The US Government has never defaulted on its debt under the current (~50 year old) global financial system.
It HAS defaulted when transitioning off the gold/silver standard, when the world moved off Breton Woods, and during the Civil War.
I’d note that each of those defaults were related to the total collapse of the existing rules for national/global finance.
So ultimately, these defaults do bolster the case for the “never defaulted” folks: a default could literally bring an end to the current global financial system.
> technical default 32 years ago was blamed on check-processing glitches and quickly corrected . . . affected only a tiny percentage of maturing securities at the time.
Is it (a US default) at all possible given all we know? and if yes, is it possible to envision what would happen specifically? If it will have global repercussions then maybe it is something the global community should insure against, somehow?
These are questions I'd like to have have a grip on. Not an economist, obviously.
Literally nobody knows the answer to these questions beyond the obvious answer of 'yes it's possible, and no it's not probable.' Everything beyond that is speculation, which is going to be more driven by ideological worldview than the unique specifics of the current situation.
People who think things won't change (not only referring to this specific issue) because the USD is still quite strong, remains the world reserve currency, and has survived rough waters in the past have a perfectly reasonable argument, even if it will inevitably be wrong one day. And those who take a bearish outlook on the situation also have a reasonable argument - we're obviously living through a major inflection point in history, the world has been de-dollarizing for decades, and the global economic (and geopolitical) winds are shifting. It's quite reasonable to see a storm on the horizon right now.
The hedging/insuring is "real" stuff. In an economic collapse any sort of financial vessel will become worthless. But after all is said and done, land, rare metals, and "things" in general will all maintain their value. Bill Gates and Ted Turner are currently the top 2 owners of farmland in the US. [1]
> Is it (a US default) at all possible given all we know?
An open question, nobody really knows. As I recall, the president has no option that isn't technically a constitutional violation. We might want to throw this to the SCOTUS and settle it.
Right! This article very misleadingly confuses leaving the Bretton wood agreement and going off the gold standard as defaults. I think that is the same only in the mind of this author, who seems to be trying to normalize something that would be very dumb to do.
They literally were defaults. The reason for Bretton Woods, and the reason the USD became the overwhelming world reserve currency, is that it was directly convertible to gold. Buying USD was as good as buying gold, which meant the currency was not dependent on any given country.
But then due to poor economic policy we found ourselves in a situation where we had far more issued debt (currency) than we had gold. We were forced to default on those debts, withdraw from Bretton Woods, and basically just told the rest of the world 'deal with it.' A famous quote from the Secretary of the Treasury at the time was, "The dollar is our currency, but it's your problem."
Imagine I promise to pay you back in Johannes-money that is pegged to the value of 1kg gold and then when it’s time to pay back I change the peg to 1kg rasins. I bet that’s pretty close to a default in most peoples opinions.
The US defaulting isn't really the most interesting topic at this point - scenarios where it honours its debts became implausible a while ago. It'd be much more interesting to get an honest insight into the views of the Chinese & Japanese leadership (two countries with the largest US dollar holdings) on what they think they are getting out of this.
The numbers are obvious - someone isn't going to be getting much in the way of real repayments. It isn't quite clear who yet where the hammer will hit (my guess is #1 pensioners, #2 foreigners). What do the foreigners think is going to happen? Did they actually buy the outrageous line that the path to prosperity was feeding goods into the US consumer for paper? It seems a tough sell that anyone in a foreign government believed that.
> It'd be much more interesting to get an honest insight into the views of the Chinese & Japanese leadership on what they think they are getting out of this.
Industry. They wanted it. They got it. This is how.
Remember, debt substitutes exports in the balance of trade. Issuing debt pumps assets and dumps exports. Buying debt pumps exports and dumps assets. Countries buy US debt because they want to pump exports. They want real jobs building real things with real infrastructure and real machines.
I wouldn't worry about China getting short-changed. I'd worry more about the implications of the US offshoring its industry. The implications to hard power are obvious, but the domestic implications are more consequential for most of us:
"We used to make shit in this country, build shit. Now all we do is put our hand in the next guy's pocket." - The Wire
No better alternative for the Chinese. US Treasuries are the worlds most liquid and deep markets for money at the nation-state scale. Euro's are still in America's sphere of influence. Holding Yuan just destroys their export economy.
Japanese depend on America for security so they do it as a sort of quid pro quo.
I do agree though: pensioners (i.e. US public) will suffer first. International treasury defaults would threaten US hegemony.
China has been buying gold. They have been preparing for the collapse of the dollar for years. There are some claims that the collapse of the dollar is China's goal.
The Asians have potentially just given huge amounts of real stuff to the US in exchange for ... arguably the exposure? They could have just taken the day off instead and been economically in the same position. "No better alternative" is a bit of a trick in assuming that the natural order of the world is Asians slaving away making life better for someone foreign. It didn't have to be that way.
I'm not saying that they've certainly made a mistake, but "no better alternative" is unimaginative. This is China and Japan we're talking about here, they absolutely had the power to make their own alternatives. Will they be surprised if the US doesn't pay them? The Russians saw it coming, they were doing exercises and whatnot years in advance of the asset seizures.
> The fourth default was the 1971 breaking of the U.S. government’s commitment to redeem dollars held by foreign governments for gold under the Bretton Woods Agreement.
Bretton Woods is a fascinating topic on its own. Accidental Superpower is a good read that dives in a little, but isn't focused specifically on it. I can't resist bringing up that book because in one of the later chapters, it predicted the invasion of Ukraine, IIRC, down to the month.
It's an interesting book and I think it's worth a read.
The author, Peter Zeihan, does a good job of melding geography, demographics, energy, and food supply to come up with a deterministic approach to geo-politics.
I have no clue how accurate it is, but it's a fun mental algorithm for simplifying complex and nuanced situations.
His prediction, and I'm paraphrasing here, was that Russian Demographics are more or less in free fall. Every year after ~2020 the Russians have less and less fighting age men and their army will be weaker and weaker.
Additionally, because most of populated Russia is a flat plane, they have no geographic barriers to protect their cities. Therefore they need to forward position their troops in order to feel secure.
So his assertion, was that based on previous Russian military conflicts, Ukraine was the next most likely target, and that if Russia wanted to do anything, they'd have to do something sometime earlier on in this decade. Otherwise they can't field an army of significant size to forward position their troops.
The past Bretton Woods system and US currency seemed to change from a process which can converting notes into precious metals into a process which can convert notes into military hardware and oil. Is there a name for this?
The "petrodollar". But more fundamentally the bit of Bretton Woods that survived was the deal that the United States would guarantee the security of global trade (that's the Navy's real mission) in exchange for a discount on imports. Unlinking from gold only cemented their position.
Our politics is so dysfunctional. We waste tremendous amounts of time making the same arguments over and over and over, like somehow this time will be different. I assume both sides want it to continue, though I don't really understand the motivations from the left. The right is super easy to understand, it's a huge win for them every time.
Notice each time the U.S. defaulted it brought economic turmoil, something The Hill didn't point out. Also, the U.S. has never defaulted under the current global financial system. If they do then they can expect even greater pushback on continuing to use the U.S. dollar as the world's reserve currency and Americans can expect to see significantly higher inflation for the next several years.
I seem to recall in 2021 when the last debt ceiling issues emerged the same political cosplay took place. It's being used as leverage, last time it was close too, they ultimately got it across the line.
Readit News
It HAS defaulted when transitioning off the gold/silver standard, when the world moved off Breton Woods, and during the Civil War.
I’d note that each of those defaults were related to the total collapse of the existing rules for national/global finance.
So ultimately, these defaults do bolster the case for the “never defaulted” folks: a default could literally bring an end to the current global financial system.
Edit: corrected 75->50 year old system
Except for 1979:
* https://www.reuters.com/article/usa-debt-default-idUSN1E76A0...
* https://www.theatlantic.com/business/archive/2013/01/heres-w...
* https://archive.is/jKayD
Not exactly the same thing.
> It HAS defaulted when transitioning off the gold/silver standard, when the world moved off Breton Woods, and during the Civil War.
If moving off of Breton Woods was a default, then your first statement is wrong, and the US hasn't defaulted on its debt in 50 years:
https://en.wikipedia.org/wiki/Bretton_Woods_system#Paralysis...
(Changed it)
These are questions I'd like to have have a grip on. Not an economist, obviously.
People who think things won't change (not only referring to this specific issue) because the USD is still quite strong, remains the world reserve currency, and has survived rough waters in the past have a perfectly reasonable argument, even if it will inevitably be wrong one day. And those who take a bearish outlook on the situation also have a reasonable argument - we're obviously living through a major inflection point in history, the world has been de-dollarizing for decades, and the global economic (and geopolitical) winds are shifting. It's quite reasonable to see a storm on the horizon right now.
The hedging/insuring is "real" stuff. In an economic collapse any sort of financial vessel will become worthless. But after all is said and done, land, rare metals, and "things" in general will all maintain their value. Bill Gates and Ted Turner are currently the top 2 owners of farmland in the US. [1]
[1] - https://www.farmlandriches.com/largest-farmland-owners/
An open question, nobody really knows. As I recall, the president has no option that isn't technically a constitutional violation. We might want to throw this to the SCOTUS and settle it.
But then due to poor economic policy we found ourselves in a situation where we had far more issued debt (currency) than we had gold. We were forced to default on those debts, withdraw from Bretton Woods, and basically just told the rest of the world 'deal with it.' A famous quote from the Secretary of the Treasury at the time was, "The dollar is our currency, but it's your problem."
When Nixon decided to end Bretton Woods.
Deleted Comment
The numbers are obvious - someone isn't going to be getting much in the way of real repayments. It isn't quite clear who yet where the hammer will hit (my guess is #1 pensioners, #2 foreigners). What do the foreigners think is going to happen? Did they actually buy the outrageous line that the path to prosperity was feeding goods into the US consumer for paper? It seems a tough sell that anyone in a foreign government believed that.
Industry. They wanted it. They got it. This is how.
Remember, debt substitutes exports in the balance of trade. Issuing debt pumps assets and dumps exports. Buying debt pumps exports and dumps assets. Countries buy US debt because they want to pump exports. They want real jobs building real things with real infrastructure and real machines.
I wouldn't worry about China getting short-changed. I'd worry more about the implications of the US offshoring its industry. The implications to hard power are obvious, but the domestic implications are more consequential for most of us:
"We used to make shit in this country, build shit. Now all we do is put our hand in the next guy's pocket." - The Wire
Japanese depend on America for security so they do it as a sort of quid pro quo.
I do agree though: pensioners (i.e. US public) will suffer first. International treasury defaults would threaten US hegemony.
I'm not saying that they've certainly made a mistake, but "no better alternative" is unimaginative. This is China and Japan we're talking about here, they absolutely had the power to make their own alternatives. Will they be surprised if the US doesn't pay them? The Russians saw it coming, they were doing exercises and whatnot years in advance of the asset seizures.
Do you mean this debt ceiling cycle or in general?
Bretton Woods is a fascinating topic on its own. Accidental Superpower is a good read that dives in a little, but isn't focused specifically on it. I can't resist bringing up that book because in one of the later chapters, it predicted the invasion of Ukraine, IIRC, down to the month.
The author, Peter Zeihan, does a good job of melding geography, demographics, energy, and food supply to come up with a deterministic approach to geo-politics.
I have no clue how accurate it is, but it's a fun mental algorithm for simplifying complex and nuanced situations.
His prediction, and I'm paraphrasing here, was that Russian Demographics are more or less in free fall. Every year after ~2020 the Russians have less and less fighting age men and their army will be weaker and weaker.
Additionally, because most of populated Russia is a flat plane, they have no geographic barriers to protect their cities. Therefore they need to forward position their troops in order to feel secure.
So his assertion, was that based on previous Russian military conflicts, Ukraine was the next most likely target, and that if Russia wanted to do anything, they'd have to do something sometime earlier on in this decade. Otherwise they can't field an army of significant size to forward position their troops.
https://en.m.wikipedia.org/wiki/Petrocurrency
* Politicians play chicken, waiting until the last possible moment
* The markets get upset in the meantime and this impacts US Treasury bond prices
* Eventually the limit is raised, right before the deadline
The estimated deadline is approximately mid August, though could be somewhere between June and early September.
In the long term, either we need something that provides massive growth (increased tax revenues, reduced welfare spending), or we'll default.
A default in 2023 is not impossible, though is definitely unlikely.
There is no coherent Left in the US: instead we have one tent for every person who isn't conservative.
Dead Comment
My wife was working in transportation consultancy and there was a sudden drop in the amount of work.
The national parks were free to go in an out, so we decided to go to the death valley. I saw the biggest pile of trash ever inside a park.
House approves debt ceiling extension through early December: https://edition.cnn.com/2021/10/12/politics/house-vote-debt-...
White House rules out concessions over debt ceiling while GOP refuses to help avert crisis : https://www.washingtonpost.com/us-policy/2021/09/20/white-ho...
House passes debt ceiling increase, sending it to Biden to avoid default hours before deadline : https://www.cnbc.com/2021/12/14/debt-ceiling-democrats-to-vo...
* https://www.youtube.com/watch?v=1FXuMs6YRCY