Obama Demagogues Default (John Browne)

Euro Pacific Capital
By: John Browne       
Monday, July 25, 2011

President Obama has continued and increased the reckless spending of the previous Administration. Now, as the federal debt reaches its statutory limit, he is spreading fear and panic in the hopes of having it raised.

Many of the key people responsible for America’s historic mess, including the President, Treasury Secretary Geithner, former NEC Director Summers, and Fed Chairman Bernanke, have pronounced publicly that a failure to lift the debt ceiling will cause a catastrophic Treasury debt default.

This is simply not true. The US Treasury has tax revenues that cover the service of its current (staggering) debt of some $14.3 trillion.

Yet, that doesn't mean the US government won't be forced to default in other ways. Failure to pay the nominal interest and principal on bonds is only the narrowest definition of “default.” When a broader definition is used – which includes the use of inflation to erode the real value of US debt – the US government has in fact been in a state of continuous default for almost a century.

A 2011 dollar is worth just four cents in terms of a 1914 dollar. As that new money circulates, your dollar will lose some 53% of its purchasing power, productivity increases notwithstanding. That's just in the last three years!

However, despite this continued stealth default and the constant underfunding of government obligations, hitting the debt ceiling would represent a very serious escalation of the United States' insolvency. For, while Treasury bonds would continue to be honored, many other obligations would not. This is the time when seniors and soldiers should being paying attention.

If the debt limit were not raised, the Administration would be forced to literally choose which checks to send and which to cancel. On the chopping block could be Social Security checks, Medicare reimbursements, military salaries, federal pensions, and myriad boondoggles that the federal government has taken upon itself to fund. Perhaps the President would cancel his next campaign stop to save the expense of fueling Air Force One? Not likely!

While President Obama would find himself walking through a minefield of special interest groups as he chose where to cut, I expect the overall effort to be broadly popular. This is, after all, what the boisterous American Tea Party has been demanding all along. And the ultimate result would be a renewed faith in the US dollar and Treasuries.

In fact, the Republicans have in their hands the opportunity of a lifetime, the chance to force the Administration into good sense, while avoiding the political fallout.

Unfortunately for them and for the country, President Obama and his key Democrat allies appear to have terrified the Republican establishment into believing that if they stand up for prudent finance, default will result and conservatives will be blamed for it.

Already, key Republicans have stated publicly that they are unwilling to risk triggering the debt ceiling, thus handing Obama their trump card. In doing so, they are forgoing any chance that Obama would be forced to re-prioritize the government's reckless spending. Therefore, they are actually raising the risk of a true default – in which not even Treasuries will be honored – in the coming years.

Increasingly, it appears likely that the Republicans will buckle. If they do, Americans will be faced with a package that both sides will claim as a victory. The losers will be hard working, patriotic Americans and those around the world who believed the United States was good for its word.