Get Over It, We've Already Defaulted
by John Tamny
by John Tamny: Why
Tyler Cowen, 'America's Hottest Economist', Is Wrong
In their 2009
Time Is Different, economists Carmen Reinhart and Kenneth
Rogoff singled out Australia, Canada, New Zealand and the United
States as countries that have never defaulted, or more specifically,
have "never outright failed to meet their external debt repayment
obligations or rescheduled on even one occasion." Of course,
as they later acknowledged on the same page, there are other ways
There is traditional
default whereby creditors experience a "haircut" or a
delay in payments, and then there's a stealth default. Looked at
in terms of stealth defaults, all those countries, including the
U.S., have most definitely stiffed creditors over the years.
Rogoff in particular pointed to a U.S. default in the 1930s. As
they wrote, "the abrogation of the gold clause in the United
States in 1933, which meant that public debts would be repaid in
fiat currency rather than gold, constitutes a restricting of nearly
all the government's domestic debt."
In short, the
U.S. defaulted in 1933, and as evidenced by the dollar's stupendous
decline in value from 1/35th of an ounce of gold in 1971 (in private
markets a dollar bought roughly 1/45th of an ounce of gold at the
time in question) to 1/1550th today, the U.S. has been in default
for most of the last 40 years.
All this bears
mention in light of Treasury Secretary Tim Geithner's hysterical
comments over the weekend suggesting we'll see "catastrophic
damage across the American economy and across the global economy"
if a failure to raise the debt ceiling leads to default. Sen. Pat
Toomey, though not an advocate of raising the debt ceiling, said
much the same as Geithner in a USA Today op-ed from yesterday.
Both doth protest too much. All U.S. creditors have known since
1971 is persistent default by the U.S. Treasury owing to
its poor dollar oversight,
Of course if
what Geithner and Toomey say is true, the answer is very simple.
Geithner's Treasury collects far more than enough each month to
stay current on Treasury interest obligations, so if default really
would be the catastrophe that he says, he should make sure to put
the U.S.'s creditors first in line for monies available, after which
a Congress that's really never cut spending (thanks to Larry Kudlow
this) in nominal dollars terms would have to find a way to make
do with less money to spread around.
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