Y'know, if I was back in 1933 and suddenly had a crystal ball that would let me see what the future was like in 2009, I'd say "Dude, let's go for it! What the hell have we been doing these past 150 years?" Even with the current financial crisis. I think that people tend to look at the shrinking value of their savings & investments and forget all about things like the interstate highway system, consumer choice on the shelves, household appliances so that housekeeping is no longer a full-time job, microwaves, air conditioning & climate control, television, personal computers, the Internet, cell phones, IPods, antibiotics, cheap food, drinkable tap water (in most places), and so on.
Maybe I'm trying to read too much into this, but I can't help thinking that the author is trying to reference our current debt situation. Problem is that I don't know what they would be saying. The US no longer offers bonds that have any value other than US Dollars and so the resolution doesn't seem to apply.
Uh, he referred to current US debt quite explicitly:
"As the bailouts in the current bust inexorably mount, financed in rapidly increasing U.S. government debt, one might wonder whether a default on Treasury debt is imaginable."
The point is not that the 1933 resolution would be used to justify a default. Basically:
(a) It's assumed that the US has never actually defaulted on a bond.
(b) Everyone assumes US Treasuries are safe, based on (a) (and of course other factors).
(c). However, (a) is controversial given that the 1933 resolution amounted to an effective default; US might have paid back the correct amount of nominal dollars but only because it unilaterally changed the definition of the dollar.
(d) Given (c), maybe it's not so prudent to assume that the US will never default (again) on a bond.
That's not the point I'd get from the article. The point I'd get is that the US government might not default on the debt, but what will those dollars be worth at the end of this?
The 1933 resolution can be seen as a default or the government saying that they'll only deal in dollars from now on - which might not be as good for investors and therefore rob them of some of their value. Since the government today doesn't have debts in non dollar form, why would they default? They can just print money. The idea that any government would default on a debt denominated in their own currency that they can readily print is ridiculous.
The only problem is that the money you get from them might not be worth much if we see a decent rate of inflation. That's where the article strikes at our current situation. The gold debt was protected against inflation (assuming that the supply of gold didn't increase much). Those investors were then subjected to inflation as the US renounced gold denominated bonds.
Since the US doesn't have bonds in anything other than dollars, this situation wouldn't happen today.
> Since the US doesn't have bonds in anything other than dollars, this situation wouldn't happen today.
Not so fast. While one can pay off a bond with inflation as well as revenue, both have costs that a govt might choose to avoid by defaulting instead. (Yes, default also has costs - my point is TANSTAAFL applies to bond payoffs.)
Also, some bonds have "inflation protection", which makes inflation less useful in paying them off. If bond-holders become concerned about inflation, they're more likely to demand such protection or higher returns to give them real return over expected inflation. Both responses make default a more attractive option.
This roundabout argument is ignoring the most basic facts. Nowadays, bonds repay in dollars, so we can always just print more money. In 1933 that was not the case, so it doesn't make much sense to say that since we had to default in 1933, we may have to default again today.
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"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson, 1816.
I won't serve that debt. I'm rather certain I'm going to be filthy stinking rich, but I am never going to serve that debt. I asked my friends at college, and they aren't paying either.
At least one other time, in 1973, I think, the US administration defaulted.
After running up Viet Nam war debt Nixon devalued the currency by de-coupling the value of the dollar from the price of gold.
The debt was repaid in dollars that had lost their value.
There was another effective default/devaluation, but I can't remember the circumstances, sorry.
