According to John Tamny’s piece at Real Clear Markets, the US has already defaulted on its debt. He uses Rogoff and Reinhart’s discussion of US finances in the 1930s:
In their 2009 book, This Time Is Different, economists Carmen Reinhart and Kenneth Rogoff singled out Australia, Canada, New Zealand and the United States as countries that have never defaulted, or more specifically, have “never outright failed to meet their external debt repayment obligations or rescheduled on even one occasion.” Of course, as they later acknowledged on the same page, there are other ways to default.
There is traditional default whereby creditors experience a “haircut” or a delay in payments, and then there’s a stealth default. Looked at in terms of stealth defaults, all those countries, including the U.S., have most definitely stiffed creditors over the years.
Reinhart and Rogoff in particular pointed to a U.S. default in the 1930s. As they wrote, “the abrogation of the gold clause in the United States in 1933, which meant that public debts would be repaid in fiat currency rather than gold, constitutes a restricting of nearly all the government’s domestic debt.”
In short, the U.S. defaulted in 1933, and as evidenced by the dollar’s stupendous decline in value from 1/35th of an ounce of gold in 1971 (in private markets a dollar bought roughly 1/45th of an ounce of gold at the time in question) to 1/1550th today, the U.S. has been in default for most of the last 40 years.
Source: US Presswire
The important point here is that their are lots of ways to get a haircut. (I added the bold above.) It can be explicit, as in “we’re not giving you all of your money back,” or it can be disguised, as in “here’s your dollar back, but it’s only worth 50 cents.” Just because someone tells you you’re getting your money back doesn’t mean you’re not taking a haircut!
Don’t be naive about financial markets. You can’t fake reality, and if someone can’t afford to pay you back, you’re going to take a haircut somehow. This has been obvious in Greece for a while now, apparently to everyone but the European finance ministers. Greece has had five sovereign defaults in the past—why would they stop now?
Instead of taking a haircut, perhaps you should consider taking your money where it has a chance to appreciate. Relative strength might help you identify some of the likely candidates.
