In Dr. Strangelove the world was threatened with the Doomsday bomb the Commies had built to destroy everything in the event the US attacked and defeated them. But the Commies had built secret underground caves to sustain live for years to come and they would emerge years later to rule the world–or so that theory went. We were left to wonder the ultimate outcome of that scenario as we watched Slim Pickens ride the nuke down to its intended target with an unknown result. Timmy Geithner our star tax cheat has preached hard and often of recent days that failure to lift the debt ceiling for the US will be the equivalent of the Doomsday bomb on our economy and the world’s.
Paying and honoring our debts goes back to the very foundation of the US. Hamilton was insistent that we had to honor all our debts incurred during the Revolutionary War and he and others even made that part of the Constitution. It was a good decision. We repaid the debts owed and the “speculators” made a lot of money on those bonds that they bought up cheaply before the issue was resolved. Technical default of sovereign debt has happened many times over the years whether national or at the state or provincial level. Mexico defaulted in reality only about 12 years ago but was bailed out by the US which fact most have already forgotten. The list of Latin American countries that has defaulted is too long to list. Historically, the Kings and Empires defaulted numerous time over the centuries, but you must realize that they eventually satisfied their creditors and those same creditors uniformly came back later to loan them even more. The Rothchilds, the great banking house in Milan and Venice repeatedly loaned funds as did the Dutch to various sovereigns even after default.
There is also a great deal of talk about some of the States defaulting on their debts such as California and Illinois to mention the most notorious. They darn sure might and it will crimp their style for a good while to say the least and the unions and special interest groups that depend on government largess for their existence. They will have to really trim their sails but they will have to do it so they can have access to credit otherwise they will have no credit. This would not be the first time it has happened.
In the 1830’s the US was still an up and comer, a wannabe. We weren’t powerful or influential yet in world affairs. Our industry was still dependent on Europe for our capital. We desperately needed capital to build infrastructure in our expanding nation. The canals, post roads, and then the railroads all took tremendous amounts of money. The US and the States borrowed money from Europe. The center of lending was England. Most Americans resented having to borrow from England but we had no funds ourselves to finance the growth of our country. The individual states borrowed lots of funds on the European market and it was administered from London. Several of our states in the 1830’s defaulted on the bonds owed to European interests. The Europeans and the English were very angry. The value of the bonds dropped like the proverbial stone. Some of the defaulters were Maryland, Pennsylvania, and Mississippi. Maryland sent a delegation to London to negotiate with the creditors. Many of the Maryland politicians didn’t want to pay anything on the bonds. The Revolutionary War was only a generation old and they didn’t want to punish their voters with higher taxes or cuts in expenditures. Sound familiar?
Cooler heads ultimately prevailed. The lead negotiator for Maryland worked out a new deal to pay the entire amount but restructured the time period for the loans. Many were very angry about the deal back in the US. That negotiator was a man named Peabody. After the deal was done he bought up a lot of the debts of the States for pennies on the dollar. When the bonds were paid and even when it became clear that the would be paid the value of the bonds soared and he became rich, very rich. His wealth ultimately was the founding of the JP Morgan company. Morgan became his partner years later. Peabody’s wealth was over one million pounds sterling which was an unimaginable amount of money in those days but he still rode the penny horse carriage to and from work every day. He was the perfect Scrooge. Indeed in “Scrooge” you can read the part where Scrooge is horrified that his assets have been turned into “US securities” which were deemed like Confederate money was a generation later. Ultimately all worked out, but for years the states were cut off from credit and we as a nation were vilified with good reason in the financial markets and in the gentleman’s clubs of England. We were pariahs for a while. Like Buffet would have said it was our own damn fault.
It is not good to default. Of course it is not good to borrow so much in the first place that you have to even consider such a possibility. That is the real shame with our current situation. Why the devil did we borrow beyond our means? Refusing to raise the debt limit is not default. The government has income. Just like you and me it decides how it will spend what is in the checking account. Our history is checkered. We can do the right thing and get our house in order. It is not our debt that is the problem it is our continuing plan to keep living on borrowed money. Geithner should worry about future borrowing more than the current debt.
“Never a lender or borrower be” B. Franklin. www.olcranky.wordpress.com
A Sage for the Ages 