No More Debt Drama, Please

Recently by John Tamny: Why Tyler Cowen, ‘America’s Hottest Economist’, IsWrong

In their 2009 book, This 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 to default.

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.

Reinhart and 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 for clarifying this) in nominal dollars terms would have to find a way to make do with less money to spread around.

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