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Washington Won't Default. Maybe it Should.
Rip off the Band Aid or Rip off the American People: Either way they're Bankrupt.
The debt ceiling "X-day," when Treasury finally hits its credit limit and has to stop deficits, just got a lot closer.
The Department of Treasury announced last week they've hit just $68 billion, meaning the Federal government, in theory, has just days before it hits its credit limit and has to immediately stop deficit spending.
The big drop, ironically enough, was a $50 billion interest payment on the debt. Even more ironically enough, a big reason for the X-day acceleration was the FDIC draining $40 billion out of Treasury last Friday.
It seems to fit that bank bailouts would break the piggybank.
To be fair, they might limp along longer — don’t be surprised if they find a few tens of billions lying around in the mega-couch cushion that is the federal balance sheet. Especially given the federal government doesn’t even know how much money it has — less than 1% of government agencies actually pass their legally-mandated audits every year. Because the federal government is a gigantic black hole of money.
Which, come to think of it, might be one place to start balancing the budget.
Still, we’re coming down to the wire here, that glorious day when Americans are finally free from the trillion dollar deficits.
Given the debt ceiling is a law, and the administration’s Constitutional duty is to enforce the laws as written, one might that would mean Janet Yellen is probably spending the day working out what non-essential government spending to cut. Perhaps the billions handed out to illegal immigrants, or the pallets of dollar shipped to every dictator who's short of cash.
America has Already Defaulted. Many Times.
One of the gaslights throughout the debt-ceiling debate has been the incantation of an almost sacred mantra: “The full faith and credit of the United States shall never be questioned.” This is supposed to pressure voters to accept higher spending, intimidating them with the sheer majesty that is government debt.
This is nonsense. In fact the US has defaulted many times, including after the 14th amendment that allegedly forbids it by saying the debt “shall not be questioned.”
The last big default was Nixon closing the gold window in the 1970’s — this meant foreigners no longer got the gold they’d been contractually promised for their dollars. Indeed, it dispossessed all Americans who had been contractually promised gold for dollars. From that moment, US dollars were just green tokens.
Before that the biggest one-off default was FDR, who effectively cancelled 40% of the national debt — including the Liberty Bonds that naive citizens had bought to fund World War I — by cancelling 40% of the value of the dollar itself, dictating the gold value of a dollar drop from 1/20 of an ounce to 1/35 of an ounce.
By the way, there were 14th amendment suits brought against FDR, which were obediently discarded by a pro-government Supreme Court in the 1935 Perry decision – which conservative Justice McReynolds opposed, writing “Just men regard repudiation and spoliation of citizens by their sovereign with abhorrence; but we are asked to affirm that the Constitution has granted power to accomplish both.”
Affirm they did, under threat of court-packing by the dictatorial FDR.
Beyond headline-grabbing defaults, since that 1935 spoilation and repudication the US has added soft defaults on the national debt via inflation nearly every single year -- 84 out of 87 so far.
To the point that today’s dollar is worth 1/2000 of an ounce – 99% gone.
So, yes, default is always on the table by redefining the terms of the debt. But spot the pattern: all of these defaults – 40% under FDR, 50% under Nixon, 99% since the Fed – didn’t just take the debt down, they took all dollars out with them: every bank account, every fixed pension, every dollar saved up in a coffee can.
Basically, the federal government couldn’t get rid of a hornet nest so it burned down the entire town.
Most likely, we’re in for an accelerated version of what was going to happen anyway: the GOP gets some window dressing like returning unspent Covid aid that should've been returned anyway. And otherwise gets goose-stepped into greenlighting another couple trillion so we can all do this again next year but at $33 trillion instead of $31 trillion.
And if, by some miracle, the GOP grows a backbone and insists on either real cuts or on just letting the ceiling hit to end deficits once and for all? Expect the mother of fear campaigns from Biden, cutting every program Americans actually like in order to protect the garbage that's actually causing the deficits -- bailouts, handouts to cronies, activists, and foreign countries at war.
As for the long-run, given it’s now well-established that default is very much possible – in fact, it’s the standard playbook for 84 out of 87 years – one could argue let’s stop defaulting by destroying the dollar, man up and just clean default. Issue new debt for the widows and orphans, and for Wall Street and China devil take the hindmost. If you want 14th amendment “shall not question” insurance, promise repayment in the year 2150 — the debt remains unquestioned, just on different terms. Then we'll see if deficits are still around in 2150.
Because in reality, the choice isn’t between default and “Full faith and credit.” It’s between clean default that only takes down government's financial enablers and the same dirty default we've been doing for a hundred year that takes the US dollar, and takes all Americans, down with it.
I’m not holding my breath, but it’s important to know how to fix a crisis even as we watch the clowns in chief fail to fix it.
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