Style Over Substance

“May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”

 

Well, Maxine Waters is obviously right – impeaching the president is an urgent task of the utmost importance. As everybody knows, he is best friends with Vladimir Putin, the shirtless barbarian who rules the Evil Russian Empire (they were seen drinking kompromat together in Moscow, a vile Russian liquor that reportedly tastes a bit like urine. Senator McCain has the details on that story). And as Maxine Waters has just disclosed, Putin’s armies are recently advancing into Korea! We cannot let this stand, or he’ll invade Kekistan next (note that he already controls Limpopo and Gabon). Who knows where it will end?

 

We assume this was directed at President Trump.  But what Waters meant by this was sufficiently vague.  There was no guidance as to how President Trump should be getting ready.

Should he pack his bags?  Should he double knot his shoelaces?  Should he say a prayer? Naturally, the specifics don’t matter in the darnedest.  Rather, these days, it’s style over substance in just about everything.  This is why Waters – a committed moron – rises to the top of class in the lost republic of the early 21st century.

At the same time, the individual has been displaced by the almighty aggregate.  Economists pencil out the unemployment rate, with certain omissions, as if it represents something meaningful.  Then lunkheads like Waters repeat it as if it’s the gospel truth.

Somehow, through all of this, our representatives are oblivious to what’s really going on; that the U.S. government is just months away from a possible default.

 

The Dutch Experience

Last week, via our friends at Zero Hedge, we came across as article by Simon Black of Sovereign Man titled, The U.S. Government Now Has Less Cash Than Google.  Inside, Black details the invention of the government bond in 1517 Amsterdam and the long term ramifications for the Dutch government.  Here we turn to Black for edification:

 

“It caught on slowly.  But eventually government bonds became an extremely popular asset class.  Secondary markets developed where people who owned bonds could sell them to other investors.  Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.  In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.

“This practice caught on across the world.  International markets developed.  English investors bought French bonds.  French investors bought Dutch bonds.  Dutch investors bought American bonds.  (By 1803, Dutch investors owned a full 25 percent of U.S. federal debt.  By comparison, the Chinese own about 5.5 percent of U.S. debt today.)

“Throughout it all, debt levels kept rising.  The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable– wars, infrastructure, and ballooning deficits.  But people kept buying the bonds, convinced that the Dutch government will never default.

“Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.  It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68 percent of tax revenue just to service the debt.

“Well, in 1814 the impossible happened: the Dutch government defaulted.  And the effects were devastating.

“In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.

“That, of course, is just one example.  History is full of events that people thought were impossible.  And yet they happened.  Looking back, they always seem so obvious.”

 

Amsterdamsche Wisselbank, a.k.a. the Bank of Amsterdam. The bank’s history is deeply intertwined with the Dutch march toward default in 1814. When the bank was originally founded, it was rightly considered the soundest bank in Europe – it was 100% reserved and for a long time its notes were indeed “as good as gold” and were accepted in payment all over Europe. Holland’s downfall was closely tied to the decision to abuse the bank’s hard-won reputation by surreptitiously forcing it to adopt fractional reserve banking in order the fund the government (in particular, in order to fund its wars).

Painting by Gerrit Adriaenszoon Berckheyde

 

March to Default

Like the Dutch several hundred years ago, everyone believes it’s impossible for the U.S. government to default on its debt obligations.  U.S. Treasuries are considered the safest investment in the world.

Nonetheless, a series of events are coming down the turnpike in such rapid succession that Washington will be incapable of dealing with them.  Before Congress can say knife, irreparable damage will be done to the government’s financial standing.

No doubt, the great story of our time, that few seem to appreciate, is the increasing likelihood the U.S. government will default on its debt before the year is over.  Of course, this isn’t a certainty.  But by simply connecting a dot or two, one can construct a highly plausible scenario where this happens.

 

The federal debtberg. As Ludwig von Mises noted: “The long-term public and semi-public credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come!” – click to enlarge.

 

Presently, the national debt is over $19.8 trillion.  The $20.1 trillion debt ceiling will be reached in the second quarter.  After that, Treasury Secretary Steven Mnuchin will be forced to take extraordinary measures to avoid a default.

However, Mnuchin can only rob Peter to pay Paul for so long.  By summer’s end, Congress will have to increase the borrowing limit or suffer a default. Most likely Congress will wait until the 11th hour to take action.  They have in the past.  But this time, given its complete dysfunction, Congress may not get it done.

Yesterday, the Obamacare repeal and replace vote was postponed so the Republicans could circle the wagon.  Today they’ll try it again.  Regardless of the outcome, this highlights why Congress will be unable to raise the debt ceiling.  There’s just plain too much animosity to get it done.

Ultimately, the quickest way to reduce the size of government is to cut off its funding.  Here at the Economic Prism, where we believe in smaller government and greater individual autonomy, a U.S. government default sooner rather than later is more preferable.

Still, the march to default is a stoic trudge.  For the looming chaos to financial markets, the economy, and everything else will be unconditionally ruthless.

 

Chart by St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

6 Responses to “March to Default”

  • Kafka:

    “the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.”

    Or correctly put, “the default recognized 1/3 to 1/2 of the country’s wealth never existed in the first place.” Money illusion- we’ve been practicing it for generations.

  • frozeninthenorth:

    OK so your argument that America is about to default is the debt ceiling? Really — America’s congress decided on an arbitrary number based on nothing except that there is too much debt — of course now we have a republican administration so that’s no longer an issue.

    America can continue to borrow or can decide to not repay its loans (with new loans). This is a false problem.

    As for Maxine — she’s talking to here “tribe” the same way the Freedom Caucus is talking to its tribe. Although this has to be the first time in a very long time (by my reckoning since shortly after the second world war) that the Republican in congress consider Russia a close friend that is welcomed to interfere in America’s election process.

    Man, some dead GOP members must be doing flips in their coffins!

  • zerobs:

    US residents will be forced to buy bonds. 401(k) laws will be changed, Social Security could be converted to a US gov’t bond account, etc. Obamacare replacement could be a bond-based HSA.

    All last gasp efforts, one final kick of the can.

  • Hans:

    Based on “nominal” interest rates – America is officially bankrupt.

    The default will come when buyers refuse to purchase US notes and bond treasuries.

    But wait if you order now, the FRB will monetize the debt.

  • prattner:

    There could be a political failure to avoid default, but I don’t think that’s likely. After all, more money from the Fed is just a phone call away. Why get blamed for setting off doomsday when you can print money? The solution is just too easy.

    No, I think they’ll work it out, even if they despise each other. Having a default actually means doing the right thing, facing the financial situation square on, and working through it. And the swamp critters sure aren’t there to do the right thing.

    All of those people in Washington are actually there to loot the country, enrich their friends, and push the rest of us around. If the money runs out because someone forgot to run the printing press, that means the party is over–no more corruption money, no more delightful little wars, no more anything fun. Not only that, a lot of the country would be marching on Washington, looking for answers, and you wouldn’t want to be in town for THAT.

    They’ll take the easy way out, guaranteed.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • A Golden Renaissance – Precious Metals Supply & Demand
      Battles for Civilization A major theme of my work — and raison d’etre of Monetary Metals — is fighting to prevent collapse. Civilization is under assault on all fronts.   Battling the barbarians at the gate... [PT]   There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travelers to...
  • The Federal Punch Bowl Removal Agency
      US Money Supply and Credit Growth Continue to Slow Down Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell's speech was regarded as dovish. If it actually was,...
  • The Non-Expiring Hedge - Precious Metals Supply and Demand
      The “Risk Asset” Dip Not Worth Buying is on its Way The prices of the metals rose, gold by +$11 and silver by +$0.25. The question on everyone’s mind (including ours) is: what will cause a change in the gold price trend, or what will make gold go up in a large and durable way? And that leads to another way of looking at this question.   Here is a very good technical reason to adopt a constructive attitude toward gold despite the fact that its nominal price in USD terms...
  • A Global Dearth of Liquidity
      Worldwide Liquidity Drought - Money Supply Growth Slows Everywhere This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China)  as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).   Nobody likes a drought. This collage illustrates why.   The liquidity drought is not confined to the US – it is fair to...
  • The Zealous Pursuit of State Sponsored Wealth Destruction
      How to Blow $9 Billion The life cycle of capital follows a wide-ranging succession. It is imagined, produced, consumed, and destroyed. How exactly this all takes place involves varying and infinite undulations.   The Stroh Brewery in Detroit. The company provided an example of how wealth that has been accumulated over generations can be completely destroyed due to just a handful of really bad decisions. [PT]   One generation may produce wealth, while the...
  • Debt, Death, and the US Empire
      Yosemite Sam Gets Worried About Federal Debt In a talk which garnered little attention, one of the Deep State’s prime operatives, National Security Advisor John Bolton, cautioned of the enormous and escalating US debt.   Deep State operative John Bolton, a.k.a. Yosemite Sam [PT] Photo credit: Mark Wilson / Getty Images   Speaking before the Alexander Hamilton Society, Bolton warned that current US debt levels and public obligations posed an “economic...
  • The Bien Pensants Agree: The World Doesn’t Need Gold – Precious Metals Supply and Demand
      The Last Thing to be Left Standing – Alas, Not Yet  The price of gold was about unchanged this week, whereas that of silver fell another nine cents. All Serious Right Thinking people agree that the world does not need gold. Indeed our monetary system produces Great Moderations that are totally unlike the incredible volatility of the gold standard era. They wish they could kill all memory of gold as money.   Ben Bernanke, the inventor of the “Great Moderation” fairy tale,...
  • How To Give Thanks Like Socrates
      Political Correctness Indoctrination [ed note: we are posting this belatedly as it was originally supposed to be published on Thanksgiving Day. Unfortunately your editor was out of commission... but MN Gordon's article is still worth reading. - PT]  Ordinary ideals of Americana range as far and wide as the North American continent.  The valued conviction of one American vastly differs from that of another.  For example, someone from the Mid-Atlantic may have little connection...
  • Trump or Seasonality: Which One is Going to Prevail in the Dollar's Late Year Surge?
      A Plethora of Headaches We hope the recent market turmoil is not giving our readers too much of a headache. As you are no doubt aware, the events of the last few weeks have made maneuvering around global markets rather difficult.   A less than happy NYSE floor trader [PT] Photo crdit: Brendan McDermit   The US faces uncertain economic times, as Trump and Xi Jinping remain locked in a bitter trade dispute that is likely to go on for some time, creating uncertainty...
  • Paper Lanterns
      Mud Volcanoes There are numerous explanations for just what in the heck is going on with the economy.  Some are good.  Many are bad.  Today we’ll do our part to bring clarity to disorder...   Two data series it is worth paying attention to at the moment: the unemployment rate (U3) and initial claims. As the chart at the top shows, when the former makes a low it is time to worry about the economy. Low points in the U3 UE rate slightly lead the beginning of recessions....

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!