We live in a media world constantly trumpeting something happening for the first time ever, the biggest, the best or the worst something happening or predicted, or something that inevitably will happen if something isn’t done. Often that simply doesn’t square with the facts or history.
The Obama Administration, fighting for a second life after 2011, has joined this Hallelujah chorus to frighten the electorate into accepting a bad bargain: a short-term bailout with more taxes, bigger deficits — and more government. It gets widespread support — from “special interests” [yours and mine] to the bond rating agencies who failed so miserably in the 2007-08 financial crisis. Mind you, those agencies should also be warning us the outlook for American government securities is grim if Washington doesn’t surgically go after its runaway spending and unsustainable deficits. [Shame on old friend Stuart Varmey for not making that clear on Fox News during one of Bill O’Reilly’s tantrums.]
As I write facing a new debt ceiling deadline, one recalls Sec. of Treasury Timothy Geithner has cried wolf too many times adding further confusion. It’s certainly legitimate to speculate whether Treasury could – as many experts insist – scrape together enough cash to pay creditors for a few more weeks while longer term solutions were put in place.
True enough, the U.S. government has never defaulted on “the good faith and credit of the U.S.”. Were it to do so, all its vast implications are probably unfathomable. That it would not be good for individual citizens is obvious. Still, it is quite another matter to call it the end of the world.
While it is true the U.S. has never defaulted per se, something pretty close came about not so long ago as financial history goes. By 1970, Washington had got itself into a fix, in many ways similar to today’s. The dollar was greatly overvalued with bills coming due for Pres. Lyndon B. Johnson‘s Great Society and the Vietnam War. International balance of payments tilted with inflexible fixed currency rates established by the 1944 Bretton Woods Agreement. Inflation threatened.
On August 15, 1971, President Richard .M. Nixon unilaterally repeat unilaterally suspended theoretical convertibility of the dollar into gold, set a new lower rate, and demanded our trading partners raise their own currencies. In December 1971 they gathered at the Smithsonian to sign on; there wasn’t a lot they could do. By the way, it didn’t work: two years later, Washington again realigned gold and the world set off on fluctuating currencies tied to the dollar which it has tried to maintain ever since.
Mind you, yes, of course, it was a different world. Europe and Japan had recovered from World War II but weren’t admitting it. Japan was running up huge dollar holdings, sucking away American manufacturing jobs, much as China today. But the U.S. was seen as cock of the walk with strong – if sometimes knuckle-headed – leadership. [That was long before President Barack Obama spent two years “leading from behind”, denigrating America’s past, its uniqueness and its leadership role.] Pres. Nixon and his president-aspirant Sec. of Treasury, blustering Big John Connally, slapped on wage and price controls, a calamity abandoned three years later when inflation hit double digits. But, in effect, “the Nixon Shocku” [as the Japanese who got caught flat-footed called it] had chopped its creditors off at the ankles.
Perhaps the most significant difference, among many, from those days is a world crisis in every theater. The Euro, a figment of Brussels bureaucrats’ imagination without EU unified fiscal and monetary policy control, is on the ropes. Sterling is in equally bad straights with the UK trying to dig out of more debt than any other industrial country. The Japanese, borrowing yen from themselves with abandon for a quarter of a century, now face mammoth new reconstruction with the world’s fastest ageing population. China, with its deus ex machina of unlimited infrastructure expansion, subsidized exports and a walled-in market, is slamming on the yuan brakes against incipient inflation. India faces runaway inflation with its rupee investors taking their capital elsewhere because they don’t see massive reform of a former Soviet-bent East IndiaCo. system. Mideast sheikhs are squandering their [and our] petrobillions in the same old way.
Things look disastrous in Washington, but bottom line: compared to whom?