Government default? It’s already happened, twicePosted: October 16, 2013 Filed under: Economics, History, Politics, U.S. News, White House | Tags: Federal government of the United States, Gene Sperling, Jack Lew, James Madison, Jimmy Carter, United States, United States Department of the Treasury, US government, White House Leave a comment
Tim Cavanaugh writes: Although President Barack Obama and the establishment media routinely describe a potential federal default as “unprecedented,” the United States government has flaked on its debt service several times, and one expert says the current default has already begun.
The historical default precedents should be of limited comfort to Obama, however. One of the deadbeat presidents was the commander in chief during a disastrous war that saw Washington, D.C. occupied and the White House burned to the ground. The other was Jimmy Carter.
According to Connie Cass of Associated Press, the U.S. government “briefly stiffed some of its creditors on at least two occasions.” The first default took place in November 1814, during the administration of James Madison, America’s tiniest chief executive. Just a few months after the British conquest of Washington, D.C. during the War of 1812, the Treasury was unable to move enough precious metal to service its debt, and missed interest payments on bonds. Boston bondholders, according to Wayne State College history professor Don Hickey, were paid off in short-term interest-bearing treasury notes or more bonds. These debt service troubles, and the war, were resolved within a few months.
A more recent default came in 1979 under President Carter, who, until Obama, held the record for presiding over the country’s longest post-World War II period of economic stagnation. Cass attributes the ’79 default to “a back-office glitch that ended up costing taxpayers billions of dollars.” She writes, “The Treasury Department blamed the mishap on a crush of paperwork partly caused by lawmakers who — this will sound familiar — bickered too long before raising the nation’s debt limit.”
The Carter default is potentially more relevant because it occurred under the 14th Amendment, a post-Civil War change to the constitution that declared the “validity of the public debt….shall not be questioned.”
These precedents for an event the president describes as unexampled in U.S. history are unlikely to get much attention from media that have been eager to ape the administration’s terror-mongering over the debt ceiling increase. Executive branch efforts to whip up hysteria have gotten wide distribution and arguably caused minor financial panic.
The Obama administration has energetically promoted an apocalyptic view of the debt ceiling fight, even though default would not automatically result if Congress failed to hike the U.S. borrowing limit.
These efforts may be bringing diminishing returns, however, as hysteria fatigue sets in among a public that has now listened to six years of flop-sweat screaming from Washington Chicken Littles. Americans were assured of a global financial meltdown during the real estate correction of 2007 and 2008. This did not happen, although the government’s “solution” — multi-trillion-dollar bailouts and stimuli, coupled with a quadrupling of the U.S. monetary base — inflicted persistent, low-level, widespread economic agony that has so far stretched over half a decade, with no end in sight.
A new round of threats came at the beginning of this year. The “fiscal cliff” fight was, as its name implied, advertised as an abysmal plunge in America’s economic well-being. The U.S. briefly went over the fiscal cliff, with no ill effects.
This spring, Americans were warned that the sequester — a slight decrease in the rate of growth in government spending — would cause large-scale economic turmoil. This too occurred, without causing any noticeable damage to the already anemic U.S. economy.
At the end of September, the much-abused American people were again warned of economic Armageddon in the event of a government shutdown. The shutdown is now well into its third week and the economy continues to function.
Even Tuesday’s news that Fitch may downgrade U.S. debt is something we’ve seen before, in January of this year.
One knowledgeable observer even says the default has already occurred. Reuters financial reporter Felix Salmon notes that some large financial firms are moving away from holding U.S. government debt. He argues this is a sign that loss of confidence in Treasury debt has begun to sink America’s economy. This catastrophe too, is more hypothetical than actual.
“The vaseline, in other words, already has sand in it,” Salmon writes. “The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive.”
Sound money advocates, including former Texas Rep. Ron Paul, have long argued that inflation itself is a form of default — and specifically that the federal government’s abandonment of the gold standard during the Depression ripped off creditors who got paid in depreciated dollars rather than in specie.
This thesis rarely gets much traction, in large part because creditors remain satisfied with payment in Federal Reserve greenbacks. Still, it is far more plausible than the recent argument that prioritizing debt service over other government spending is no different than defaulting.
The meme that “prioritization is default by another name” was created in 2011 by Deputy Secretary of the Treasury Neal Wolin. More recently the notion has caught on as a left-wing talking point, and it has been repeated by Treasury Secretary Jack Lew as well as Gene Sperling, director of Obama’s National Economic Council.
Although prioritization is a familiar process to individuals and families who routinely curb spending and tighten budgets in order to avoid missing car, credit card or mortgage payments, neither Lew nor Sperling was laughed at for making this wild claim.
“The administration has been selling this as the first default, and that just ain’t so,” Hickey, the Wayne State professor and author of “The War of 1812: A Forgotten Conflict,” told The Daily Caller.
He pointed out that the 1814 failure, which is widely described as a “technical” default, was in fact a general suspension of interest payments. But it gets little attention — both because the War of 1812, even in the middle of its bicentennial, is largely unknown, and because there is political value in ratcheting up public terror.
“It is in the interest of the party in power and its media allies to cry wolf,” Hickey said. “The more they can persuade the American people that there will be a catastrophe if they don’t get what they want, the more they can get what they want.”
- The Myth that U.S. Has Never Defaulted On Its Debt (ritholtz.com)
- Chart: Why Default Won’t Happen (illinoisreview.typepad.com)
- Debt Default 101: What Happens on Oct. 17? (Or Not) (abcnews.go.com)
- The U.S. Has Repeatedly Defaulted: It’s a Myth that the U.S. Has Never Defaulted On Its Debt (rinf.com)
- U.S. has actually defaulted before (rare.us)
- U.S. put on notice for downgrade (money.cnn.com)
- Claims US never defaulted on debt fall short (mysanantonio.com)
- U.S. never defaulted on its debt? Not so fast (seattletimes.com)
- U.S. Never Defaulted On Its Debt? Not So Fast (huffingtonpost.com)
- Obama Doesn’t Know His History (tomohalloran.com)