The Mythological Forest Creature Big Foot was sighted in DC. Or it may have been his cousin the Giant US Never Defaults on its Debts Monster. Regardless, both ore myths. Let's examine the default record of the US Government.
By the most basic definition of default — not making agreed-upon payments to those you owe — the US. has indeed defaulted, arguably on multiple occasions.
1814: Amid war with the British, the Treasury couldn't come up with the scratch to service its debts, with Treasury Secretary Alexander J. Dallas admitting, "the dividend on the funded debt has not been punctually paid; a large amount of treasury notes has already been dishonored."
1933-34: President Franklin D. Roosevelt's refusal to repay Treasury bondholders with gold, as agreed to when the securities were sold, represents an abrogation of the contract that certainly qualifies as a default.
1979: The Treasury briefly missed payments on roughly $122 million in Treasury bills, according to the Wall Street Journal, citing issues with computer technology. Investors were repaid, with interest.
I admit these are pretty old but old does not mean never. And that short list does not include the biggest most egregious Default. Nixon closing the Gold Window …temporarily. Yeah. is that like transitory to inflation? It's still closed and I'd venture to say it is permanent.
When I pay my bills like electricity, gas, insurance, rent, groceries it's a simple kitchen table type process. I have my bills organized by due date and amount owed laid out in front of me. I also have my check book with its up to date register showing what I have available to pay with. Most times, I have enough to pay all of my bills. The times I don't, I just run late prioritizing the most crucial ones. That dings credit standing but I do not walk away and never pay. I'm good for it but I'm just late. In other instances, the bills use up all of my money and I have to buy food, fuel and other items using my credit card. That's an expensive way to go considering the interest paid. But the point is, I was NOT ABLE TO PAY MY DEBTS so I used credit. That is exactly what the US does. It can't pay its bills so it uses credit. If it indeed paid its bills we would not need a debt ceiling and the inevitable crisis to raise the limit. How this is missed is amazing to me.
What the US Treasury can and has done is prioritize shortfalls generally considering Social Security, Medicare, Military in the must be paid category but mostly the US Bond Holders are the Priority which is effect maintains the Full Faith and Credit thing. Or so it is hoped.
When a hiker finds himself hopelessly trapped under a boulder, he often asks himself how he ever got there in the first place…followed quickly by the assertion that there is no rock pinning him down. Followed by despair that he can't do anything about the rock he once denied. Same for the US Government. The debt limit being raised again and again is saying there is no rock. Followed by the despair of having no way to get out from under the Debt.
The history of US Debt Limit is found in its failure(s) to operate on a balanced budget and I do not mean simply in times of emergency like wars and catastrophes but just normal day to day expenses. The US is a shopaholic Nation…it has a big spending problem. The debt ceiling is akin to my credit card limit. Once hit I either cannot use it anymore or I must get the limit raised or seek other credit which may be more costly or do the unthinkable, live within my means. How is that the US Government gets to raise its own limit when I can't. Well, that is the benefit of being top dog with a printing press. The US has been failing to pay its bills for many years and kicks the can down the road borrowing from others at a high interest expense. When not if the world says no more, the US is toast. The press can still print but the spending power will erode even faster than recent times and could become hyper. I Hope you have a wheel barrow because you'll need one to carry enough cash for a loaf of bread. Not kidding here.
So, the US again cannot pay its debts and again the US will borrow. What the Republicans are proposing is more than nothing but not much more. They are NOT cutting spending but rather using the DC trick language and cutting the future rise is spending….yes, they call that a cut. McCarthy's plan is to limit the debt ceiling to 1% per year and cuts nothing. Spending goes on and on into the sunset but at a slightly lessened rate of increase. And how long does that last? Until the next Congress chucks it and gets back on track for unlimited increases. If the world stops helping out the debt bubble pops and it won't matter much if we pay our bills. Trust will be gone and so goes the full faith thing. We will be forced into a hyper inflationary period where printing out of thin air is the way of the day and there goes the USD. When the USD goes, lifestyles change. Right now, we have a nice beautiful coat to wear that covers up our sickly emaciated body. When the coat is off, the world will see the US for what it is… BROKE!
You can personally beat this to a degree by diversifying out of the USD. Don't worry about price fluctuations, get some gold and silver and foreign denominated investments. That will hedge your wealth as it were. Times get iffy in hyper inflationary environments. A short search will give plenty of examples. Social constructs are a thin veneer covering the dyer straits of starvation. I know, doom and gloom. Not for all, just those who say there is no rock….there is no rock…there is no rock.
Best of luck,
Donn Marier
DM-Your Own CFO