues the dollar so the government will have to spend more just to keep pace with inflation - unless they actually find a way to improve efficiency and make cuts. But the biggest parts of the budget are politically impossible to cut.
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