Is American Debt default really possible??

[Iseree22]

Some say that the recent American debt crisis is a non-issue. America can never default on it's debts since it is the issuer of the American Dollar, and all Government debt is issued in American Dollars. When it comes time to repay the debt, the American state can create more money. There is only one risk, and that is inflation. Since America's core inflation is 3.8% then this is not a real issue.

I think of it in terms of Bitcoin, lets say that there is also a decentralized Bitcoin Central Bank. Miners create Bitcoin Treasuries instead of Bitcoin Dollars. Bitcoin Treasuries are a promise to pay $100BTC at some future date. The total sum of BTC Treasuries created by Miners is the 'National Bitcoin Debt'. BTC Treasuries are sold at auction for BTC Dollars. If the number of BTC Dollars in circulation is too small, then naturally the price of BTC Treasuries will fall significantly below $100BTC. So the BTC Central Bank purchases BTC Treasuries and 'creates' new BTC Dollars to pay for the BTC Treasuries. This action pushes the price BTC Treasuries back up towards $100BTC.

From this view-point the recent American Debt Crisis is a non-issue. And the American Debt is not a debt in the traditional sense, rather it is a measure of the total amount of money created.

Greece is in a different position. Since Greek debt is denominated in Euro's, the Greek's have to attract Euro's from the market. The Greek's do not create Euro's, and so they can default on their debt.

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[Gabi]

There is only one risk, and that is inflation. Since America's core inflation is 3.8% then this is not a real issue.

3.8% now

If they start printing tons of dollars to pay all the debts then inflation skyrocket, or better, more than skyrocket, it directly light it's Warp drive to go faster than light; a dollar will be worth nothing, less than the cost of the paper used to make it.

[mikethebodacious]

America has defaulted on it's debt before.  To understand the creation of money and it's impact on society you should go watch Secret of Oz by Bill Stills.  Bill Stills has another document called The Money Masters which also is a good watch.  Bill is definitely a paperbug versus a bullionbug and he makes very valid points as to why we need paper money versus a gold standard.  Anyways, anyone who says America hasn't defaulted on it's debt is a liar, we've defaulted twice so far and definitely on track for a third time.

[Iseree22]

There is only one risk, and that is inflation. Since America's core inflation is 3.8% then this is not a real issue.

3.8% now

If they start printing tons of dollars to pay all the debts then inflation skyrocket, or better, more than skyrocket, it directly light it's Warp drive to go faster than light; a dollar will be worth nothing, less than the cost of the paper used to make it.

What is more important, inflation or unemployment? Monetary inflation will only occur once unemployment falls dramatically, and that clearly isn't the case in America at the moment. The more people that become employed, the more goods and services produced by America to meet the increased demand caused by printing money.

The inflation America is experiencing at the moment is caused by a shortage of essential resources. This type of inflation is solved by increasing the supply of such resources.

BTW when the Fed commenced quantative easing, this did not cause a net increase in the amount of exchangeable financial assets. The idea that the FED has been debasing the dollar is fictitious. The Treasury is the only authority that can debase the U.S Dollar.

[Iseree22]

America has defaulted on it's debt before.  To understand the creation of money and it's impact on society you should go watch Secret of Oz by Bill Stills.  Bill Stills has another document called The Money Masters which also is a good watch.  Bill is definitely a paperbug versus a bullionbug and he makes very valid points as to why we need paper money versus a gold standard.  Anyways, anyone who says America hasn't defaulted on it's debt is a liar, we've defaulted twice so far and definitely on track for a third time.

Had a quick look at the money masters, which I think Bill produced? Below is a quote from the site.

1. Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt.
2. Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt.
http://www.themoneymasters.com/

This is exactly what should happen in America. The first point would end this perpetual 'debt' non-issue that occurs periodically.

America has defaulted on its debt, but the circumstances were significantly different. Today America issues its own money backed by nothing more than the faith of the people. The first time America defaulted in 1779, the U.S dollar was backed by the Spanish Dollar. This is exactly the same as the Greek situation today, where America has to source Spanish Dollars to service it's currency. The default of 1862 is similar, except instead of the currency backed by Spanish Dollars it was backed by Gold. Once again this is similar to Greece, America must source Gold to produce Dollars. So when America couldn't source enough Spanish Dollars or Gold, obviously this is the definition of default. This is the same situation that Greece faces.

However, since America has gone off the Gold Standard, the creation of the Dollar is no longer constrained by the amount of gold available. The American debt created today is denominated in U.S dollars and since America is the issuer of its own currency then there will always be enough U.S dollars to pay back the debt. Therefore as long as America remains the issuer of its own currency, which I'm sure she will, and backed by nothing more than the faith of the people, America can not default on its debts.

[worldinacoin]

Greece is in a bad situation.  Cannot be compared to the USA.  Greece debts are in Euros, even if they abandon the euros and print their own currencies, no matter how they devalue their currencies, the Euro debts will still be there and growing larger.  Americans are lucky as their debts are denominated in USD.  But of course devaluation hurts the general population.

[netrin]

Europe will print more euros. This is why Jurgen resigned. The US will print more dollars. And yes, the US Fed creates inflation. That was one of the key points to QE*. Congress spends money it doesn't have. The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates. Oh and the Chinese will print more yuan, Swiss more francs, Japan more yen. Anyone not printing paper?

Core CPI is 3%, but real inflation including such frivolities as food and energy is 12%.

[Iseree22]

Europe will print more euros. This is why Jurgen resigned. The US will print more dollars. And yes, the US Fed creates inflation. That was one of the key points to QE*. Congress spends money it doesn't have. The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates. Oh and the Chinese will print more yuan, Swiss more francs, Japan more yen. Anyone not printing paper?

The Fed doesn't cause inflation. All quantitative easing did was exchange one form of money(U.S Debt) for another form(U.S Dollar). The size of the monetary base remained the same.

http://research.stlouisfed.org/fred2/series/WRESCRT?cid=32215

This shows that the balance sheet of the Fed increased from 800 billion to 2 800 billion since 2008. That means the Fed has increased the amount of money by a factor of 3.8 since 2008. It would be reasonable to assume that if the FED was a significant source of inflation, then America should be experiencing an inflation of atleast 200%, and it is not. This is because the FED also purchased U.S debt equal to the increase, and U.S debt can be used for money.

The amount of money in the U.S has increased by a factor of 3.8 but serious inflation has not occurred.


Like I said before the inflation America is currently experiencing is caused by a shortage of essential resources.

[netrin]

No, because M3 collapsed 110%. The Fed's monetary inflation countered unprecedented deflation. The reserves parked at the Fed are keeping the banks solvent, yet they are only hanging on by a thread. In addition to buying back toxic debt from banks at nearly 0% interest, the Fed also bought UST driving yields down. When interest rates go up, there will be more contraction. Housing, finance, and gadgets have a long way to go down. Volatility has increased and hard commodities, food, and energy are double digits and climbing.

PS - M3+ dwarfs M0 by an order of magnitude and there's more deleveraging that still needs to happen.

[indio007]

The US can never default. FRN's are not money. They are a promise to pay money. No one ever even attempts to collect so how can there ever be a default until people redeem their FRN's for lawful money?

U.S. v. Thomas 319 F.3d 640

Paper currency, in the form of the Federal Reserve Note, is defined as an "obligation[] of the United States" that may be "redeemed in lawful money on demand." 12 U.S.C. § 411 (2002). These bills are not "money" per se but promissory notes supported by the monetary reserves of the United States.

[netrin]

The US can default on its $14 trillion public debt, but then it'll have trouble paying it's future $56 trillion obligations (social security, medicare, etc).

BTW, the US population (including children and elderly) is about 300 million. Do you think US debt and obligations will ever be repayed? At what point will markets realize the inflationary risk on their 0% interest bonds is a shady deal? The roulette wheel keeps spinning because it's the only game in town.

[penix]

The USA will not "default" as long as they can just print more money. There is no reason to. That in itself it a type of default, but it is not recognized in the same respect. Make no mistake about it, the USA cannot repay the debt that has been accrued.

[Iseree22]

The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates.

The Treasury can always repay the debt, as long as the debt ceiling keeps rising.

I think of it in terms of Bitcoin, lets say that there is also a decentralized Bitcoin Central Bank. Miners create Bitcoin Treasuries instead of Bitcoin Dollars. Bitcoin Treasuries are a promise to pay $100BTC at some future date. The total sum of BTC Treasuries created by Miners is the 'National Bitcoin Debt'. BTC Treasuries are sold at auction for BTC Dollars. If the number of BTC Dollars in circulation is too small, then naturally the price of BTC Treasuries will fall significantly below $100BTC. So the BTC Central Bank purchases BTC Treasuries and 'creates' new BTC Dollars to pay for the BTC Treasuries. This action pushes the price BTC Treasuries back up towards $100BTC.

Building on the Bitcoin Example in the OP:

When the Miners create BTC Treasuries they will eventually have to redeem the value of the BTC Treasuries using BTC Dollars. The amount of BTC Treasuries that miners can create is subject to a hypothetical BTC Debt Ceiling. Periodically the BTC debt ceiling is raised so that new BTC Treasuries can be sold. When a BTC Treasury comes due, the miner will create a new BTC Treasury and sell it at auction, for BTC dollars that are given to the holder of the expired BTC Treasury. If there is not enough BTC Dollars in circulation then the price of BTC Treasuries will fall and the corresponding 'interest yield' on BTC Treasuries will increase. This is when the BTC Central Bank steps in and prints BTC Dollars to purchase BTC Treasuries. This has the effect of lowering the yield on BTC Treasuries. Therefore as long as the BTC debt ceiling keeps raising there is no possible way that issuers of BTC Treasuries can default.

[indio007]

Your not getting it. The US doesn't "pay" anything. They discharge debts via tendering paper promises. It doesn't matter what the US owes. As long as people accept as valuable the paper, the debt is discharged.

[netrin]

The Treasury issues bonds it can't repay. And the Fed buys many of them back with numbers scratched onto the balance sheet lowering interest rates.

The Treasury can always repay the debt, as long as the debt ceiling keeps rising.

Is this the same Iseree22 who said "The Fed doesn't cause inflation"? Whether you blame the supplier, the buyer, or the drinker, the fact is, this economy is drunk.

If you're talking about core CPI, then you are correct, the Fed has not increased non-food non-energy price inflation above pre-2008 levels. If on the other hand, you discuss its countering effect, then the Fed massively reflated the base money supply as higher aggregates collapsed. Do you believe the Fed can claim 'mission accomplished' and perform no more conversion of "one form of money(U.S Debt) for another form(U.S Dollar)"? If not, what effects will further Fed manipulation have on the economy? But if so...?

[Iseree22]

Your not getting it. The US doesn't "pay" anything. They discharge debts via tendering paper promises. It doesn't matter what the US owes. As long as people accept as valuable the paper, the debt is discharged.

Perhaps I'm wrong, but given U.S Treasuries are denominated in 'Reserve Promises'. If there are not enough 'reserve promises' in circulation, then that is a default.

[indio007]

Your not getting it. The US doesn't "pay" anything. They discharge debts via tendering paper promises. It doesn't matter what the US owes. As long as people accept as valuable the paper, the debt is discharged.

Perhaps I'm wrong, but given U.S Treasuries are denominated in 'Reserve Promises'. If there are not enough 'reserve promises' in circulation, then that is a default.

The only way to get a true default is to perform a notarial presentment and see get a certificate of protest for non-payment/non-acceptance. AFAIK T-bills and T-Bonds are all in electronic format now. The law has not been update to give the same type of rights and remedies as a signed  and/or sealed promise in writing.

[Aelfgar]

The US can never default. FRN's are not money. They are a promise to pay money. No one ever even attempts to collect so how can there ever be a default until people redeem their FRN's for lawful money?

U.S. v. Thomas 319 F.3d 640

Paper currency, in the form of the Federal Reserve Note, is defined as an "obligation[] of the United States" that may be "redeemed in lawful money on demand." 12 U.S.C. § 411 (2002). These bills are not "money" per se but promissory notes supported by the monetary reserves of the United States.

So where do I go to redeem my green food stamps for lawful money?  Yeah, good luck with that one.  Maybe Santa Claus, or The Tooth Fairy can redeem them for me...

I keep seeing claims that debt is money.  No, it is not.  If I borrow $100 from the bank with an unsecured loan, pay back $10 of the loan, and then declare bankruptcy because I spent my $100 on high living and fast women (i.e., I have not gained any physical assets from my $100) then $90 of the bank's money is gone.  Except that these days they aren't calling in that loan because they know it is worthless and the assets they can recover from me aren't worth much either so they keep the loan on their balance sheet and pretend it is still an asset.

If you think I am wrong explain it in terms a child would understand.  According to Einstein (my personal hero) if you can't explain it to a child you probably don't really understand it.

Here's a great story, I don't know anything about the author, but I think he has hit the mark with this one: Why We Are Totally Finished: http://www.financialsense.com/contributors/d-sherman-okst/why-we-are-totally-finished

[mikethebodacious]

I think to really understand the answer to this question one should ask "What is money?"  I think Bill Stills does a great job of covering that, but I also remembered this excellent audio clip that had some valid points:

http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

Their answer is that money is fiction, but I would say that currency is fiction and not money.  I would consider gold to be a currency AND a money, but the Federal Reserve Note is just currency since it has no intrinsic value other than toilet paper or kindling in the event of currency failure.  So in essence the FRN is fiction, it can be printed at a whim and can be exchanged for REAL money or commodities (that is where the scam lies).  That isn't to say that once the US defaults we will not have to trade commodity or other assets for the foreign debt being held.

I am pretty impressed with everyone's responses on this posting and have thoroughly enjoyed the discussion so far.  I think Bitcoin will succeed as a currency, mainly because everyone supporting it here is quite intelligent (forget the speculators).  It is just a matter of time before it catches on (we need decentralization around the globe).

[netrin]

Both of these resources are great:

@ http://www.financialsense.com/contributors/d-sherman-okst/why-we-are-totally-finished
The third bubble IMO is the bond market, and by extension fiat currency exchange and depreciation.

@ http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money
This makes the case for bitcoin without mentioning them by name. While bitcoins are incredibly abstract, they are a completely discreet, quantifiable money supply. They could become a standard asset.

I'd add this to the list, re: 2008:
http://www.thisamericanlife.org/radio-archives/episode/365/another-frightening-show-about-the-economy