Default: The American Way

In a story on reality creeping into the Cheerleading Nitwits Bubble Channel, Michael Panzner links this video of Kenneth Rogoff being interviewed by Keynesian Kool-Aid drinker Steve Liesman.

Bottom line is that countries default all the time. And the United States defaulted in 1933. I found the history of that default in American Spectator fascinating. The U.S. had issued bonds with the explicit promise of gold backing. Then when the debt burden got too difficult, FDR and Congress decided to unilaterally violate the gold clause, devalue the dollar, and pay people off in cheap paper money instead of the gold-convertible sound money they had been contractually promised. If that's not default, I don't know what is.

Now this time around, the government won't have to legally default, because they never promised current bondholders that dollars would be exchangeable for gold or worth anything at all. They can print a one-trillion-dollar bill and ship it to China marked "paid in full." It's not a legal default, but it might as well be, because bondholders get back something that's worth far less than what they paid for the bonds.

Default by inflation is no picnic. It risks hyperinflation, which always causes social unrest, sometimes civil war, and occasionally genocide. And even if hyperinflation is avoided, moderate inflation is brutal on the working class and the elderly, as their wages and savings can't keep up with the rising cost of living.

But just because default by inflation isn't pretty doesn't mean it won't happen. That is the path we're on. Consider that before you shrug off the significance of trillion-dollar deficits as far as the eye can see.


Sic Ibid said...

Public Schools teach kids about biology and chemistry, etc. in great detail, but not about money/currency. They also politicize history curricula, and the total effect is obvious. They are deliberately churning out big-government loving, but economically illiterate kids who will vote for the expansion of government every time.

Just imagine what our U.S. citizenry would be like today if for the last 50 years, schools had been teaching even just the basics of money; economics, finance, banking, debt, different types of currency, and some simple historical examples/ case studies. Lincoln's Greenbacks, for instance, could be a simple lesson in debt-free currency.

It's such a shame, because kids are smart. Do you think a 12 year old child couldn't understand, in a basic way, what FDR did in 1933? Kids would get it. Kids can see fraud and abuse. This is why they're not taught about money in schools. They're supposed to see Money as that strange, powerful, intimidating, complicated thing that only our highly educated, moral, and qualified elected officials can manage for us.

Jr Deputy Accountant said...

I remember the first time I read Panzner's Financial Armageddon (please tell me you have picked it up BY NOW) and he spoke of this as a possibility. I flipped. What? Hyperinflation? Default? WTF was this guy smoking?!

And now nearly 4 years have passed since he wrote it and most of his "predictions" (protectionism, bailouts, social upheaval, political instability) have come true. That leaves us with the hyperinflation scenario.

Why wouldn't they try to print their way out of it? It's what they've been doing all along, now the hole is SO massive that there is no other option.

enjoy your 30 year mortgage, WCV!

and F&^#, Sic, your comment gave me chills. It's ok that kids aren't taught this in school, my son went to an End the Fed rally at 5 and has already been taught about "money". The lesson changes every year as he gets older. It's my responsibility as a parent to teach him this, not the school. Well that and he's in California public schools so it's pretty much my job to teach him everything. Do you know those asshats don't even teach first graders MATH?! WTF. Point being, he got his first lesson in inflation at 5 and hasn't been able to get me to shut up about it since.

Lincoln wanted to free the slaves, if you recall the lesson in school. It wasn't until I was older that I learned the guy could have cared less about the slaves, it was what he considered an aside to his political agenda.

ubu roi said...

Inflation is the insidious way that the smart people stick it to the idiots over time; they know that can't stick it to them straight up, so they boil them a degree at a time. Then they stand around wondering aloud why prices seem to be going up, must be something uncontrollable, like the weather.

Sic Ibid said...

Agreed, JDA, that it's the parent's duty to teach their kids about money. But my point was that the schools obviously don't even have an interest in teaching that topic. It would not benefit the whole government/education complex! I do believe it would help the students, though, to just have some sort of basic economics taught in public schools. Maybe at the very least it would stimulate discussion about the topic at home. I do trust that parents would do a better job of it, but I do not think it's "ok" that schools don't teach this. They should have something basic at least. However, I'd not necessarily trust that it wouldn't result in further brainwashing/dumbing down of the students. That's the rub, I guess, especially there in CA!

Happy Super Tuesday!