Guest Post: Does The US Have A "Sane" Government?

Tyler Durden's picture

Authored by Barry Eichengreen, originally posted at Project Syndicate,

The dollar is the world’s go-to currency. But for how much longer? Will the dollar’s status as the only true global currency be irreparably damaged by the battle in the US Congress over raising the federal government’s debt ceiling? Is the dollar’s “exorbitant privilege” as the world’s main reserve currency truly at risk?

To be sure, the purveyors of dollar doom and gloom have cried wolf before. When the subprime-mortgage crisis hit, it was widely predicted that the dollar would suffer. In fact, the greenback strengthened as investors seeking a safe haven rushed into US Treasury bonds. A year later, when Lehman Brothers failed, the dollar benefited from the safe-haven effect yet again.

Data from the International Monetary Fund confirm that these shocks caused little (if any) decline in the dominance of the dollar in central banks’ holdings of foreign-currency reserves. Likewise, data gathered by the Bank for International Settlements show that the dollar dominates global foreign-exchange transactions as much as it did in 2007.

But a default on US government debt precipitated by failure to raise the debt ceiling would be a very different kind of shock, with very different effects. In response to the subprime disruption and Lehman’s collapse, investors piled into US government bonds, because they offered safety and liquidity – prized attributes in a crisis. These are precisely the attributes that would be jeopardized by a default.

The presumption that US Treasury bonds are a safe source of income would be the first casualty of default. Even if the Treasury paid bondholders first – choosing to stiff, say, contractors or Social Security recipients – the idea that the US government always pays its bills would no longer be taken for granted. Holders of US Treasury bonds would begin to think twice.

The impact on market liquidity would also be severe. Fedwire, the electronic network operated by the US Federal Reserve to transfer funds between financial institutions, is not set up to settle transactions in defaulted securities. So Fedwire would immediately freeze. The repo market, in which loans are provided against Treasury bonds, would also seize up.

For their part, mutual funds that are prohibited by covenant from holding defaulted securities would have to dump their Treasuries in a self-destructive fire sale. Money-market mutual funds, virtually without exception, would “break the buck,” allowing their shares to go to a discount. The impact would be many times more severe than when one money-market player, the Reserve Primary Fund, broke the buck in 2008.

Indeed, the entire commercial banking sector, which owns nearly $2 trillion in government-backed securities – would be threatened. Confidence in the banks rests on confidence in the Federal Deposit Insurance Corporation, which insures deposits. But it is not inconceivable that the FDIC would go bust if the value of the banks’ Treasury bonds cratered.

The result would be a sharp drop in the dollar and catastrophic losses for US financial institutions. Beyond the immediate financial costs, the dollar’s global safe-haven status would be lost.

It is difficult to estimate the cost to the US of losing the dollar’s position as the leading international currency. But 2% of GDP, or one year’s worth of economic growth, is not an unreasonable guess. With foreign central banks and international investors shunning dollars, the US Treasury would have to pay more to borrow, even if the debt ceiling was eventually raised. The US would also lose the insurance value of a currency that automatically strengthens when something goes wrong (whether at home or abroad).

The impact on the rest of the world would be even more calamitous. Foreign investors, too, would suffer severe losses on their holdings of US treasuries. In addition, disaffected holders of dollars would rush into other currencies, like the euro, which would appreciate sharply as a result. A significantly stronger euro is, of course, the last thing a moribund Europe needs. Consider the adverse impact on Spain, an ailing economy that is struggling to increase its exports.

Likewise, small economies’ currencies – for example, the Canadian dollar and the Norwegian krone – would shoot through the roof. Even emerging-market countries like South Korea and Mexico would experience similar effects, jeopardizing their export sectors. They would have no choice but to apply strict capital controls to limit foreign purchases of their securities. It is not inconceivable that advanced countries would do the same, which would mean the end of financial globalization. Indeed, it could spell the end of all economic globalization.

Sane governments do not default when they have a choice – especially not when they enjoy the “exorbitant privilege” of issuing the only true global currency. We are about to find out whether the US still has a sane government.

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hedgeless_horseman's picture



Sane governments do not default when they have a choice – especially not
when they enjoy the “exorbitant privilege” of issuing the only true
global currency. We are about to find out whether the US still has a sane government.

Sane governments do not live beyond their means for decades on end.

I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country.
-Andrew Jackson

NotApplicable's picture

It's as sane as any other criminal enterprise. The insane ones in this case are those who believe it represents a functional, coherent method of human organization for our benefit.

Long story short, social harmony NEVER emerges from the barrel of a gun.

James_Cole's picture

Sane governments do not live beyond their means for decades on end.

Worked out OK for the British empire for a couple (few?) centuries. This 'living beyond their means' argument with respect to states & power is inane, not that I support the spending. 

Randoom Thought's picture

Did it?

I guess if you consider that the British government was a curse on the rest of the world through their theft and empire building. So debt is OK, if you have a policy to go around the world murdering innocent people and stealing their stuff.

12ToothAssassin's picture

The whole point of this manufactured crisis is to crash the dollar. In that context, it all makes sense. But what comes after that?

12ToothAssassin's picture

"The only winning move is not to play" W.O.P.R.

Manthong's picture

Sane means “sound”

Physically, maybe yes because of coercion, intimidation a printing press and world reserve status.

Morally, absolutely not.

Lost Word's picture

New World Order, Synagogue of Satan (to quote Jesus), treasonous plan to destroy the United States and promote One World Government totalitarian tyranny.

The NWO does not seem to understand that the United States is meant to be the New Israel of Bible prophecy.

aint no fortunate son's picture

Sane? Such an ambivalent word. Can one be sane when one is sociopathic or pathological? If yes, then they're sane.


Steve in Greensboro's picture

The above note by Mr. Eichengreen is so profoundly silly that it made me wonder whether I had accidentally wandered over to the Business Insider website.

--Of course the debt ceiling is going to be raised. Although Obama would like to create an event of default as part of his Cloward-Piven strategy to destroy the U.S. system and replace it with a Total State, he won’t do it unless he could colorably claim it to be the Republicans’ fault. Boehner is falling all over himself to avoid that.

--Even if the debt ceiling were not raised, tax revenues are roughly ten times greater than debt service, so there is no practical reason to default.

The whole premise of his argument is silly, that an event of default could occur in the near term, so there is no reason to go through his parade of horrors.

But the result of the debt ceiling not being raised would be a radical curtailment of discretionary spending by the U.S. government. It would result in diminution of the pernicious impacts of agencies like the IRS, the EPA and the SEC. Less government means more freedom. More freedom creates greater economic growth and greater income and wealth for all sectors of society. As JFK quoted “a rising tide lifts all boats.”

Further, it is a profoundly silly idea that continuing to borrow, print and spend as Obama and his government are having us do is somehow reasonable and prudent. We are spending roughly $100b more than we take in every month and printing roughly $80b every month to monetize almost all of the resulting debt. Continuing down this path will inevitably result in default by our U.S. sovereign, with very destructive impacts for America. Which is of course why our Cloward-Piven president wants to do it.

Marco's picture

The problem is that the short term pain for kicking a 4 decade long debt binge is going to be catastrophic. Sure, debt service is 10% of tax income now ... it's probably going to be 50+% after the crippling depression a bipartisan austerity plan would cause (ie. stiff the poor, even if they leave the middle class out of it tax/benefits wise the huge drop in consumption would drag them right along).

A well functioning well intentioned leadership might be able to make the transition ... the leadership the US has would lead the country straight to a Fascist coup d'etat.

A rising tide lifts all boats, shame the boats are all owned by the 1% ... inequality stifles economic growth, regardless of freedom.

rubiconsolutions's picture

I have a question for all the armchair economists in Zero Hedge land: What would happen if the federal government had an epiphany and decided to eliminate all debt? That is to eliminate the (publicly stated) public debt of $17 Trillion?

Now, the reason I want an answer to this question is simple, I believe that there would an economic calamity. Why? Because there would be no money. At least not in the way we define money these days. Money in the US is debt based. So, logically speaking, if you eliminate the debt you eliminate money. Every dollar in your pocket would go away.

This is the conundrum that faces the US, indeed every country that has a fiat / debt based monetary system. And it’s why the US government is painted into a corner that there is no way out of. By virtue of the fact that in 1913 a fractional reserve banking system was created with the Federal Reserve Act the US began a process which will ultimately prove fatal. When Nixon did away with the last vestige of dollar legitimacy by eliminating the convertibility of the dollar into gold that was the beginning of the end.

Everyone can sit and stew about the debt ceiling and government shutdown and the implementation of the ACA (Obamacare) but none of it matters. Because the damage was done in 1913 and 1971. America has been on life support ever since. It’s not if but when the patient stops breathing.

Lost Word's picture

Print Treasury Notes instead of Federal Reserve Notes,

just like JFK attempted, and got himself killed for it.

Which means the Federal Reserve Banksters killed JFK.

And now they are killing the USA.

Lost Word's picture

Strange how in the current pseudo "Government shutdown", less Government has often turned out to be less freedom, as the Government chooses to continue to enforce restrictive laws, while abandoning any idea of Public property and citizen rights to freedom of access to Public property, but now obviously Not public property, but instead Government property, such as Washington Mall and National Parks.

James_Cole's picture

So debt is OK, if you have a policy to go around the world murdering innocent people and stealing their stuff.

That's a separate issue, the article is about the question of default, not foreign business policy. As long as the empire can continue its dominance, being able to 'pay the bills' is not a concern.

UK had 250% debt to GDP, and then they won the war and guess what happened to the deficits?  

Marco's picture

They took it by force, the US pretends to take it as credit with the intention to one day pay it back ... a pretence not only held up to the world, but also to it's own population.

When the pretence crumbles maintaining the status quo will become harder ... and more violent.

Pool Shark's picture



In this situation, the only 'sane' move is to stop the overspending which eventually must cause a default.

We currently have far more than enough revenues to meet our legal obligations. What we can't afford are endless wars, and the constant re-arming of the "free Shit Army."

Keep it Shutdown; pay only the legal obligations...


Shell Game's picture

Legal obligations?  Are you kidding me?


"When government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours.....For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation." -Murry Rothbard



Repudiate. Their. Fucking. Debt.

FL_Conservative's picture

Exactly HH.  WTF is this douche talking about?  There's not going to be a default with receipts at 8-10x debt service.  The "doom and gloom" over the dollar comes from those among us who understand the crime of having to print fiat currency because leaders have ignored the need for balanced budgetary contraints as a result of their own self-interests.  I've had it with academics with cranial-rectal disorder.

Anusocracy's picture

And those of us who understand that using force to transfer wealth to the government is nothing but theft.

fooshorter's picture

"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States" — Sen. Barry Goldwater (Rep. AR)


It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." — Henry Ford


"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance." — James Madison.


"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill." -- Charles A. Lindbergh, Sr. , 1913


 "The few who understand the system, will either be so interested from it's profits or so dependent on it's favors, that there will be no opposition from that class." — Rothschild Brothers of London, 1863

earnyermoney's picture

Not raising the debt ceiling does not equal default.

Pairadimes's picture

I didn't catch the author's name - Rip Van Winkle?

AlaricBalth's picture

No we do not have a sane government. And most of the populace is not quite "all there" either.

Al Huxley's picture

The public's drugged, educationally deficient, or compromised by the short-term benefits they enjoy as long as the current system can be propped up.

NoDebt's picture

Insanity, it seems, is more contagious than we ordinarily give it credit for.

wisehiney's picture

FOCK NO! But I will pour myself a nice tall glass of sanity in just a little while.

Al Huxley's picture

I find it hilarious, in a sad sort of way, that raising the debt ceiling is considered the responsible choice, and an important element in maintaining the USD's reserve currency status.  Somehow, people are willingly lead to believe that the common sense logic that applies to personal finance doesn't apply to governments. 


To wit, considering the US still a good risk if the debt ceiling is extended, but a bad risk if it isn't is exactly equivalent to considering ME a good risk if my credit card limit is raised so that I can borrow the money I need to pay the interest on the balance I already owe (plus the obligations I've already committed to for stuff already in my possession).  So in my personal example this is obviously insane, and yet when the debate is about the government, the exact opposite is accepted without question.


Marco's picture

Yes ... and like a Ponzi, it can continue to build or it can collapse. There is no middle way.

Kick the can or catastrophic depression, those are the short term choices.

Lost Word's picture

Ponzi interest and spending debts paid with more debt borrowed money created from nothing but free electronic numbers in a computer file.

McMolotov's picture

Your buddy George Orwell understood this phenomenon:

"Doublethink is the act of ordinary people simultaneously accepting two mutually contradictory beliefs as correct, often in distinct social contexts. Doublethink is related to, but differs from, hypocrisy and neutrality. Somewhat related but almost the opposite is cognitive dissonance, where contradictory beliefs cause conflict in one's mind. Doublethink is notable due to a lack of cognitive dissonance — thus the person is completely unaware of any conflict or contradiction."

Al Huxley's picture

Brave New World and 1984 - instruction manuals for todays' cocksucker elites.

Tijuana Donkey Show's picture

If  I could get more Soma. The Deltas keep buying it all up at Wal-Mart

Anusocracy's picture

Doublethink occurs when the two mutually contradictory beliefs are correct in different moral spheres.

For example: you stealing is wrong - Harm, government stealing is right - Authority and Community.

Al Huxley's picture

Hey, I see the bullion trader or BIS trader of CFTC fuckwit from earlier's following me now!  Here shithead, this is what I'm hoping the Asian masters pick up on - maybe they'll follow through to placate the masses after they take over, (you know, to make up for the burden of having to learn Chinese when not scrubbing toilets)


"1125 A.D. In this year before Christmas King Henry sent from Normandy to England and gave instructions that all moneyers ... be deprived of their members ... Bishop Roger of Salisbury commanded them all to assemble at Winchester by Christmas. When they came hither they were then taken one by one, and each deprived of the right hand and the testicles below. All this was done in twelve days between Christmas and Epiphany, and was entirely justified because they had ruined the whole country by the magnitude of their fraud which they paid for in full."
-The Laud Chronicle (E)

I'm hoping eventually to be able to spot the BIS traders, Bullion bank traders, and regulators on the streets of New York, London and Hong Kong as the guys walking around with their left hands over their nuts and their right hands tucked behind their backs, under their jackets.

NOTaREALmerican's picture

The "Keynesian" economists don't like to think about the moral effect their economic fantasies have on democracies.

Kinda tough to have representative government when the politicians can afford everything.  

They can blow up the sand people and hand out welfare to their buddies, and the voters never have to pay.  

Nice gig if you can get it.

Dewey Cheatum Howe's picture

“But I don’t want to go among mad people," Alice remarked.
"Oh, you can’t help that," said the Cat: "we’re all mad here. I’m mad. You’re mad."
"How do you know I’m mad?" said Alice.
"You must be," said the Cat, or you wouldn’t have come here.”
? Lewis Carrol



ultraticum's picture

So is he promoting we just take it up the arse with O'sickcare to save the money jobbers?

SheepDog-One's picture

I 'sanity' is a govt living well beyond it's means, growing exponentially like a leviathan, consuming vast greater amounts every day as the norm...that's 'sanity' to this guy. 

Dr. Engali's picture

There sure is a lot of digital ink wasted on something that will never happen. The debt ceiling will always be raised.

cougar_w's picture


I mean like what is there to stop it? Someone gets embarrased or something? Or finds religion? The only other likely thing is that they will pass a law that says there is no ceiling to their spending at all. Every time the ceiling needs to be raised I start looking out for that talk to slither out from under a stone.

NoDebt's picture

They won't stop until somebody stops them.  And I don't mean voters.  I mean people who matter.

Tijuana Donkey Show's picture

They won't, because they would need to come up with a different distraction. The "ceiling" is a great boogeyman, and lets the ACA act slide firmly in our ass, letting the military, utility, big agriculture, state and local GOVT, and now medical industrial complexes put their hand in our pocket. Now that there is nothing left to steal, the people will get restless, like an unfed dog.

Tall Tom's picture

The Federal Reserve will just swell its Balance Sheet by purchasing MBS from the Government.


The Bank will step in with "Extraordinary Measures" for the "Rescue". No Default.


God bless the Fed. Damn that makes me want to regurgitate my entrails.


That will somehow "justify" the existence of that Criminal Enterprise.


This is all "Theater". Are you entertained, yet?

Tijuana Donkey Show's picture

entertainment at the donkey show requires much more that this. Bohner needs to be center ring on this, with Obama on deck for the next show. Compromise at a donkey show is a life defining event....

Unstable Condition's picture

We would not default if we don't raise the damn debt ceiling. False premise from the jump.

We only default if we stop paying interest on our debt. We bring plenty of tax revenue in for that. It would be the govt parasites and the truly needy that would suffer the most from this.

SheepDog-One's picture

Barry Eichengreen....go fuck yourself.

hangemhigh77's picture

This question is INSANE!!!!  Of course our government is insane....duh.  Not to mention stooooooooopid.

Jena's picture

And that's why we keep stacking, because we know we don't have a stable, sane government.