Gary Gibson

As you read this, the U.S. government owes just a sliver under $14 trillion dollars to various suckers who’ve lent it money. And it wants to borrow more.

Timothy Geithner warned that a failure to raise the debt limit would mean the government would not be able to make the payments on the current debt in the very near future.

Consult the official record and you’ll read that the U.S. has never defaulted on its obligations. That’s technically true…but then what about when France’s prime minister Charles de Gaulle politely asked the U.S. to hand over the gold it promised was backing the U.S. dollars held by France and other nations?

“No gold for you!” Nixon was heard to say. That’s because the U.S. had printed a lot of dollars in order to pay for Lyndon Johnson’s social programs and war (among other things). There was no way that the ratio of dollars to gold held by the U.S. was still anywhere near an amount that would support the official $35/oz.

What was the real price of gold with all those extra dollars floating around? Who knows? But when they were allowed to own gold again beginning in 1974 Americans bid gold up to over $887/oz in just six years.

Nixon knew back in 1971 that there was no way the U.S. could make good on the dollar at the official rate. The official rate was a lie. If every yahoo with $35 U.S. were to show up at the gold window then, only a small percentage of them would get their gold. So Nixon “closed the gold window.”

But a default by any other name apparently isn’t really a default.

And now Mr. Geithner tells us that in order not to default, the U.S. government has to take on more debt.

Remember, there are certain ways government gets purchasing power…

Steal it directly by openly taxing its subjects (on income, payrolls, transactions, imports, exports, etc)…

Steal it sneakily through currency debasement (inflate paper money supply or clip the coins).

Borrow it.

Number three really isn’t really income, however. And it often leads to number two.

Geithner just admitted that if the U.S. doesn’t borrow more than the current debt ceiling allows, the government wouldn’t be able to meet its obligations. When you can’t pay for your expenses — including the interest on the debt you already owe — is it really a good idea to borrow more?

Maybe you should cut up the credit card, move to a smaller apartment, sell the car and take public transportation, stop eating out so much…any of these things in any combination would help. Borrowing more to fund your lifestyle doesn’t make the list. It just guarantees there will be even more pain to reckon with later.

Borrowing is what got them in this jam. Raising the debt ceiling at this point is about as healthy as having the credit card company extend an individual more credit when he already owes more than he can make in a year.

Some would say not to worry so much. Sure, the national debt is unthinkably high in absolute terms, but as a percentage of GDP the debt isn’t as bad as it was right after WWII. And, say, didn’t the national debt go to zero briefly under President Jackson?

Today the choices for dealing with the debt are pretty simple…

…They raise income by stealing more in taxes, less money is available for business investment and tax revenues ultimately fall.

…They lower expenditures and the net tax recipients could get violent.

…They default honestly and the dollar falls hard and fast.

…They default sneakily by creating new money to monetize the debt and the dollar falls slowly at first…and then hard and fast.

Or they could just raise the debt ceiling and let the next couple of generations worry about it.

They’ll probably just raise the ceiling. They’ll put off the day of reckoning. Who wants to contend with currency collapse and hyperinflationary chaos today? Let it be on our children’s heads…and that of our children’s children.

Gary Gibson
Managing Editor, Whiskey & Gunpowder

January 7, 2011

Gary Gibson

Gary Gibson is the managing editor for Whiskey and Gunpowder. He joins the Whiskey staff as a long-time fan and reader of both Whiskey and Gunpowder and the Daily Reckoning. A graduate of Fordham University, Gary now spends his days reading about and writing on limited government, sound money, personal responsibility and resource investing.

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  • james moylan

    I have a web site where I cover stocks under ten dollars so I like to try and remain positive about things. about the article concerning the national dept. believe it or not I think it would be a good thing if moody or standard & poors downgraded the credit rating of the united states this would finally force are law makers to make drastic cuts in the budget and bring spending under control.

  • Mark Herpel

    I think we all recognize that after a few loud discussions on the Sunday talk shows the debt limits will be raised. It’s the American way!

    This “extension” works fine at the $2 Trillion level, but not so well on $14-20 trillion. These numbers are too big in the face of falling tax receipts. A default is coming soon. What will trigger the default? Who knows, but it’s done and over. The dollar as we have known it will move to the fiat money graveyard. I don’t think anyone I know will be the slightest bit surprised or unprepared. We’ve been reading W&G for years now, nothing shocks us anymore!

  • Brendgard

    “believe it or not I think it would be a good thing if moody or standard & poors downgraded the credit rating of the united states this would finally force are law makers to make drastic cuts in the budget and bring spending under control.”

    Do you really think that alone could even phase congress? They will simply start printing money faster when nobody will loan it to them. To cut the budget is to make voters back home unhappy, or at least the half that don’t pay any taxes. It would be political suicide, ain’t gonna happen.

  • Tim Scanlon


    Nothing hurts like the truth.

  • Mike

    Excellent article, base in fact. The future of the U.S. financial system looks bleak !

  • misterkel

    ‘Default honestly and the dollar falls hard and fast’

    I’ve thought about this one a lot and I’m not sure that’s what would actually happen. If the US globally defaulted (is that force majeure?) then it would have NO MORE DEBT! It would still be the superpower, it would still have the currency, and it would be one of the few countries without debt. Being unlikely to default again anytime soon, it’s currency would shoot upwards in value.
    I don’t know this would happen, but considering market perversity, it just might.

  • Jim Bandinelli

    An analogy I recent read, I think, sends this message home:

    Imagine for a moment that you’ve chosen to smoke cigarettes all your
    life. You’ve ignored the warnings about them that appear all around
    you. Then, eventually, and unfortunately, you get diagnosed with lung

    Luckily, you’ve caught the disease in its very early stages. The doctor presents you with two choices.

    First, you can enter chemotherapy. The road to recovery, the doctor tells you, will be harsh. You’ll suffer extreme nausea. You’ll hardly be able to swallow from the ulcers you develop in your mouth. In short,
    you’ll go through hell in an attempt to beat the disease. But because you caught the disease after the first symptoms appeared, you have a high chance at a full recovery.

    The doctor also offers a second alternative. He’s worked out a deal that allows you to rid yourself of the disease instantly. No pain. No suffering. No hell. All you have to do is agree to give the disease to your 2-year-old grandson.

    In a few weeks we will see who is the coward, what senator will give the disease to their children and grandchildren in order to save themselves. It’s time for a true test of character!

  • Gil Koss

    I think that you’re forgetting something. Nations don’t pay their debts!

    If our marketing/partner nations (like China) don’t extend us more credit…we won’t be able to buy their stuff!
    If we can’t/don’t buy their stuff…their Economy goes under!

    I sure that, in some way, our creditors will find a way to “write off” the debt so we can continue to be a customer.

    If you think I’m wrong, try to find another nation (outside of the Euro-zone) that has repaid its debts!

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