Mandeville, LA – Exclusive Transcript – If we go back to October the 11th, interview given by James Grant of Grant’s Interest Rate Observer, you would have found this posted at the Washington Compost under the headline “Has The United States Ever Defaulted?” Grant’s answer is: Yes, and it’s going to default again; it’s inevitable. Check out today’s transcript for the rest…
Begin Mike Church Show Transcript
Mike: If we go back to October the 11th, interview given by James Grant of Grant’s Interest Rate Observer, you would have found this posted at the Washington Compost under the headline “Has The United States Ever Defaulted?” Grant’s answer is: Yes, and it’s going to default again; it’s inevitable.
The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.
Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.
Things were very different when America owed the kind of dollars that couldn’t just be whistled into existence. By 1790, the new republic was in arrears on $11,710,000 in foreign debt. These were obligations payable in gold and silver. Alexander Hamilton, the first secretary of the Treasury, duly paid them. In doing so, he cured a default.
Hamilton’s dollar was defined as a little less than 1/20 of an ounce of gold. So were those of his successors, all the way up to the administration of Franklin D. Roosevelt. But in the whirlwind of the “first hundred days” of the New Deal, the dollar came in for redefinition. The country needed a cheaper and more abundant currency, FDR said. By and by, the dollar’s value was reduced to 1/35 of an ounce of gold. [Mike: Grant is restating what Professor McCulloch said.]
By any fair definition, this was another default. Creditors both domestic and foreign had lent dollars weighing just what the Founders had said they should weigh. They expected to be repaid in identical money.
The “American default,” as this piece of domestic stimulus was known in foreign parts, provoked condemnation in the City of London. “One of the most egregious defaults in history,” judged the London Financial News. “For repudiation of the gold clause is nothing less than that. The plea that recent developments have created abnormal circumstances is wholly irrelevant. It was precisely against such circumstances that the gold clause was designed to safeguard bondholders.”
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Mike: In other words, Roosevelt screwed everyone that was holding bonds backed by gold, which was all of them. So the United States, in 1933, defaulted on its debt. Gosh, we’re still here. I saw the moon this morning. I am actually confident that the sun will rise today. We might even see American flags raised on flagpoles today. And there was a default in 1933? Grant continues:
The lighter Roosevelt dollar did service until 1971, when President Richard M. Nixon lightened it again. In fact, Nixon allowed it to float. No longer was the value of the greenback defined in law as a particular weight of gold or silver. It became what it looked like: a piece of paper.
Yet the U.S. government continued to find trusting creditors. Since the Nixon default, the public’s holdings of the federal debt have climbed from $303 billion to $11.9 trillion.
If today’s political impasse leads to another default, it will be a kind of technicality. Sooner or later, the Obama Treasury will resume writing checks. The question is what those checks will buy.
“Less and less,” is the Federal Reserve’s announced goal. Under Chairman Ben Bernanke (with the full support of the presumptive chairman-to-be, Janet Yellen), the central bank has redefined price “stability” to mean a rate of inflation of 2 percent per annum. Any smaller rate of depreciation is an unsatisfactory showing to be met with a faster gait of money-printing, policymakers say.
In other words, the value of money has become an instrument of public policy, not an honest weight or measure. In such a setting, an old-time “default” is impossible. How can a creditor cry foul when the government to which he is lending has repeatedly said that the value of the money he lent will shrink?
The post-1971 dollar derives its value from the stamp of the government that issues it. Across the seas, this imprimatur is starting to look a little tenuous. Lend us your dollars for 10 years, the Treasury proposes. We will pay you the lordly interest rate of 2.7 percent per annum. And at the end of those 10 years, we will hand you back your principal, which will almost certainly buy less than the money you lent.
This is the unsustainable conceit of the world’s superpower-cum-super debtor. By deed, if not audible word, we Americans say: “The greenback is the world’s great monetary brand. You have no choice but to use it. Like it or lump it.” But the historical record of paper currencies is clear: Governments always over-issue it. The people finally do lump it.
What to do? Let us face facts: We have defaulted in the past. Let us confront the implied message of the Federal Reserve’s pro-inflation policy: We will default in the future, though no lawyer will call it “default.” And let us preempt the world’s flight from our intangible money by taking steps to fashion a 21st-century improvement. We have the gold and the brains to find the solution.
Mike: A couple of things that we’ve learned in the first 21 minutes of the program today. Number one, the United States, contrary to the lie being promoted by nearly every human being alive today that can get in front of a microphone or a television camera has defaulted on her debts before, I repeat, has defaulted on her debts before. As Jim Grant points out, we are currently defaulting every single year over year because the money we promised to pay back in 2012 that was borrowed will not be worth the money that will be paid back in 2013, because we, by definition, intentionally devalue it. We admit that we devalue it. Yet, Moody’s and Fitch have the unmitigated gall to say that if we don’t continue the enterprise they’re going to downgrade our debt? Why haven’t they downgraded it already? What is it worth? If you buy it today, it’s not going to be worth the same as it is worth today in purchasing power one calendar year from today. That’s locked in. It’s guaranteed. What are you buying? You are buying the fallacy and the fantasy that economies can be built on debt, and that all that has to happen is just keep printing money, keep borrowing. Don’t ever actually pay back what you have borrowed.
If I’m to read Fitch’s threat to downgrade our debt, let me translate the “U.S. is on debt downgrade watch.” Let’s translate this. If the United States were to choose to become austere or to actually manage its economic and fiscal affairs in a manner that is consistent with the prudence that such a large undertaking deserves and should be managed under, then it wouldn’t acquire any more debt. It already has too much. It would try to pay back what it’s already borrowed, and, while it’s doing that, live within its means. The government won’t have any problem putting you — they get to write the bankruptcy laws — they’ll put you on a bankruptcy repayment diet, won’t they? They’ll make you pay back your creditors while you have done what? While you have adjusted your expendable income. In other words, they’ll put you on a spending diet. If we’re to translate the threat from Fitch that they’re going to downgrade our future debt, we’re on negative debt downgrade watch, which is kind of like saying you’re on double secret probation. If we’re to translate that and understand it correctly, what they’re saying is that if the American people through their agent, the federal leviathan, do not continue to be the world’s greatest debtor nation in the history of the planet and do not continue spending money that they don’t have by borrowing it while promising to default on it, then they’re not going to be our buddies anymore. They’re not going to give us that AAA rating.
End Mike Church Show Transcript