March to Default

“May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity.

Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”  We assume this was directed at President Trump.  But what Waters meant by this was sufficiently vague.  There was no guidance as to how President Trump should be getting ready.

Should he pack his bags?  Should he double knot his shoelaces?  Should he say a prayer?

Naturally, the specifics don’t matter in the darnedest.  Rather, these days, it’s style over substance in just about everything.  This is why Waters – a committed moron – rises to the top of class in the lost republic of the early 21st century.

At the same time, the individual has been displaced by the almighty aggregate.  Economists pencil out the unemployment rate, with certain omissions, as if it represents something meaningful.  Then lunkheads like Waters repeat it as if it’s the gospel truth.  Somehow, through all of this, our representatives are oblivious to what’s really going on; that the U.S. government is just months away from a possible default.

The Dutch Experience

Last week, via our friends at Zero Hedge, we came across as article by Simon Black of Sovereign Man titled, The U.S. Government Now Has Less Cash Than Google.  Inside, Black details the invention of the government bond in 1517 Amsterdam and the long term ramifications for the Dutch government.  Here we turn to Black for edification:

“It caught on slowly.  But eventually government bonds became an extremely popular asset class.  Secondary markets developed where people who owned bonds could sell them to other investors.  Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.  In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.

“This practice caught on across the world.  International markets developed.  English investors bought French bonds.  French investors bought Dutch bonds.  Dutch investors bought American bonds.  (By 1803, Dutch investors owned a full 25 percent of U.S. federal debt.  By comparison, the Chinese own about 5.5 percent of U.S. debt today.)

“Throughout it all, debt levels kept rising.  The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.  But people kept buying the bonds, convinced that the Dutch government will never default.

“Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.  It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68 percent of tax revenue just to service the debt.

“Well, in 1814 the impossible happened: the Dutch government defaulted.  And the effects were devastating.

“In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.

“That, of course, is just one example.  History is full of events that people thought were impossible.  And yet they happened.  Looking back, they always seem so obvious.”

March to Default

Like the Dutch several hundred years ago, everyone believes it’s impossible for the U.S. government to default on its debt obligations.  U.S. Treasuries are considered the safest investment in the world.

Nonetheless, a series of events are coming down the turnpike in such rapid succession that Washington will be incapable of dealing with them.  Before Congress can say knife, irreparable damage will be done to the government’s financial standing.

No doubt, the great story of our time, that few seem to appreciate, is the increasing likelihood the U.S. government will default on its debt before the year is over.  Of course, this isn’t a certainty.  But by simply connecting a dot or two, one can construct a highly plausible scenario where this happens.

Presently, the national debt is over $19.8 trillion.  The $20.1 trillion debt ceiling will be reached in the second quarter.  After that, Treasury Secretary Steven Mnuchin will be forced to take extraordinary measures to avoid a default.

However, Mnuchin can only rob Peter to pay Paul for so long.  By summer’s end, Congress will have to increase the borrowing limit or suffer a default.

Most likely Congress will wait until the 11th hour to take action.  They have in the past.  But this time, given its complete dysfunction, Congress may not get it done.

Yesterday, the Obamacare repeal and replace vote was postponed so the Republicans could circle the wagon.  Today they’ll try it again.  Regardless of the outcome, this highlights why Congress will be unable to raise the debt ceiling.  There’s just plain too much animosity to get it done.

Ultimately, the quickest way to reduce the size of government is to cut off its funding.  Here at the Economic Prism, where we believe in smaller government and greater individual autonomy, a U.S. government default sooner rather than later is more preferable.

Still, the march to default is a stoic trudge.  For the looming chaos to financial markets, the economy, and everything else will be unconditionally ruthless.

Sincerely,

MN Gordon
for Economic Prism

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One Response to March to Default

  1. John says:

    I ignore people who say failure to raise the debt ceiling is default.

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