In its history, America has defaulted on its debt more than once. “According to media reports (which has now become the accepted and conventional belief), this will be the first time the USA has ever defaulted on its debt obligations,” opined an article on the Chartlines website, a blog that brings the latest news regarding investing and trading in the financial markets.
The default dubbed the Continental-Currency Default was not only the very first default, but also the default on the first issuance of securities by the U.S. federal government in 1775, issued to fund the American Revolutionary War (1775-1783) against the British Empire.
“In November of 1779, Congress announced a devaluation of 38.5 to 1 on the Continentals, which amounted to an admission of default. … This first default resulted in a cumulative loss of approximately $7 billion dollars to the American public,” according to an article on the Ludwig von Mises Institute website, a privately funded institution located in Auburn, Ala.
In 1934, investors were willing to invest in U.S. government bonds, which were issued to finance World War I, as the U.S. federal government promised to pay them back in gold. President Roosevelt and Congress, and later upheld by the Supreme Court, were not only instrumental in devaluating the currency, but also rescinded the gold clause.
“Any obligation which purports to give the obligee a right to require payment in gold or a particular kind of coin or currency … is declared to be against public policy,” as written in the HJR 192 resolution of June 5, 1933, and available on the nomoredebt website.
There was a short default in 1979, but not because the U.S. government was unable to pay its obligation, but because of an oversight and misunderstanding. The investors sued, and the U.S. federal government relented. “The government decided to avoid any further publicity by giving the jilted investors what they wanted rather than ride the high horse of sovereign immunity,” according to the Mises Institute article.
Calling the U.S. Government’s Bluff
“There is one simple truth about the discussion of the looming U.S. debt crisis: it is largely a compendium of half-truths, distortions, myths and outright lies,” opines a July article on the AlterNet website, a platform by the Independent Media Institute, a not-for-profit entity.
The AlterNet article comes up with a slew of misrepresentations the U.S. federal government has publicized to show their good and aboveboard intentions.
The truth is that neither Republicans nor Democrats truly want to stop the ever increasing budget deficit. According to the Congressional Budget Office, the deficit over the next two years will hover around $4 trillion and increase to $8.5 trillion by the end of this decade.
Given the above numbers, “Cutting one or two hundred billion dollars a year is meaningless,” advises Richard Wolff, professor of economics emeritus at the University of Massachusetts, Amherst, in the AlterNet article.
In April, Congress passed a $38 billion budget cut, which is peanuts. Even slashing the budget deficit by $300 billion isn’t making a dent in the budget deficit and is meaningless.
“It gives lie to the idea that the Republicans and Democrats are interested in trying to cut the national debt,” said Wolff in the AlterNet article.
There is no doubt that the U.S. debt cannot be maintained in the long run. But it is a myth that if the White House and Congress were to miss the deadline for increasing the country’s debt ceiling the U.S. would be unable to pay its bills.
John Silvia, Wells Fargo Securities LLC chief economist, said during a recent interview on Bloomberg Television that by cooperating with each other, the U.S. Federal Reserve and the Department of Treasury can get together sufficient cash for at least two if not three months to avert a Treasury default and give Washington’s politicians more time to bicker about the country’s debt reduction.
If the opposing factions fail to concord “the government instead would choose among cutbacks on various expenditures such as state and local aid, medical aid, for war, for infrastructure. It would [be] extraordinarily unusual for a government in such a situation to attack its creditors,” said Wolff in the AlterNet article.
Public Debt in Numbers
As of Aug. 1, 2011, the U.S. public debt was $14.4 trillion and amounted to $46,157 per U.S. citizen, according to the U.S. National Debt Clock. Since September 2007, the national debt increased by $3.81 billion on a daily basis.
Interest payments for the public debt for 2011 amount to $430 billion, which is an increase of $66 billon or 18.13 percent over the public debt in 1998. But with the U.S. economy having expanded by close to 30 percent since 1998, the public debt should not create the debacle it has since the politicians began their haranguing.
“Rock-bottom interest rates on U.S. government debt account for the low payments today, but the practical effect is that servicing the debt as a percentage of GDP is near the lowest it’s been in decades,” advises the AlterNet website article.
Welfare Versus Subsidies
“There is no way to get the well-off to pay anything close to their fair share of the fiscal burden. The top 1 percent own 33 percent of the wealth and receive about 15 percent of the income in the country. These shares have risen over the past 30 years. They are being asked to bear none of the burden of closing the fiscal gap,” according to an article on the Brookings Institution website.
Brookings is certain that the burden is and will remain on America’s middle and lower classes. Any program that benefits the public is on the block, including veteran disability payments, Medicare, and Social Security.
The Obama administration doesn’t seem to acknowledge, and it is almost impossible for them not to be in the know, that Social Security has become a personal piggy bank for the government.
Every excess penny from Social Security goes into the Social Security Trust Fund and then is immediately transferred to the government’s general account. It is then allocated to different government programs outside of Social Security, and an IOU is created. By the end of September 2010, the IOUs to the American public had grown from $47 billion in 2003 to $2.6 trillion.
The moneys have not been invested in stocks or bonds on behalf of the American public, and the federal government doesn’t have the funds to pay the Social Security fund back.
On the other hand, corporations have benefited by spending millions to be on the top of the list for government subsidies, thus reducing their taxable income to almost zilch.
Between 2008 and 2010, 12 firms disclosed $171 billion in profits before taxes, but paid no taxes into the federal coffers during one of these years because of the many subsidies that allow these firms to reduce their taxable income.
Experts suggest that if America’s upper echelon corporations would pay their fair share of taxes, there would not be a debt problem.
“If the federal government started taxing the wealthy and their corporations at the same rates in effect a half-century ago, the federal debt to investors would almost totally vanish over the next decade. … Our political system is failing to tax the rich because the rich have fortunes large enough to buy off the political system,” according to an article by Sam Pizzigati from the Institute for Policy Studies, on the Bernie Sanders, U.S. Senator for Vermont, website.
