All this talk about default is very dangerous, even if it doesn’t happen.
What most people, including elected officials, do not understand is that the dollar is still the world’s reserve currency. This means that all the countries and international corporations in the world hold huge piles of American dollars in order to carry on international trade.
If the dollar were suddenly to lose reserve status, the United States of America would face catastrophic inflation. All the dollars that the Federal Reserve has been creating, at about $85 billion each month, would begin to be dumped right on our heads, and the dollar would become virtually worthless. A loaf of bread could cost $50, a basket of groceries could cost $500. Hyperinflation has happened to many nations, including post WWI Germany, France and Russia, and modern day Greece and Spain.
That is the headline on the 30th anniversary issue of Grant’s Interest Rate Observer, which this morning is, as it has been every other week for the past generation, being savored among the savvy. The latest headline sits atop one of the newsletter’s classic editorials. “Since 1917,” it quotes its analyst, Charley Grant, as reporting, “the ceiling has been raised 107 times. Expressed as a compound annual rate of growth, the debt ceiling has risen by 8.4%, the nominal GDP by 6% Twenty-nine more years on this track and the debt ceiling would be the size of the GDP.”
Grant’s also quotes President Van Buren as saying that the “creation in time of peace of a debt likely to become permanent is an evil for which there is no equivalent.” It is Grant’s view that it would “do the quality of debate a world of good if someone would move to reduce the ceiling, not to raise it.” We’re all for it. We comprehend it runs against what is being received by the Republicans in the way of political advice, which holds that confronting the debt ceiling would be a kind of suicide of the party. We’re not so sure.
Recent research is shedding new light on just how destructive excessive debt — both public and private — can be to economic growth.
The study comes not from a right-of-center think-tank like Americans for Limited Government or the Cato Institute, but from the Bank for International Settlements (BIS) — the central banks for all central banks.
The bank of who?
Housed in Basel, Switzerland, the BIS has played a significant role in the direction of monetary policy worldwide since 1930.
At first it was set up to manage the post-war reparations regime against Germany, but once World War II broke out, significantly the bank declared neutrality, and continued doing business with the Third Reich, handling their deposits of gold — which were looted from other central banks.
Nowadays, the BIS is responsible for setting standards for lending worldwide. The Basel Capital Accords, now in their third manifestation, fix how much limited capital banks must hold in order to carry on lending. In practice, however, these agreements, to which the U.S. is a primary signatory, allow institutions to lend far more money than they ever hold in capital.
The standards that have been set in Basel are one of the major reasons why the U.S. — and other advanced economies — have such a high debt load. They are also the principal reason why today when there are large defaults, the entire financial system is imperiled with what policy wonks like to call systemic risk.
If banks were not allowed to lend money into existence, we wouldn’t have these types of problems.
From George Washington to Dwight D. Eisenhower, the national debt tended to grow in wartime and shrink in peacetime. Because the dollar was generally convertible into gold or silver at a fixed and statutory rate, the central bank, when there was a central bank, couldn't just materialize money as the Federal Reserve does today. You had to dig the metal out of the Earth, or entice it into American vaults with money-friendly financial policies. The Treasury could borrow, all right, but not without limit. Wars aside, the government paid its way like a man with a debit card.
Washington, D.C., got its credit card on Sunday, Aug. 15, 1971. Pre-empting the horse opera "Bonanza," President Richard Nixon told a national television audience that the gold standard, or what little of it remained, was kaput. No more would the dollar be defined in law as 1/35th of an ounce of gold. It would rather be anchored by the good intentions of the people who printed it.
There has never been a credit card quite like the nonmetallic dollar. We Americans, consuming much more than we produce, finance our deficits with the dollars that we alone may lawfully print. Our Asian creditors not only accept this money in payment for goods and services but also turn right around and invest it in U.S. Treasury bonds and federally insured mortgages. It's as if the greenbacks never left the 50 states.
The Nixon gambit marks a great divide. In the 10 years before 1971, the "gross" public debt (counting even those obligations held by the government itself) had climbed to $408 billion from $293 billion. This increase amounted to a compound annual rate of only 3.4%, the Great Society and the Vietnam War notwithstanding. In the next 10 years, till 1981, the gross debt jumped to $995 billion from $408 billion—a compound annual rate of 9.3%, the close of the Great Society and the end of the Vietnam War notwithstanding. Not until fiscal 2001 did the debt reach $5.8 trillion. Yet it expanded by an identical $5.8 trillion in the four short years between 2007 and 2011. Now the grand total stands at $15.6 trillion.
One of the most reliable indicators of being in the midst of an era of reform is the preponderance of citizens movements seeking major changes. Such movements also often herald paradigm shifts in national politics.
But because these movements always originate outside Washington and New York, the liberal mainstream media almost always misses their birth and emergence into political forces to be reckoned with on a national scale.
Forbes columnist and new media guru Ralph Benko directs our attention to just such a movement, this one aimed at stopping the seemingly inevitable growth of the national debt via the kabuku dance that is the congressional debt ceiling process.
Here's the heart of Ralph's column:
"No matter which party wins next November Washington again will — with a phony show of reluctance — raise the debt limit to allow it to continue its borrowing binge on our tab. Most Americans understand that the debt ceiling debate is as choreographed, as predetermined, as a professional wrestling match. Eyes full of crocodile tears, Washington will increase its debt ceiling by hundreds of billions … or trillions … of dollars.