Peter Schiff made a statement that if the government pays its debts by printing money, that in essence the government is defaulting on its debts. This is only partially true. Yes, the creditor is getting paid in a devalued currency, but the creditor can still buy things, just not as much. The thing is, that the currency is devalued for everyone, not just the creditor. Which means it is also a tax on everyone holding that currency. So, printing money to pay off debts is unique, in that it is both a tax and a default.
I’m not so sure I agree with that analysis. But I think it’s probably a bit of a gray area and depends upon ones definition of default.
I don’t think that the criteria for a default is whether or not “the creditor can still buy things”, even if not as much. Dubai, for instance, recently notified its creditors that it would be slow on paying its debts. I believe they were going to delay payment by several months. That sent shock waves through the world’s financial system and the newspapers screamed that Dubai had defaulted on their loans. If they did in fact pay up, but a few months late, their creditors could still “buy things” and the loans they held would still have value, but Dubai was still in default. They didn’t pay what they had promised to and when they had promised to.
The same is true of people, companies or countries that pay a portion of what they owe. Even if they pay 95% of what they promised, they are still in default on their obligations.
I would submit that a country has an implied obligation not to inflate the money supply to such an extent that their creditors would be receiving payments that are significantly less than what the creditors had given them in the first place. China and several other countries have been publicly and loudly complaining about US fiscal policy and worrying about whether they were going to be ripped off on the massive pile of Treasuries they are currently holding. If the US were to massively inflate its money supply and pay them back with what would amount to pennies on the dollar, I personally would say they have a valid point if they were to complain that we had defaulted on our promise to them, even if one might claim that we had not technically defaulted.
We not only had that implied promise, but probably even explicit ones, even if they were off the record, that we would pay them back with dollars that have held their value. Even now, officials have given public statements that they don’t have anything to worry about, and that they intend to safeguard the value of the dollar. I personally think that is a lie, however, and that they are deliberately devaluing the dollar and hope to do so for a sustained period, but ideally, from their perspective, in a “controlled manner”.
Which is why I said that he was wrong, kind of. Yes it is still a default, like you say. But it is not a 100% default. I would daresay not even close to a 100% default. Of course it depends on how devalued the currency is when the money is printed to pay the debt.
Does anyone know exactly what happens if a government declares bankruptcy? I mean do they go to a bankruptcy court and distribute the remaining assets among the different claimants or does the insolvent government just get all their debts annulled? I’m asking because I really have no idea and I think knowing would probably shed some light on what a proper “sovereign default” would look like.
As a side note, imagine in my question that the government in question can’t just monetize all the debt like what Spidey is talking about.
I could be wrong, but I don’t think a national government has ever declared bankruptcy, since it can print money to pay off its debts.
I know in the U.S. city and county governments can declare bankruptcy, however I do not believe a state government has ever declared bankruptcy, nor do I think they even have the option to do so. If that is the case, it will be interesting to see what happens when state governments go belly up. We know that the California government issued IOUs for a while and that banks were forced to accept them as payment.
The s*** gets crazy.
Precisely what Spidey laid out in the OP. In fact, he is talking about a bankruptcy. The assets behind the currency (the value of the taxpayers’ holdings) are liquidated at a fraction of their value in order to satisfy creditors. This is done by creating lots of new currency (essentially lowering the prices of the capital of the country) and then offering that capital in an informal auction to the people standing in line with notes to redeem.
This is a reorganization of the American peoples assets into the hands of their foreign creditors, who will be able to better manage those assets.
If Schiff could explain this in his excellent manner of communicating to laymen, it would probably scare the heck out of a lot of people.
Ah, excellent point.
Does this mean that chinese (or whatever nationality they are) creditors will have a claim on all property owned in America, or just property that the government owns? In other words, am I personally on the line?
Yes, because of taxes.
And the devaluation of your property, which is an indirect tax.
Well, that’s lame.
We like to call this system, and its inevitable economic failure, statism.
Yeah yeah.
“if the government pays its debts by printing money, that in essence the government is defaulting on its debts”
I don’t agree. If it owes 1 trillion pieces of green paper to a creditor, and prints them up, then it is has satisfied its agreements. The creditor was promised 1 trillion wallet-sized portraits of George Washington, and nothing else.
What can you do with 1 trillion wallet-sized portraits of George Washington? Buy property denominated in US dollars. That means US land, infrastructure, businesses etc.
Repudiating the National Debt - MNR
Posting because it is relevant and possibly helpful.
I actually like the repudiating idea. And it’s not like foreign nations can really do anything about it, our military is very powerful. Unless they team up against us…
Sure they can do something about it unless you suggest enslaving them. They can stop trading with, and accepting US money going forward.
America is an import nation. Without imports or with dramatically higher priced imports, the American standard of living will decline.
Ron Paul has said it many times, a nation that lives beyond its means will be forced to live below its means. Particularly when it has to pay for military force to protect itself when it goes bad on its debts.
The free ride is at an end.
Do you think that would happen? Is that really acceptable to you?