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Washington Is Quietly Repudiating Its Debts
by moonwolf | August 23, 2008 at 08:12 am | 254 views | 7 comments | 22 recommendations
A relatively new and unexpected facet of fiscal mismanagement by the White House, The Federal Reserve and the US Treasury is fueling runaway inflation and putting the already floundering American economy at ever greater risk. The following editorial is from the Wall Street Journal.
"Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer "no" without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.
In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold.
The bond markets are certainly not protecting creditors from the risk of what Smith called "pretended payment" through inflation. Nor did they do so until far into the great inflation of the 1970s. Not until late 1977 and into 1978 did the bond market fully incorporate the reality of the debased dollar, by demanding higher long-term interest rates.
How can this happen? Markets are supposed to be forward-looking and efficiently price in all relevant risks. Yet monarchs have been repudiating debt explicitly and implicitly throughout recorded history.
Many years ago, the Austrian economist Ludwig von Mises offered an explanation. He suggested that while you can't, in Abraham Lincoln's words "fool all of the people all of the time," you can fool all of the people at least some of the time. And this is easier to do if a central bank has in the past earned credibility in fighting inflation."
August 23, 2008 at 08:12 am by moonwolf, 254 views, 7 comments
Most RecentMost Recommended Comments (7)
at 11:00 on August 23rd, 2008
moonwolf, I like this story. It's good stuff. Oh Canada!!
at 11:13 on August 23rd, 2008
Thanks Barry!
at 11:39 on August 23rd, 2008
yer welcame, anytime, least ah cud do fer throwing out yer issue of the comminist maneefesto, ah kepts the centerfold though, that is one fine lookin tractor!
at 03:35 on August 24th, 2008
Hi moonwolf. Good stuff and an important article.
The WSJ article is worth reading and the implications of government budget should be at the center of the current US election. By coincidence the same argument has broken surface in the UK this weekend. Leading right wing politicians {See article} want to see a future Conservative government cut its expenditure cloth just like the voters are now being forced to do – and tax cuts to stimulate the economy. Perhaps they read your post.
The popularity of Britain’s New Labo{u}r party comes from the killing of their socialist dragon – once the cornerstone of Labo{u}r party principles. Now, you never hear the word even murmured. But New Labo{u}r’s BIG government expenditure reminds me of British Labo{u}r governments of the past. It shocks me just how intrusive the government is here in everyday life. One in four work for the government. That may help Britain win Olympic gold medals but what do these people add to Britain’s GDP? Nothing.
Clearly, they have not culled enough dragons.
at 08:10 on August 25th, 2008
Hey thanks Anglo! Inflation, the deadly hidden tax that gets foisted on the people by irresponsible fiscal policies of governments!
at 08:27 on August 25th, 2008
moonwolf, I like this story. It's good stuff.
Great, maybe we should all follow there excemple.....
at 10:16 on August 25th, 2008
moonwolf, I like this story. It's good stuff.
This is the major problem of the West. We have governments that just love spending money (thusly increasing their own power) and none of them have any idea how the economy works.
Seriously folks, how else do we get statements like "take those profits and give them to the people" [paraphrasing Obama, Hillary Clinton, and probably nearly every other democrat] or "in a downturn we should just throw money out of a helicopter to stimulate things [paraphrasing Bernanke].
And the republicans are just as bad many times. Our government's budget has ballooned under Bush. What's worse is that no matter who is in office we have morons in government thinking they know where the economy should go (i.e. we need low-income people getting homes, we need corn based ethanol, we need to protect our sugar producers, we need, we need, we need!).
Get those %#%$#%$% boneheads out of the economy!
One last thing - if inflation is leading to a covert repudiation of our debt then it wasn't by design. When we bailed out Freddie and Fannie what our government was basically doing was making sure that Freddie and Fannie's creditors got paid. Who were their creditors? You, me, China, other sovereign wealth funds, etc.
How should we fix this? I'm not convinced that the gold standard is a bad idea but, if we can't do that, how about replacing the Fed with a computer? I think Friedman suggested that at some point.
Anyways, good post. Always glad to see a story from CATO.