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).
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.
Managing Editor, Whiskey & Gunpowder
January 7, 2011
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.
Pingback: Tweets that mention A National Debt That Will Never Be Repaid -- Topsy.com()
Pingback: A Debt That Will Never Be Repaid « Defund & Disobey()
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.
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!
“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.
Nothing hurts like the truth.
Excellent article, base in fact. The future of the U.S. financial system looks bleak !
‘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.
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!
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!
Pingback: The Fiscal Cliff and Raising Taxes | Flyover-Press.com()
Seeing that many lenders want you to allow these phones withdraw a
payment from that account as soon as your loan is due. This sort of loan is exclusive because it does not demand any
sort of collateral to provide secureness for your lender.
Pingback: Love Letters For Her()
The clock is ticking down to April 15th. TaxBot founder, Sandy Botkin, outlines the five big tax changes for 2015 you need know before you file...
Look, we're not contrarian just for the sake of being contrarian. Only idiots are. And yes, the market will eventually drop. But the charts will tell us when it's time to sell. And right now, they're screaming "BUY". There's simply no other way to put it.
The trouble with money printing, explains David Stockman, is that it's responsible for Tesla. Armed with earnings figures, he shreds the company’s visage to pieces...
This year, we expect China to reveal just how much gold it owns. Today, our friend, Frank Holmes, gives his insight on how China could buy even more gold in the near future. And we’ve got every reason to believe it could upset the gold markets any day now, with great results for gold investors…
Where can you reasonably expect to make 50% in the next six months… and in the oil-patch, no less? The best way to play this short-term opportunity is with a handful of well-positioned refiners. Jody Chudley tells all...
Oil isn't magically jumping to $100 anytime soon. As I said, it could fluctuate around $50 for the foreseeable future. That's great news for businesses using a lot of fuel. Operating costs are way down, which means higher profits. And higher stock prices.