Thursday, November 28, 2013

The Government HAS Defaulted Before

The government has defaulted several times before. It defaulted in 1933 when it refused to honor its debts by paying in gold. It defaulted in 1965 when it took silver out of the monetary system. It’s basically been defaulting all along by allowing the dollar’s purchasing power to be eroded through inflation and debasement year after year, after year.

So, given the fact that they’ve defaulted so many times before, can they default this time? Yeah, sure they can. And it won’t mean anything to the politicians, but it’s going to mean a lot to anybody who has debt with the US government. It’s always sort of amazed me that, after the government takes 30 to 40% in taxes of what you earn, why you would ever lend money back to the government with the rest of it. Because once you lend it to them, they’re in control, you’re not in control.

And this is a good example of that attitude. The government is in control of the situation. If they default they might say, “well, we will pay everybody who has a $10,000 T bill. But we’re not going to pay individuals who have a million dollar T bill because they can afford a loss of a million dollars. Where somebody with only 10,000 may not be able to afford a loss.” They can do all kinds of crazy things like that.

The reality is that they don’t have to default. They can prioritize their bills. They get money coming in all of the time for taxes, so they can use that money to pay interest on the T bills and T bonds that the government owes, so there’s a lot of theater in claiming that there’s going to be a default on October 17th. It doesn’t have to be that way.

I think the ramifications to the world is really a key question here though. Because it’s just part of the erosion of American credibility in the rest of the world. Everybody outside of the United States, and I think a growing number of people in the United States, recognize that the US is on the wrong path. That what has been happening to the dollar, and the continual increases in the debt are the wrong path.

And the US, given its role as the world’s reserve currency, has a responsibility to the rest of the world to maintain the dollar as a sound unit of account. And the US government has hopelessly failed in that responsibility. So it’s not surprising to me to see other countries around the world taking steps for a post-dollar world reserve currency situation.

In other words, you see China building up trade relationships with various partners, trading partners, where goods and services are paid in terms of Yuan, the Chinese currency. You see Germany pulling gold out of the United States. These are types of things that confidence in the US government is eroding. And the concern here is that it could erode very, very quickly, given the fiasco that’s going on in Washington right now.

I think that the debt limit is extremely important. It’s the last form of discipline that we have in terms of controlling government spending. But at the end of the day I think the politicians are going to increase the limit, and when they do it’s going to open another tidal wave of money printing by the Federal Reserve.

- Source, James Turk via a interview with Sprott Money: