Tuesday, May 10, 2016

History Shows Us Government Inevitably Default On Their Debt Obligations

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Trump's suggestion that the US could indirectly default on its debt by buying back debt at less than face value has raised few eyebrows in mainstream media; either media is poorly schooled by the lessons of history or lacks the independence to report it. For starters, governments inevitably default on their debt obligations. There are very few exceptions to this observation. Second, while indirect defaults is a popular tactic used by all levels of governments, their not discussed openly or frankly with the public. For example, Detroit suspended payments on its municipal bonds during the Great Depression from 1937 to 1963. In other words, Detroit defaulted on its debt after 1937.

Trump is right, China may want out of its massive US debt position at some point. Unfortunately, they'll never get out if confidence in sovereign debt is failing worldwide. Little more than a rumor of official Chinese selling would coax plenty of front-running and higher interest rates.

Higher interest rates driven by the invisible hand rather than illusion of public policy will have the majority questioning the logic of perpetual spending and borrowing by its representatives as the business cycle transitions to liquidation. Those that have actually read The Constitution of the United States know that the Founding Fathers did.

Headline: Donald Trump's Glorious Threat To Default On The National Debt Is Just The Conventional Wisdom

Donald Trump has pointed out that if the US got into trouble with the national debt then it would be possible to negotiate that debt down. Perhaps buy it back at a discount, negotiate somehow with the holders of the debt so that they will agree to take less than the full amount they are owed. This has of course had all sorts of people up in arms: but the glory of this is that The Donald is exactly correct here, even if we usually prefer that people don’t say so. To prove this point I would mention just four words: Puerto Rico, Argentina, Greece. For what is it that all right thinking people, all financiers, bien pensants and politicians have been calling for in those three cases?


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