Treasury Default Not So Unthinkable

Treasury Default Not So Unthinkable

by Rick Ackerman

Originally posted September 1, 2009

Although we can be certain Americans and their government owe far more than they will ever be able to repay, the question of how this debt eventually will be discharged is the economic conundrum of the day. Some think hyperinflation is the only way out, since it would allow debtors to repay all that they owe with worthless bank notes by then in copious supply. However, this is hardly a solution, since those on the receiving end – i.e. the lenders — would be ruined, as would the bond markets, banks and all other institutional conduits and agents of saving.

We’ve argued here that deflation will prevail, visiting pain on borrowers more or less in proportion to their sins. Lenders would wind up with the collateral, mainly in the form of residential real estate, but the advantage in this would probably be far less than what has been imagined by those who see bankers as conniving thieves out to steal the whole world’s tangible assets. In fact, the bankers would have to rent the homes back to those who had defaulted, saddling themselves with the politically unseemly problem of squeezing blood from a stone. Would they risk stirring up the mob, or would they instead settle up on relatively easy terms?  We don’t think they’ll have much choice.

Why No Inflation?

Our reasoning about such things has always been intuitive — and so far correct in explaining why the huge fiscal and monetary blowout by the Federal Government during the last two years has produced no significant inflation. This fact is especially telling in the housing sector, which as the inflationists well know was the main target of the government’s historically unprecedented fiscal and monetary blowout.

Anyone interested in the inflation/deflation “debate,” will be abundantly rewarded by reading the superb essay by Jeffrey Rogers Hummel at the Library of Economics and Liberty.  Hummel does not explicitly support the arguments of the deflationists, but he has nonetheless made a compelling case against the possibility of a Zimbabwe-style hyperinflation. Instead, he sees a much greater likelihood that the U.S. will simply default on some of its Treasury debt while acting to prevent the dollar from plummeting to the threshold of worthlessness. He also explains why “seigniorage” – i.e., revenue generated by monetary expansion – can no longer help the U.S. or any other government buy its way out of trouble.

If you read just one more essay on the subject of inflation/deflation, make it this one by clicking here.

by Rick Ackerman
Originally posted September 1, 2009

Read this, and then click on the accompanying piece
“Why Default  on U.S. Treasuries is Likely”

ALTHOUGH WE CAN BE CERTAIN THAT AMERICANS and their government owe far more than they will ever be able to repay, the question of how this debt eventually will be discharged is the economic conundrum of the day. Some think hyperinflation is the only way out, since it would allow debtors to repay all that they owe with worthless bank notes by then in copious supply. However, this is hardly a solution, since those on the receiving end – i.e. the lenders — would be ruined, as would the bond markets, banks and all other institutional conduits and agents of saving.

We’ve argued here that deflation will prevail, visiting pain on borrowers more or less in proportion to their sins. Lenders would wind up with the collateral, mainly in the form of residential real estate, but the advantage in this would probably be far less than what has been imagined by those who see bankers as conniving thieves out to steal the whole world’s tangible assets. In fact, the bankers would have to rent the homes back to those who had defaulted, saddling themselves with the politically unseemly problem of squeezing blood from a stone. Would they risk stirring up the mob, or would they instead settle up on relatively easy terms?  We don’t think they’ll have much choice.

Why No Inflation?
Our reasoning about such things has always been intuitive — and so far correct in explaining why the huge fiscal and monetary blowout by the Federal Government during the last two years has produced no significant inflation. This fact is especially telling in the housing sector, which as the inflationists well know was the main target of the government’s historically unprecedented fiscal and monetary blowout.

Anyone interested in the inflation/deflation “debate,” will be abundantly rewarded by reading the superb essay by Jeffrey Rogers Hummel at the Library of Economics and Liberty. Hummel does not explicitly support the arguments of the deflationists, but he has nonetheless made a compelling case against the possibility of a Zimbabwe-style hyperinflation. Instead, he sees a much greater likelihood that the U.S. will simply default on some of its Treasury debt while acting to prevent the dollar from plummeting to the threshold of worthlessness. He also explains why “seigniorage” – i.e., revenue generated by monetary expansion – can no longer help the U.S. or any other government buy its way out of trouble.

If you read just one more essay on the subject of inflation/deflation, make it this one by clicking on the link on right column “Why Default  on U.S. Treasuries is Likely”.