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Should the U.S. government default?
The right question: Can the U.S. government avoid defaulting? The answer is clear: no.
It will default. It is $222 trillion in the hole. That’s the present value of its future obligations.
Of course it’s going to default.
Would that be bad? Not for taxpayers. Would it be bad for the Powers That Be who run this country? Yes. Devastating.
Would it be bad for federal bureaucrats? Yes. They would lose their jobs.
Would it be bad for people who are dependent on the federal welfare state? For a while, yes. But they will recover. Necessity is the mother of invention.
It’s coming. The mainstream media have ignored this statistically inevitable problem. The problem threatens the Establishment as no other. So, the media pretend it does not exist. But the blackout may at long last be cracking. We read this on PBS.
Alasdair Roberts: In last night’s State of the Union Address, President Barack Obama asked Congress to promise that the United States would never default on its debt. “Let’s agree,” Obama said, “to keep the people’s government open, pay our bills on time, and always uphold the full faith and credit of the United States of America.”
It’s incredible that the leader of an economic superpower should feel obliged to say anything about the need to honor the country’s debts. But there’s no doubt that default would cause enormous damage to America’s reputation abroad. We already have the evidence, provided by one of the most humiliating moments in America’s economic history.
He gives a history of state defaults in the 1830s and 1840s.
He says they were a disaster. They weren’t, which is why we never hear of them. The defaults merely ruined the reputations of state politicians and their boondoggles. There were lots of boondoggles.
State governments wanted in on the action. Voters were pleading for new infrastructure – canals, railroads and turnpikes – as well as more access to loans to speculate in real estate. Legislators believed they could meet those demands easily. States could establish government-owned banks that borrowed at 3 percent in London and lent at 6 percent at home. Or they could repay infrastructure loans from the tolls and fees that were sure to come from new roads, railways and canals.
It seemed like a riskless proposition, and states borrowed massively. Within three years, from 1836 to 1838, U.S. states incurred obligations equal to the combined national debt of Russia, Prussia, and the Netherlands.
Then the bubble burst.
It caused ripples. The Great Boondoggler Daniel Webster had been on the payroll of the Second Bank of the United States ever since 1819. He was its main lawyer. It paid him a fortune. Because Congress failed to renew its charter in 1832, it lost its monopoly as America’s central bank in 1836. Webster then became a well-paid promoter of state bonds. He had assured British investors that these investments were risk-free.
British investors had been assured by statesmen such as Daniel Webster that state bonds were a safe bet. No state, Webster said in London in 1839, would risk “dishonor and disgrace” by defaulting.”
British investors were suckers.
So were American investors.
The wave of defaults compelled Americans to rethink this sunny view of democratic rule. The crisis seemed to show its darker side. Democratically elected legislatures could be swayed by popular passions or compromised by logrolling and corruption. Some kind of check seemed necessary. “We have not that perfect confidence in ourselves,” said one legislator in the late 1840s. “And we take our cool and calm moments to protect ourselves against the sudden and dangerous impulses of passion and prejudice.”
So, did America’s economy stop growing? No. Did investors learn their lesson? No. Did the Civil War vastly increase the government’s debt? Yes.
Will the federal government default? Yes. Will investors learn their lesson? Not for long. But for a time, yes.
Here is the lesson: Do not trust a politician who says America cannot, must not, and will not default.
Here is the rule: “Never believe a rumor until it is officially denied by the government.”
Obama has officially denied it.
February 16, 2013
Copyright © 2013 Gary North